Too Fast, Too Furious; Tesla And Musk

By now you’d think Elon Musk would be used to close calls, having snatched a number of notable enterprises from the jaws of defeat and ushered them to stunning success.

Now, however, Musk could be facing his greatest challenge. Having staked a reputation as a rock star of the business world, the question is whether he can transport his Tesla (TSLA) car company from a boutique builder of head-turning luxury electric vehicles into a mainstream automaker capable of bringing the company’s upcoming Model 3 to the workaday masses.

This latest pursuit for Musk is a big step, and Tesla’s most ambitious project. The company plans to make five times as many Model 3s than any other car it now builds and the to-do list — before building gets underway in a scant two months — is formidable.

First, Tesla’s assembly line is taking a gamble by forgoing the common use of prototypes, and instead is going headlong into production right from the start. Further, pricing and profit expectations rely on a massive battery-manufacturing plant the company is building. Meanwhile, Tesla has to expand dealerships, service centers and charging stations to accommodate this more moderately priced car. And it needs to pull all this off while competitors are breathing down its neck.

“There’s a lot that could go wrong here,” said Brad Erickson, equity research analyst at Pacific Crest Securities.

Tesla’s goal is to ramp up production to 500,000 Model 3 vehicles a year — a huge leap from its 100,000 run rate with the Model S sedan and Model X sport-utility vehicle. The Model 3 is a five-seat sedan with a starting price of $35,000, vs. $68,000 for the Model S and $82,400 for the Model X, both of which typically sell for about $100,000 when customer options are included.

Execution Risks

Tesla recently affirmed that its Model 3 production is on track to begin in July at its Fremont, Calif., assembly plant, but plenty of execution risks remain.

“The demand for Model 3 will be there and that’s why you’re seeing investors lean into the stock,” Erickson said. “But the thing that sticks out is Tesla has modified their initial approach to manufacturing the Model 3.”

Erickson is referring to an apparent shift in manufacturing plans by Tesla. A year ago, Musk said he was completely rethinking Tesla’s factory process and was convinced that dramatic improvements in manufacturing could be achieved by “factors of 10 or even 100 times.”

Musk had led analysts to think the dramatic improvement would start with the Model 3. Instead, Tesla now plans to do that with its Model Y, a crossover vehicle yet to be unveiled but expected to enter production by 2019.

“Historically, they’ve always said things will go wrong,” Erickson said. “They told us before the Model X and Model S that things will go wrong and they did.”

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