"I have great respect for people who manufacture large numbers of complex objects," Tesla Motors (NASDAQ:TSLA) CEO Elon Musk said during the company's third-quarter earnings call. Musk is learning firsthand how tough it is to ramp up production of vehicles. After hitting a road bump in the company's planned production boost, Tesla was forced to reduce full-year guidance for 2014 from 35,000 deliveries to 33,000. But the electric-car maker has a few immediate plans to simplify production and hopefully streamline manufacturing enough to help boost Model S output by another 50% in 2015.
A fair criticism of Tesla
Musk went to great lengths in the earnings call to drive home the point that demand was not a problem for the company. But this doesn't mean Tesla investors should expect the company to increase production fast enough to meet demand in a short period of time.
"Being unable to increase production fast enough, not lack of demand, is a fair criticism of Tesla," the company said in the third-quarter letter to shareholders.
Why is Tesla falling behind its production guidance this year? After all, the company beat its own initial full-year guidance in 2013. The answer is that Tesla underestimated the complexities involved in adding into production new autonomous driving features and options for a dual-motor system for the Model S.
To be fair, Tesla's production progress is still notably rapid. After delivering about 22,500 vehicles during the first full year of Model S sales, the company's expectation for 33,000 deliveries this year would suggest a 47% boost to annual deliveries. Going forward, Tesla remains bullish about its ability to further ramp up production, estimating a 50% pop in Model S production in 2015 "and probably for several years to follow," according to the letter to shareholders.
The company has some near-term plans to simplify production of its Model S that Tesla hopes will begin to pay dividends as early as 2015.
"One of the significant actions we intend to take in order to reduce manufacturing complexity is to simplify our product offering by reducing the number of options and powertrain combinations," the company said in the Q3 letter. "This will enhance our ability to scale production in 2015."
The changes are already visible on the company's website. After Tesla launched a dual-motor configuration for the Model S in October, the upgraded powertrain system was initially an option for the 60 kilowatt-hour, 85 kWh, and performance 85 kWh Model S formats -- all on top of the less-expensive rear-wheel drive powertrain system for all three versions of the vehicle. In total, this was six different powertrain combinations for customers to choose from for the Model S. Tesla has now narrowed the possible combinations to four: The 60 is only available with rear-wheel drive, the 85 has both rear-wheel-drive and dual-motor versions, and what was the P85 and is now the P85D is only available as a dual-motor option.
For investors, it's good to see that the company plans to keep its vehicle configuration options as simple as possible, which makes it more likely that Tesla will meet its ambitious goals of ramping up production rapidly each year. A focused product portfolio is especially valuable now, while the company has more demand than it can handle. If Tesla did have demand shortages, a case could be made for providing consumers with more options to increase orders, but Tesla is far from having to worry about demand.
There are also likely immediate benefits to the new pricing structure. Replacing Tesla's previous flagship $93,400 P85 with the $105,670 P85D should increase the company's average selling price. Furthermore, the introduction of a dual-motor option for the 85 kWh model, with a starting price $5,000 higher than the rear-wheel-drive version, should also help with ASPs.