So far, Tesla's (TSLA 5.42%) Model 3 launch has followed a far different path from Tesla's last new vehicle. The late-2016-launched Model X encountered some significant problems during development and production. The SUV was several years late to market, and management even admitted to launching the vehicle with "far too much technology" in the first version, resulting in reliability and production challenges. For the Model 3, however, Tesla is not only launching the vehicle on time, but management has also focused on designing the vehicle from the ground up to be much easier to produce in higher volumes.
Now Tesla is ready to begin delivering the vehicle to customers. And you can bet investors will be watching closely. But the handover event this Friday is only one small step for Tesla's plans for the vehicle. Getting to volume production will be the real test.
Model 3. Image source: Tesla.
Will Tesla's first Model 3 deliveries and subsequent production ramp-up go as smoothly as the company hopes? For Tesla to convince investors it will really be able to pull this off, it will need to stick to its initial Model 3 production ramp-up plan and sustain current demand levels for its higher-priced vehicles even after availability of its lower-cost Model 3 increases.
Model 3 production plans
Ahead of the Model 3's launch this week, Tesla's confidence in its ability to ramp up production of the vehicle is quite astounding. Initially aiming for the $35,000 vehicle to help Tesla achieve total annual production of 500,000 units by 2020, last year Tesla moved this target two years earlier, to 2018. This represents an astronomical jump in production compared to where Tesla is at today; ahead of this week's Model 3 launch, the automaker is only producing vehicles at an annualized rate of about 100,000 units.
But investors will be able to preview Tesla's ability to execute on its production ramp-up well before it hits an annualized build rate of 500,000 units. To get an idea whether Tesla is on track, investors can compare actual production and deliveries to the initial trajectory Tesla has forecast for the Model 3. Tesla CEO Elon Musk recently said he expects to deliver 30 Model 3 units on July 28, about 100 cars in August, and above 1,500 in September. During December, Musk said Tesla should be able to reach about 20,000 monthly Model 3 deliveries.
Beyond these figures, Tesla has also said it expects to achieve a weekly production rate for Model 3 of 5,000 units per week before the end of the year, and 10,000 per week at some point next year.
Differentiating Model S and X
Another important point of execution for Tesla will be maintaining customer interest in its higher-priced Model S and Model X vehicles after the Model 3's launch. Currently delivering its Model S and Model X at a combined annualized rate of about 100,000 units combined, a pullback in demand for these vehicles when Model 3 comes to market could hurt Tesla's business -- especially in the beginning of the Model 3's ramp-up, when low volume production of the new car means Tesla won't be making money on the lower-cost vehicle.
Model S (left) and Model X (right). Image source: author.
To ensure the Model S and X stand out as the Model 3 comes to market, Tesla has been making some effort to differentiate the higher-end vehicles. Last week, Tesla made a number of changes to its Model S and X options, including making some features standard that used to be optional and notifying customers interested in its 75-kilowatt-hour battery, rear-wheel-drive Model S (the cheapest version of Model S) to inform them that the vehicle will no longer be available later this year. By including more features as standard on its Model S and X and by eliminating its cheapest version of the Model S, Tesla is probably hoping it can create a clearer distinction between its Model 3 and its higher-priced Model S and X.
While Tesla's first deliveries of the Model 3 on Friday will undoubtedly represent an important milestone for the company, it will only be the beginning of an important part of Tesla's growth plan. Investors should keep a close eye on the electric-car maker's ability to execute.
