MORE MODEL 3S

Elon Musk says if SpaceX can launch a Roadster to Mars, Tesla can fix the Model 3

Tesla took a victory lap on its latest earnings report, released Wednesday (Feb. 7). Looking back at 2017, the car company reeled off its biggest milestones: record deliveries of its Model S and X, the arrival of its first Model 3, an updated Tesla Roadster (one currently headed toward Mars after being launched inside a SpaceX rocket), a 500-mile range semi-truck, and the world’s largest battery in Australia. “Overall, it was a phenomenal year,” said CEO Elon Musk.

But the Model 3 once again struck a discordant note. The company’s first mass-market vehicle, a $35,000 electric sedan that Tesla is betting will be its biggest hit yet, has missed its production targets since starting manufacturing this year. This quarter was no exception.

The company said today (pdf) it delivered 1,543 Model 3s in the most recently completed quarter at its Fremont plant in California. That’s just 3% of Musk’s original plan of rolling out 20,000 Model 3s per month by the end of 2017. The company has now pushed back that milestone until the end of June. It’s now planning to produce 2,500 Model 3s per week by the end of March.

Tesla remains a money losing proposition (it has never made a full-year profit since going public in 2010). Tesla reported a quarterly loss of $771 million on $3.3 billion in revenue. The company continues to burn cash at a furious rate with annual losses ramping up from $773 million in 2016 to $2.2 billion this past year, much of it for expanding Model 3 and Gigafactory 1 production capacity.

Yet that hasn’t phased investors. The stock was stable in after-hours trading and Tesla’s stock has soared more than 40% in the last year, doubling the performance of the S&P 500 over that time. Musk said Tesla could be positive cash flow by the third quarter (although the company planned to invest more heavily in Model 3 and energy storage products) and was “cautiously optimistic” about Tesla’s prospects of turning a profit in the near future.

Deliveries of Model S and Model X were another bright spot. They hit a new record—28,425 units combined—growing 28% compared to the same quarter last year. The company claims foot traffic for the Model 3 is boosting sales of its premium cars, as well as solar panels and battery packs, rather than cannibalizing demand for its high-end products as feared.

Fixing the factory

The company said it’s “systematically addressing” production bottlenecks that have plagued the Model 3. In October, Tesla blamed “manufacturing systems suppliers” on malfunctioning battery assembly equipment in its Gigafactory 1 outside Reno, Nevada. As a result, Tesla was forced to redesign two parts of its battery process.

Tesla is now riding a production “s-curve.” Musk always warned the company would see a slow start before an exponential rise and leveling off again at around 1 million cars per year by 2020. The Model S and Model X followed similar trajectories, but the Model 3 will be on a much larger scale.

That said, the Model 3 assembly line is almost completely automated for the first time. Any problems with the “machine building the machine,” as Musk calls his factories, can result in long delays, as technicians work to fix or redesign the process. Once fully operational, the pace of production is expected to exceed any factory reliant on humans to handle assembly (Musk envisions a factory in which assembly robots move faster than the human eye can see).

That hasn’t happened yet. Instead, battery module subsystems from suppliers “flat out didn’t work,” Musk claimed. He admitted Tesla was complacent, believing Tesla had solved battery assembly manufacturing problems. Now, the company must settle for “semi-automated lines,” with humans moving materials between machine assembly stations until fully automated lines arrive in March. The redesigned assembly lines—which Musk described as operational, with versions working in Germany right now—will be disassembled, shipped to the US and installed at the Gigafactory 1.

That all fits into Tesla’s goal of beating rivals by being the best manufacturer in the automotive industry. “The competitive strength of Tesla long-term is not the car, it’s the factory,” said Musk. “We’re going to productize the factory.” He compared Tesla’s approach to that of Henry Ford: a relatively simple product in what, at the time, is the world’s most advanced manufacturing facility (in Ford’s case, the River Rogue plant in Dearborn, Michigan). “The Model T wasn’t the product,” Musk said. “It was River Rogue.” Musk predicted Tesla could increase the velocity of its assembly lines from today’s upper limit of about 0.2 meters per second, or walking speed, to something approaching “jogging speed,” or 20 times today’s pace.

Model 3 Moonshot

In what may prove to be a metaphor for Tesla, just Tuesday (Feb. 6) the company’s first electric sports car, the Roadster, rode into orbit, perched above the world’s most powerful rocket, the Falcon Heavy. The move seemed to settle investors even though SpaceX is a separate, private company (Tesla’s stock jumped slightly after the successful launch).

Catherine Wood, CEO of ARK investment management, said on CNBC that the feat reaffirmed her confidence in the company. “We think that if Elon Musk, if SpaceX, and can do what they did yesterday in space, they’re gonna be able to produce the Model 3,” Wood said.

It was a risk. This was SpaceX’s first attempt at a rocket of this size and sophistication. The world’s most powerful rocket, throwing off 5 million pounds of thrust, could have easily failed. But the mission succeeded with only minor glitches. The Roadster is now on its way to the outer reaches of the solar solar system, and hundreds of private spacecraft, many of them built by SpaceX, are likely to follow.

Musk suggested Tesla’s fate may be among the stars as well. He told investors on Feb. 7 that if SpaceX could manage to launch a Roadster into space, then the Model 3’s manufacturing problems could be solved. “It’s just a matter of timing,” he said.

Correction: A previous version of this post stated the Tesla had produced 1,543 Model 3s. Rather, it has delivered them.

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