Tesla’s Business Model: It’s Complicated

If Musk can build it, they will come

Our choice of the Tesla Model 3 as 2018 Design of the Year does not mark the first time we recognized the design and engineering acumen of Silicon Valley’s “disruptive” car company. Our 2012 Automobile of the Year was Tesla’s breakout product, the Model S. In the six years since, Tesla has grown. The only issues holding it back from becoming a mass-market automaker are its struggle with actually manufacturing electric-powered cars and SUVs, and slipping demand for electric vehicles in markets such as Hong Kong after a government tax break or subsidy is eliminated.

Tesla CEO Elon Musk appears to look at the battery-electric vehicle market only from the supply side. Prior to selling the first Tesla Model 3s, he said production of the $35,000 (base price) sport sedan would reach a rate of 5,000 per week by the end of 2017 and quickly rise to 10,000 per week later this year. Those plans called for producing 500,000 Teslas, mostly Model 3s, in 2018. By the end of 2017, Tesla had built 2,685 Model 3s, 2,425 of them in the fourth quarter. It had delivered 1,773 Model 3s, with another 860 in-transit early in the first quarter of 2018.

In his third-quarter financial results analysts’ call in November, Musk famously characterized Tesla’s Model 3’s launch as “production hell.” He said a subcontractor had “robot calibration issues” but blamed himself and his team for signing the subcontractor. “We had to rewrite all that software—20 to 30 man years of software—in four weeks,” Musk told the analysts.

A subcontractor had “robot calibration issues. … We had to rewrite all that software—20 to 30 man years of software—in four weeks.”

The CEO amended his production targets in that call and said Tesla would ramp up to 5,000 Model 3s per week by the end of the first quarter of 2018. But in a January update, Tesla pushed back the Model 3 ramp-up back to the second quarter. Doubling the number to the ultimate goal of 10,000 per week would be easy, Musk said in November, because Tesla can make the robots “go really, really fast.” Whether Tesla meets Musk’s late first-quarter goal or not, it’s clear the 455,000 (net) global customers who placed $1,000 deposits on a Model 3 will not all get their cars before 2018 ends.

A couple weeks after Musk’s conference call, he unveiled a prototype for a semi truck at his Hawthorne, California, facility. It arrives in 2019. A new Roadster, also shown at the event and which looks more like a four-seat targa top GT, comes in 2020. Musk promised a 5.0-second 0-60-mph time and a 500-mile range, and that’s for the truck. The Roadster will have a 200 kWh battery pack capable of 620 miles of range, a 1.9-second 0-60-mph time, and a top speed of more than 250 mph. The compact Model Y SUV, based on the Model 3, is due the same year as the Roadster, and Musk has since confirmed that the next product after that will be a pickup truck. “Don’t set your watch by this, but rough production starts in about three years,” he said of the Y in the third-quarter earnings call.

Tesla critics wonder where Musk intends to build all these cars and trucks. If he meets his stated goal of 500,000 Teslas per year at the company’s Fremont, California, facility, he will surpass New United Motor Manufacturing’s best year, 2006, when it assembled 428,633 Toyotas and Pontiacs. NUMMI averaged 6,000 units per week between 1984 and 2009. One possibility is Tesla’s Gigafactory in Nevada, though Musk has given no indication the company will assemble cars in a plant designed to mostly produce lithium-ion battery cells. No matter where the new models are assembled, Tesla will have to invest hundreds of millions of dollars, even billions, in new tooling and an expensive paint booth tall enough to accommodate big-rig trucks.

Perhaps it doesn’t matter to a new car company that continues to lose money ($619 million in the previous third quarter) while showing a far more promising future than every upstart automaker since Preston Tucker. Some observers steeped in auto-manufacturing lore believe traditional automakers have a better shot at funding the EV revolution with the healthy profits from conventional gas- and diesel-powered vehicles. Silicon Valley considers that 20th century thinking. The Cult of Elon, much like the Cult of Mac nearly a generation ago, will tell you that when climate change becomes a clear, imminent threat to global economic forces in a few years, Tesla will be positioned to become the world’s dominant automaker.