Tesla and the Difficulty of Ramping Up Production – 5/3/16

To date, Tesla has shipped about 110,000 cars, mostly Model S sedans so the sudden influx of orders for the Model 3 reserving about 400,000 of the vehicles is both a blessing and a curse. On one hand, Musk’s goal of selling 500,000 cars a year by 2020 seems very possible. On the other, Tesla is now expected to ship out more cars than it has ever produced, starting in 18 months, despite large cash outflows and losses associated with initial fixed costs as it ramps up production.

The production hike is meant to coincide with the completion of Tesla’s “gigafactory” for batteries, which is meant to make the Model 3 affordable via economies of scale cost savings. Battery cost makes up a third of the price of an electric vehicle and Tesla has worked hard to bring it down by building the largest ever battery factory and a complementary battery-storage business, Powerwall. The work seems to have paid off: battery packs are expected to be made for under $220 per kilowatt hour, considerably less than the industry average.

If successful, Tesla would be bringing to market the first widely affordable and practical electric car. The Model 3 would clock in with a 0 to 60 time of less than 6 seconds and a range of 215 miles. And even charging isn’t half the issue many might think, since charging stations, unlike gas stations, be installed discreetly in the garages that a majority of Americans own. With an at-home charger and range more than large enough to cover the average American’s transit, most would only need to stop at a charging station on longer trips. For these drivers, Tesla has already begun work on Tesla Superchargers, a network of chargers might to provide 170 miles of driving range in 30 minutes, free of charge.

Unfortunately for Tesla, it is known for delays lasting months, if not years. And any deposits on the Model 3 is fully refundable meaning that the capital taken in from the reservations could be easy come, easy go money if people start getting impatient. Luckily for everyone wanting an electric car as soon as possible, almost every major automaker and major tech company has an electric-car program they hope will take some market share. General Motors, Ford Motor Co., Google, and Apple are just some of the companies investing billions into cars meant to compete with Tesla.

rise of electric cars

BNEF analysts made some predictions about how quickly electric automobiles could begin replacing gasoline-powered cars at the expense of oil markets.

GM plans a debut this fall for the Chevrolet Bolt, an all-electric car with a range of at least 200 miles. Nissan Motor Co.’s next-generation Leaf car is expected to match that distance and Ford will begin offering its Focus Electric model with a driving range of 100 miles this Fall. In addition, Honda has announced it’s going to expand its Clarity line to include an all-electric version and a plug-in hybrid next year, and Volvo has announced it will release its first fully electric vehicle in 2019.

The companies are encouraged to break into the market now because of research showing increased willingness to pay for an electric vehicle as driving ranges grow to 200 miles and prices fall below $30,000. Automakers are also under pressure to improve the fuel economy to meet regulations mandating that a company’s collection of cars must average 54.5 miles per gallon by 2025, a threshold much easier to reach with a vehicle when no gallons are being consumed in the first place.

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