Tesla Model S: Production Must Be Perfect To Avoid Financial Failure

By Antony Ingram

4,380 views Aug 17, 2012

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Tesla Model S undergoing assembly

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As far as many people are concerned, Tesla Motors [NSDQ:TSLA] has done the hard bit already.

They've started a company from scratch. Built and sold a sports car. Developed a new model. Put it into production. Started selling it to an adoring crowd. No vaporware to see here, folks.

However, even Tesla CEO Elon Musk himself is admitting the next six months will be tougher than at any other point in the company's nine-year history so far.

"The challenge...is scaling production enough to achieve a certain gross margin on our product so we can be cash flow positive. That’s extremely important.

"If we’re unable to do that, we’ll enter the grave yard with all the other car company startups of the last 90 years" he told reporters at the recent National Clean Energy Summit in Las Vegas.

No mistakes

According to GigaOM, Musk is keen to avoid making mistakes--the same sort of mistakes being experienced right now by fellow startup Fisker with its Karma sedan.

The ramp-up of production needs to be perfect. Tesla will go from shipping around 500 cars in the third quarter of this year, to 5,000 by the end of the year. The company certainly doesn't have a problem with demand, as an interview in Automobile confirms--12,000 people put down the $5,000 deposit to secure a Model S--but supply could be a different matter.

To hit that target--and to remain solvent as a result--there can be no mistakes. No expensive, time-consuming recalls, and no production mistakes. The cars need to be produced quickly, but up to the levels of quality buyers of sedans costing up to $100,000 expect.

Learning from the Roadster

Nor can Tesla afford to take too much time over production, lest it see dwindling reservations as buyers get bored and go elsewhere. This happened with the Tesla Roadster, built the last time that Tesla nearly died.

In Musk's interview with Automobile, he says that the Roadster's gestation wasn't as simple as putting an electric powertrain in an Elise, and the changes needed brought additional complications.

2011 Tesla Roadster Sport. Photo by Joe Nuxoll.

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"It was like you wanted to build a house, couldn't find the right house, so you try to fix an existing house and end up changing everything except for one wall in the basement".

In the end, it cost $150 million to put the Roadster into series production, rather than the $25m-$30m predicted. The Model S has already avoided many of the Roadster's problems, but it will also sell in greater numbers.

Thorough engineering

Negatives aside, Tesla is in a position to deliver cars with minimal disruption. Musk explains how huge amounts of time have been spent eliminating potential issues with the battery pack--potentially the component most likely to see problems.

Musk says the toughest testing they've done has been on safety, and ensuring the pack cannot break down. Get that right, maintain Tesla's record of zero reported battery fires and fix little issues like the Roadster's reputation for poor air conditioning--Musk says the Model S is ice cold, even in Death Valley--and those trouble-free production targets should be achievable.

Tesla and Musk undoubtedly have a chance of success, but that success hinges entirely on making it through these next six months with minimal problems.

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