Reuters: Tesla Reduced Model 3 Parts Order Due to Bottlenecks

Tesla has reportedly slashed its parts order from third-party manufacturers by 40% in December citing a bottleneck in Model 3 production.

Reuters reported that Hota Industrial Manufacturing Co, a Taiwanese automotive components maker and supplier for Tesla, has been asked to reduce production of Model 3 components from 5,000 units per week in December to 3,000 per week.

Hota builds gears and axles for Tesla cars. Despite the slow-down in December, the company said its preparing for a significant ramp in Tesla’s production and plans to ship 10,000 parts a week in May or June. Tesla previously indicated it hoped to reach that mark by March.

Tesla CEO Elon Musk has been quite willing to say the company is facing production challenges, but has yet to give specifics. Some reports say bottlenecks are occurring at the Fremont factory where the Model 3 assembled, others blame suppliers. Then Musk tweeted about “production hell” from the company’s Gigafactory in Nevada, leading some to question if the bottleneck is related to the Model 3 battery pack.

It seems the company still has a long way to go before delivering on nearly half a million Model 3 reservations.

 

[arnis]

US can rest in peace: Tesla will not hit 200 000 in the first quarter for sure.
It's around 150 000 right now. And they added 15k last quarter. With no M3
ramp up this year, not possible to get 200 000 during 2 next quarters
(except if more cars are kept in US, which will not happen - on the contrary, less).
Numbers grow but percent will drop. M3 demand is higher where smaller vehicles
are preferred. And that is not US

 

[Garlan Garner]

For what it's worth, they can ramp production without ramping sales.

Why would they do that? The are rolling them out to employees with NDA's to test them. That's probably what happened to find the problems they did.

It also makes no financial sense to do such a thing..

 

[Marsnaut]

Not as far as I know. Everyone up to 200k gets the full credit. Every car after 200k in the quarter they hit 200k also gets the credit, so the more cars they can push in the same quarter the more tax credits those owners get. If they hit 200k cars in March 15th, only cars sold until the 30th get the tax credit. If they hit 200k cars on April 1st, every car sold until June 30th gets the credit.

I believe it is for the quarter 200k cars is hit AND the quarter after. So if they hit it on April 1st, it will actually extend all the way to Q3 (September 30, 2018).

 

[voip-ninja]

For what it's worth, they can ramp production without ramping sales if they have enough space in Livermore. They only hit the limit with sales, so the more they can produce ahead of time, and higher the ramp rate once they hit 200k US sales, the more people get the tax credit.

Problems with the current production line/configuration could delay the AWD line, but delays in sales may not be representative of problems in production as long as they have enough storage space for the 3 in Livermore/elsewhere.

Edit - They can also deliver X cars from each batch of Y cars, and use the real world data/experience/problems from those to see if they need to fix/update anything before delivering the remainder of that batch.

Now that I'm thinking about it, that's kinda brilliant. It's a pain to have to fix a part on batches 15 and 27 sitting in a warehouse in Livermore, but it's a lot easier than scheduling replacement with owners across the US.

I've done similar in software testing, but I hadn't thought about doing it in manufacturing.

Investors won't put up with it.

Elon has previously stated that Tesla will try to work things out to maximize the # of people who will get the tax rebate. While this would help with sales, they have more sales than they know what to do with, they need to build and deliver cars.

I see it as being extremely unlikely that they will stockpile inventory and delay deliveries for tax credit purposes... not to mention they could get flak from the .gov for doing so as it is gaming the system at the expense of tax payers.

 

[omgwtfbyobbq]

I believe it is for the quarter 200k cars is hit AND the quarter after. So if they hit it on April 1st, it will actually extend all the way to Q3 (September 30, 2018).

Edit- Scratch that. The phaseout starts the second calendar quarter after the quarter when the 200k sale is made, so the first quarter is still at the full credit.

The qualified plug-in electric drive motor vehicle credit phases out for a manufacturer’s vehicles over the one-year period beginning with the second calendar quarter after the calendar quarter in which at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009) (“phase-out period”). Qualifying vehicles manufactured by that manufacturer are eligible for 50 percent of the credit if acquired in the first two quarters of the phase-out period and 25 percent of the credit if acquired in the third or fourth quarter of the phase-out period. Vehicles manufactured by that manufacturer are not eligible for a credit if acquired after the phase-out period.

Plug In Electric Vehicle Credit IRC 30 and IRC 30D | Internal Revenue Service

It appears to be 50% the following two quarters and 25% the two quarters after that.

Reminder: How the Federal Tax Credit Phaseout Works

The federal tax credit is phased out over time beginning the second quarter after the quarter in which a manufacturer reaches a total of 200,000 BEV and/or PHEV vehicles sold since 2010. Here’s how the phaseout works:

• The full amount of the EV qualifying tax credit is in place during the entire calendar quarter in which 200,000 EVs are sold by a manufacturer, and through the subsequent quarter.
• Then the tax credit amount is reduced by 50% ($3,750 for Tesla models) for the next 2 quarters.
• The credit is reduced again to 25% ($1,875 for Tesla models) of the original amount for the subsequent 2 quarters.
• At that point the credit expires completely.

