Last week, Tesla Motors shattered all its critics by moving ahead with its ambitious production plan of building 500,000 cars per year for two years.
It was made just as Tesla announced a quarterly loss of US$ 282 million (Rs 1,880crore). The announcement was also made with the departure of Greg Reichow, it’s head of the production, and John Ensign, its head of manufacturing.
It was a week that Tesla considered average. The highs and lows in the automotive industry were compressed into a few days.
Most industry observers were surprised by Tesla’s announcement about its massive production increase, based on the staggering 400,000 preorders for Model 3 . This is surprising.
Even though Tesla’s press release made the matter seem very factual, Elon Musk, CEO of Tesla, stated that “Increasing production fivefold in the next two years will prove difficult and will likely require additional capital. But this is our goal, and we will work hard to achieve it.”
It’s hard to imagine a production ramp-up in the auto industry as fast as this. Paul Niewenhuis, Cardiff Business School professor, believes it is possible “especially with money at the bank”.
Tesla’s accounts indicate a reasonable cash reserve of US$ 1.44 Billion (Rs 9,600 Crore) in the bank. This does not include Model 3 deposits. However, larger car companies usually have at least 10 times as much cash.
There are many questions about the production ramp-up. Tesla, an industry giant, produces 50,000 Model S vehicles per year. The company is ramping up its output by adding the X SUV to increase it to “between 800.000 and 90,000.” By 2016, there were 80,000 to 90,000.
New plans call for the Model 3 to be in production by mid-2017, with first deliveries expected in late 2017. The Model 3 will then go into full production in 2018. 2018 will see the first year of production.
Tesla stated in its quarterly report that it plans to integrate the best technology into Model 3. However, it will keep it simple to build high volumes and high quality.
It was like many Tesla announcements. There were more questions than answers, especially the crucial one about how suppliers will convince them to increase production for such large numbers of cars when long-term demand remains unknown.
Tesla has a long list of quality suppliers for Model S and Model X. They share the same aluminium skateboard chassis, battery, and motors.
Bosch/ZF supplies power steering; Magna front and back subframes; ThyssenKrupp front and rear anti-roll bars; SKF wheel bearings; Novem interior trim – all from a list of at least 50 Tier 1 suppliers. Tesla supplies the battery and electric motor.
According to the ambitious Model 3 forecast, all suppliers must invest in tooling to meet the increased volume and higher price.
Many suppliers will remember being burned in the past when they agreed to high volumes, but their actual orders were lower. This is a surefire way for them to lose money quickly.
The incoming factory bosses will have to win over suppliers. They will also need to increase production despite a company’s reputation for quality issues and delays. According to online rumours, some models may have warranty costs as high as US$ 4000 per car.
Senior manufacturing engineers will be intrigued by the possibility of working in Tesla’s boiler room, but many challenges are ahead.