It's crunch time for Tesla (TSLA) -- but the electric carmaker is still tinkering with how to ramp up Model 3 production.
CEO Elon Musk boasted on Sunday that Tesla had met its closely-watched goal of producing at least 5,000 Model 3s in the last week of its second quarter. But to get there, Tesla has been making 'on the fly' changes to its Model 3 production lines, including doing some work in a giant makeshift tent that serves as a third assembly line, according to the New York Times.
A significant ramp up in production is necessary for Tesla to achieve needed economies of scale and avoid having to raise additional capital.
Investors initially cheered the news that Tesla had hit the milestone, sending the stock up as much as 6% on Monday morning, but as the day went on, several analysts questioned whether the production pace was sustainable and shares eventually fell. One analyst, CFRA's Efraim Levy, even downgraded his rating on the stock from hold to sell. Tesla finished the day down 2.3% to $335.07.
Sam Abuelsamid of Navigant, an automotive research firm, said he was skeptical about extrapolating too much from Tesla's milestone.
"Any claims about how many cars were completed in the past seven days are meaningless until we know how many were started as well," Abuelsamid said. "If they pulled staff from other areas to add final components to partially finished cars that were started in prior weeks, the fact that 5,000 were completed doesn't imply a 5,000/week build rate."
Edmunds analyst Jeremy Acevedo shared similar opinions.
"In all of the Tesla releases, what's becoming more apparent is that there's a big difference between 5,000 per week and 20,000 per month. It does showcase what the factories are capable of, but doesn't seem like something they can sustain," Acevedo said.
Tesla had spent between $80 million and $90 million building automation tools, according to a report from the Wall Street Journal. But the automated system had mixed results and had even meant a less efficient assembly line, as Musk suggested at a June shareholder meeting.
"One of the biggest mistakes we made was trying to automate things that are super easy for a person to do but super hard for a robot to do," Musk said. "And when you see it, it looks super dumb. And you are like, wow! Why did we do that?"
That's led to ongoing shifts in production strategy that analysts describe as unprecedented for car manufacturers. "Every other manufacturer tests production equipment at the vendor's facility before shipment and then typically spends several months running small batches of cars in pre-production builds before approving cars for delivery," said Abuelsamid, noting that "in Tesla's case they have clearly been so desperate to book revenue and meet Elon's promises that they completely skipped this stage for Model 3."
Meanwhile, should the thousands of Tesla lovers on the waitlist for the Model 3 think twice about driving a car assembled in a tent? Given recent reports of quality and safety issues, it may be reasonable for Model 3 buyers to give their builds a series of once-overs when they finally get them, Acevedo said.
"I think Tesla's been under the magnifying glass for quality issues. So when you have a highly publicized new take on producing vehicles, it makes perfect sense that those who are queued up for a Model 3 would be going through their new car with a bit more scrutiny," Acevedo added.
Moreover, the mainstream customers that Tesla is targeting with its first mass-market build may have far less patience with sloppy quality or warranty repairs, noted Abuelsamid.
"Mainstream customers will not tolerate waiting weeks for parts that a Toyota, GM or Ford dealer would have available the next day," Abuelsamid said. And having to do extensive warranty repairs on a growing number of vehicles could severely tax Tesla, according to Abuelsamid, who noted that in 2017, Tesla booked $1,000 in service revenue per year for each car they had in service, but spent $2,000.
"Ramping up production without addressing that cost will quickly put them out of business because these are repairs that can't be addressed with an over-the-air software update," Abuelsamid said.