Federal EV Tax Credit Phaseout Quarter For Tesla Becoming More Clear (Sort Of)

 

[omgwtfbyobbq]

Why would they do that? The are rolling them out to employees with NDA's to test them. That's probably what happened to find the problems they did.

It also makes no financial sense to do such a thing..

Two reasons... They can maximize the number of people getting the full tax credit and by testing some percentage of each batch they produce, minimize the number of defects customers have to have fixed.

The first is I think the most significant. The original ramp was I think projected to be roughly 1500 cars in September, (est)5000 cars in October, (est)10000 in November, and 20000 in December, which when combined with X/S sales, would have put them at 200k right around the first of the year., assuming they keep track of sales and don't go over in December, which I'm sure they are. If they continued to crank out 20000 3s per month, then ~60k model 3 owners and another ~15k X/S owners would get the tax credit. As it stands, with them being two months behind, at least from what I can see, they would hit 200k cars in late February/March, which would only result in ~20k-30k 3 owners getting the full tax credit and ~5k-10k S/X owners getting the full tax credit. Missing out on nearly half a billion in tax credits isn't something to sneeze at.

In terms of reliability, if they have 10 cars warehoused for every car on the road, the turn time to fix any problems they find during employee/early adopter real world use is far less than the turn around time if all those cars are on the road, or whatever the specifics are. That would also explain why they're so annoyed at CR. If the 3 is being launched in a fundamentally different way, comparing it's reliability to that of the S/X when they launched is 100% horse hockey.

 

[omgwtfbyobbq]

Investors won't put up with it.

Elon has previously stated that Tesla will try to work things out to maximize the # of people who will get the tax rebate. While this would help with sales, they have more sales than they know what to do with, they need to build and deliver cars.

I see it as being extremely unlikely that they will stockpile inventory and delay deliveries for tax credit purposes... not to mention they could get flak from the .gov for doing so as it is gaming the system at the expense of tax payers.

My guess is that most large investors already have an idea of what they're doing. It might not be what I'm describing, but I'm sure most large investors and analysts will be OK with Tesla delaying sales if doing so could help their customers get an extra half billion in tax credits.

 

[shokunin]

They are at something 4,000-5,000 US S/X sales per month. Waiting an extra 3 months would add maybe 15,000 sales, which I think was estimated to be ~150,000-160,000 Model S/X sales as of January 2018, so they shouldn't put Tesla over the limit, at least not with a 3-month delay.

Given the current sales rate of the S/X the number to watch is 35,000 or so Model 3 deliveries between now and March 31st. That's a pretty low bar to achieve given the projected ramp curve they were targeting. If they hit a run rate of 3K a week in december, they should be able to hit 200k total sales in US in Q1, which means full tax credit through Q2.

 

[gregincal]

I can see Tesla fudging things by a week or two, but they aren't going to hold back months of production to delay things into Q2. Just isn't going to happen. It would totally destroy Tesla's bottom line for the quarter, for no stockholder benefit.

 

[omgwtfbyobbq]

I can see Tesla fudging things by a week or two, but they aren't going to hold back months of production to delay things into Q2. Just isn't going to happen. It would totally destroy Tesla's bottom line for the quarter, for no stockholder benefit.

I strongly disagree. If they don't optimize the delivery of the 3, their customers could lose out on nearly a half billion in tax credits and they would have to make far more repairs of in-service cars if there things they still need to fix. Granted, the 3 could be absurdly reliable right out of the factory and they may be able to hit 200k vehicles sold on January 1st 2018 with a production rate of 20k 3s per month by December, in which case they wouldn't need to do anything.

However, if there are problems with the ramp and like every other car maker, they have problems with initial production runs for certain parts, I think it's far better for them in the long run to delay some sales so they can maximize the number of customers who get the tax credit and minimize the amount of in warranty repairs/possibly bad publicity they get. Sure, there will be plenty of people to criticize them for another quarter of loses, but they've been showing consistent loses for years with plenty of investor confidence. As long as they're doing the right thing in the long run, they'll continue to grow and investors will be fine with that.

 

[Garlan Garner]

Two reasons... They can maximize the number of people getting the full tax credit and by testing some percentage of each batch they produce, minimize the number of defects customers have to have fixed.

The first is I think the most significant. The original ramp was I think projected to be roughly 1500 cars in September, (est)5000 cars in October, (est)10000 in November, and 20000 in December, which when combined with X/S sales, would have put them at 200k right around the first of the year., assuming they keep track of sales and don't go over in December, which I'm sure they are. If they continued to crank out 20000 3s per month, then ~60k model 3 owners and another ~15k X/S owners would get the tax credit. As it stands, with them being two months behind, at least from what I can see, they would hit 200k cars in late February/March, which would only result in ~20k-30k 3 owners getting the full tax credit and ~5k-10k S/X owners getting the full tax credit. Missing out on nearly half a billion in tax credits isn't something to sneeze at.

