Tesla Achieved “World Class Result” With Model 3 Production, Says Analyst

DEC 7 2018 BY VANJA KLJAIC 20

While the result is world-class, the path was nothing short of a production-hell-avoiding pool of misery.

Certainly, you may think the above line is simple over-exaggeration. However, all the things that Tesla, its management, workers and customers went through with the Model 3 production and market launch, couldn’t be described better. After all, when the company rolled off the first 30 production Model 3s off the line back in July 2017, Elon Musk bigheartedly welcomed Tesla’s employees to “production hell.”

While many considered (and still do) Tesla as one of those companies that will either fail miserably or be the next best thing since sliced bread, the truth is – as always – somewhere in the middle. The two years following Musk’s announcement were just that – production hell – but it made the company grow out of its infancy stage, helping it become one of the most prominent carmakers in the world. And mind you, we’re not talking about “just” electric vehicle makers. And evidently, this is most true when you consider last Recode Decode podcast, where Musk revealed how that Tesla is now at a point where it is no big deal for the company to produce 5,000 Model 3 per week.

However, Musk noted how Tesla’s employees had to put out “an excruciating effort” to both refine and improve the Model 3 production, in order for the ramp up to achieve the desired goals and help the company produce the vehicle at the numbers it is doing so today. And the result of this effort didn’t go unnoticed. In a recent visit to the Tesla Fremont factory, one Wall Street analyst was seemingly left really impressed.

Pierre Ferragu of New Street Research can be considered as one of Tesla’s most prominent supporters in Wall Street. He holds a $530 price target on Tesla stock, making him a firm believer in the electric car maker and its future.

Last Tuesday, Ferragu noted how the California based carmaker made a lot of mistakes in the early stages of the Model 3 ramp up. He even went as far as describing Tesla’s Fremont factory as a “crowded mess” in its current state, all due to the facility’s complexities. One example is the intricate conveyor belt system that was eventually scrapped and replaced with human workers. In turn, this resulted in the process being 30% less productive than what the company first anticipated.

However, Tesla pushed through all of these problems, resulting in a company that’s more accustomed to mass production of vehicles. The Wall Street analyst notes how Tesla’s production processes are only bound to get better from this point, particularly as the company is in a constant state of improvement. Furthermore, he thinks that the lessons learned from the Tesla Model 3 “production hell” are likely going to result in some new production facilities – such as the Shanghai-based Gigafactory 3 – being built right from the getgo, with all the optimizations and lessons learned implemented right away. In turn, this will allow Tesla to produce vehicles a lot faster and more efficiently.

“All these (mistakes) feed a lot of (the) bear argument on the company. We see it the exact opposite way. Failure is where one learns the most. By shooting way too high, Tesla failed on its original plan, but achieved a world-class result. The next production sites will be much more efficient, and will ramp very rapidly.” 

Overall, the analyst summarizes Model 3 ramp: “Tesla failed on its original plan, but achieved a world-class result.” Furthermore, Tesla is only at the half-way point for the Model 3 production numbers. The carmaker eventually aims to produce 10,000 Model 3s per week, as the vehicle is slated to start getting delivered to customers in Europe and Asia.

Tesla eventually aims to manufacture 10,000 Model 3 per week, particularly as the vehicle starts getting delivered to territories such as Europe and Asia. In this light, Ferragu stated in his note that Tesla’s Model 3 ramp to 10,000 per week would likely be a far less painful process for the company.

“The road to 7,000 units per week seems easy, and limited capital expenditures will be required (in the low tens of millions) to get to 10,000,” the analyst wrote.

Tesla is still in a very delicate state. But as things move along, the fear that some had (including me) for the company’s future, are slowly being replaced by optimism all across the board. Let’s not forget, Tesla is a young company. They didn’t have the backing of an already-in-place industrial system that would ensure things go smoothly. And even so, with the recent example of Porsche announcing their own “production hell,” it seems that bringing a completely new vehicle and technology to the market is never an easy process. But, with Tesla doing so good and the legacy carmakers joining in on the fun, an electric future seems less and less doubtful, and a lot more certain.

And that, by all measurement, could very well mean our grandkids don’t have to float on a raft somewhere in the middle of the ocean, fighting modern-day pirates once the sea levels go up and the climate change kicks all of our butts in the only way mother nature can: hard and without any regret.

Source: Teslarati

Categories: Tesla

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20 Comments on "Tesla Achieved “World Class Result” With Model 3 Production, Says Analyst"

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John

Looks like you’ve got a duplicated paragraph
(Feel free to remove this comment 🙂

ffbj

We gonna rock down to electric avenue…
https://www.youtube.com/watch?v=vtPk5IUbdH0

MikeG

I don’t see how the author considers Tesla in a delicate state–they are cashflow positive and should remain that way in the future, given they have a best-selling car. Short of a meltdown of the global economy which would likely take down the legacy automakers with it, the only reason I would expect Tesla (alone) to fail is that an meteorite takes out Fremont or Sparks.

