Demand for Model 3 pushes Tesla to accelerate manufacture plans

Source: Anne C. Mulkern, E&E reporter • Posted: Monday, May 9, 2016

Tesla Motors will accelerate production of all its electric vehicles, pushed by heady demand for its planned midpriced car, the company said yesterday.

Palo Alto, Calif.-based Tesla, best known as a maker of luxury EVs, said it’s on track to start making the mainstream Model 3 in 2017. In addition, because of the clamor for that car, Tesla will push up its plan to hit production of 500,000 total cars annually, reaching that road mark by 2018.

The company earlier had targeted 2020 for that half-million production point. That total would include the current Model S sedan, at base price $73,000; the Model X crossover, at $81,000; and the Model 3, which will start at about $35,000.

“The overwhelming demand for Model 3 confirms that compelling all-electric vehicles have mass-market appeal,” the company said in a letter to shareholders. “In the first week of taking deposits for Model 3, we received more than 325,000 reservations despite no advertising or paid endorsements.”

“This implies about $14 billion in future sales, making the Model 3 introduction the biggest consumer product launch ever,” it said.

People paid a $1,000 refundable deposit to reserve the right to later purchase a Model 3. Many prospective buyers camped out at Tesla stores.

Company CEO Elon Musk said the company will ramp up production both at its current factory in Fremont, Calif., and at its “Gigafactory” now under construction in Nevada.

Tesla is meeting with parts suppliers, with Musk insisting on talking personally with the teams and “getting a commitment they intend to work harder on that program than [they] ever have.”

In the meantime, Musk said, he’s spending so much time at the factory that he has a sleeping bag in his office.

“Tesla is going to be hellbent on becoming the best manufacturer on Earth,” Musk said during a call with stock analysts and reporters to discuss Tesla’s first-quarter financial results. “The key thing we need to achieve in the future is to also be the leader in manufacturing. It’s the thing we need, to scale and scale rapidly, if we’re going to make the cars affordable.”

Musk has said he’s driven by the need to get people out of cars that burn fossil fuels and emit greenhouse gases.

“This is a big deal,” he said yesterday. “It’s the right thing to do. What we’re trying to do is get as many electric vehicles on the road as possible.”

The company could be making 1 million total cars by 2020, he said.

If Tesla can deliver “a high-quality” Model 3 for $35,000, and one that gets its projected 215 miles per charge, “that opens up their market to a whole new segment of the car-buying public and further accelerate the transition to EVs,” said Costa Samaras, an assistant professor in the Department of Civil and Environmental Engineering at Carnegie Mellon University.

Tesla’s optimism came even as the company reported it again failed to make a profit. It lost $282.4 million in January through March, compared to a loss of $151.1 million in the same period a year earlier. The company’s revenue in the first three months included $57 million in environmental credits it earned from California for selling zero-emissions vehicles, or ZEVs.

Commitments from parts makers

Musk said that he anticipated having to raise money to increase production, and that he didn’t anticipate using the Model 3 deposits as capital. One analyst agreed with that approach.

“That is almost certain, that they’ll need to raise capital to scale up,” Samaras said. “Since folks who put down a Model 3 deposit can ask for it back, it would be pretty risky to rely solely on that source of funds.”

Musk said the company planned to hold its Model 3 suppliers accountable. He laid out a timeline for getting that car to production by late 2017. He said suppliers would need to have their parts done by July 1, 2017. But he conceded, even while giving that date, that it “is not a date that will actually be met; it is an impossible date,” but it is a date the company needs “to hold suppliers to.”

With some parts inevitably coming in late, production probably won’t start until later in 2017, Musk said. A car can’t be made with even 2 percent of the parts missing, he said.

He said the suppliers probably won’t be those that are working with other carmakers. Those companies typically are on a six-year development cycle, he said, while “we’re on three years. It just doesn’t connect properly.”

At the same time, Tesla will aim to make some of the parts so it has those as a backup if suppliers can’t come through.

There were snags delivering the Model X earlier this year because of problems with some suppliers “and Tesla not having broad enough internal capability to manufacture the parts in-house,” Tesla said last month (ClimateWire, April 5).

Musk said that as production increases, the company might have to look eventually at opening factories in Europe and in China, because making cars in California and shipping them around the world is “not a very efficient thing.”

“It wouldn’t make sense to ship cars from California to Europe or Asia in those volumes,” Musk said. “It’s not an efficient way to go.”

At the same time, when pushed for details on other factories later, Musk said that in terms of making 1 million cars, “I think it is actually feasible, maybe not advisable, to do that with just Fremont and the Gigafactory.”

Those locations could scale to 1 million vehicles annually, he said, adding that “whether that’s actually wise is a different question,” as logistical expenses “start becoming a bigger and bigger part of the costs.”

During the call, Tesla executives were asked whether the Gigafactory would have to pare back production of batteries that will be sold for energy storage. The part of the company promoting that aim is called Tesla Energy. But the company said it wouldn’t need to “rob from Tesla Energy plans to meet the Model 3 schedule” and that both could be accomplished.

Musk said the company soon would be making announcements on new hires related to the production ramp-up, but did not give further details.

Growing all EV demand?

Analysts said Tesla’s plan to move faster was smart.

“Given the large number of deposits for the Model 3, as well as demand growth for the Model S and Model X, the firm is accelerating what was already an aggressive production schedule,” said Samaras at Carnegie Mellon University. “From a strategic point of view, this is a pretty good move.”

“It builds some consumer and market excitement, and sets a lofty goal the company can focus on,” he added. “If they succeed, they’ll have dramatically ramped up production and they’ll be praised for pulling it off. If the timeline slips, it’s a little easier to get up and try again.”

The demand for Model 3 shows there’s significant desire for EVs, beyond Tesla, said Gil Tal, a researcher at the University of California, Davis’ Institute of Transportation Studies.

“We still have to wait and see how much of these [Model 3] reservations will actually materialize” as sales, Tal said. At the same time, he said, “it’s very encouraging for battery electric vehicles in general.”

Even if some of the people who put down deposits don’t buy a Model 3, they might buy a different EV, he said. There will be other options available in 2018, as Tesla competitors also are working on EVs and hybrid electric cars.

Both Tal and Samaras said Model 3 sales could be negatively affected by the availability of the federal tax credit for electric vehicles. That $7,500 incentive is limited per manufacturer. Once a carmaker sells 200,000 cars, Tal said, it has six months to sell as many as it can, with those vehicles getting the same credit. Then the credit is cut in half for three months, and after that, it’s no longer available.

Tal said Tesla also needs to think about its charging stations as it’s making more cars. The stations are free to use right now. There could be higher demand, which could cause congestion.

“Tesla is going to have a big challenge on their hands to ramp up their infrastructure,” Tal said.