“I think it’s good news,” Nissan-Renault chief Carlos Ghosn said yesterday at Nissan’s factory in Iwaki, Japan, when Automotive News reporter Hans Greimel asked him to comment on the amazing number of pre-orders Tesla received for its upcoming lower-cost electric car, the Model 3. “The fact that so many people are willing to make a down payment to get this car, which I understand will be available by the end of 2017, is a very good sign,” Ghosn continued with a straight face.
By industry convention, established automakers rarely if ever say anything bad about the competition. Privately, some industry insiders think that Tesla Motors TSLA -2.33% might drown in that sea of orders. Some even doubt outright that the numbers are valid.
When Tesla’s Elon Musk took to the stage to reveal the Model 3 on March 31, he already had 115,000 reservations placed by people who paid $1,000 for the privilege to get in line for a car that might not ship in considerable volume until 2019, as Barclays analyst Brian Johnson predicted on the day of the car’s unveiling. Last Saturday, the number of Model 3 pre-orders stood at 276,000, as per @elonmusk’s tweet, and he promised even more mind-boggling numbers for today.
In the many decades I have been in this business, and I have been in it since I wrote the first ad copy for the launch campaign of Volkswagen’s Golf in 1973, I’ve never witnessed such a high number of reservations. For a long time, the 12,000 orders written on the launch day of Citroen’s legendary DS in 1955 were considered as the record to beat. When a new Ford Fiesta, one of the world’s best-selling cars, was launched in 2011, it made headlines for receiving “6,000 reservations and more than 100,000 handraisers, months ahead of its launch this summer,” as a Ford press release trumpeted at the time. Those handraisers did not have to fork over $1,000. By the end of 2011, the Fiesta had sold 781,147 units.
To put the unbelievable number of pre-orders even more in perspective, the world’s best-selling electric vehicle, the Nissan Leaf, has sold a total 211,000 units globally since its launch in 2010, as Nissan spokesman Dion Corbett told me this morning.
With so many Model 3 reservations supposedly taken in just a few days, the number could easily double within a few months. Musk expects that to happen. Two days ago, he tweeted that 500,000 pre-orders are possible “if the trend continues,” before part 2 of the launch event, which could be anywhere from within a few months to “closer to start of production,” whenever that will be. Which leads us to the biggest question:
How is Tesla planning to make all those cars?
At the launch event, Elon Musk glossed over the question, saying that “our Fremont factory, in the past, has actually made almost 500,000 cars a year.” Past performance is, as we are wont to ignore, not an indicator of future results. According to contacts at Toyota, a company that pretty much donated the Nummi factory to Tesla’s cause (and to appease the gods in Washington, as the WallStreet Journal claimed) the capacity of the plant was closer to 400,000 a year. The biggest problem, however, is the fact that the plant is nowhere ready to crank out cars in large numbers.
“When we left Nummi, there were two lines, one for sedans, one for trucks,” said the Toyota contact, who requested anonymity on account of not having anything nice to say about the competition, Musk’s “fool cell” barbs notwithstanding. “We pretty much dismantled most of the equipment when we left, except for the stamping equipment and the paint shop,” the contact continued, adding that some of the machinery left behind dated back to 1962, when the plant was opened by GM. Hardly the cutting edge technology Tesla should let close to its cars. Tesla learned this the hard way when it refurbished the paint shop last year, and promptly ran into problems with California’s environmental regulator.
Meeting the demand of the 276,000 cars supposedly pre-ordered in the first three days would fill the capacity of a completely new plant. To build one in China, or India, where most of the car factory building is taking place these days, costs anywhere from $1.5 billion on up. Nobody dares to guess what a new plant would cost that meets the strict requirements of California. Also, you would build a plant sized for the volume you expect in three to five years, not for hands raised between Thursday and Saturday of last week.
To put matters even more in perspective: Carlos Ghosn’s Nissan builds a million cars a year in Japan, and it does that with five huge plants all around the country, augmented by a long list of support facilities, a wholly-owned transmission maker, and three proving grounds. In January, Elon Musk announced plans for “at least a few million a year” by 2025, requiring, using Nissan’s yardstick, 10 plants in less than 10 years. They would take a few years to build, and between $20 billion to $30 billion to pay for.
