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Abu Dhabi, UAETuesday 25 September 2018

Has Tesla's Model 3 missed its 'iPhone' moment?

Delays to the highly-anticipated mid-range electric car may see the pioneer lose out to older rivals

Tesla chief executive Elon Musk. The slow production rate of the company's Model 3 has worried investors. Carla Gottgens / Bloomberg
Tesla chief executive Elon Musk. The slow production rate of the company's Model 3 has worried investors. Carla Gottgens / Bloomberg

Has Tesla, the revolutionary phenomenon of the auto industry, missed its “iPhone moment”, the once-in-a-life-time opportunity to leverage its unique position in the electric car revolution before traditional car-makers catch up?

Steve Jobs seized his moment with both hands in 2007 with the launch of the iPhone, a groundbreaking product that that transformed the smartphone market and drove Apple’s share price into the stratosphere, making it the biggest company in history in the process.

Tesla’s uber-bulls have long believed the same thing is about to happen to them, with an electric vehicle – specifically the highly anticipated Model 3 - that will blow the competition away and change the industry forever. But the faith of the bulls has been severely shaken by events over the past week.

Veteran American analysts have been warning for months that the American car company, which is only 14 years old, was never going to meet the hugely ambitious production targets widely trumpeted by its ebullient chief executive Elon Musk. And they may be right.

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Tesla admitted last week that it made just 260 of its Model 3 cars (which retail from $35,000) in the third quarter of the year, or just three a day, a fraction of the 1,500 it had promised its investors. Musk is still projecting production running at 500,000 a year, starting in 2018, but it now looks pretty certain he will not get anywhere near that.

Tesla and Musk have many enemies and doubters in the auto industry, and in the past week you could almost hear them rubbing their hands in glee. Someone clearly had spies inside the Tesla factory because eye-witness accounts appeared of the production line at a standstill, robots not working and models still being made by hand. The Wall Street Journal, which has been highly sceptical of Tesla from the outset, reported shop floor workers watching young colleagues struggling to move large pieces of metal to weld together. “You’ve got two associates lining up with a big, old spot welder hanging from the ceiling by a chain,” said its inside source, “and you’ve got another welder with his arm guiding it.”

There was always great scepticism about Musk’s lack of production skills, but this is much worse even than anything suspected so far. “That’s horse and carriage stuff,” a veteran manufacturing consultant was quoted saying. “That’s not today’s automotive world.’ Old auto hands, who have built a few production lines and launched many new models in their time, point to the enormous difficulties of mass-producing a car with 10,000 components sourced from all over the world using a semi-skilled workforce in a brand-new factory. Traditional car-makers run a new production line for a year before they let cars out of the factory. Tesla has been trying to do it in months.

Tesla’s future in the auto industry hinges on the success of the Model 3, the car which was to have ushered in the biggest revolution in America’s most iconic industry since Henry Ford began making Model Ts over a century ago. Over half a million Tesla fans have signed up for the new model, putting their deposit down and many more are impatiently waiting for it to arrive in the glossy showrooms which have sprung up in strategic spots around the world (a Dubai showroom opened in July). The hype that surrounds the new car has driven Tesla shares up nearly 70 per cent in the past 12 months, at times taking its market value above $60bn, higher than either General Motors or Ford. Just to put that in perspective, last year Tesla made a total of 84,000 Model S sedans and Model X SUVs. GM by comparison made over 10m vehicles, or 27,000 a day, and generated cash flow of over $20bn. Tesla used up another $5bn of precious cash with more – much more – to go before it turns the corner.

But, as Musk says, the Model 3 is not just a car – it is a “computer on wheels”; it’s arguable therefore that Tesla should be seen as a tech firm as opposed to an automaker, making comparisons with the old-fashioned giants of Detroit less relevant. Astonishingly the news of Tesla’s production bottlenecks has done little to dent the company’s popularity with its almost fanatical shareholders, or even the normally sceptical Wall Street analysts who still believe Musk will pull it off. Steve Jobs however knew that revolutions wither and die if they are not sustained by physical products being available, and he made sure the iPhone was ready for the launch. Musk’s track record on that score is not great. Over the weekend he posted a video showing the Model 3 production line apparently at work, and has insisted that the company is still production curve will steepen in due course. Such utterances didn’t stop the company’s shares falling back 4 per cent on Monday, their first setback in six sessions.

Barclays’ analysts, big fans of Tesla stock until recently, released a note on Monday morning suggesting that the Model 3 production problems could delay or even destroy Tesla’s “iPhone moment”, threatening the loyalty of its investors and customers and giving rivals including the Chevrolet Bolt and the Nissan Leaf the chance to compete. Tesla’s production delays mean the marketing ramp could drag into the second half of next year or even into 2019, by which stage the likes of GM and Nissan will be in a much stronger position to take on the Model 3.

The race is well and truly on. The smart money is still betting on Elon Musk and Tesla, but further delays could see investors’ patience wearing thin.

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