Electric-automobile and solar power producer Tesla reported fourth quarter and full year 2016 results this week but it seemed that most eyes are focused on the ramp-up of the new Model 3 volume ramp-up production and supporting supply chain strategies. Tesla_Flag

On the financial front, the company reported mixed results. Q4 automotive revenues were reported down by 7 percent on a quarter on quarter basis while total year revenues increased 69 percent from the year-earlier period. Q4 gross margin in automotive nearly doubled from the year-earlier quarter while full year gross profit for automotive increased 74 percent.

Equity analysts remained concerned about Tesla’s current and anticipated cash-burn rate, particularly since the new Model 3’s ramp-up will require added capital spending. The Wall Street Journal today observed that total liabilities now stand at nearly $18 billion, compared with $7 billion a year ago. Total cash on-hand amounts to $3.4 billion with speculation that the company must raise additional capital. A further development is the pending departure in April of the firm’s current CFO Jason Wheeler who will be replaced by Deepak Ahuya, Tesla’s initial CFO for more than 7 years.

In this week’s letter to stockholders, Elon Musk, Chairman and CEO indicated that in the past quarter, combined net orders for the Model S and Model X increased 49 percent compared to the same period in 2015.  Vehicle production increased by 77 percent over the year-earlier period. I

In January, Tesla reported that it produced a total of 83,922 vehicles which was at the low-end of its mid-year forecast for producing between 80,000-90,000 vehicles in 2016. During the final quarter, the auto maker produced 24,882 vehicles, many of which were delayed until December because of a what have been described as short-term production challenges starting in late October and extending to early December. Like the rest of the auto industry, Tesla remains challenged by a gap of finished goods produced vs. vehicles actually delivered and signed for by customers. In the final quarter, the gap between vehicles produced and vehicles delivered was 2682 vehicles, which will be counted in the new fiscal year as revenue.

Yet, the company still has a long way to go to meet its milestone of producing upwards of 500,000 vehicles on an annual basis by 2018.

We previously alerted our readers to a published report that Tesla began pilot production of the new Model 3 vehicle earlier this month, to coincide with this week’s report to shareholders. In this week’s letter to shareholders, Musk declares that Model 3 product development, supply chain and manufacturing are on-track to support volume deliveries in the second-half of this year, while installation of manufacturing equipment is underway at both the Fremont California and the Nevada based Gigafactory. The company expects to invest somewhere between $2 billion and $2.5 billion in capital expenditures ahead of the start of Model 3 production and by our lens, there is little tolerance for missteps in engineering and process design.

Upwards of 400,000 paid deposit reservations are believed to have been made so that prospective Tesla customers can be assured of a Model 3 delivery slot. Tesla executives however refuse to cite any number related to Model 3 deposits.

Musk previously informed shareholders of plans to begin Model 3 volume production by July of this year but cautioned that the company could miss that date if suppliers do not meet deadlines. In this latest letter to shareholders, there is a statement indicating that all Model 3-related sourcing is on plan to support the start of production in July.

During the Q&A phase of management’s briefing to equity analysts regarding the latest financial results, there were multiple questions related to further background for the Model 3 ramp-up. Musk re-iterated that the goal for the Model 3 is to have production rates of 5000 per week by the end of this calendar year and that current supplier parts orders begin to ramp to increased volume cadence from July through September. He reiterated that the auto maker has refocused most of Tesla’s engineering, including design engineering into designing the factory. “I think in the future, the factory will be a more important product than the car itself.” Also stated: “I’ve said this before, but our goal is to be the best manufacturer on Earth. This is our real goal. I don’t know if we will succeed, but I think we’re making good progress in that direction.”

Responding to a question on the difference in the Model 3’s design, executives indicated that the amount of complexities in the overall design and vehicle complexities to assemble the newer, lower priced but higher volume model have been dramatically reduced, while the amount of operations that involve more judgment from production operators have been dramatically reduced, or almost eliminated. The Model 3 was described as designed for manufacturability.

A further acknowledgement was learning from the previous Model X production ramp-up where complex design changes hampered ramp-up, bottleneck and cost efficiency milestones, which we have pointed out in prior blog postings related to Tesla.

Another difference noted by Musk is that in earlier models, it was rather difficult to recruit established automotive tier-one suppliers for long-term supply contracts because Tesla was viewed as a start-up with financial risks. For the Model 3, component and subsystem supply contracts have been established with some tier-one suppliers and there is now renewed confidence in supplier capabilities to meet design, quality, and volume commitments.

Supply Chain Matters has previously praised Tesla’s vision, innovative thinking and its can-do perspectives concerning supply chain and distribution. Many eyes are now focused on Tesla’s next critical milestone, that being the ability to operate as a high volume, disciplined manufacturer of industry-leading and technology-laden innovate automobiles.  As many of our readers are well aware, Tesla is now embarking on a full-blown supply chain segmentation strategy, one that differentiates capabilities of full-featured, higher-priced vehicles from that of the high-volume, lower-priced Model 3.

The year 2017 will be the crucial test.

Bob Ferrari

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