Tesla wrapped up its second quarter with a characteristically dramatic flourish, pulling out all the stops to reach an elusive target of building 5,000 Model 3 sedans a week. Now the mercurial automaker led by billionaire Elon Musk has to lock in and smooth out that pace to ensure product quality and avoid burning out factory workers, a task that looks a bit harder with the departure of engineering chief Doug Field.
Musk tweeted out on July 1 that the company managed to build 7,000 Model 3s in seven days, and the company said total production of the car, nominally priced from $35,000, totaled 28,578 for the quarter or about three times the volume in the first quarter. By the end of August, output of the car should reach 6,000 units a week.
“The last 12 months were some of the most difficult in Tesla’s history, and we are incredibly proud of the whole Tesla team for achieving the 5,000 unit Model 3 production rate,” the company said in a statement. “It was not easy, but it was definitely worth it.”
After 12 months of production “hell” that included revised timetables for hitting the 5,000-unit rate, departures of high-level managers, erecting an outdoor assembly line next to Tesla’s Fremont, California, plant (where Musk appears to have lived for much of the past month), the company may finally be evolving into a high-volume manufacturer. And while hitting the goal seems as consequential as when Model S sedans first rolled out of the Fremont plant six years ago, getting there wasn’t pretty and the pace may be hard to maintain, especially with the loss of its respected engineering chief.
Senior Vice President Field, a marquee engineer who Musk lured away from Apple in 2013, had been on a sabbatical since May. “After almost five years at Tesla, Doug Field is moving on,” the company said in a statement, without elaborating. “We’d like to thank Doug for his hard work over the years and for everything he has done for Tesla.”
His departure, reported earlier by the Wall Street Journal, comes after Nick Kalayjian, who’d been vice president of engineering for Tesla and a Field’s lieutenant, left the company in June. Musk also announced a 9% across-the-board cut in jobs last month that may further thin its engineering ranks.
Efraim Levy, an equity analyst with CFRA Research, said in a note on Monday that although he’s optimistic that over time Tesla can consistently remain at or above the 5,000/week Model 3 rate, he cut his recommendation on its shares to Sell from Hold as the stock is trading well above his $300 target price,
“After Herculean efforts and albeit a few hours after a self-imposed deadline, TSLA finally achieved its latest goal to reach production of 5,000 Model 3 sedans per week,” Levy wrote. “In the interim, we do not see this production rate as operationally or financially sustainable.”
Gordon Johnson, an analyst with Vertical Group who is particularly bearish on Tesla shares, however, had a more pessimistic take, suggesting in a Bloomberg Television interview that Tesla hadn’t achieved its goal. “I don’t think they’re anywhere near a production rate of 5,000 cars per week, despite nearly every media outlet highlighting that,” Johnson said.
The production pace is critical to help Tesla generate sufficient revenue to finally reach consistent profitability, a goal that’s eluded the company since its 2010 initial public offering.
“The problem is that Tesla appears to be good at ‘burst’ rates, but it needs to attain consistency which will come, but my forecast is that they will sell just over 100,000 Model 3s this year in the U.S.,” said Alan Baum, whose Baum and Associates consultancy specializes in tracking and forecasting electric vehicle sales.
Assessments of Tesla’s extraordinary production efforts by the Wall Street Journal and New York Times raised questions about whether its seemingly on-the-fly solutions to speed up assembly work will impact Model 3 quality. The Times also noted that assembly workers are feeling a high level of pressure to keep up the pace, often working 10- to 12-hour production shifts, and leading to frequent turnover on the factory floor.
Along with further boosting Model 3 output to 6,000 units a week in late August, Tesla reiterated its target to be both cash-flow positive and profitable in the second half of 2018. Likely Chinese tariffs in retaliation to the Trump administration’s approach to trade policy shouldn’t prevent Tesla from attaining profitability in the third and further quarters, the company said in a statement.
Total production, including Model S sedans and Model X crossovers, reached 53,339 units in the quarter, a company record. It delivered 40,740 vehicles during the period, including 18,440 Model 3s. A big jump in the pace of output at the end of the quarter meant an additional 11,166 Model 3s were in transit to customers and will be counted in third-quarter deliveries.
Though it’s delivered 28,386 Model 3s since production started a year ago, assembly delays appear to have kept reservations for the car flat, with “roughly 420,000” at the end of the first half, the company said. It reported about 450,000 reservations at the end of the first quarter.
In its relatively brief history, Tesla has never operated like a conventional automaker and shows no signs of doing so now. It should because when it comes to auto production, crafty, quick solutions can be helpful but aren’t a reliable long-term strategy. Long-term Tesla bulls have held out hope that good things will happen once the company sustainably achieves big-time production scale. It’s making that transition, but getting there has been messy and expensive.
For Tesla’s long-term viability and financial health, less chaos and a more (boring) predictability would be a welcome change.