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Model 3: How Ambitious Are Tesla Motors Inc.'s Production Plans?

By Daniel Sparks - Mar 30, 2016 at 1:23PM

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This chart highlights the company's huge expectations for vehicle sales.

"Looks like we may need to increase production plans for the Model 3," Tesla (TSLA 4.53%) CEO Elon Musk said on Twitter on Tuesday. His tweet included a screenshot of a CNBC poll asking whether readers would deposit $1,000 for the company's newest vehicle, which Tesla will show for the first time on Thursday. At the time of this writing, 71% of the poll's respondents said they would, and more than half said they would certainly follow through with an outright purchase.

Tesla Model 3 event invitation art. Image source: Tesla Motors.

The poll, along with Musk's note about possibly needing to increase production plans, brings the company's growth plans into focus. What could Tesla's vehicle production in the coming years look like as it ramps up production of its recently launched Model X and begins Model 3 deliveries in late 2017?

First, a look back helps provide context for a forecast of what might be ahead. Here's a look at the company's growth to date -- and how it got to Model 3.

Tesla's extraordinary growth story
While the company started with luxury vehicles, which currently have a minimum starting price of about $70,000 and can be optioned as high as about $145,000, it's never been the electric-car maker's intention to build a business that caters only to buyers that can afford cars this expensive.

In 2006, Musk detailed his secret master plan:

Build sports car

Use that money to build an affordable car

Use that money to build an even more affordable car

Of course, few took Musk very seriously at the time. The company's sports car, or its now out-of-production Roadster, was still about two years away from first deliveries. And the first Model S deliveries were about six years away.

And the doubting continued even beyond Tesla's Model S launch in 2012. The company's plan to deliver 20,000 Model S in 2013 appeared unrealistic after its worse-than-expected 2,700 deliveries during the second half of 2012. But sentiment turned positive as the year went on; actual deliveries by the end of 2013 were nearly 22,500. Having proven the company can follow through with its ambitious growth plans, the stock's valuation began to price in years of growth.

Today, its growth ambitions are as optimistic as ever. On Friday, Tesla will finally unveil what its "even more affordable car" has to offer -- and this car is supposed to play a key role in propelling deliveries from an estimated 80,000 to 90,000 this year to 500,000 annually by 2020.

What could this production ramp look like?
Tesla has said very little about its specific plan to ramp up production to 500,000 vehicles per year. All management has articulated is that it expects Model X production to eventually rival that of the Model S and it anticipates Model 3's lower price point to be a key driver for this growth.

In chart form, here's what the growth could look like in the coming years if Tesla really does stick with its plan to grow sales to 500,000 annually by 2020.

Data for chart is retrieved from SEC filings for periods shown. Periods with asterisks indicate estimates based on comments from management. Chart source: author.

Is this sort of growth realistic for Tesla? Looking back at how Model S production has ramped and the vehicle has resonated with customers and outsold comparably priced vehicles in key markets, there's reason to believe it's possible.

And it is certainly planning on significant growth ahead. Its Gigafactory, which is aimed to help support battery production for as many as 500,000 vehicles annually by 2020, is far enough into construction for the company to be confident that battery production won't hold back Model 3 production.

Furthermore, interestingly, it is growing its sales at faster rates the larger it becomes, making a rapid ramp more believable than it would be if growth proved to be more difficult as Tesla grew in size.

Data for chart is retrieved from quarterly SEC filings covering periods shown in chart. Chart source: author.

One thing is clear: Tesla's ambitions for vehicle production are unmistakably huge -- and management clearly hopes its Model 3 will move the needle in a big way.

On Thursday, investors will get to see just how serious it is about its $35,000 car.

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