Elon Musk, CEO of Tesla Motors Inc., left, discusses the company's new Gigafactory in Sparks, Nev. Tesla Inc. chief executive Musk is on track to deliver on a promise by building the world'ss biggest lithium-ion battery in the Australian Outback within 100 days, an official said on Tuesday, Nov. 28, 2017.
Elon Musk, CEO of Tesla Motors Inc., left, discusses the company's new Gigafactory in Sparks, Nev. Tesla Inc. chief executive Musk is on track to deliver on a promise by building the world'ss biggest lithium-ion battery in the Australian Outback within 100 days, an official said on Tuesday, Nov. 28, 2017. AP Photo - Rich Pedroncelli

Tesla makes startling admission

TESLA has a big problem.

On Wednesday night, US time, the electric vehicle maker confessed what rumours had already suggested.

Its production processes are not working properly and in the last three months of 2017 it failed to make anything like as many vehicles as it had originally pledged.

CEO Elon Musk once said his company would make 20,000 of its affordable Model 3 vehicles in December alone.

At the end of December Tesla counted up all the Model 3s it made in October, November and December and it was just 2,425. Just 1550 were delivered to customers.

Promises, promises.
Promises, promises.

This is not the first time Tesla has failed to keep a promise. The company has a pattern of missing self-imposed deadlines.

Perhaps the most famous such example is the self-driving car. In 2015, claimed claim a self-driving car was two years away. The deadlines has passed and cars still have steering wheels with humans behind them. Meanwhile, many experts think fully self-driving cars are still a decade away or more.

Tesla sells vehicles with a feature called autopilot, but it is for now limited in what it can do. While the company is continually releasing updates for the software, it remains a long way from the automated driving experience the name implies. YouTube contains many videos of the autopilot experience and outside nice straight freeways (the only place you're supposed to use the system) they are a catalogue of jerky steering, slow speeds, and frequent demands for the driver to take back control.

Tesla has made two very cool cars - the Model S, a luxury sedan; and the Model X, a luxury SUV. It has proven it can make modest numbers of expensive cars, delivering 28,000 of those two models combined in the last three months. But the promise of the company - the reason it is hailed as the next Apple or Amazon - has always been its pledge to make a mass market vehicle, the Model 3.

The Model 3 is supposed to cost US$35,000 and to sell in huge numbers. Over 400,000 people put down a reservation costing US$1000 on the basis of that promise. For now, though, the price tag is far higher than that, with buyers paying as much as US$57,500. And it is selling in puny numbers, limited mostly by Tesla's inability to actually make the damn thing.

RAMPING UP

Tesla is trying to make the Model 3 like no other car before it. The production process has an unusually automated production line. To add to the excitement, the company decided to skip the preliminary, quality assurance stages of installing the production line - so called "soft-tooling" - that most automotive manufacturers rely on.

The bold gamble hasn't worked - yet.

Whenever Tesla is forced to announce production is not yet happening at the desired pace, it promises to rectify that in future. In October the company made the shocking announcement that production of the Model 3 was just 260 in the preceding three months. At that time they made a pledge: By March - six months later - Tesla would be making 5,000 Model 3s a week.

That six-month time frame is an interesting one to watch. The CEO, Mr Musk, has in the past believed that six months is far enough away to expect technical problems to have evaporated.

Nearly a year later … we’re still waiting.
Nearly a year later … we’re still waiting.

The six-month production time frame would have seen 5,000 Model 3s a week being produced by March. It has been dropped. Now, Tesla pledges 5,000 vehicles will be able to be produced by the end of June - in six months time.

A FEW MONTHS HERE OR THERE, WHO CARES!?

Time is money, in more way than one. If the Model 3 is later than expected, three main things happen:

1. Losses. It is highly unlikely Tesla can operate at a profit while building just 1000 or 2000 Model 3s a week. The factory is built (and to some extent staffed) to make far more.

For as long as the ramp-up is delayed, losses are likely to accumulate. That matters because Tesla has relatively little money in the bank (cash of US$3.5 billion) relative to how much it has been using (free cash flow of negative US$3.2 billion in the last nine months).

If revenues are lower than costs for much longer, it may need to raise more money to keep paying staff.

Back in 2012, Elon Musk suggested Tesla would never need to raise more money again. The profits on the luxury cars would fund the mass-market car, was the plan.

"I feel confident saying that Tesla does not need to ever raise another funding round," Mr Musk said. Since then it has gone to the market for extra funding eight times, raising many billions in funds, as debt and by issuing new shares.

Tesla's billions in debt needs to be paid back at some stage, or refinanced in an era of rising interest rates. That increases the pressure on Tesla to have high margins in future, in order that it can raise funds to repay.

Needing high margins reduces a company's ability to compete on price, which may be necessary as other car makers enter the game.

2. Tesla got started on electric vehicles before any other major car maker. It got the jump on the pack and made cars with batteries cool. It deserves huge praise for that.

Most other car-makers were slow to respond. But they are finally doing so. By one estimate, 100 models of electric cars are expected to be released onto the market in the next five years.

That's a problem for Tesla. Imagine it expects to sell two million Model 3s. It can sell some before the competition heats up. But the later Model 3 production hits its stride, the more of those two million will need to be sold at a time when Toyota, General Motors et al have electric vehicles competing in the same market.

3. You make your loyal customers mad and tarnish your brand.

For now, Tesla has loyal fans, cash in the bank and few competitors. The later the Model 3 is, the more those advantages crumble. For Tesla, every moment counts.

In three months time, when it tells us how it did in the three-month period that is just starting now, it needs, for once, to be able to announce some good news.



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