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Can Tesla, Inc. Hit Its Model 3 Production Target?

By Daniel Sparks - Mar 13, 2018 at 11:05AM

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Tesla needs to prove to investors that they can trust its targets.

With just a few weeks left in Tesla's ( TSLA 1.64% ) first quarter, time is running out for the electric-car company to follow through on its bold production target for the period. In its fourth-quarter shareholder letter, Tesla said it was on track to hit a production rate for Model 3 of 2,500 units per week by the end of the first quarter.

As Tesla attempts to quickly ramp-up production and make a dent in the hundreds of thousands of reservations it has garnered for Model 3, achieving this milestone is important. Can Tesla pull it off?

A Model 3 driving on an open road

Model 3. Image source: Tesla.

Pausing production

Up until recently, it was beginning to look like Tesla could hit its ambitious weekly production target by the end of the quarter. But when the pace of Model 3 deliveries seemed to slow a few weeks ago, there was concern that the company was running into to some unexpected production bottlenecks. Fortunately, the pullback turned out to be nothing more than a planned pause in production between February 20 and February 24 as the company installed more automation on the assembly line. Tesla stock rallied about 6% on Monday as investors breathed a sigh of relief.

"Our Model 3 production plan includes periods of planned downtime in both Fremont and Gigafactory 1," Tesla said in a statement to Bloomberg over the weekend. "These periods are used to improve automation and systematically address bottlenecks in order to increase production rates. This is not unusual and is in fact common in production ramps like this."

Tesla has implemented similar production pauses during ramp-up phases in the past. One example is when Tesla implemented a two-week pause in the middle of 2014 at its factory in Fremont to accelerate Model S production and install some of the initial Model X production equipment. After this pause, Model S deliveries increased from about 14,000 units in the first half of 2014 to 18,000 in the second half of the year.

In order for Tesla to hit its Model 3 production targets, production needs to be growing exponentially at this point. So, investors should hope the production pause pays off in a significant increase in capacity.

Tesla needs to prove itself

So far, Tesla has made a habit of missing its important Model 3 production targets. The company was initially aiming to exit 2017 at a production rate of 5,000 Model 3s per week, but Tesla then delayed this target to the end of Q1, followed by another delay to the end of Q2.

Tesla vehicle production at its Fremont factory

Tesla's Fremont factory. Image source: author.

After acknowledging its troubles so far at hitting targets for the Model 3 production ramp, Tesla tried to reassure investors in its fourth-quarter shareholder letter:

What we can say with confidence is that we are taking many actions to systematically address bottlenecks and add capacity in places like the battery module line where we have experienced constraints, and these actions should result in our production rate significantly increasing during the rest of Q1 and through Q2.

Tesla has its work cut out for it in order to get to a weekly production rate of 2,500 units by the end of Q1 and 5,000 units by the end of Q2. In the fourth quarter of 2017, Tesla only produced about 2,400 Model 3 units. 

The pressure is on for Tesla to follow through with its ambitious Model 3 production ramp -- not just because management set public targets, but also because investors have already priced in a rosy future for the company. Tesla's $58 billion market capitalization will only make sense if the electric-car company can become a mass-market auto company.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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