Tesla’s big Model 3 bet rides on risky assembly line strategy

[Tennis]

Tesla Inc (TSLA.O) Chief Executive Elon Musk took many risks with the technology in his company's cars on the way to surpassing Ford Motor Co's market value. Now Musk is pushing boundaries in the factory that makes them.

Most automakers test a new model's production line by building vehicles with relatively cheap, prototype tools designed to be scrapped once they deliver doors that fit, body panels with the right shape and dashboards that don't have gaps or seams.

Tesla, however, is skipping that preliminary step and ordering permanent, more expensive equipment as it races to launch its Model 3 sedan by a self-imposed volume production deadline of September, Musk told investors last month.

Musk’s decision underscores his high-risk tolerance and willingness to forego long-held industry norms that has helped Tesla upend the traditional auto industry. While Tesla is not the first automaker to try to accelerate production on the factory floor, no other rival is putting this much faith in the production strategy succeeding.

Musk expects the Model 3 rollout to help Tesla deliver five times its current annual sales volume, a key target in the automaker's efforts to stop burning cash.

"He's pushing the envelope to see how much time and cost he can take out of the process," said Ron Harbour, a manufacturing consultant at Oliver Wyman.

Investors are already counting on Tesla’s factory floor success, with shares soaring 39 percent since January as it makes the leap from niche producer to mass producer in far less time than rivals.

There are caution signs, however. The production equipment designed to produce millions of cars is expensive to fix or replace if it doesn't work, industry experts say. Tesla has encountered quality problems on its existing low-volume cars, and the Model 3 is designed to sell in numbers as high as 500,000 vehicles a year, raising the potential cost of recalls or warranty repairs.

"It's an experiment, certainly," said Consumer Reports' Jake Fisher, who has done extensive testing of Tesla's previous Models S and X. Tesla could possibly fix errors quicker, speeding up the process, "or it could be they have unsuspected problems they'll have a hard time dealing with."

Financial pressure is partly driving Tesla’s haste. The quicker Tesla can deliver the Model 3 with its estimated $35,000 base price to the 373,000 customers who have put down a $1000 deposit, the closer it can log $13 billion.

Tesla has labored under financial pressure since it was founded in 2003. The company has yet to turn an annual profit, and earlier this year Musk said the company was "close to the edge" as it look toward capital spending of $2-2.5 billion in the first half of 2017.

Tesla has since gotten more breathing room by raising $1.2 billion in fresh capital in March and selling a five per cent stake to Chinese internet company Tencent Holdings Ltd (0700.HK) .

Musk has spoken to investors about his vision of an "alien dreadnought" factory that uses artificial intelligence and robots to build cars at speeds faster than human assembly workers could manage.

But there are limits to what technology can do in the heavily regulated car business. For example, Tesla will still have to use real cars in crash tests required by the U.S. government, because federal rules do not allow simulated crash results to substitute for data from a real car.

http://www.reuters.com/article/us-te...-idUSKBN17Q0DE

Uh oh. Model 3 might end up way behind schedule as many expected.

[NED funded]

Yeah I'm unsure why Musk is taking this type of actions. I'm reminded of a few days ago, where Tesla tried to pay its workers in stock options and welll that sort of thing doesn't fly in Germany where workers are heavily unionized. Heck it did not even work in Fresno, where workers tried unionizing.

[dvaz]

Wonder if it would be possible for them to merge with regular automaker and just stick to developing the batteries / motor / software and leave the car production and assembly to the more established car maker.

[Independent voter]

Heard on a news show that Tesla has a higher market value than GM right now., I can't imagine why. It's need that a small company is successful with tens of thousands of orders but I doubt that Tesla is the equal of GM.

[NED funded]

Heard on a news show that Tesla has a higher market value than GM right now., I can't imagine why. It's need that a small company is successful with tens of thousands of orders but I doubt that Tesla is the equal of GM.

Its not, there is nothing to justify the valuation of Tesla. Its basically a castle in the sky.

[Dug]

Its not, there is nothing to justify the valuation of Tesla. Its basically a castle in the sky.

The markets can see the writing on the wall. Electric cars and automated driving are going to take over eventually

[Exedore]

Heard on a news show that Tesla has a higher market value than GM right now., I can't imagine why. It's need that a small company is successful with tens of thousands of orders but I doubt that Tesla is the equal of GM.

It's not hard to see why Tesla has such a high market value: a bunch of people buy into the idea because they like the ideal outcome enough to overlook the idea's practically. Those people get on board quickly, which causes the stock price to jump. But that investment pool is limited and if you can't start turning a profit shortly thereafter, you see a dramatic collapse because there are no new investors.


I also think Musk is wrong about electric vs. hydrogen fuel cell.

[NED funded]

The markets can see the writing on the wall. Electric cars and automated driving are going to take over eventually

Cool, but Tesla doesn't have any essential patents to electrical cars or self driving. Also, it doesn't have the disruption capability of Amazon, since the big companies are already investing a healthy amount of cash into R&D and their production and sales numbers are far higher than Tesla's.