Kbm3

Too funny. A meteorite is one of the black swan events I thought about to convince myself to diversify from > 100% Tesla to 75%:)

Jason

“…they are cashflow positive and should remain that way in the future“

How do you know that?

After reading your comment, I looked at Tesla’s latest 10-Q filing and if it weren’t for the increase in A/P & accruals for the current 9-month period (as pointed out in the Statement of Cash Flow), Tesla would have had negative Cash Flow from Operations.

For the same 9-month period last year, A/P & Accruals were a source of cash of about $170 million compared with roughly $1.628 BILLION as source of cash for this year’s 9-month period, respectively.

MikeG, do you know how to read a Statement of Cash Flow?

Jason

Here’s Tesla 10-Q filing so you can see it for yourself.

http://ir.tesla.com/static-files/c8fa9d0d-827a-47ba-950a-b19e1fe21662

The Statement of Cash Flow should be on page 7 and it clearly shows the Tesla failed to pay bills (e.g. accruals or accrued expenses) and relied on trade / vendor credit (aka spontaneous financing because it’s not funded debt, e.g. debt does not bear interest).

If I don’t pay my bills, I too would be cash flow positive.

TheWay

You are making 2 mistakes:
1) You are looking at 9 month period. Tesla was cash flow positive last quarter but not the 2 quarters before that.
2) if you look at other automakers, they have the same thing.

Jason
@TheWay 1. The Statement of Cash Flows is a year to date statistic for a reason. 2. I like how you make stuff up. Here’s Tesla’s 10-Q filing for 6/30/2018. http://ir.tesla.com/index.php/static-files/685556bc-569e-4b92-9db4-1c838916d08b 3. I am not responsible if you cannot handle facts; I was a corporate bond analyst on the buy side and read roughly 300+ annual reports a year. I am stating facts that any CPA would point out. FASB pronouncement #95 was the standard for understanding the Statement of Cash Flow back in my days as an Analyst. https://www.fasb.org/summary/stsum95.shtml 4. Tesla used Accounts Payables & Acruals as a source of cash for its operations (it comes from the Statement of Cash Flow from Tesla, e.g. Tesla is telling its investors this per SEC Regulation SX). And if you understand logic, GIVEN the 9 month number is a year to date statistic and the 6 month number is also a year to date statistic, respectively, and that both statistics are UNAUDITED, then the difference will be for the 3-months period ending 9/30/2018. That statistic was $909.7 million for 6-month and grew to $1.628 billion or AN INCREASE OF roughly 718 million for the 3-month period ended 9/30/18. Tesla relied on… Read more »
Pushmi-Pullyu

I don’t need to be able to read a financial statement to notice someone is pulling out a few outlier figures and trying to pretend those are the norm.

There was an article a few months ago about some bills that Tesla hadn’t paid. So what? It wasn’t an indication of anything except, perhaps, that their growth is so rapid that some accounts haven’t been attended to properly. That happens at all large companies, doesn’t it? It’s nothing but Tesla bashing to pretend that’s a red flag.

Good luck on shorting TSLA. How much money have you lost on that, dude?

Jason
@P-P I am just stating facts. And thanks for making an assumption about my ownership position in Tesla: I don’t have ANY position in Tesla stock. That was a cheap shot and shows you cannot debate the point but rather make personal attacks. I just came to this website to help people understand the financial side of car companies since I have vast experience in this matter. “That happens at all large companies, doesn’t it?“ I see you made that up since you are ignorant about how **ALL** large companies run their businesses. The short answer is NO due to concept of Falsifiability. https://en.m.wikipedia.org/wiki/Falsifiability “It’s nothing but Tesla bashing“ I am NOT bashing Tesla; I am just showing (since I provided the links as the source) the actual amount of Accounts Payables and Accrual line item in the Statement of Cash Flow that is required by Regulation SX per the SEC. https://en.m.wikipedia.org/wiki/Regulation_S-X In summary, I am just stating FACTS (the source is from Tesla). Anyone here can call Tesla investor relations department and ask if Tesla is using Accounts Payables & Accruals as a source of cash for its operation per the Statement of Cash Flow. And, thanks for the… Read more »
antrik

Yes, amount of outstanding bills increased — as is expected while increasing volumes and thus ordering more stuff. However, the amount of outstanding *incoming* payments increased even more. Nothing to see here.

Jason

“amount of outstanding bills increased”

Dude, you are confused. I am talking about the amount of UNPAID outstanding billd increased. Notice the adjective UNPAID.

Nice spin by the way.

Pushmi-Pullyu

Yeah, the “mess” here is this author’s mistaken view of Tesla’s now-solid financial situation. Tesla certainly did make some major errors in its initial Model 3 production plans, but the only “mess” was all the rubbish piled up in the Fremont factory parking lot; a visible symptom of rapid growth.

TheWay

Innovation requires trial and error. New technologies allow for new possibilities, but at same time may not always work out.

And to be the best one can be requires taking the risks to further innovation.