Model X. Image source: Tesla.
Past performance does not guarantee future results.
I know that you've likely heard that line way too many times by now in your investing career, but I'm using it in a different context. Tesla Motors (TSLA 0.88%) has a pretty spotty track record when it comes to product launches. That includes in terms of timing and initial build quality with early production units. It's partially for this reason why investors and analysts are so skeptical about the company's ability to launch Model 3 in late 2017. They figure that Tesla has always been late, so this time won't be different.
What if it is different this time?
"Much tighter feedback loop"
I've already argued why this assumption might be flawed. It's true that we have a limited sample size, since Tesla has only launched three cars to date, but it's important to analyze the actual underlying reasons for past product hiccups in order to appropriately assess whether or not those reasons even apply in the context of Model 3. Roadster was hand-built with an outsourced chassis, Model S just needed to work, and Model X was severely over-engineered.
On the last conference call, CEO Elon Musk gave some additional insight into how Model 3 development differs from its predecessors.
With Model 3 we're being incredibly rigorous about ensuring that we don't have anything that isn't really necessary to make a very compelling version one of the car. We also have a much tighter feedback loop between design engineering, manufacturing engineering, and production. And so a new element of Model 3 can't be approved unless manufacturing has said that this is easy to manufacture and that the risk associated with manufacturing is low.
There are stories of Musk pushing back and overriding objections from his manufacturing team when it came to the Model X's falcon-wing doors. He simply had to have them. But those doors have proven to be a significant manufacturing challenge, and may end up being more trouble than they're worth (especially if we start talking about out-of-warranty repairs). Musk said he has taken "a lot of lessons learned from Model X."
It's encouraging to know that Tesla is taking additional steps to ensure Model 3's manufacturing feasibility, with different teams collaborating at a deeper level to minimize any risks to the production ramp.
From the brief views that investors have had of Model 3 so far, the prototypes do look simpler in many ways. For instance, the door handles are mechanically quite simple and don't look as flashy as the Model S retractable handles or the Model X falcon-wing doors; the front fascia is flat instead of having a complex recessed region.
Here's Musk warning against the prevailing assumption:
It's always tempting for people to reason by analogy instead of first principles. And that would be the mistake of assuming that anything to do with the X production has bearing on the Model 3. They are very different programs with completely different approaches.
So I would not try to extrapolate from that, any more than it would've made sense to extrapolate from the Roadster when we were making 600 cars a year, to 20,000 cars a year with the Model S.
He continued:
If you were to extrapolate from the Roadster experience, you would be completely wrong about the Model S outcome, and many people were. That's why I would say X is not relevant.
There are many reasons why Tesla may still miss its target date for Model 3, but they probably won't have anything to do with past mistakes.
