Tesla faces Capacity Constraints in Meeting High Model 3 S Demand

While shareholders are grasping onto Elon Musk’s transformative strategic plan for the transportation industry, Tesla is facing more pressing issues with its day-to-day scheduling. Tesla announced in its quarterly financial report that is on track to reach a milestone of making 5,000 Model 3 sedans a week by the end of the second quarter (a twice postponed goal) and that it is addressing bottlenecks that have derailed production. Despite early bottleneck troubles while building the Model 3 sedan, Tesla expects to generate its first sustained operating profit sometime this year. Amid the ambitious predictions, Tesla cautioned shareholders that the company has encountered “difficulty of accurately forecasting specific production rates at specific points in time.” Last November, Tesla acknowledged it was struggling to ramp up the Model 3 due to the complexity of the battery-pack assembly and its automated manufacturing process. It has suffered from bottlenecks at the assembly plant in Fremont, Calif., and at the battery factory near Reno, Nev.


Just like Sara pointed out in her post last week, the overarching concern over Tesla’s quality is whether or not the company can handle the growing pains of transitioning from a boutique carmaker to a mass-production manufacturing business without forfeiting quality and falling into the trap of “building fast, fixing later.” Tesla already has highly rated quality assurance. The problem has shifted away from quality issues and towards production capacity. Tesla has received about 500,000 reservations to buy the Model 3, so the question is how quickly it can crank up production to meet the demand. The company’s website currently says it will take about 12 to 18 months to get a Model 3 delivered if reserved today. The delayed Model 3 sedan sales will eat into Tesla’s already depleting cash. Tesla will have to raise additional capital in order to meet the demand for the Model 3 sedan, but this additional capital will be expensive since Tesla still operates at a loss. Tesla’s lithium battery production is based out of a “gigafactory” out of which Panasonic also bases its production of electronics. The auto maker plans to add capacity at its assembly plant to be able to make 10,000 Model 3 sedans a week after reaching the 5,000-a-week milestone, but Panasonic’s cathode powder supply chain can’t support more than half of that volume.


Currently, Tesla’s car production is limited to its battery production, and its battery production is limited by the amount of cobalt. The location of Tesla’s lithium-ion battery cell and battery pack production is currently split to some degree. The company’s new 21700 form factor battery cells being produced at the Gigafactory while the 18650 form factor cells are produced elsewhere (mostly at Panasonic facilities). More importantly, expansion of integration between the Tesla/Panasonic supply chain would be a difficult task because its cathode powder supplier, Sumitomo Metal Mining already is using 100% of its cobalt production to satisfy Panasonic’s cathode powder requirements. Cobalt prices have skyrocketed because of the increased demand by the automobile industry. Tesla CEO Elon Musk has previously revealed that the company is planning to build a great many more Gigafactories over the coming years and decades with facilities spread around the world to meet local and regional demand in the areas where Tesla is located and has strong market demand, but this will come with the challenges of resource scarcity and investor confidence.





6 thoughts on “Tesla faces Capacity Constraints in Meeting High Model 3 S Demand

  • February 20, 2018 at 9:27 pm

    Tesla’s recent failures to reach expected production levels and their plans for the future make me wonder how much capacity forecasting they have done, and if they have done enough, where the holes in their assumptions for the future have been. To me, it almost seems like they have been more focused on generating excitement, and thus demand, for their revolutionary products than they have on ensuring that they can actually supply them to customers. For Tesla, though, the future viability of electric cars may be more worrisome. You mentioned the issues with cobalt shortages, which I had actually read about recently in an article on ocean floor mining. It suggested that one of the best ways to increase the global supply of precious and useful metals such as cobalt would be by mining hydrothermal vents. As you might expect, this will have environmental consequences in its own right, which brings up the question of how much better for the environment electric cars can be if they require such harm just to be made. Tesla’s management of these input dilemmas will certainly play a large role in their ability to provide for customers in the future.


    • February 21, 2018 at 8:31 pm

      I agree with Nick that the problems Tesla is facing stretch beyond the recent issue with their Model 3’s. Also worth noting is 2015 was the year that their first Model S lease was up, flooding Tesla with a huge inventory of their older model. They increased their lease numbers by rolling out new leasing opportunities back in 2014. If you have enough money to lease a Tesla, it’s likely that you’re going to want the newest, best version, especially in Silicon Valley. Where they begin to fall into problems is when they begin to over promise and under deliver. Another notable time that they ran into problems as a result of lack of monitoring and assessing was their self driving issues. As recent as last month Tesla has been under attack for all the issues they’ve had with their self driving features. When you add all of these on top of the pressure to roll out their newest model, it is understandable that Tesla is having issues with their revenues and stocks. My suggestion in order to fix this would be to shift their focus back on their quality that made them famous. Through good process management I believe they can bounce back from this.


