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1 Silver Lining in Tesla's Delivery Miss

By Evan Niu, CFA - Apr 5, 2016 at 9:45AM

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The EV maker misses its delivery guidance but is ramping Model X production quite nicely.

Model X continues to generate production challenges. Image source: Tesla.

Six parts.

That's all it took to bottleneck Model X production. Yesterday, Tesla Motors (TSLA -6.42%) announced its first-quarter vehicle deliveries. Total units came in at 14,820 during the quarter, a clear miss relative to the 16,000 deliveries that Tesla had guided to. That included 12,420 Model S cars, and 2,400 Model X SUVs.

The company attributed the shortfall to parts shortages, again acknowledging the "hubris" of over-engineering the vehicle. Just like the saying goes, it takes 4,000 parts to make a car, but only 1 missing part to not make the car. In this case, Model X has 8,000 unique parts, and there were shortages for "half a dozen" of them.

In after hours trading, shares gave up most of the day's gains related to the blockbuster Model 3 reservations. However, it wasn't all bad news.

The less-bad news
For starters, Tesla is still reaffirming its full-year guidance of 80,000 to 90,000 vehicle deliveries. This will put more pressure on the next three quarters to hit that range, but the company feels confident that it can still get there nonetheless.

But the most notable silver lining was that Tesla has significantly improved its Model X production rate. For the last full week of the quarter, the Model X build rate has increased to 750 units per week.

Model X. Image source: Tesla.

On the fourth-quarter conference call, CEO Elon Musk said he hoped to get to a peak Model X production rate of 1,000 units per week, but expected the average rate throughout the quarter to be 700 to 800. Musk didn't think Tesla would get to the 1,000-per-week target until the middle to the end of the second quarter.

The fact that Tesla is now at 750 units per week shows that the company is ahead of schedule with ramping up to 1,000 units per week, since Tesla has already reached the average rate.

It's unclear which parts are causing the holdup. On the call, Musk did say that the culprits are often counterintuitive, noting that the most recent hurdle at the time was the chrome finish around the front window. There were also issues with seals, with Musk going as far as to call seals a "huge bane" that had to be redesigned to fit properly.

Lessons learned
To be clear, the reported deliveries were a definite miss, and the figures further underscore the challenges of mass-producing vehicles at scale. Ramping auto production is incredibly hard, especially when you have an overly complex vehicle.

Let's hope that Tesla is taking all of these lessons to heart and truly prioritizing "ease of manufacturing" with the Model 3's design and development. It has an awful lot of orders to get through.

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