Tesla moves up ambitious 500k production goal to 2018

Michael Wayland
The Detroit News

Tesla Motors Inc. on Wednesday said it is moving up an ambitious goal of producing 500,000 vehicles annually to 2018 – two years ahead of schedule.

The Palo Alto, California-based electric vehicle manufacturer announced the stepped-up production target amid reports that two of its top executives — vice president of production Greg Reichow and vice president of manufacturing Josh Ensign — plan to leave the company.

The five-fold increase from expected production of 80,000 to 90,000 electric vehicles this year is a result of hundreds of thousands of reservations for its $35,000 Model 3 sedan that debuted in February, according to a shareholder letter from Tesla CEO and chairman Elon Musk and CFO Jason Wheeler.

“Increasing production five-fold over the next two years will be challenging and will likely require some additional capital, but this is our goal and we will be working hard to achieve it,” reads the letter.

Musk during a first-quarter earnings call on Wednesday said he feels “great confidence” the company will meet the accelerated target. He added the company will have “some exciting announcements coming, possibly in the next few weeks” about additions to its executive production team.

Challenging could be an understatement, as the 2020 goal was three times the number estimate of some industry analysts.

“We note that Tesla’s estimates appear to put the Model 3 among the top 3 percent of global vehicles by sales volume, which is an optimistic forecast,” Bank of America Merrill Lynch auto analyst John Murphy wrote in a recent note to investors.

In the first week of taking deposits for the Model 3, Tesla reports it received more than 325,000 reservations with $1,000 refundable deposits for the upcoming sedan, which is scheduled to arrive late next year.

The company, which has a history of delaying product launches, including pushing back its Model X SUV by 18 months, said 93 percent of people to place reservations for a Model 3 are not current customers.

Edmunds.com senior analyst Jessica Caldwell said moving up its production target two years is a bold move but “clearly something that needs to happen,” given the number of reservations for the Model 3.

“It is something they need to do for market demand, and it’s not particularly too surprising but a big challenge from where they are today,” she said, adding the company will “have to clearly accelerate at a great speed from this point.”

Kelley Blue Book executive market analyst Jack R. Nerad said the earnings report shows a company attempting to transition from a niche manufacturer of one vehicle line into a true automobile manufacturer.

“It is an amazing achievement to engineer, build and market 50,000 examples of one model in a hotly competitive global market, as Tesla has done,” he said. “It is a far more difficult assignment to reach the 500,000-unit sales mark with a multi-vehicle line, as Tesla Motors claims it will do in this decade.”

Tesla said it remains on track to make the first battery cells at the Gigafactory in Nevada in the fourth quarter of this year, and it is adjusting its plans there to accommodate revised build plans.

Musk in February said the lithium-ion battery factory will “produce more lithium-ion batteries than all other factories in the world combined” by 2020. The plant broke ground in June 2014 and isn’t expected to begin cell production until 2017.

The production change was announced in conjunction with Tesla’s announcement of a $282 million loss on $1.15 billion in revenue for the first quarter of 2016. A 57 cents loss per share slightly beat Wall Street expectations of 60 cents, according to Bloomberg.

Tesla shares jumped nearly 10 percent to $243.43 in trading after the market closed.

The company continues to battle state regulators over its direct-sale model in which the company retails cars directly to buyers. Several states have outlawed the practice. Michigan banned it in late 2014, but Tesla in November applied for licenses to sell and service its electric vehicles in Michigan.

Michigan Secretary of State spokesman Fred Woodhams on Wednesday told The Detroit News that the applications remain under review while the state waits for a response for additional information from Tesla.

Musk said Tesla believes it can achieve its targets despite “unjust” laws that ban or limit its direct-sales model.

Tesla plans to open more than 70 additional retail and service locations in 2016, bringing its total to nearly 300 globally.