  • February 21, 2018 at 5:43 pm

    Before Tesla, electric cars appeared to most people as an inconvenience rather than a benefit. Few charging stations existed, and impracticality greatly diminished the appeal of an electric vehicle. Now, with Tesla’s impressive rise from an emerging business to the cutting edge highly demanded product it is today. That being said, growth rates like those Tesla is experiencing is bound to run across a number of problems. Perhaps Tesla has overextended themselves. Determining the limiting factor in production is crucial. In this case Cobalt is the limiting factor for Tesla. How can they promise cars to customers when they can’t produce enough batteries for the cars? Clearly the capacity of Tesla’s production has already been reached and they have used up all of their capacity cushion. Often situations like this are problematic for a company because it typically means customers will be lost and turn to competitors for what they desire. I believe that’s where Tesla may have the advantage. At the moment they are the main producer of electric vehicles in the world. There are very few viable alternatives to Tesla. By generating too much demand for their products and having consumers wait for up to a year may be a competitive advantage for Tesla. They haven’t lost customers and are in fact ensuring that they will still have demand even through all the growth they are experiencing. For the next year and a half, they have already guaranteed sales that they can work to satisfy while still focusing on growth. By staying behind demand for the time being they may actually be ensuring their growth is justified as they are still a relatively young company. Too much growth without demand has often led to more problems than too much demand and not enough growth.

  • February 21, 2018 at 6:29 pm

    Tesla has continuously failed at achieving their planned production levels. All of their products are highly sought after, but the demand seems to outweigh the supply of their products, and the delivery time of the product is always delayed. I am curious to see how their processes are planned. I can’t imagine they have properly computed their capacity forecasting. I would like to see in the future if this trend continues as they release new products or if they can get a handle on their operations. It is curious to me that even though their products are continuously delayed the man in charge is not held accountable. Their CEO, Elon Musk, can potentially earn a $55 Billion bonus if he can help expand their operations to $650 Billion within the decade (https://www.theguardian.com/technology/2018/jan/23/elon-musk-aiming-for-worlds-biggest-bonus-40bn). However, it seems like it would be more beneficial for their company to expand their operations and improve their supply chain with this money. They need to increase their maximum capacity of cars that can be manufactured at their facilities in order to improve their supply chain and keep up with demand. I know many people who are extremely excited for Tesla’s future, due to their extremely innovative ideas, but in order to truly become a great company, they need to control their operations.

  • February 21, 2018 at 8:26 pm

    Tesla has continuously financed its projects through debt because of its inability to generate cash flows. In order to avoid the increased costs of the debt that would normally be associated with increased borrowing Tesla has backed the new debt issuances with assets to make them more secure. The most recent issuance of debt was backed by Tesla’s automobile leases and carries yields ranging from 2.3 to 5%. It is interesting how so many varying factors impact the ability of a company to keep production on pace. Tesla highlights this very well in that they have needed to look for external financing to improve production capacity and then when the issue is fixed they are hampered by a lack of raw materials. Tesla also needs to keep in mind that as they continue to increase their level of debt they must so to increase their revenues to meet the interest payments. If Tesla can generate profits as they plan to they must continue to invest in their infrastructure and supply chain in order to become more streamlined.

  • February 21, 2018 at 8:59 pm

    I agree that the hype behind Tesla is a significant asset. That being said, there is obviously a limit to how much excitement they can generate for their products with the amount of uncertainty there is to when, and if, the demand will be supplied, especially considering the cobalt shortages. I think Tesla has to decide exactly what they want their company to be, as making this transition from boutique carmaker to mass producer is extremely difficult. They essentially have to alter their entire production line to supply greater demand, while attempting to keep the same high quality they advertise in their products. Something I looked into was how a company like Armani breaks up their supply chain. To elaborate, Armani has the Giorgio Armani line, which consists of extremely high quality yet expensive items, while their Armani Exchange line offers more affordable products, with lesser quality that are produced on a more massive scale. Obviously, cars are a different industry entirely. Nonetheless, I think it goes to show that mass production usually comes at a cost, and Tesla may have to make some adjustments in their branding, rather than simply attempt to accommodate demand with their current production process.

    Sources: https://en.wikipedia.org/wiki/Armani

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