Tesla Suppliers: High-Volume Production Plan for Model 3 Impossible

Tesla Model 3

The suppliers of Tesla Motors Inc (NASDAQ:TSLA) and industry consultants said its plan to advance the start of its high-volume production by two years to 2018 is impossible and potentially expensive.

The electric car manufacturer informed suppliers over the past three months that it was doubling its initial production target for Model 3 to 100,000 units in 2017 and 400,000 units in 2018, according to Reuters based on statements from several industry supplier executives.

Strong demand for Model 3

In a regulatory filing with the Securities and Exchange Commission (SEC), Tesla explained that it is raising additional capital and accelerating its production plans because of the strong demand for the Model 3.

“Because of the significant demand that we have seen, we have decided to advance our 500,000 total vehicle build plan (combined for Model S, Model X, and Model 3) to 2018, two years earlier than previously planned,” according to Tesla.

The electric car manufacturer disclosed that its net reservations for the Model 3 were 373,000 units as of May 15.  Tesla said the figure was net of around 8,000 customer cancellations and 4,200 reservations that were cancelled by the company due to its belief that those “could have been duplicates from speculators.”

Tesla also emphasized that it was able to obtain such level of reservations without any advertising or paid endorsements, and believed that it could increase that number with minimal efforts. However, the company said “it is better to guide customers to purchase products currently in production.”

Musk admits volume production target is unachievable

In April, Tesla CEO Elon Musk told suppliers to get ready for Model 3 production tests in July 2017. Some people think that goal may be unrealistic. Musk emphasized that the “aggressive “target was necessary to achieve the company’s production goals.

Musk admitted to analysts that they won’t be able to reach its volume production in 2017. He said, “Now, will we actually be able to achieve volume production on July 1 next year? Of course not, the reason is that even if 99% of the internally produced items and supplier items are available on July 1, we still cannot produce the car because you cannot produce a car that is missing 1 percent of its components.”

Musk believes that enthusiastic suppliers, new production hires, and the simple design of the Model 3 would help the company reach its goals. He also stressed that Tesla would eliminate suppliers that couldn’t deliver on the set deadlines. The company would bring more parts production in-house,

“It’s very important for us to have the ability to produce almost any part on the car at will because it alleviates risk with suppliers,” he said.

Comments from industry experts

Industry experts expressed doubts about Tesla’s new production goals, which they consider extraordinary. They noted that there are only a handful of auto plants in North America that are capable of building 500,000 vehicles a year. Those plants were operated by automakers with decades of experience.

Ron Harbor, an auto making consultant of Oliver Wyman commented that increasing production at Tesla’s plant in Fremont to 500,000 units in 2018 would need more stamping, welding, and assembly machinery, which “could take up to 18 months to order and install.

According to him, Musk’s plan to make parts in-house could minimize risk but it can be distracting and more costly.

Jeff Schuster of LMC Automotive commented that the electric manufacturer’s goals were “implausible,” in part citing the reason that its Gigafatory is not yet finished.