Tesla has eased off the accelerator in manufacturing its new mass-market electric car while the company faces questions about its ability to mass-produce new vehicles.
This past Monday, the assembly line for the Model 3 in Tesla’s Fremont, California, plant was temporarily shut down — again. This came only a few days after CEO Elon Musk assured the public that he was feeling optimistic about the increased production of the company’s long-awaited, mass-produced sedan.
And according to Tesla employees, the announcement of the production pause came without warning.
During the shutdown, workers are expected to use vacation days or stay home without pay. A small number of employees might be offered paid work elsewhere in the factory.
This is at least the second time in recent weeks that production has halted.
This time, a Tesla spokesperson stated that the assembly line had been paused to “improve automation and systematically address bottlenecks in order to increase production rates.”
And Musk’s tweets on the subject are pretty much self-explanatory:
This latest hiccup comes after Tesla surprised investors with a rapid improvement in production pace at the end of March. Its output reached 2,000 vehicles per week for a very short period of time.
But some industry experts have suggested that Musk’s ambition to adopt advanced automation on the assembly line hasn’t been the best idea.
“Yes, excessive automation at Tesla was a mistake. To be precise, my mistake. Humans are underrated,” Musk tweeted last week in response to the most recent production shutdown.
Tesla will likely have to finish its Model 3s by hand because the automated assembly line systems aren’t up to scratch and cars coming off the assembly in semifinished states.
The company declined to comment on how long production would be stalled. But it did say it’s “not unusual” and “our Model 3 production plan includes periods of planned downtime.”
This seems suspect because Monday’s announcement came as a complete surprise to factory workers. And because Musk has said nothing of “planned downtime” in the past when referring to amped-up, volume-boosting, promise-keeping Model 3 production schedules.
I call bull on that one.
General analyst consensus is calling for nearly 155,000 Model 3s to be delivered to customers this year. But this would be unrealistic if ceased production continues for weeks or if these “periods of planned downtime” continue to punctuate production.
Instead, it seems likely that the company will miss its production target for the fourth consecutive quarter. And this would delay Tesla’s efforts to regularly generate much-needed cash.
But Musk, who has developed a habit of overpromising in his public statements, recently claimed that Tesla would be cash-flow positive in the second half of the year and, therefore, wouldn’t need to raise any more capital.
Again, that seems unlikely.
Granted, investors these days are more comfortable than in the past with owning many unprofitable stocks that offer high growth potential. But in the case of Tesla, the need to generate free cash flow soon is becoming very, very real.
The company has $23 billion in total liabilities, including more than $10 billion in debt. Accounts payable was $2.4 billion at the start of the year. And the company’s battery contract with Panasonic means that it will owe billions more over the next several years — whether those batteries are actually needed or not.
Then there’s the reality that automakers that have actually mastered the art of manufacturing generally command a valuation of 10 times earnings or less. In contrast, Tesla trades at more than 100 times next year’s projected earnings.
And achieving even that positive denominator hinges on the company actually meeting its goals.
That’s all for now.
Until next time,
John Peterson
Pro Trader Today