Can Musk finish the Model 3 before it finishes Tesla?

As competition to be the first to market with an affordable, efficient battery-powered vehicle heats up, Elon Musk’s Tesla is losing its new car smell before one base line Model 3 has even rolled off the showroom floor. The burgeoning electric car industry is no longer the playground for ideological billionaires it once was as the goal of liberating society from its overdependence on gasoline-powered vehicles moves from exhaust pipe dream to realistic objective. The tactics being used by Muskiavelli and Co, therefore, have shifted too, with the emphasis now on realpolitik rather than any ideological stance. Perhaps the end will justify the means.

US president Donald Trump must really dislike Elon Musk. Not because tech's one time messianic visionary is in any way a threat to his political power (except perhaps on Mars). While no other subject appears to be off limits for Musk, he has proven very reluctant to comment publicly on the current political landscape within which his multifaceted empire tries to stay afloat.

No, what really gets on Trump’s goat is that Musk is commanding more and more attention on Twitter at the expense of the commander-in-chief. Between tweets saying he was considering taking the publicly-held Tesla private, to using the social medium to publicly label one of his critics a paedophile, Musk clearly appreciates the value of using the social media channel as a method for getting his point across in as few characters as possible in a way that could only be compared with a certain leader of the free world.

But in the same way many believe President Trump’s controversial and often erroneous tweets are in fact calculated moves to distract from even more heinous activity out here in the real world, Musk could also be seeing the value of Twitter as not merely an efficient communication tool but also as an effective attention deflector.

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Ambition

Or not. Musk has as many zealous followers as he does critics. Any attempt to uncover “truth” about what the man is actually up to is, therefore, more difficult than it needs to be.

What we do know is that his ambition, intelligence, self-confidence and, a genuine (albeit contested) desire to change the world for the better have resulted in a failure on his part to give adequate attention to any one of the ambitious ongoing projects he currently busies himself with.

Right now the world’s attention has shifted away from his plans to get to Mars and back to Tesla and its commitment to deliver a reliable, efficient and, most importantly, affordable electric car to the masses.

Elon Musk’s astonishing vision and war-weary experience of both entrepreneurial success and failure make him an ideal candidate to successfully achieve in a field where so many others have tried and failed: the dream of producing an affordable electric car that performs as well as any gasoline-powered equivalent.

Vision and personal experience may not be enough to overcome the harsh economic realities faced by Tesla currently. Success in the automobile industry, regardless of what’s fuelling motion, is conditional on operating efficiencies. It’s no secret that the proposed strategy for Tesla’s Model 3 is underpinned by ensuring it has the ability to economically mass produce the vehicle.

Pressure on Tesla to bring the car to market and simultaneously ramp up production volume keeps rising. As do expectations on Wall Street. Increasing levels of material requirements have in turn put undue pressure on Tesla’s entire supply chain.

Information deficit

Clear channels of communication regarding pricing for the Model 3 have been demonstrably lacking since it was first announced the cost of a Model 3 would be comparable to the average new automobile. The information deficit since then has left many potential middle-class buyers confused and, therefore unlikely to take a gamble on a race they literally cannot afford to lose.

Musk originally claimed Tesla could turn a profit selling the car for $35,000 as long as there were millions of willing buyers. But his messianic status as a man truly on a mission has kept him from falling prey to the dangers of being tarred with the same brush as other Silicon Valley tech types. This, ironically, may have given him the breathing space needed to fully exploit the “fake it till you make it” business approach so popular in a Valley his followers choose to believe he turned his back on a long time ago.

A new company with designs on disrupting a well-established, global industry is going to need plenty of hype surrounding it at first in order to gain the investment needed to even get off its knees. In the meantime, it can iron out the creases in its business model – as discreetly as possible – and figure out how exactly it can deliver on the hype that’s already been generated. Tesla appears to be doing just that.

"To clarify, the Model 3's base model is already priced at $35,000 but this particular model cannot be ordered at this time," explains S Michael Sury, former VP at Goldman Sachs and currently a lecturer in finance at the University of Texas at Austin. "The only models being shipped out have a variety of different options and features [eg, long-range battery] that come at an added cost. This added cost is what gives Tesla the margin it needs to deliver the vehicles."

Sury has done the maths and, based on his calculations, Tesla generates operating profits of more than $3,500 on each vehicle it currently sells within the $50,000 to $80,000 price range. “If the base-only Model 3 were sold today at $35,000, it would likely produce operating losses in the order of $5,000-$6,000,” he says.

Musk has reportedly said Tesla would need one to two quarters producing 5,000 or more vehicles a week in order to justify selling the base-only Model 3 at $35,000.

Risky territory

In short, Tesla is navigating through uncharted, risky territory. Nothing Musk hasn’t seen before. And while many of the same tactics he’s known for are being used this time round too, he is also leaving many second guessing his strategy, especially when he’s on Twitter.

Reports of a $2 billion stake being taken in the electric car maker by Saudi Arabia’s sovereign wealth fund (making it one of Tesla’s largest investors) came just after Musk had tweeted his intentions to privatise the company.

Confusing. But we won’t be fooled a second time into making further attempts at understanding the baffling world of the uber rich. Let us continue our quest to separate real Musk from fake Musk back down on the factory floor.

“He needs to either raise the base price of the Model 3 vehicle or rework the supply chain to produce higher volumes at lower cost,” Sury states. If his track record is anything to go by, he will probably choose the latter and ruthlessly push the labour chain to its limits in order to achieve the desired efficiencies.

It’s a bit of a gamble though. “Pushing manufacturing lines too much leaves almost no margin for error,” stresses Sury. “In the past few months alone, there have been too many reports of safety violations, injuries, and line stoppages to instil much confidence in Musk’s ability to achieve the kind of efficiencies needed.” Then there’s the knock-on effects from each incident and stoppage which make it that bit more challenging for Tesla to meet its production quotas.

Disgruntled workers

This is the small stuff, though. Musk is the quintessential “why not” guy. So those obstacles will be overcome, even if it is at the expense of many disgruntled workers.

The real danger lies in areas Musk is less familiar with. Like his growing celebrity. If he can avoid falling victim to the risks posed by being in the spotlight too much, and ease off on the weird tweets, he has a good chance of accomplishing his vision for a highly affordable electric vehicle for mass consumption.