[Dug]

Cool, but Tesla doesn't have any essential pathents to electrical cars or self drivong. Also it doesn't have the disruption capability of Amazon, since the big companies are already investing a healthy amount of cash into R&D and their production and sales numbers are far higher than Tesla's.

Diversify. Gamble on all the big names going into the future.

[Sunseeker]

The number of anti-Tesla articles in the news recently has been rathre astounding. I've yet to see one based on any actual economic data other than URMURGURD TESLA IS GONNA SELF-DESTRUCT!

Yes, Tesla is run differently than most businesses, so far, that's been Musk's advantage, not his downfall.

[Belize]

You guys need to watch L2.

Investors don't want profitability anymore. They want growth and innovation. That's why Amazon is barely profitable.

[Masark]

Cool, but Tesla doesn't have any essential patents to electrical cars or self driving.

But they do have a big damn battery factory. Currently, Tesla's Gigafactory 1 makes up about 40% of the worldwide production of Li-ion batteries (35 gigawatt-hours/year out of about 90 gigawatt-hour/years). They plan to up that to 50 GW-hr by the end of this year, eventually hitting 150GW-hr.

And they're planning to build at least one more such factory. And they've made sounds about possibly 3 more such factories.

Either the established companies will have to bottleneck their production capacity for lack of batteries, build their own factories to make enough batteries (and play catch up for years), or buy the batteries from Tesla, assuming they have surplus from their own car production.

[melodramocracy]

Heard on a news show that Tesla has a higher market value than GM right now., I can't imagine why. It's need that a small company is successful with tens of thousands of orders but I doubt that Tesla is the equal of GM.

It's not. This is just a reminder of how disassociated stock prices actually are with a company's actual value.

[NED funded]

But they do have a big damn battery factory. Currently, Tesla's Gigafactory 1 makes up about 40% of the worldwide production of Li-ion batteries (35 gigawatt-hours/year out of about 90 gigawatt-hour/years). They plan to up that to 50 GW-hr by the end of this year, eventually hitting 150GW-hr.

And they're planning to build at least one more such factory. And they've made sounds about possibly 3 more such factories.

Either the established companies will have to bottleneck their production capacity for lack of batteries, build their own factories to make enough batteries (and play catch up for years), or buy the batteries from Tesla, assuming they have surplus from their own car production.

Dude thats Panasonic, Tesla owns the building.

Also Tesla is ranked pretty low in self driving tech, arguably far more important than EVs.

[Deleted]

The markets can see the writing on the wall. Electric cars and automated driving are going to take over eventually

Yeah, but not by a rich guys ponzi scheme skipping testing and trying to not pay it's workers.

- - - Updated - - -

The number of anti-Tesla articles in the news recently has been rathre astounding. I've yet to see one based on any actual economic data other than URMURGURD TESLA IS GONNA SELF-DESTRUCT!

Yes, Tesla is run differently than most businesses, so far, that's been Musk's advantage, not his downfall.

Musk taking money from gullible idiots has been his advantage.

[Whitedragon]

The markets can see the writing on the wall. Electric cars and automated driving are going to take over eventually

The only trouble with "eventually" is that the so called market is still so far down the road its almost pointless betting on its success for some time to come. As always when it comes to the "Green" market it tends to drop the ball on some big performance, viability, and affordability issues, because of this chunks of the consumer market will never even consider the electric (and other Eco cars) until they become mostly comparable to Gas/Diesel vehicles. What this means in the short and mid term is that any investment in this field is most likely going to produce negative results, which is one sure fire way to lose investors. It looks to be a vicious cycle which will probably delay any outstanding breakthroughs in a viable competing electric car.

[Masark]

Dude thats Panasonic, Tesla owns the building.

No, said equipment will be owned by Tesla, subject to the terms of the contract between Panasonic and Tesla. Though we don't know what those precise terms are, as they've been omitted from the SEC filing.

9.1 Property . The tooling, jigs, dies, gauges, fixtures, molds, patterns, other equipment (collectively, the “ Tooling ”), as well as the supplies, materials, and other tangible property that are or will be used by Seller to manufacture, store, and transport Goods, or used to develop or make Goods for Tesla (such Tooling, supplies, materials and other tangible property shall collectively be referred to as the “ Property ”) will be owned by Tesla if Tesla has [***] (“ Tesla Property ”); provided, however, that Property will not be deemed to be Tesla Property if Tesla has [***]. “ Seller ’ s Property ” means all Property which (a) is owned and/or used by Seller in connection with these General Terms and/or the Contract(s) and (b) is not Tesla Property. Seller will not purchase on the account of or charge Tesla for any Tesla Property except as authorized in a Purchase Order. Title to Tesla Property shall transfer to Tesla upon Tesla’s payment in full for such Property.