On Wednesday, Tesla announced that it would sell $2 billion, yes billion, in equity to help finance its Model 3 production. Tesla has accepted about 375,000, $1,000 deposits for customers who want to buy the Model 3, however there is not yet a set date for the release of the Model 3. Tesla CEO Elon Musk said that he believes that the company will be ab
le to produce 500,000 Model 3s by 2018, however this new round of fundraising makes me wonder whether they will be able to meet the 375,000 initial orders! Tesla has a history of not delivering things on time due to many issues with their vertical supply chain and given the sheer size of the initial order makes me wonder whether they have been able to fix these issues from shipping to battery production. Tesla plans its Model 3 to be the car that it moves down the market with and given Tesla’s immaturity within the industry, it remains to be seen whether Tesla can produce the amount it hopes to. A research analyst with Edmunds.com says that a typical factory output is between 200,000 to 250,000 cars per year and in the first 3 months of 2015, Tesla was only able to produce 15,000 cars. Moreover, its current models cost $75,000 (Model S) and $80,000 (Model X) and the Model 3 will be priced at $35,000. Whether this price is profitable for Tesla I do not know, but currently they are not making money and are relying solely on government credits that they sell to other OEMs for profit. Another thing is that Tesla has recently had two execs leave the company: Greg Reichow, VP of production and John Ensign, VP of manufacturing are both leaving the company which makes me wonder if there are issues that have not been announced to the public that has caused their departure. “In the first quarter of this year, Tesla lost about $283 million on revenue of $1.15 billion. During the same period last year, it reported revenue of about $940 million and a loss of $154 million.” This data is not encouraging however an analyst for Goldman Sachs recently changed his recommendation of Tesla from Neutral to Buy, causing Tesla’s share price to rise. In conclusion, I am still doubtful that Tesla will be able to keep to their goal of 500,000 cars by 2018, let alone meet the 375,000 in Model 3 pre-orders. If this is true, then it could be a total disaster for the company and its shareholders.
Source:
nytimes.com/2016/05/19/business/tesla-to-offer-2-billion-in-stock-to-meet-model-3-production-goal.html?ref=automobiles&_r=0
I agree with you David; I doubt that Tesla will be able to match their goals of production. Not only have they had five executives leave in the past year, but there was also much delay in the release of the previous Tesla model, the Model X. Due to glitches in certain aspects of the car, the release of the Model X was delayed months. It will be interesting to see how Tesla learns from their mistakes with the release of the Model 3. I also doubt that, if at a price of $35,000, Tesla will be able to make a profit with the Model 3.
I agree with both of you that I doubt Tesla will reach there production goals; however, I think the profitability of the model 3 will be extremely high because I’m sure Tesla has determined they will be able to produce these cars at low enough cost to make a profit, and because there is already so much demand for the product because of the brilliant marketing of Elon Musk.
I agree as well, I doubt that they will be able to meet production expectations. I also think that it does not bode well for them that they are having to raise another $2 billion on top of the $375 million they already brought in with the initial deposits. The fact that they undershot their expectations by so much, means that they need major improvements in efficiencies. The question remains whether they will be able to achieve these before other car companies create well known and successful rivals that offer similar cost benefits and functions.
If they are able to sell upwards of 500,000 Model 3s, then they may be able to turn a profit. As we learned in class, the auto industry is a highly fixed cost structure, so once they are able to cover those costs then most of the $35,000 in price will be profit. However, this is a very big if, because if they are not able to sell the volume that they hope to, then it may result in catastrophic losses for the manufacturer. It remains to be seen whether or not they can make good of Musk’s vision.
Tesla struggles in part because it does not benefit from economies of scale like GM or Ford. As such, it will be very difficult to produce not only the car itself but the battery for the car in a sufficient quantity. If Tesla has to refund some of the $1,000 deposits on the Model 3 it could prove disastrous for the company.
As any immature company, Tesla is doing everything they can to generate enough capital to get up and running and work out the kinks. The $1000 pre-orders as well as the sale of government credits suggests they are hurting for working capital. I am fairly certain that all of the executives leaving is a horrible sign for the company. These are the guys in charge and looking at the numbers daily. If they are leaving, it’s because they see things on the horizon they don’t want to be a part of, or have their name attached to.