Tesla’s busy and worrisome week
Elon Musk’s Model 3 production challenges likely to linger even if Tesla hits next target
The assembly lines are cranking this week at Tesla. The problem is they need to crank this much every other week of the quarter.
When the electric car manufacturer announces second-quarter delivery results next week, investors will likely focus on whether Tesla hit its goal of producing 5,000 Model 3 sedans in a single week.
Reaching that goal would certainly qualify as good news. The deadline to reach the weekly milestone, which Tesla originally planned to hit last year, has been rolled back several times. Wall Street analysts now expect about 138,000 Model 3 deliveries this year, according to estimates compiled by FactSet. That figure was about 228,000 last August.
More important, Moody’s Investors Service, which downgraded
Tesla’s credit rating in March, said meeting production targets was necessary to avert further downgrades.
But even if CEO Elon Musk can hit his mark, it doesn’t mean
Tesla can produce at that level consistently. There should be real concern on that front.
For starters, Tesla has developed a habit of jamming as much production as possible into the end of the quarter. In last year’s fourth quarter, Tesla produced a third of its 2,425 Model 3s in the final days of the period and in the most recent quarter, it was a fifth of the 9,766 cars produced.
There’s reason to believe that pattern will repeat itself. “All Model 3 production lines have demonstrated capability of producing 500 cars per day,” read a slide presented at Tesla’s shareholder meeting earlier this month. That phrasing stopped short of actually saying the lines were producing 500 cars a day. Later on in June, Tesla erected a new production line housed in a tent at the company’s Fremont property.
This approach can help meet a deadline, but it raises questions about whether Tesla can produce high-quality cars during the crunch time. Reports of Model 3 quality problems have plagued the company. That in turn can hurt its fragile finances. Analysts at Bernstein Research said in a note last week that Tesla’s gross margin in its “services and other” reporting segment, which includes vehicle service and maintenance expenses, has plunged from 5 per cent to negative 45 per cent since the third quarter of 2016.
If Tesla can’t reverse that trend, the growth story that has captivated its bulls looks flimsier than ever.
The company has already announced plans to cut 9 per cent of its workforce and scaled back its capital spending forecast. Tesla also must contend with persistently negative cash flow, more than $10 billion in total debt on its books, and looming competition from more experienced automakers.
Tesla simply can’t afford more hiccups, no matter what it reports next week.