Elon Musk loves to talk. What he has to say in the press conferences after an earnings call often contains pearls of wisdom that can’t be had anywhere else. At yesterday’s press event, Elon held forth at length on the production ramp up for the Tesla Model 3. Pilot production began earlier this week with regular production scheduled to begin July 1.
“There’s many a slip twixt the cup and the lip,” my old Irish grandmother was fond of saying and Elon seems to be aware that the start of a new venture seldom goes smoothly. The Model X was nearly two years late to full production because of teething issues, most of which centered around making the iconic falcon wing doors function correctly.
But the Model 3 has been designed from the beginning for efficient production. Musk is well aware that he can’t afford another debacle that might convince many of the nearly 380,000 reservation holders to take their business elsewhere. He had some interesting things to say about supply chains and the difficulty of building automobiles profitably.
The company declined to speculate how many cars a week it would be building by the end of the year, largely because such predictions are subject to many variables that cannot be fully anticipated in advance. “The rate of production is as fast as the slowest component in the vehicle. And when you have several thousand unique items, it can move as fast as the least likely and worst executing part of Tesla or our suppliers. That’s just the way it goes.” He then went on to say, “I feel pretty confident that we should get there by the end of this year, to 5,000 a week.
Tesla’s goal is to be building 500,000 cars a year by the end of 2018, but getting there depends on close coordination with its suppliers. “So, when we place parts orders with our suppliers, we’ve told them 1,000 a week in July, 2,000 a week in August, and 4,000 a week in September. These are parts orders. Then the parts need to arrive. They need to be turned into a car. And the car needs to be delivered to customers.
“None of these things occur instantaneously. And we have what I call….the term paper problem. I was a teaching assistant in college and no matter what date we set the exam paper for, when the term paper was due, there’s always some number of people that are late. It’s just the way it goes. People sometimes – well, and I’m guilty of this too. Like too optimistic about the timing or they get unlucky or something like that.”
Last year, Musk had some advice for other companies who think they can just build a factory and start churning out cars. You get a sense from Musk’s comments that he may be had such an attitude at one time. But no more. Building cars well and making a profit is hard work. As he told his audience yesterday, if just one part is missing or late arriving, production either stops or the part has to be made in-house, which costs the company up to 30 times more than paying a supplier to do it.
So there you have it straight from the Tesla Zen Master himself. Start up will be rocky with issues that crop up at the last minute getting in the way of an orderly production ramp. But Musk fully expects to hit that 5,000 car a week target before the end of this year. Elon is someone who is accustomed to getting what he wants. It would take a brave investor to bet against him.
Transcript provided by Seeking Alpha.