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Tesla's Production Woes Continue

By Adam Levine-Weinberg - Apr 5, 2016 at 6:20PM

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Tesla is finding out just how hard it is to become a high-volume automaker.

Tesla Motors (TSLA 5.14%) investors were riding high last weekend, after Tesla CEO Elon Musk tweeted that Model 3 reservations had reached 276,000 within three days: far more than what the company had expected. Clearly, demand for a well-designed and affordable electric car is quite strong.

Tesla has racked up astounding pre-orders for the upcoming Model 3 sedan. Photo: Tesla Motors

But by the end of Monday, more quotidian issues threatened to disrupt the party, as Tesla missed its Q1 delivery guidance by a mile. The cause -- temporary Model X production disruptions -- isn't too much of a concern in its own right. However, it casts significant doubt on Tesla's ability to ramp up Model 3 production on time to satisfy all of the customers who just ordered one.

Tesla misfires on production -- again
In its Q4 earnings report, Tesla projected that it would deliver 16,000 vehicles during Q1, and 80,000-90,000 for the full year. However, Tesla reported on Monday that it actually delivered just 14,820 vehicles last quarter, consisting of 12,420 Model S sedans and 2,400 Model X crossovers.

The shortfall came from severe parts shortages related to the Model X. According to the company, "The root causes of the parts shortages were: Tesla's hubris in adding far too much new technology to the Model X in version 1, insufficient supplier capability validation, and Tesla not having broad enough internal capability to manufacture the parts in-house."

Tesla did state that it had fixed its supply chain problems by March, so that Model X production reached a rate of 750/week by the end of the month. As a result, Tesla should still be able to reach its full-year delivery guidance, barring any further snafus.

Late (but great) is Tesla's specialty
This is not the first time that Tesla has missed a production target. Indeed, of the vehicles it has introduced thus far -- the Roadster, Model S, and Model X -- all three have arrived later than planned.

Tesla hasn't been improving on this score, either. The Model X has experienced even worse delays than the company's two preceding models. The first delivery was originally scheduled for 2013, but slipped until late 2015. And high-volume production is only just ramping up.

Tesla's Model X arrived a full two years behind schedule. Photo: Tesla Motors

Most customers have stuck by Tesla in spite of these massive delays, as the company has always delivered stellar products. However, the company probably lost some sales from people who got frustrated by the ever-lengthening wait times.

Will the Model 3 launch be any better?
Tesla has said that it still expects to begin Model 3 deliveries by the end of 2017, which lines up with its original timetable. The company also claims that it is addressing all three root causes of the most recent Model X production problems, to ensure that similar issues don't impact the Model 3 launch.

It's possible that Tesla will be able to follow through on this promise. As my Foolish colleague Evan Niu explained earlier this year, the Model 3 will be simpler to build than the Model S, let alone the over-engineered Model X.

Nevertheless, the fact that Tesla whiffed so badly on its Q1 production guidance does not inspire confidence. After all, that guidance was issued on February 10, and Tesla claims that the supply problems occurred in January and February. If Tesla executives couldn't see what was right in front of them, how will they be able to foresee production hurdles that could be coming down the pipeline in a year or two?

Furthermore, Tesla hopes to ramp up total production from 50,000 vehicles last year to 500,000 vehicles a year by 2020. Most of the volume increase will come from the Model 3. Investors shouldn't underestimate the operational difficulty of growing that much in such a short period of time.

High stakes
With the Model 3 backlog bursting at the seams, the pressure is on for Tesla to deliver its newest model on time and ramp up production quickly. Even if everything goes smoothly, customers reserving a Model 3 today probably wouldn't be able to get their vehicle until 2019. It wouldn't take much in the way of production constraints to push that date back to 2020.

As Tesla grows its customer base beyond its most ardent fans, it will become increasingly important for the company not to disappoint customers with extended delays. The risk of alienating would-be customers is simply too great. Finally, the longer it takes Tesla to ramp up Model 3 production, the more time it will give other automakers to work on competing designs.

Hopefully, Tesla CEO Elon Musk and the rest of his leadership team finally appreciate the hurdles ahead of them as they try to ramp up Model 3 production. Unfortunately, even if they do, there's no guarantee that they will be able to meet their aggressive production goals.

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