Wall Street is making excuses for Tesla's Model 3 problem - and it could backfire this year
- Nomura analyst and Tesla bull Romit Shah thinks Tesla's focus on quality control justifies its sluggish Model 3 production ramp.
- But quality control should be a given for Tesla, not an excuse.
- 2018 will be the year when the Tesla bulls have their optimism tested.
Tesla missed badly on Model 3 delivery expectations for the fourth quarter, selling only 1,550 vehicles.
When the carmaker announced its numbers on Wednesday, it added in a statement that "[a]s we continue to focus on quality and efficiency rather than simply pushing for the highest possible volume in the shortest period of time, we expect to have a slightly more gradual ramp through Q1, likely ending the quarter at a weekly rate of about 2,500 Model 3 vehicles."
That prompted Nomura analysts Romit Shah to offer some insight via a research note published Thursday.
"[W]e believe that Tesla is prioritizing quality control," he wrote.
"While Tesla's repeated guidance revisions could begin to risk damaging its elite brand, a mass-recall would probably be far more damaging. We believe that Tesla is (correctly) taking advantage of its unique beta testing ecosystem. Issues caught by early customers can be rapidly addressed by Tesla's versatile assembly process."
Shah is bullish on Tesla, with a target price of $500 per share (in trading Thursday, the stock had slipped 3%, to $309). But more is at stake than brand damage as far as Tesla's exceptionally weak Model 3 rollout.
Quality control is a smoke screen
The Model 3 was supposed to be designed for mass-production, and that process has been underway for half a year now (the vehicle launched back in July of 2017). Apart from the recognizable car parts of the car - the exterior features, the interior, wheels, brakes - the Model 3 isn't that different from the larger and much more expensive Model S, aside from the latter vehicle's greater use of aluminum in its construction.
Effectively, Model 3 production should be straightforward: take car, add battery pack and drivetrain. In fact, when the Model 3 was launched, Tesla said that it would initially build only the higher-spec, $44,000, to reduce complications on the assembly line. That's why it made sense that the initial delays were due to battery bottlenecks at Tesla's Nevada factory: no batteries means no cars.
If you contrast the issues on Model 3 with the non-issues on Tesla's other vehicles - Model S and Model X, which together accounted for over 100,000 deliveries in 2017 - questions start to get thorny. It isn't easy to bring a new car to market, but this isn't some radical departure from either automotive norms or Tesla's own capabilities. It's a mid-size sedan. Honda builds and sells well over 100,000 Accords every month.
Demands for the Model 3 is also abundant
The vehicle has over 400,000 pre-orders. If you signed up to get a car when it was revealed in 2016, you can now expect to wait until late 2018 or 2019 to get your ride. If you want a new Accord, you can head down to the dealership today and drive one home.
The point I'm making is that Wall Street keeps coming up with borderline nonsensical justifications for Tesla's increasingly glaring lack of a fundamental auto industry skill: building cars at scale. Quality control obviously matters - nobody wants their car of the future to be a buggy mess, a "lemon" in the old world parlance - but quality control and mass-production have been happy bedfellows for literally decades, since Toyota revolutionized auto manufacturing in the 1970s and '80s.
In other words, the days when quality control had to even be ranked someplace above first in an automaker's consideration are a relic of the 1950s, back when General Motors controlled half the US market and owners were accustomed to cars that routinely broke down.
Wall Street's Tesla bulls have been quite patient with Tesla's apparent enthusiasm for what CEO Elon Musk calls "production hell." It makes for an interesting story. But the idea that it should befall everything the company does after existing for 14 years is sort of crazy. So 2018 will be the year when investors are really put to the test, when it comes to what Tesla represents versus what it can actually come through on.