Yesterday I shared why I think Tesla’s Model 3 production ramp will take a bit longer than even Tesla is forecasting and hoping for. Today I’ll share some thoughts on why I think Tesla will get production under control and why ultimately the Model 3 will be a huge success.
Let’s take the following three important goals:
1. To make the best quality and performing car in the luxury compact sports sedan market at a competitive price
2. To make a healthy 25% gross margin on the Model 3 at volume production
3. To reach volume production of 5000 cars/week quickly as possible
I would argue that ramping production to 5000 cars/week as quickly as possible is actually not the most important goal, but rather is the least important goal among the three.
The most important goal is to make the product the best in class. And I think Tesla has achieved this. In fact, the Model 3 is so stellar of a car, I think other manufacturers will be chasing the Model 3 for many years to come. The Model 3 is a pure dream to drive, and in almost all ways is a better car than it’s competitors (BMW 3 series, Audi A4, Lexus IS, etc).
Ultimately how good the car compared to its competition will determine demand, and demand will determine the volume that Tesla will ultimately be able to sell, which will grow revenue and profits for the company.
The second most important goal is to be able to make a healthy 25% gross margin on the Model 3 at volume production of 5000 cars/week.
The reason this is important is because it makes no sense for Tesla to make 5000 cars/week if they’re going not going to be able to make money off of them. While achieving gross margins of 15% might allow them to scrape by with a 5% profit margin per car, an even healthier 25% gross margin will allow Tesla to accrue significant profits over time.
The last, but not least, important goal of the three I mentioned is to reach 5000 cars/week as soon as possible. Now, this goal is important because if they take too long to reach full volume production it could cause problems with cash flow since production and gross margins isn’t optimized at lower levels of production. Thus, Tesla would be forced to raise funds, which doesn’t seem like it would be a problem because Tesla has a large market cap and they could issue common stock even if they couldn’t access the debt market. However, in the real world anything can happen, and because of that slow Model 3 production is a financial risk to Tesla, albeit not a huge one at the present in my opinion.
So, there you have it. While Model 3 production is important, it’s the least important of the three most important goals for the Model 3 that Tesla needs to achieve.