Tesla Likely to Struggle Meeting Model 3 Production Demands

Placed a deposit on a Model 3? You might have to wait a while.

It’s difficult to keep up with the advance order bank for the new Tesla Model 3 – with about 300,000 potential buyers already plunking down $1,000 deposits less than a week after the unveiling of the new battery-electric vehicle.

The big question is whether Tesla will be able to keep up once it comes time to fill all those orders. Production is set to begin sometime late next year, according to founder and CEO Elon Musk, but based on the battery-carmaker’s record, it could be quite some time before it actually gets those orders filled.

Since its founding 13 years ago, Tesla has had a history of falling short on expectations, at least when it comes to getting product out the factory door. And its track record isn’t getting much better, if the latest quarter is any indication. In fact, the company is blaming its own “hubris” for falling well short of expectations for the Model X SUV.

While the Silicon Valley automaker delivered 14,820 vehicles during the January to March quarter, that included only 2,400 of the newer utility vehicles. The original goal was something closer to a 50/50 mix, CEO Elon Musk had suggested during the official Model X debut last year.

“The root causes of the parts shortages were Tesla’s hubris in adding far too much new technology to the Model X in version 1,” the company said in an unusually frank statement, along with “insufficient supplier capability validation, and Tesla not having broad enough internal capability to manufacture the parts in-house.”

As blunt as that statement might be, it still falls short of explaining the production problems the company has had at its Fremont, California assembly plant. According to various reports, one of the biggest issues centers around the distinctive “falcon doors” that are a signature feature of the Model X. Problems with the original, hydraulic hinge system forced late changes and initial production problems – and led the carmaker to sue Hoerbiger Automotive Comfort Systems, the Swiss firm that came up with the original, faulty hinge design.

But Hoerbiger and Tesla’s current suppliers can only catch some of the blame for the fact that the Model X was a full two years late to market. As Musk acknowledged during a media conference call, Tesla engineers seriously overestimated their ability to share components between the battery SUV and older Model S sedan, a miscalculation that required extensive re-engineering.

It wasn’t the first time the automotive start-up had to go back to the drawing board. The original Tesla Roadster was supposed to come to market with a two-speed gearbox. But despite repeatedly switching suppliers, that approach failed and the two-seater that eventually did reach Tesla’s factory-owned showrooms had a single-speed transmission. Engineering issues plagued the Model S sedan, as well.

And continue to do so. After raving about the Model S, and dubbing it the best vehicle it ever tested last summer, Consumer Reports subsequently reversed course. It later described a plague of reliability issues that led the influential non-profit magazine to revoke the sedan’s coveted “Recommended Buy” rating.

Industry insiders contend that another reason for the slow launch of the Model X has been Tesla’s desperate desire not to repeat the quality and reliability issues seen on the Model S.

Which brings us to the launch of the Model 3. Tesla desperately needs the small sedan. It continues to operate at just a fraction of the Fremont plant’s 500,000 vehicle annual capacity, one reason it is running deep in the red. It will continue to burn cash for some time on product development. But even the ever-confident CEO Musk seemed hesitant when he outlined the production plan for the Model 3.

“Next year,” the South African-born executive said during the Model 3 preview, before quickly adding, “I feel fairly confident they will begin next year.”

He may be one of the few even that confident. “Supplying all those electric vehicle hopefuls with a reliable, high volume and profitable sedan will require a complete transformation of Tesla’s engineering, production and quality standards,” cautioned Karl Brauer, a senior analyst with Kelley Blue Book.

As Tesla has so far shown, it hasn’t yet mastered the art of even keeping up with production levels expected in the luxury market, said Joe Phillippi, of AutoTrends Consulting. It has not shown how it will suddenly be able to jump from last year’s 50,000 vehicles to 500,000 by 2020, the target Musk has set. It’s far from clear it can even get up to a pace of perhaps 100,000 to 200,000 by 2018, the first full year of production for the Model 3, at least according to the current plan.

If anything, Tesla will have to become more, rather than less, focused on quality and reliability with the Model 3. The maker’s current customers are a generally fanatic and loyal bunch, and they typically have several other vehicles they can turn to when their Models S or X break down, suggested David Sullivan, of research firm AutoPacific, Inc. The Model 3, on the other hand “is likely to be an owner’s only vehicle,” so reliability will be crucial.

Add the fact that Tesla will have a relatively limited dealer network, with a number of states continuing to bar its factory-owned showrooms. That will raise the quality bar even higher, as many of those who’ve placed early deposits will be hours – and possibly several states – away from a repair center.

There’s yet another challenge Tesla will have to deal with. The lithium-ion packs for the new Model 3 will come from the new, Reno-based Gigafactory. Barely operational today, it will soon have to be smoothly producing more batteries than any other plant in history.

So, even if the Model 3 does get into production in late 2017, the likelihood that Tesla will meet its huge order bank quickly seems quite a stretch. Simply getting the first Model 3 out the door will be a small victory.