Tesla is taking a long time to ramp up production for the Model 3 - here's why

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elon musk

Reuters/Bobby Yip; Business Insider/Dave Smith

Tesla CEO Elon Musk.

• No major automaker with 500,000 pre-orders for a new car would be so slow to hit full production.

• Tesla is actually shifting from serving a small market well to a potentially large market badly.

• There are options, but Tesla doesn't appear to want to choose them.

Tesla semi-officially launched the Model 3 in July, delivering 30 vehicles, mainly to insiders and employees. In August, the delivery tally rose to 75, according to InsideEVs.com .

That's more than double the July number, and don't forget that at Tesla's July handover event, CEO Elon Musk stressed that the company would be in "production hell" for at least six months .

Tesla's goal is to produce 20,000 Model 3 vehicles per month by the end of the year. A good start would be hitting an anticipated 1,500 total for the month of September. The pressure is on because the carmaker has something like 500,000 pre-orders for the vehicle - but has never manufactured even 100,000 annually.

You might justifiably ask yourself, "Hey, hasn't Tesla been around for over a decade? Why is it so hard for the company to execute on its model basic business - building cars?

Over 100 years ago ...

Contrast this with the production ramp of the famous Ford Model T. Henry Ford's revolutionary mass-produced automobile started what we would now call full production in about 1911, when 12,000 examples rolled off the assembly line. By 1914, that number had risen to 300,000.

If you don't like case studies from over 100 years ago, ponder the production curve for the Chevy Bolt, an all-electric, 200-miles-of-range vehicles that General Motors launched last October (in limited markets) and priced at about $37,500 before tax credits.

Chevy sold about 600 Bolts in December of 2016 and took that number to about 1,200 the following month. In August, the company sold 2,100 cars.

Demand for the Bolt is nowhere near what Tesla has seen for the Model 3. But that's a distraction. For vehicles in high demand, GM has seen dramatic sales increases and pushed production accordingly: the Cadillac XT5 SUV sold 300 units last April, but in August, the brand moved over 7,000.

It isn't complicated

This isn't that complicated. A carmaker - or any other business, for that matter - see demand and capitalize on it, ideally at a profit, unless the objective is to amass market share and eventually pricing power through the development of a monopoly (a risky move, traditionally, as that attracts antitrust attention from the federal government).

It is complicated for Tesla because the company isn't exploiting its actual market advantage, instead, it is trying to create and dominate a new market. With its Model S and Model X vehicles, Tesla dominates the tiny market for luxury electric cars. But it wants to capture a massive portion of the currently marginal market for mass-market EVs - and by doing so encourage a rapid transition of all auto transportation from gas to electric power (Musk's overarching and quite noble plan).

The problem is that although the Model S and Model X are compelling, Tesla isn't very good at building them in even modest volumes, falling short on delivery guidance two years in a row. Demand for these vehicles might be topping out anyway, and Musk has said that S/X production was designed for a run-rate of about 100,000 units annually.

So what we're really witnessing here is a 14-year-old carmaker starting from scratch.

Tesla Factory

Benjamin Zhang/Business Insider

Tesla's factory.

A source of frustration

This is frustrating for experienced auto-industry observers to watch, as even though Tesla has its critics, most people are rooting for the company to succeed and aren't hung up on the debate about whether the company deserves its $60-billion market cap or should be shorted into oblivion on Wall Street.

It's frustrating because although Tesla isn't a veteran of automaking, it's been in the game long enough to know how to do it. If Chevy had 500,000 pre-orders for the Bolt, you can bet it would have ramped production to 10,000 a month in, well, a few months. Some of Tesla's challenges can be traced to the supply chain - Musk recently noted that the company has finally gotten the attention of what he called the A Team at the top-tier suppliers.

tesla model 3

Tesla

They've already come, so just build it.

But these explanations go only so far. If Henry Ford could figure it out at a time when we still had horses and carriages in city streets, Musk should be able to do it now, with a robot-packed factory, software-optimized production, and a vast network of suppliers to call on.

Even if he can't, there's always contract manufacturing: big car companies send their overflow demand to be serviced by companies like Magna, the largest contract player in the business.

If Tesla doesn't want to make customers wait four years to get their Model 3s, it needs to go from zero to 100 mph in the factory. Its track record suggests that, despite Musk's optimistic predictions, that won't happen. This actually isn't a big deal - unless Tesla insists on doing everything itself. And spending a long time in production hell.

Get the latest Tesla stock price here.

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