Tesla struggles to scale Model 3 production, Wall Street doesn’t care

Tesla has reported that it only managed to ship 260 Model 3 cars in Q3, some 1,340 units short of the target for the quarter, citing bottlenecks in the supply chain as the route of the cause. But optimists should bear in mind that the battery form factor Tesla is currently using could make it difficult for the company to ever scale production to the 500,000 unit per annum target – according to industry skeptics.

Even with the poor production news, Tesla’s stock only dipped slightly before returning to its average price in August of $355. Wall Street is clearly unperturbed by Tesla’s tardiness on production targets, remaining bullish on the long-run performance of the vehicle.

A report in the Wall Street Journal claims that Tesla is assembling many of the parts in the Model 3 by hand, and is still a long way off having a fully automated production line. One such example given in the report was that the Model 3’s body panels were being welded by hand, as opposed to by precision robots that have become standard on automotive assembly lines.

But investors still have much to be positive about, based on Tesla’s claims. If the company can reach the 10,000 units per week production target, then the Model 3 could apparently reach over 20% margin. Once the 10,000 units a week target has been met, Tesla expects to ship 500,000 units a year, making the company $3.5bn in annual profits from the car – according to its projections. Given that most OEMs typically have an operating margin of less than 10%, even at the premium end of the industry, this is an attractive proposition for those investors to cling on to.

Tesla is anticipating eventually scaling production to 1m units per year for the Model 3. Producing at such volumes would put Tesla on a par with the world’s most popular car, Toyota’s Corolla, which shipped 1.2m units in 2016.

The production volumes seem particularly ambitious given that the company only produced 14,065 Model S (released 2012) and 11,865 Model X (released 2015) vehicles – a total of 2,180 cars per week in the entirety of Q3, demonstrating that Tesla has a long journey to hitting even the 5,000 unit a week target for the Model 3.

Tesla’s ambitions for the Model 3 have proven popular enough to raise some $1.5bn in capital this year to expand production capacity. Electrek reported that the stock offering was oversubscribed by some $300m, a fact that will further support an already anticipated 2018 equity raise – again to support the Model 3 production drive.

Whether Tesla can deliver on production and margin expectations for the Model 3 is still unclear, but there is no uncertainty around the consumer demand that exists for the vehicle. The premium allure of the Tesla brand, access to the Tesla fast charging network, growing appeal of EVs, the 215-mile range, and $35,000 price tag, drove a rumored 400,000 consumers to put down a $1,000 preorder deposit for the Model 3 – a feat unprecedented in the automotive sector, where preorder sales tend to only exist at the very premium end of the market.

Cars have proven a difficult form-factor for batteries. While in conversation with eCamion CEO Carmine Pizzurro, a company that considers itself a premium battery storage vendor, the former GM employee who led development of the Chevy Bolt and an expert in battery technology expressed the view that the battery cell form factor used in the vehicles would be incredibly difficult to scale. He highlighted how all other automakers have opted for the pouch-based battery technology, instead of the cylindrical cell form-factor found in laptops and used by Tesla, – manufactured in partnership with Panasonic at the Gigafactory.

Tesla has marked itself out as an outlier amongst OEMs in using these cylindrical cells. Although the cost of the cylindrical cell is currently amongst the lowest of all the battery form factors, price declines in cylindrical cells have slowed in comparison to pouch cells in recent years, according to the Battery University.

Pouch cells are also the most efficient cells in terms of use of space, attaining 90-95% packaging efficiency. Cylindrical cells in Tesla’s vehicles are arranged in special sequences to optimize vehicle charging, but this means that they are less space efficient when compared to the pouch designs found in EVs like the Nissan Leaf and Chevy Bolt.

One of the areas where cylindrical cells will work to Tesla’s advantage is that their design and stability lends them to automated manufacture. Now that Tesla has in-housed the production of the cells through the Gigafactory, it will be down to the company to scale the production of the batteries up to price competitive volumes. It is attempting to scale its cylindrical battery production by offering cut-price contracts for its storage products.

Currently, it’s hard to prove Pizzurro’s assertion that the cylindrical form factor to be used in the Model 3 will make it difficult to scale the production of the car to the levels promised by Tesla. But what is clear, is that Tesla still has a lot of bumps to iron out in its production lines.

Whether the Tesla can deliver on its production volume targets is perhaps unimportant, as most of current value of the Tesla stock, is said to be grounded in the delivery of a new service, where Tesla car buyers will be able to generate income from their vehicles by opting into a scheme that allows the owner to send the vehicle out as a self-driving taxi – when not in use. Delivering on the autonomous driving service would change the economics of owning one of the company’s vehicles, and likely enable to it raise huge amounts of capital to deal with any production issues.