Tesla Hits Model 3 Production Target, Warns Of China Headwinds

Just one day after speculating on the amount of produced and delivered vehicles Tesla would be reporting for its third quarter, we have the answer. According to a press release put out by Tesla this morning, Tesla produced 80,142 vehicles, 50% more than its prior all-time high. The press release broke down the following details:

53,239 Model 3 vehicles, which was in line with our guidance and almost double the volume of Q2. During Q3, we transitioned Model 3 production from entirely rear wheel drive at the beginning of the quarter to almost entirely dual motor during the last few weeks of the quarter. This added significant complexity, but we successfully executed this transition and ultimately produced more dual motor than rear wheel drive cars in Q3. In the last week of the quarter, we produced over 5,300 Model 3 vehicles, almost all of which were dual motor, meaning that we achieved a production rate of more than 10,000 drive units per week. 

26,903 Model S and X vehicles, which was slightly higher than Q2 and in line with our full-year guidance.


How does the Model 3 production of 53,239 compare to estimates? It was somewhat better than Wall Street consensus 50,416 but just below Bloomberg’s Model 3 tracker estimate of 53,457.

Putting these numbers in context, in the last week of the quarter, Tesla hit its long-standing target of 5,000 Model 3 cars a week according to Bloomberg. For the quarter, production of a little more than 53,000 means about 4,000 cars a week.

Recall that Tesla CEO Elon Musk had pulled out all of the stops in the last couple of weeks to hit sales and production goals. So it remains to be seen if Tesla's outdoor assembly line is consistently hitting 5,000 of the Model 3 every week. Also it remains to be seen if the current production pace will result in a quarterly profit.

The biggest "beat" for the company was the number of deliveries, which came in well above expectations, at 83,500.

Q3 deliveries totaled 83,500 vehicles: 55,840 Model 3, 14,470 Model S, and 13,190 Model X. To put this in perspective, in just Q3, we delivered more than 80% of the vehicles that we delivered in all of 2017, and we delivered about twice as many Model 3s as we did in all previous quarters combined.

The company also noted the obvious, namely that its Model 3 sales were limited to higher ASP versions of the vehicle. It also stated that demand for the Model S and Model X "remains high":

Our Q3 Model 3 deliveries were limited to higher-priced variants, cash/loan transactions, and North American customers only. There remain significant opportunities to grow the addressable market for Model 3 by introducing leasing, standard battery and other lower-priced variants of the car, and by starting international deliveries.

Demand for Model S and X remains high. In Q3, we were able to significantly increase Model S and X deliveries notwithstanding the headwinds we have been facing from the ongoing trade tensions between the US and China. Those trade tensions have resulted in an import tariff rate of 40% on Tesla vehicles versus 15% for other imported cars in China.

One drawback: the promising nature of China looks as though it may have dimmed a bit, as well, with the company noting that trade tensions with China "have resulted in an import tariff rate of 40% on Tesla vehicles versus 15% for other imported cars in China."

Tesla continues to lack access to cash incentives available to locally produced electric vehicles in China that are typically around 15% of MSRP or more. Taking ocean transport costs and import tariffs into account, Tesla is now operating at a 55% to 60% cost disadvantage compared to the exact same car locally produced in China. This makes for a challenging competitive environment, given that China is by far the largest market for electric vehicles.

The solution to tariffs is local production, and Tesla said that it was "accelerating construction of our Shanghai factory, which we expect to be a capital efficient and rapid buildout". There was no word on where the capital was going to be coming from to fund this buildout. 

Also with regard to the major question of profitability, there's no news on that front yet. 

"Our net income and cash flow results will be announced along with the rest of our financial performance when we announce Q3 earnings," the PR reads. "Tesla vehicle deliveries represent only one measure of the company’s financial performance and should not be relied on as an indicator of quarterly financial results".

Overall, the numbers were generally in line with expectations, which we broke down in our list for production and deliveries yesterday:

Since there were no major surprises, the stock is unchanged on the news.