VIDEO: Tesla's Survival Depends on Model 3 Manufacturing
James Anderton posted on December 07, 2017 | 1583 views

Will Tesla survive? That’s not a question many people were asking a year ago with the announcement of the company’s breakthrough product: The Model 3. The goal was to produce a sort of little brother to the Model S: smaller, simpler and much less expensive, opening the enormous US mid size sedan market to Tesla, a market dominated by big volume products like Toyota’s Camry and Honda’s Accord.

A win here and Tesla could break out of their low volume specialty automaker closet and into the big time. And just as importantly, a big win with Model 3 will effectively kickstart the entire electric vehicle industry and assure the success of EV’s as the ultimate replacement for the internal combustion engine.

Of course, if it doesn’t work, it could have exactly the opposite effect: the destruction of public confidence in EV technology antifreeze which could set back better electric vehicles for a decade or more.

Will Tesla succeed?

That’s a surprisingly complex question, in no small part due to Tesla’s unbelievable market cap. At 51.7 billion dollars, it surpasses Ford at 49.9 billion dollars. How can a company with a single assembly plant making a relative handful of cars per year be valued the same as a company that made 2.6 million cars and trucks last year?

Well, the answer is, Elon Musk. Tesla is not a car company, or a technology company, it’s a vision company, specifically a vision of the future which is quite different from the one we’ve seen so far in the 21st Century.

So far, the 21st Century has been a huge disappointment, from a technology standpoint. Unimaginable improvements in computing power and a collapse of costs has given everyone smart phones and the Internet, yet the basic, fundamental global problems are the same as they were 40 years ago. Poverty, illness, violence, a polluted environment, declining prospects for youth, the problems have not been solved, or even addressed by code-driven technology. Despite this, smart coders are the new entrepreneurial superstars, the Edison’s, Bells and Fords of the new century…. with one difference. Today’s coder oligarchs simply don’t deliver a better life for most people. Facebook just doesn’t clean the air.

Enter Elon Musk. Musk has a vision of the future that reads like a 1950’s B-movie Sci-fi script: Rockets to Mars, Hyperloops, brain-machine integration and yes, electric cars.

Electric cars haem been around for over a century and every once in a while, an automaker revisits the concept, notably GM with the EV1 in the 1990s. They have always failed, mainly because battery technology has been inadequate, too expensive, or both. Musk’s genius is to recognize that the market wants electric vehicles, despite the lack of a technology base to build them…. then he did it anyway. By building brand awareness and demand, he has created the interest in solving the battery problem, even though current EVs are hardly competitive with internal combustion engine power in most key metrics, especially price. His “build-it-and-the batteries -will-come” philosophy is straight out of Hollywood, but it might work. With a strengthening consensus that EVs can help address global warming, combined with a strong desire from consumers for manufactured products that improve their lives, Elon Musk has created a cult of personality that he’s using to bootstrap the EV industry.

This is highly laudable, except for the one area where Musk struggles: manufacturing. Tesla builds great cars, but in the third quarter of this year, the company lost 619 million dollars, about 4600 dollars per minute. That’s bad. On the other hand, Tesla has over 400,000 deposits for their new Model 3 mid size sedan, which at an estimated selling price of 44,000 dollars per car, represents a potential gross revenue of over 17 billion dollars. If they achieve their current, reported gross margin of 15 percent, that’s 2.6 billion dollars on the bottom line.

Big numbers for sure, but can they actually build the cars? They’ve been working on the Model 3 assembly line since the spring and after many delays, predict volume production of 5000 cars per month by the end of the first quarter of next year. Can they do it? Let’s look the “pros and cons”:

Advantages

  • The product is in high demand, consumers will wait
  • Early adopter cachet
  • They have some manufacturing experience with current products
  • Tax incentives for EV buyers
  • Emissions credits paid by other automakers to Tesla
  • Ability to raise money as needed
  • Secure battery supply
  • Elon Musk

Disadvantages

  • Lose money on every car
  • Almost $10 billion in debt
  • Fremont, California plant
  • Vertical integration
  • Panasonic battery deal
  • Model 3 MSRP
  • Disappearing EV tax credits
  • Disappearing emission credits
  • Competition
  • Elon Musk

How can Elon Musk be both an advantage and a disadvantage? Because whether he likes it or not, Elon Musk is widely perceived as the new Tony Stark, a billionaire visionary who can drag the future into the present by the sheer boldness of his vision. In a sense, Elon Musk is what the 21st century was supposed to be: a technologically driven march toward a future when all substantive problems on the planet are solved. Impressive technical achievements with Space X and innovative ideas like Hyperloop reinforce the narrative. But making things with mass production is a lot more mundane than dreaming big. There is a widely held misconception that the ability to design a great product automatically confers the ability to profitably mass-produce that product, although the two are very poorly correlated. Tesla’s Model 3 will cost so much to build, and must be produced at such a volume, that Musk is literally betting the future of Tesla on a single plant and a single assembly line. If it fails, and it might, it will take down Tesla, but just as significantly, it will take down the mystique of Elon Musk as well.

The irony is, if Elon musk is the visionary but so many believe he is, the success of Tesla is far less important than Musk’s vision of forcing the world automakers to switch from the internal combustion engine. In that sense, Tesla the company could fail, but Tesla the idea could succeed. Of course, the company could be bought out by a competitor, a non-automotive outside investor, or simply enter Chapter 11, restructure debt and emerge as a going concern. For Tesla, however, the future once again depends on successful execution on the assembly line. It’s always been my contention that manufacturing is the second most important human activity after procreation, and I think Tesla and Model 3 just prove my point.

What Do You Think?

Do you agree that Tesla may not have the manufacturing ability to meet demand? Is Elon Musk is the next Tony Stark or the next Howard Hughes? Let us know in this quick survey:

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