Every quarter, Tesla quickly posts a press release citing two critical numbers: How many cars it built and how many it actually delivered to customers. With the most recent figures being 24,882 produced and 22,200 delivered, it is fair to note a couple of things. First, Tesla missed its own projections in a couple of critical areas. It hoped to delivered 80,000 or more cars in 2016 and fell well short at 76,230. And it failed to match its own record for deliveries set last quarter when it broke the 25,000 level. Second, despite that Tesla had far and away its best year in terms of sales, delivering 50% more vehicles than in 2015. Third, though and perhaps most important, nearly every quarter the company finds itself explaining why it didn't quite do what it hoped. This has huge implications as Tesla attempts to get its high volume Model 3 to market later this year.
If it's not one thing, it's another
Earlier this year, Tesla did something common in Silicon Valley but atypical of automakers. It publicly released a goal that was audacious and arguably unachievable: A previously announced plan to build 500,000 cars annually by 2020 would be "advanced" to 2018. The motivation for this was the more than 300,000 reservations Tesla received when the $35,000-and-up Model 3 sedan went on sale last March.
The question then -- and perhaps more so now -- is whether that goal is even slightly within the realm of reasonable. If Tesla were to increase production again by 50% in each of the next two years it wouldn't be making even 200,000 vehicles next year, let alone half a million. To place some simple math around how daunting the challenge is: Say the company doubled its output in 2017 to more than 150,000 vehicles and then tripled that again next year. Well, yeah, that's still not enough.
This doesn't even mention the reality that for all the innovation in Tesla's vehicles, it hasn't yet proved itself adept at launching or ramping new products. The Model S and Model X were both significantly delayed on release and very slow to reach volume production. It's somewhat encouraging that in the fourth quarter of 2016, the deliveries were split about 60/40 between the Model S and Model X. Why? Well it means that the numerous glitches that delayed Model X appear to be in the rear-view mirror and the company can now build that complex vehicle about as well as the much older S sedan.
Production innovation?
CEO Elon Musk knows that the overly ambitious Model X was problematic both operationally and reputation-wise for Tesla -- and that there's a ton riding on the Model 3. To that end, the lower-cost sedan is said to be simplified in critical ways for easier assembly. But Tesla has absolutely no experience building at the volumes it anticipates for Model 3 and also has new dependencies in the offing.
To supply the cars with necessary batteries will require an unprecedented supply of lithium-ion cells, the vast majority of which are to come from Tesla's new battery "Gigafactory" in Nevada. Development of that facility has been proceeding over the past year but the pressure is on for it to begin outputting batteries at literally record volumes if Tesla is to deliver Model 3 on time and in volume.
Then there is Tesla's desire to control more of its parts supply chain, having been negatively affected by third parties in the past. Musk has noted that if you have 99% of the parts needed to build a vehicle, it is in many ways like having none because you can't ship the car.
Altogether, this puts Tesla in an interesting predicament. It has to become good at shipping a new car on time, become good at ramping up production, become a volume auto manufacturer, become a very integrated one, become the world's largest producer of lithium-ion batteries, and do all of this in roughly a year.
Pay lots of attention to the man behind the curtain
It's worth mentioning that if there's a living human on the planet who can manage this, it's probably Musk. The man has already launched the first startup automaker to achieve any reasonable success in the U.S. in a century, spawning imitators around the globe. Musk also has been sending rockets skyward, planning Mars missions, and devising Hyperloops. All the while he's helped Tesla raise billions in needed capital thanks in part to a stock price that remains strong because investors believe in Musk.
But 2017 is going to challenge Tesla like no year in its history and most of that challenge is going to be backloaded to around whenever the Model 3 actually launches. Along the way, distractions like integrating SolarCity and beginning the transition of its business model from leasing to selling will keep Tesla plenty busy. The company will say more in a few weeks when it releases detailed earnings. More on the outlook then.
