Tesla appears close to achieving both sustained weekly production of 5,000 Model 3 luxury sedans and long-term profitability, according to Q2 financial results released yesterday.
In a letter to shareholders, CEO Elon Musk and CFO Deepak Ahuja said Tesla had “repeated weekly production of approximately 5,000 Model 3 cars multiple times while also producing 2,000 Model S and X [units] per week” in July. For some time, Musk has assured investors that hitting the 5,000-per-week target for the Model 3 would unlock positive cash flow and profitability for the company.
“A total vehicle of output of 7,000 vehicles per week, or 350,000 per year, should enable Tesla to become sustainably profitable for the first time in our history,” Musk and Ahuja said in the shareholder letter.
Notwithstanding the possibility of a downturn in the economy, a natural disaster, or a quarter in which Tesla pays back a loan, Musk added on the Q2 earnings call: “I feel comfortable achieving a GAAP income positive and cash flow positive quarter every quarter from here on out.”
Musk also said Tesla is convinced it can boost production on its existing vehicle general assembly lines at its Fremont, California manufacturing facility.
“We found, as we’ve spent a lot of time debugging a wide range of manufacturing issues, that the potential for our existing lines to be able to produce far more cars is much greater than expected,” he said.
He went on: “By simplifying production lines, by speeding them up, by, in some cases, having things done manually rather than automatic, and, in other cases, things be done automatic rather than manual, we’re able to achieve dramatic improvements.”
Tesla said it aims to produce 6,000 Model 3s per week by the end of August and expects to make 50,000 to 55,000 Model 3s in Q3.
Improved productivity at the Fremont plant partly explains why Tesla now expects 2018 capex spending to be below $2.5 billion, down from the $3 billion projected at the end of Q1 and the 2017 level of $3.4 billion.
Musk said the capex required to go from 5,000 to 10,000 Model 3s per week “is a tiny fraction” of the capex needed to go from zero to 5,000 Model 3s per week.
Musk reiterated that Tesla has no plans to raise equity. “I have no expectation of doing so. I have no plan to do so. We certainly could raise money, but I think we do not need to,” he said.
Tesla posted a net loss of $717 million and burned through more than $700 million in cash. Tesla has $2.2 billion of cash on hand, which will allow the company to ramp up without asking for more money.
Model 3 customers driving “viral” growth in sales
On the earnings call, Musk said “the more Model 3s we delivery to the field — it’s actually causing viral growth of our sales.”
“We deliver a Model 3 to somebody. They love it. They tell all their friends. Our customers are our primary sales force,” he said.
Musk said Tesla is prioritizing cars for customers. But, recognizing the importance of word-of-mouth sales, it is also working to make Model 3s available for test drives at all Tesla stores. The company started taking test drive requests last month and has already received more than 60,000 for the Model 3 in the United States.
Three weeks ago, Model 3 test drives were available at just eight Tesla stores; now, more than 90 Tesla stores have Model 3 test-drive cars.
Tesla said the top five trade-in cars for Model 3 customers in the United States this year are the Toyota Prius, BMW 3 series, Honda Accord, Honda Civic and Nissan Leaf.
Musk noted that with Tesla not yet selling its long-promised $35,000 Model 3, the trend of customers trading in largely non-premium sedans and hatchbacks for a higher-end Model 3 is “promising for the future.”
Tesla goes to Shanghai
Earlier this month, Tesla finalized an agreement to build Gigafactory 3 in Shanghai, the first Gigafactory outside the United States. Musk had mentioned on the Q1 earnings call that Tesla’s China Gigafactory would incorporate both battery module and pack production and vehicle assembly.
On the earnings call, Musk said Tesla is confident that lessons learned from construction of Gigafactory 1 in Nevada will drive down the cost of the Gigafactory in Shanghai. Musk said a $2 billion investment for the facility, compared to $5 billion for Gigafactory 1, was all that was needed to set it up to achieve a production rate of 250,000 vehicles per year.
Musk said Tesla will finance the Shanghai Gigafactory with loans from local banks. According to the shareholder letter, construction is expected to start “within the next few quarters,” with the first cars leaving the production line “in about three years.”
Musk also said Tesla hopes to announce the location of a Gigafactory in Europe before the end of this year.
Energy business to catch up with vehicles
On the earnings call, Musk and CTO JB Straubel remarked on the scale of Tesla’s energy business.
Straubel said it took Tesla five years to reach 1 gigawatt-hour of cumulative energy storage deployments — a milestone the company achieved in May.
Tesla is aiming at perhaps 3x or 4x growth in its energy storage business in 2019, according to Straubel.
Musk said the storage business is constrained by a lack of certified electricians. Tesla launched an electrician training program because “there’s not enough electrician capacity in the United States and most places in the world to install Powerwalls.”
“The car business is still much bigger, as we sit here today,” said Straubel, “but the growth rate on energy is faster.”
“Long-term,” Musk said, “we expect the energy business to catch up to the auto business in size.”