In terms of reliability, if they have 10 cars warehoused for every car on the road, the turn time to fix any problems they find during employee/early adopter real world use is far less than the turn around time if all those cars are on the road, or whatever the specifics are. That would also explain why they're so annoyed at CR. If the 3 is being launched in a fundamentally different way, comparing it's reliability to that of the S/X when they launched is 100% horse hockey.

Do you really think Tesla is doing anything right now with the Tax Break in mind? I hope not. I hope they are just trying to get the cars out there.

Are they calculating the tax bread during "production hell" ?

 

[zer0cool]

Ya if the threshold is there within 2 weeks of end of quarter, I think Tesla will try to delay some deliveries to squeeze into the 2nd quarter. However if it's more than 2 weeks, there's no way they would hold on to tens of thousands in inventory just so extend the full credit.

 

[gregincal]

I strongly disagree. If they don't optimize the delivery of the 3, their customers could lose out on nearly a half billion in tax credits and they would have to make far more repairs of in-service cars if there things they still need to fix. Granted, the 3 could be absurdly reliable right out of the factory and they may be able to hit 200k vehicles sold on January 1st 2018 with a production rate of 20k 3s per month by December, in which case they wouldn't need to do anything.

However, if there are problems with the ramp and like every other car maker, they have problems with initial production runs for certain parts, I think it's far better for them in the long run to delay some sales so they can maximize the number of customers who get the tax credit and minimize the amount of in warranty repairs/possibly bad publicity they get. Sure, there will be plenty of people to criticize them for another quarter of loses, but they've been showing consistent loses for years with plenty of investor confidence. As long as they're doing the right thing in the long run, they'll continue to grow and investors will be fine with that.

They are testing parts in cars right now. That's part of the ramp. You want them produce artificially low volumes for the next 5 months to continue to test parts?? Why stop there. Perhaps they should produce 200 cars a month for the next year to make really really sure they are reliable.

 

[smak]

Ya if the threshold is there within 2 weeks of end of quarter, I think Tesla will try to delay some deliveries to squeeze into the 2nd quarter. However if it's more than 2 weeks, there's no way they would hold on to tens of thousands in inventory just so extend the full credit.

Delaying sales at the end of a quarter is the exact opposite of what Tesla does.

Holding off 2 weeks of Model 3 sales, at a time they'd be making >5,000 a week seems like a lot to do.

That's almost 500 million in sales to not book in that quarter.

Seems like they'd more likely try to do something on paper, rather than physically hang on to 10k cars somewhere.

 

[FlyingKiwi]

Or simply announce that Canadian early orderers have been moved up the priority order and keep building flat out but ship the cars over the border.

 

[Big Dog]

I can see Tesla fudging things by a week or two, but they aren't going to hold back months of production to delay things into Q2. Just isn't going to happen.

Not production, but US deliveries. Remember, they could always ship last March/June cars north of the border. (The Canadians would be happy, eh?)

 

[gregincal]

Or simply announce that Canadian early orderers have been moved up the priority order and keep building flat out but ship the cars over the border.

Assuming they've completed Canadian homologation.

 

[Phrixotrichus]

at this point I can`t but remember the Model X disaster.

By now I think it`s entirely possible that I´ll see Mercedes/BMW/Audi/VWs mystical EVs before I see the first Model 3 here in germany......

 

[GLDYLX]

Bottlenecks in Model 3 production don't necessarily mean bottlenecks in revenue; Tesla can prioritize non-US S/X sales and Tesla Energy projects to make $$$ AND push the 200k US sales mark past 12/31, or even 3/31.

I wouldn't mind seeing the Model 3 ramp graph look more like a hockey stick than a curve, assuming they have used the time this Q (and possibly all of Q1)to work out bugs in the line and the cars. That way MANY more people can take advantage of the full credit in Q1 and Q2 (or Q2 and Q3), with the fewest number possible of Model 3s that fly off the line next year having to spend time at the SvC in their first year of life.

I just hope my '00 Celica lasts long enough to not force me into a stop-gap car; my mechanic PROMISED that it won't actually burst into flames................. But it's doing its best to make me hate it before I donate it for scrap. Heh.

 

[Big-T]

Investors won't put up with it.

Elon has previously stated that Tesla will try to work things out to maximize the # of people who will get the tax rebate. While this would help with sales, they have more sales than they know what to do with, they need to build and deliver cars.

I see it as being extremely unlikely that they will stockpile inventory and delay deliveries for tax credit purposes... not to mention they could get flak from the .gov for doing so as it is gaming the system at the expense of tax payers.

Elon has said plenty of things that wind up not being accurate when the time comes. (sigh) sorry it's been a long day.