Tesla is struggling to build the Model 3 — here’s why

Tesla Model 3The Tesla Model 3.Timothy Artman/Tesla

Tesla’s third-quarter delivery numbers were both impressive — and depressing. The carmaker is on pace to sell 100,000 vehicles in a year for the first time in its 14-year history. But it’s also far, far behind with the production of its new Model 3 sedan, the vehicle that’s supposed to bring Tesla to the masses and spell the beginning of the end for gas-powered cars.

Tesla said that it would produce 1,500 Model 3s in September; it has managed fewer than 300 since the car was launched in July.

Getting to 20,000 in monthly production by December now seems like a hopeless expectation, as does CEO Elon Musk’s prediction that Tesla will be manufacturing 500,000 vehicles annually by the end of 2018.

This means that the half-million pre-orders for the Model 3 could go unfulfilled for several years, putting a huge number of $1,000 refundable deposits for each new car in doubt. That threat is real, but the markets are unconcerned. Tesla stock is still up 65% in 2017 and the brand has lost none of its captivating aura.

But it’s also obvious that for a carmaker that’s been around as long as Tesla should be good at, Tesla isn’t: building vehicles.

So why is Tesla struggling to build the Model 3 on its own admittedly ambitious schedule? There are five main reasons:

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1. The numbers don’t mean anything.

1. The numbers don't mean anything.

What numbers?Bill Pugliano/Getty Images

Tesla has a long history of overpromising and underdelivering. Customers and investors have been more than happy to forgive the automaker for this transgression, largely because both groups understand that there’s nothing to be gained if Tesla under promises and over delivers.

Tesla does not benefit from being normal. The company’s entire DNA is organized around being special, different, extraordinary. Leave it to the General Motors’ of the world to announce an all-electric Tesla Model 3 competitor, the Chevy Bolt, in 2015 and have it hit the streets by 2016.

Tesla’s game is to astound (eventually), not execute. As such, the only predictions that matter are outsized ones. You don’t change the world by restraining yourself.

And Wall Street doesn’t care. Over the past two years, Tesla’s stock has been wildly volatile. But it’s still up over 1,200% since the company’s 2010 IPO. Despite almost no profitable quarters and a balance sheet that can keep the company in business for only about a year before the cash is all gone.

2. The Model 3 is all-new production.

2. The Model 3 is all-new production.

Robots assembling Teslas.Benjamin Zhang/Business Insider

Tesla is reasonably good at manufacturing its expensive, luxurious Model S sedans and Model X SUV. Production of these vehicles was designed around a run-rate of about 100,000 per year, and Tesla will hit that mark most likely in 2017.

Of course, the Model X endured “production hell,” as Musk memorably put it, during its roll-out in 2016. The Model S also endured early production issues that were later corrected. And Musk declared that production hell would be back for the Model 3. In fact, production hell often seems to be Tesla default state.

Traditional automakers are quite good at mass-production, but Tesla has been challenged to be a mass-production company until now. Musk talks about Model 3 production in terms of an “S curve,” with a very slow ramp rapidly speeding up before leveling off at a desired point.

But Tesla also has a second S curve, related to learning. It doesn’t know, exactly, how to build the Model 3. The company also skipped a beta-stage of production, in order to launch the Model 3 ahead of schedule this year. And although the Model 3, according to the Musk, was engineered for rapid production, it’s still a new thing.

Established automakers build cheaper cars in volume all the time; Tesla never has.

3. Tesla enjoys endless patience from everybody.

3. Tesla enjoys endless patience from everybody.

Just trust me on this one!Reuters/Mike Blake

Tesla’s brand equity is probably its most valuable asset. Short-sellers aren’t fans, and plenty of analysts argue that Musk is all hat and no cattle, but everybody else loves the company.

And Tesla knows it. Having built up massive positive brand equity over the years, Tesla has the advantage of “spending” it from time to time by, frankly, deceiving the public. Within this negative pact, however, is shared understanding: Yes, we aren’t going to make our goals — but we also aren’t going to lose focus on the big picture, which isn’t to sell more cars, but rather to save the planet.

Unlike most other companies, even professedly do-gooding outfits in Silicon Valley, Tesla truly has a mission, one that’s difficult to resist or criticize. Importantly, Tesla has earned this trust by delivering a genuine payoff to anybody who’s willing to go along for the ride.

4. Tesla isn’t actually mass-producing the Model 3 yet.

4. Tesla isn't actually mass-producing the Model 3 yet.

The first 30 Tesla being delivered at the carmaker’s factory.Screenshot/Tesla

A lot of things have to happen at the right time even for an inexpensive, simple-to-build vehicle to stay on schedule. In 2011, when a tsunami and nuclear-plant disaster hit Japan, the automotive supply chain was massively disrupted for Toyota and Honda, leading to manufacturing slowdowns worldwide.

Tesla is still small by the standards of the auto industry. The company’s California factory is also off the grid a bit, as the US car business runs out of the Midwest and the South. Tesla has only recently gained access, according to the company, to the best teams at the best suppliers, and the history of its manufacturing is one of fits and starts. The Model X, for example, went through both a rear-door and rear-seat redesign just months before the car launched in 2015.

Even if Tesla had hit its goal of 1,500 Model 3’s in September, it would still be a long way from the levels of production needed to meet demand. The low numbers, which the company chalked up to production “bottlenecks,” suggest that the ramp to just pre-mass-production is taking longer than expected.

If Tesla hadn’t fallen so short of its own run-rate for September, we could assume some bobbles, but unfortunately, it looks more like the decision to forego the process of testing out the Model 3 assembly line before trying to accelerate the production ramp isn’t working out.

5. The Model 3 looks simpler then the Model S and Model X — but is it?

5. The Model 3 looks simpler then the Model S and Model X — but is it?

The Model X is complication. The Model 3 is supposed to be simple.Tesla

Tesla designed the Model 3 to be easier to build than the Model S and Model X, but compared with electric cars that have now been in production for a while — the Chevy Bolt and the Nissan Leaf, for example — there’s a lot of “clean slate” to the newest Tesla.

To build an EV that they can get to market quickly, build easily, and price below $40,000, other manufacturers are just adapting existing gas-car platform to the task. The Bolt doesn’t feel all that futuristic inside, and the Leaf has a fairly conventional interior. Neither car is dramatic to look at on the outside.

Tesla has eliminated as much dashboard instrumentation as possible with the Model 3, going for a very clean, minimalist vibe that stars a single, horizontal touchscreen. Although that might sounds like it makes everything easier, it doesn’t necessarily because it’s a major departure from how cars are currently put together.

Ultimately, Tesla’s plan to simplify, simplify will pay off, but in the short term, negotiating the learning curve could slow them down.

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