Tesla’s Q4 2018 earnings letter just came out, and among the news were several updates on Model 3 production.
The most important tidbits are that Tesla is targeting 10,000/week production rate by the end of the year, that labor hours per vehicle decreased sequentially by 20% in the last quarter, and that Model 3 production for the Chinese market should start by the end of this year.
Tesla has been steadily increasing Model 3 production over the course of the last year. When the car was first released in July of 2017, only a minuscule amount of cars were available and they only went to employees. It took another 5 months or so for deliveries to start to non-employees, and the production rate barely cracked 100/week until the end of 2017.
Then over the course of 2018, production rates shot up to above 5,000/week, with the second half of the year seeing a massive increase in Model 3 deliveries.
Now Tesla’s production curve has leveled off, and Tesla expects to see more “gradual” gains in production capacity over the course of the next year.
Tesla reports that every part of their Model 3 production process in Fremont has demonstrated the ability to reach a rate of 7,000 cars per week over a 24 hour basis. They target a sustained rate of 7,000 cars per week by the end of the year, which annualizes to a rate of 350,000 cars per year.
But that’s just out of the Fremont factory. Tesla also announced plans to start production on Model 3 at gigafactory Shanghai, which broke ground earlier this month. By the end of the year, they want production of Model 3s to start in China with a goal of hitting 3,000 units per week, bringing the total up to 10,000 per week globally, or an annualized rate of 500,000 per year.
Better yet for Tesla, the company expects that capital costs for construction of their Chinese Model 3 line will be less than half of what was spent to build the Fremont line. This should help to increase margins on the Model 3, which will then allow Tesla to create more affordable vehicles while maintaining sustainable profitability.
Another development on this front was an additional 20% reduction in labor hours per vehicle over the course of Q4. Because of this, despite a reduction in average selling price due to the introduction of the mid-range Model 3, Tesla was still able to maintain high margins on the Model 3 as a whole. This bodes well for the eventual introduction of the $35k base Model 3, which we were supposed to see this quarter but is still nowhere to be found.
The reduction in labor hours per car might help explain Tesla’s recent trimming of 7% of their workforce, though most of that is reported to have been from the Model S and X lines, and Tesla is still looking to grow the total production rate of Model 3 regardless.
It’s funny for Tesla to describe a doubling in production as “gradual.” But then again, the company did manage to nearly triple revenues over the course of one quarter, from Q2 to Q3 2018. So a doubling in production rate over the course of a year is a more modest level of growth.
This relies, however, on Tesla’s estimate that Model 3 production can get up to speed in a building which didn’t even exist at the start of this year.
This seems rather fast, but one reason so many companies move production to China is because of the speed with which a factory can be brought online. We saw this recently, where just a week after the groundbreaking ceremony, the site was already alive with work being done.
Tesla’s Fremont factory took about a year to go from “online” (a few tens of cars per week) to “volume production” (a few thousand per week), so going from nothing to volume production in a year would be an even more incredible task.
But Tesla has learned a lot about production along the way, and if they can apply those lessons to the building of their Shanghai Model 3 line, perhaps this rate is achievable.
I would not be surprised if Tesla doesn’t meet this timeline exactly, as the company is known for setting overly optimistic timelines on production and vehicle releases. But the timelines aren’t wildly optimistic, and Tesla usually ends up delivering…eventually.
For example, originally Tesla planned to deliver 500,000 cars in the year 2020, but back in 2016, Tesla stated that they planned to deliver 500,000 cars in 2018. Few believed this pronouncement at the time. It turns out they didn’t hit that number – they delivered about half that many cars last year, and they plan to deliver 360,000-400,000 cars this year according to today’s update.
But even if Tesla misses 10k/week Model 3s by a few months, it seems likely that they will manage to deliver 500,000 cars next year, putting them back in line with their original plans. And if they do manage to exit 2019 at a Model 3 rate of 10k/week, and plan to reach Model Y volume production next year, plus continue to sell S and X, then they may even sell more than 500,000 cars next year, beating their original estimate.
Thus is the complicated matter of following Tesla’s ever-changing production plans. The common thread is this: Tesla is growing, very rapidly, but it’s hard for anyone to guess exactly how rapidly, or to guess when things will happen down to the resolution of a few months.
So Tesla’s pronouncements today can be taken with a grain of salt, but the concept of Model 3 production starting “soon™” in China seems sound.
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