Tesla faces five big challenges – USA TODAY

7 months ago Comments Off on Tesla faces five big challenges – USA TODAY

The customers came. Now Tesla Motors has to figure out how to deliver.

At least 325,000 potential buyers each plunked down $1,000 deposits in less than a week for Model 3, which, at $35,000, will be about the cost of other Tesla models in a bid to put long-range electric vehicles within range off the masses. Now Tesla has to figure out how to ramp up production in a way that will allow it to fulfill those orders starting late next year.

Here are some of the challenges the upstart electric vehicle maker must figure out to grow from a niche maker of luxury electric vehicles for Silicon Valley’s technorati to a mass producer of a car that might free hundreds of thousands, eventually millions of people from their dependence on gasoline.

1. Who will make it? 

Will Tesla do all the manufacturing at its Fremont, Calif., assembly plant or elsewhere, or contract with an established automaker or supplier? Or will it go to Europe or China?

The French minister of environment and energy reportedly has offered Tesla the site of a nuclear power plant slated for decommissioning later this year.

Contracting with another company is unlikely.  “The genetics and personality of the company indicate that they would rather build the vehicle and the plant their way and not contract anything out,” said Erik Gordon, professor at the University of Michigan Ross School of Business.

Producing cars in the tens of thousands per year, like Tesla does now, is far different from building 300,000 or more per year.

“The No. 1 issue is their cycle times. They have to speed up production, and you’re talking four or five times faster than they produce now. On top of all that you need more people. You need more stations on the assembly line,” said Jay Baron, CEO of the Center for Automotive Research in Ann Arbor. “Everything gets a little more complicated and the mistakes happen more often and with greater consequences.”

2. Can Tesla find enough skilled labor?

Tesla will need to find skilled manufacturing workers in the Bay Area, an area known more for its wealth of software code writers and electrical engineers than manufacturing. California is an expensive place to make anything, with or without union representation.

Beyond labor costs, Tesla might have to recruit in other regions for the industrial engineering talent to boost production by a factor of six or seven. “They’re going to need to hire experts in scheduling, quality, training and supplier development,” Baron said. “It will take them some time. Those types of experts don’t come cheap.”

As Daimler learned through its failed acquisition of Chrysler, building luxury vehicles with the latest technology is not the same as engineering and maintaining quality in mainstream vehicles selling for half the price.

3. How will it sell cars? 

Tesla must grow its network of retail and service centers, which now encompasses fewer than 100 locations in 24 states with a heavy concentration in California, New York, Washington-Baltimore and Florida.

Many states, including Michigan, are resisting Tesla’s effort to sell directly to consumers without involving franchised dealers. Anyone who lives in flyover country may have to drive for hours unless they live in major metropolitan areas with a Tesla store, or gallery as the company calls it.

That model may work well for ultra-luxury products, but that’s not what the Model 3 will be. Early adopters and environmentally conscious consumers will drive to the largest city to buy, but will they have to go that far for maintenance?

“It’s a separate skill set,” Gordon said. “Not only do you need a lot of money but you’ve got to hire a lot of people and you can’t remotely control it from California.”

Compromising with state franchise laws could jeopardize Tesla’s control over the retail setting, not to mention pricing.

4. Can stock price survive need for more capital? 

Raising more cash could deflate Tesla’s stock price.

According to analysts, Tesla is burning through $400 million of cash each quarter and that’s before the company purchases the tooling necessary to build  300,000 or more cars annually.

A Barclay’s report estimates Musk and company will need $11 billion of capital over the next five years.

Keep in mind that the newer models will carry lower prices. Either the savings offset the lower revenue per vehicle or profit margins begin to shrink.

Gordon suggests that issuing more stock is the most likely method to raise cash. But that could dilute the lofty stock price, which has been part of what makes Tesla CEO Elon Musk’s growth story believable.

Unlike traditional automakers who face a separate set of criteria by which investors evaluate their stock, Tesla, like many Silicon Valley companies, is selling a somewhat speculative vision of wholesale transformation in which drivers will leave the internal combustion engine for battery power and the sky is the limit.

Obviously, that premise is debatable.

“In the near term, it’s a game of maintaining confidence,” Gordon said. “To succeed at that, investors have to believe that the results eventually will be a viable car company that will throw off large profits.”

5. What is the core of Tesla’s business model — cars or the Gigafactory?

Maybe the mammoth lithium-ion battery complex that Tesla is building near Reno, Nev., — it’s “Gigafactory:”  — will generate sales to customers beyond its electric vehicles. Perhaps battery-generated power and energy storage for homes and businesses will replace natural gas, heating oil and all other sources and batteries become Tesla’s core product.

Battery cell production at the Gigafactory is to start in 2017, coordinated with the launch of the Model 3.

Tesla faces five big challenges – USA TODAY

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