Which brings us, before we address the money part, to another problem with Tesla’s mass-market aspirations: The challenging part in the auto industry is not the relatively mature technology of the automobile itself, especially not the much simpler technology of the electric vehicle. The holy grail of the industry is production engineering, the art and science of putting out large amounts of cars in consistent quality, made on flexible lines that can handle many different models at the same time, lines that can build each car according to customer specs. Tesla has grappled with production problems many times, even while in boutique production mode.
Elon Musk often complains that “people don’t quite appreciate how hard it is to manufacture something. It is really hard.” It sure is. It will be much harder when you produce 2,000 cars per day, and when the slightest glitch in your system produces seas of unsalable cars that spill over your parking lots.
Why 2,000 units per day? Simple math: 500,000 units per year is a number Tesla wants to reach by 2020. It should be more than doable if the pre-orders hold up. Divide by 260 work days, close to 2,000 per day. Also, the orders ebb and flow in the course of the year, so you want a little extra capacity. Putting matters in the dreaded perspective again: Volkswagen’s Wolfsburg plant is a true gigafactory, the world’s largest. It employs 40,000 people, with a daily output of a little over 3,000 units. It took the world’s 2nd-largest automaker nearly 80 years to get there. Knowing this, it is understandable that some think Musk’s plans are a little ambitious.
Tesla refuses to learn from its many production problems. The unbelievable number of pre-orders conveniently came just in time to distract from Tesla’s announcement Monday that in all of the first quarter, it managed to make just 2,400 of its ballyhooed Model X, due to – self awareness is the first step towards improving oneself – “Tesla’s hubris in adding far too much new technology to the Model X in version 1, insufficient supplier capability validation, and Tesla not having broad enough internal capability to manufacture the parts in-house.”
As if it just found out, Tesla revealed the amazing fact that production could be severely impaired by just six missing parts, “out of more than 8,000 unique parts, nonetheless missing even one part means a car cannot be delivered.“
There is a reason why “legacy” automakers start trial production of a new car long before its launch, like GM did with its 2017 Chevrolet Bolt electric vehicle. To shake out the bugs that can bite new model start-ups, pre-production of GM’s Model 3 competitor started weeks ago, half a year before the official line-off of the Bolt.
But then one should remember that Tesla is a company with a Silicon Valley mentality that makes cars like Microsoft does software. It leaves the testing to its loyal fanbase, which happily volunteers as beta testers. Mass-market customers are much less accommodating. They also don’t buy cars to save the world, but for more mundane purposes, like getting groceries, or getting to work.
Normally, a quarter with missed production forecasts would have sent Tesla’s stock southwards, but with the unbelievable number of pre-orders all over the Internet, Tesla shares are zooming back in the direction of new highs, which might just be the right time to issue the stock necessary to finance just a tiny part of the bricks, mortar, and machinery necessary for Tesla’s mass-market aspirations. “I wouldn’t be astonished if Tesla issues new stock within the next few weeks,” opined my partner Ed Niedermeyer, who writes about cars at Bloomberg.
Tesla will need that money even more if what more than a few curmudgeon grey-beards of the car industry fear occurs: that the company will fall victim to the dreaded Osborne effect, named after the Osborne computer company, which went under after announcing a new model much too early, which made buyers pause their purchasing until the new one was available. Those 300,000 to 500,000 Model 3 claimants are effectively removed from the Model S pool of potential buyers. Nissan learned this the hard way. Its Leaf sales started to flag right after Carlos Ghosn dropped a hint on late-night Tokyo TV about a range-doubling model with a breakthrough new battery. Nissan’s PR chief Jeff Kuhlman left the company nine months later, claiming incurable homesickness, Carlos Ghosn is still around.
And what if the huge number of pre-orders fizzles? The $1,000 down is refundable. In comparison to legacy carmakers and their dealers, who have to buy their own cars to goose their numbers, which they nonetheless do with gusto, unwinding even a large position of pre-orders would be much easier. In the end, disappointing car sales following encouraging orders could always be blamed on “scalpers,” as Tesla has done when its market dropped out in China.
The first Model 3 reservations have already turned up on Craigslist, at a 25% markup.
For more information: http://www.forbes.com/sites/bertelschmitt/2016/04/06/teslas-unbelievable-model-3-pre-order-mirage-be-careful-what-you-wish-for/#3656f7ad4dcb