In 2017, and again in 2018, if you’re manufacturing, there’s one story that’s on everybody’s radar: Tesla. Elon Musk is without doubt the highest profile CEO in the world today, and judging by the ink his utterances generate in the mass media, only Donald Trump and a smartphone even come close. Now Tesla is a 14-year-old company, and its slow, steady march toward the popularization of mainstream electric vehicles has been talked about ad nauseam by mainstream and business media alike. But something big is happening in Tesla in 2018, and it has nothing to do with electric cars: It’s about manufacturing. Tesla’s new product, the Model 3, was a remarkable success before anyone even saw a prototype: Over 450,000 people paid Tesla $1,000 to reserve a spot on the waiting list for the small four-door sedan. In essence, the Model 3 is a smaller, simpler version of Tesla’s Model S and was projected to deliver with a starting MSRP of $35,000.
That $35,000 number is significant, because it’s at the profitable end of the mid-priced sedan’s sweet spot, trending toward the high end, for example, of the Toyota Camry or Honda Accord, and just nudging the entry-level pricing of BMW’s 3 Series. In small sedans, this is where the auto industry really makes money in volume production: heavily optioned higher-end variants of mass market vehicles whose base price is in the mid to high $20,000s. Toyota’s Camry is the poster child for this philosophy, with Toyota’s state-of-the-art Kentucky facility cranking out some 300,000 of these vehicles a year. But for Tesla, no automaker in history ever enjoyed such a confluence of happy circumstances: a virtual monopoly on the most interesting new automotive technology since the Wankel rotary engine, and nearly half a million people so desperate to buy Tesla’s product that they each give the company a grand to reserve a car that they’ve never driven and most had never seen.
There’s only one problem: manufacturing. Tesla estimates that it will need a 5,000-unit-per-week production rate to begin to make a dent in the order book, a rate that’s in the ballpark for efficient auto assembly operations of the current state of the art. Musk predicted this performance for the end of 2017, then moved it to the end of the first quarter of this year, and now has pushed back his prediction to the end of the second quarter. No one knows what the current production rate is, with most estimates (that is guesses, because Tesla won’t say) at about 1,000 to 2,000 units per week. Numerous reasons for this delay are cited, the most common one being technical difficulties at Tesla’s Nevada Gigafactory, where the battery packs are assembled. Tesla fans are nothing if not patient, and the blogosphere is filled with praise for what the fan base calls Tesla’s careful, quality-driven production ramp. It sounds good, but the reality is that all manufacturing has a common enemy: time. And time is money, and at Tesla, it burns through money at a rate of $16 million per day. Many experts believe that Tesla will run out of cash before it achieves the 5,000-per-week rate, and still other Wall Street analysts believe that it will need more than 5,000 a week to become profitable, especially dragging around the ball and chain of a $20 billion debt.
But what about the massive demand for Model 3? Here’s what I believe is the single defining issue for the survival of Tesla: the first Model 3s delivered will have an MSRP of somewhere between $44,000 and $50,000. This is outside the affordability range of most American families, but it’s where Tesla needs to be to make Model 3 profitable at current production volumes. If or when it successfully ramps up to 5,000 units a month, Tesla can begin to deliver base model cars at or near the original $35,000 price point. Those units will be lower margin, but presumably higher volume. Current reservation holders can’t expect to see a $35,000 Model 3 until summer at the earliest. Now delivering higher-margin vehicles to more affluent consumers first is a logical strategy—at least it has been so far. Unfortunately for Tesla, there are lots of new competitor electric vehicle (EV) products in the pipeline, some of them coming on stream this fall. Tesla has acknowledged that there have been reservation cancellations, but won’t release revised numbers. Meanwhile, the cash burn continues. During Tesla’s recent fourth-quarter investor call, the company stated that cash conservation is a high priority, noting that Tesla has negotiated favorable terms from Tesla’s suppliers. Now stretching out payment terms to auto manufacturers’ tier one supplier community is an old game, but it’s not quite as cost-effective as you might think. I can tell you from experience that lower-volume customers who want net 120, 150 or 180 terms simply don’t get favorable pricing compared to high-volume customers that pay net 30, 60 or 90 days. So Tesla can conserve cash now, but it’s a dangerous game to use its supplier community as a bank.
Meanwhile, EV and self-driving car technology is moving forward at a rapid pace, with every major manufacturer and most of the big software houses all knee deep in the tech. January’s Consumer Electronics Show in Las Vegas was full of interesting prototypes, and major players like Uber, Lyft, Nvidia and others are cutting deals with mainstream manufacturers. And the Chinese are demonstrating increasing capability from the hardware and software side as well. So will Tesla survive? If Elon musk can continue to leverage his personality and vision for a green, hip, electrically driven future, the answer is “maybe.” But if he doesn’t fix the mass production problem, all the money in the world won’t save his company. Yet again, it’s all about the manufacturing.