With the first Model 3 deliveries just weeks away, Tesla (NASDAQ:TSLA) has officially begun manufacturing the completed version of the $35,000 vehicle. In a nod to the start of the important electric vehicle's production, Tesla CEO Elon Musk posted two photos of the first production unit on Saturday.
The timing of Tesla's photo of the final Model 3 suggests the vehicle's production timeline is on schedule for the electric-car maker's planned July 28 launch.
Readying the Model 3
Tesla's first production unit of its Model 3 follows years of anticipation and hype. Even before the Model 3 had a name, Tesla heralded the vehicle as the affordable electric car that would help Tesla transition to a mass-market player and ultimately catalyze an industrywide shift to electric vehicles. With its starting price at about half of its Model S sedan, Tesla has long viewed the Model 3 as the vehicle that would take Tesla from annual production levels around 100,000 units to 500,000.
Tesla's first unveiling of its prototype Model 3 design last year was met with wild customer demand. On the day of the March 31 event, hundreds of customers lined up at stores around the world even before they knew what the vehicle would look like. And within a week of the unveiling, Tesla said it had accumulated more than 325,000 reservations for the vehicle. Reservations soon climbed to about 400,000, and Tesla recently said they are still climbing every week.
But bringing the Model 3 to market has required significant investment and constant execution from Tesla. To ensure it would have enough battery production to support its 2018 production target of 500,000 total vehicles, Tesla broke ground on the world's largest battery factory in Nevada and has quickly scaled it to a 1.9 million-square-foot footprint, with 4.9 million square feet of operational space when including its multiple levels.
Further, Tesla's capital spending has soared. Its capital expenditures in the first half of 2017 are on pace to rise to approximately $2 billion to $2.5 billion, up big from the $1.3 billion Tesla spent during the entire year of 2016. To help reduce risk associated with its sharply increasing spending, Tesla raised about $1.7 billion in May 2016, and about $1.2 billion more earlier this year.
Musk believes these investments will be worth it. He has predicted that the Model 3 program will eventually generate $20 billion in annual revenue, sporting an impressive 25% gross profit margin.
It's easy to see why investors are watching Model 3 so closely.
The real test
While Tesla plans to begin Model 3 deliveries on July 28, it's going to take a few months for deliveries to ramp up to meaningful levels. Musk recently said he expected Tesla would deliver about 30 Model 3 units at its handover event on July 28, 100 units in August, just over 1,500 in September, and about 20,000 in December.
On its path to achieving a production target of 500,000 Model S, X, and 3 units combined in 2018, Tesla has also said it expects to achieve a Model 3 production rate of 5,000 units per week before the end of 2017, and 10,000 units per week at some point in 2018. In other words, Tesla probably expects its 2018 production to include about 100,000 combined Model S and X units, and around 400,000 Model 3s.
With the Model 3 finally ready, Tesla will face its greatest test yet: Can Tesla ramp up production of the critical vehicle as quickly as it hopes?