Tesla Says It Is Making Progress on Model 3 Production Issues


Tesla Inc. on Wednesday signaled it is making progress in overcoming its early production troubles building the Model 3 sedan, telling shareholders it expects to generate its first sustained operating profit sometime this year.

The Silicon Valley auto maker said 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.

The optimistic tone is a reversal from last quarter’s report, when Tesla warned of monthslong delays in the production of the Model 3 and raised the possibility the company could pump the brakes on planned growth. Tesla on Wednesday reported yet another record loss—$675 million attributable to common shareholders—but unlike three months ago, the loss on an adjusted basis was narrower than what analysts were expecting.

This year “will be a transformative year for Tesla, with a high level of operational scaling,” Chief Executive Elon Musk wrote Wednesday in a letter to shareholders. “As we ramp production of both Model 3 and our energy products while keeping tight control of operating expenses, our quarterly operating income should turn sustainably positive at some point in 2018.”

Tesla also improved its cash flow during the quarter—burning just $277 million in free cash—crediting a delay in investments for the Model 3, a sell-down of inventories of Model S sedans and Model X sport-utility vehicles and a 24% increase in customer deposits from three months earlier. While the company doesn’t break out which products collected those reservations during the quarter, Tesla revealed a new semitrailer truck and a high-end sports car that will cost as much as $250,000.

In after-hours trading on Wednesday, Tesla’s shares fluctuated around the $345 closing price, after rising 3.3% during regular hours.

Amid the buoyant predictions, Tesla cautioned shareholders that the company has encountered “difficulty of accurately forecasting specific production rates at specific points in time.” The company often misses its targets, as it did with the Model 3 in the fourth quarter, when it sold only about 1,550 of the sedans, and fell short of hitting the 5,000-a-week goal by the end of the year.

Deliveries of the Model S sedan and Model X sport-utility vehicle helped boost unit sales by 35% during the fourth quarter from a year earlier. Tesla sold a record 102,807 vehicles last year mainly on the back of those two pricey cars, which typically sell for about $100,000.

But investor attention is focused heavily on the Model 3, which starts at $35,000 and is a key pillar of Mr. Musk’s strategy to remake the luxury auto maker as a more mainstream company that offers electric cars, solar panels and batteries for power storage.

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.

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.

In 2016, Mr. Musk had said he expected to make as many as 200,000 Model 3s in the second half of 2017 and that the company would reach 500,000 total production in 2018. Instead, Tesla, which began production of the compact car in July, built roughly 2,400 Model 3s in the fourth quarter, making Mr. Musk’s dream of producing a half million vehicles a year, including the Model S and Model X, look unlikely anytime soon.

Model 3 delays threaten to eat into Tesla’s limited cash. Tesla ended 2017 with $3.4 billion in cash on hand after spending $787 million on capital expenditures for Model 3 and battery production during the fourth quarter. That was less than Tesla had forecast in November when it said it planned to spend about $1 billion. The company said it delayed spending on the Model 3 until the first quarter.

Tesla plans to spend slightly more on capital expenditures this year compared with the $3.4 billion spent in 2017, the company said. 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, Mr. Musk wrote.

Analysts expect Tesla will have to raise additional money this year, and with the delays, their expectations for the company’s ability to turn a profit have deflated. About a year ago, the consensus among analysts surveyed by FactSet estimated Tesla turning an annual adjusted profit of $1.46-a-share in 2018, a view that has flipped to a loss of $4.16 a share. In 2017, the company, which has never posted an annual profit, lost $1.96 billion, or $11.83 a share.

Despite the hurdles, Mr. Musk continues to stoke enthusiasm among investors and fans. Shares of the company have soared more than 7% this year so far, giving it a market value that rivals

General Motors

, the largest U.S. auto maker by sales.

Tesla also seems to benefit from Mr. Musk’s involvement with his other company, Space Exploration Technologies Corp., which on Tuesday launched the world’s most powerful rocket in almost five decades that carried a Tesla sports car as a test-payload.

Last month, Tesla announced that the company’s board had approved a compensation package for Mr. Musk that aims for the company to reach a market value of $650 billion, about 10 times its current value.

In the fourth quarter, Tesla’s $675 million loss attributable to common shareholders compared with $121 million a year ago. On an adjusted basis, the company recorded a per-share loss of $3.04, beating the $3.11 predicted by a consensus estimate of analysts surveyed by FactSet.

Automotive revenue, which makes up the bulk of Tesla’s total revenue, rose 36% to $2.7 billion from a year ago.

Write to Tim Higgins at Tim.Higgins@WSJ.com

Appeared in the February 8, 2018, print edition as ‘Tesla Signals Better Model 3 Output.’


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