Elon Musk made more news Tuesday with the leak of an internal email--first reported by Jalopnik--that details
Tesla’s plans to increase
Model 3 production. Musk noted that Tesla will be adding a third shift at the Fremont assembly facility and hiring "400 people per week for several weeks" between Fremont and the company's Gigafactory in Sparks, Nevada.
The key takeaway is that Tesla will be adding costs to its production system, and doing so just as the launch of the Model 3 is, as I have noted in several Forbes columns, stretching Tesla's financial resources to the pain point. Musk's pronouncements always need to be parsed, and I am sure there will be other articles today that focus minutely on his plans for Model 3 production ramp-up. The email noted a “burst-rate” production target of 6,000 Model 3s per week by the end of June, but also implied Tesla will have to implement another extended shutdown in Model 3 production in May to tweak the production process.
I’d rather focus on Tesla’s profitability, and Musk’s pronouncement that Tesla would be running “24/7” has to be measured in terms of its impact on margins. First of all, there is no auto plant in the world that runs “24/7”--machines need maintenance or they will break--but even accounting for Musk’s tendency to exaggerate, adding a third shift is a momentous decision. Auto plants in Japan--the mothership for lean manufacturing methods--rarely run three shifts a day, and the U.S automakers generally add capacity by going to a “three-crew” system of production rather than hiring another shift’s worth of workers.
Auto industry navel-gazing aside, though, the “Profit” section of Musk’s memo was the most disappointing to me. I wanted to hear from Musk some of the bravado he flashed in his tweet last week--Tesla will be cash flow positive in the third and fourth quarters and "obv" won’t need to raise capital. Instead, there were no figures at all, other than a new policy that Musk must personally approve any expenditure totaling more than $1 million. With so many articles in the financial media questioning Tesla’s financial strength, I figured Musk would reassure employees on that front, but I didn't get that from the email.
So, Musk's memo raised more questions than it answered. The problem facing potential investors is the mass of uncertainty that reigns at Tesla. It's just impossible to tell what the financial condition of this company is on a day-to-day basis, and looking at the stock chart is not a good guide. There is a long list of I don't knows at Tesla:
I don't know when Tesla is going to report first quarter earnings. It is amazing to me that TSLA hasn't yet set a report date for a quarter that ended on March 31st. While some analysts will hang on the production figures in Musk's memo, the bond market needs to know how much cash Tesla burned in the first quarter.
I don't know the core profitability of the Model 3. This was raised in a Bernstein note this week, which questioned whether the Model 3 will ever hit Tesla's 25% gross margin target. Please do not underestimate the extra fixed costs that are added by going to three-shift production. So, if it takes "24/7" to achieve what Musk referred to as "economies of scale" in his e-mail, the addition of another shift will likely erode all the economic benefits of the extra units produced.
I don't know how one person can possibly handle every major task at a multinational. I don't doubt Musk's marketing genius, but when he used the phrase "common sense" in his email, I did break a smile. Common sense would dictate that Tesla needs a Chief Operating Officer. Don't forget that since Elon's cousins--Peter and Lyndon Rive--left SolarCity last year after its merger with Tesla was finalized, it would appear that Elon has full operating responsibility at SCTY as well as managing the Tesla Motors operations in Fremont and Sparks. While I don't doubt his passion, no human being could possibly do all those jobs.
When Tesla finally reports its first quarter financial results, I am convinced that the balance sheet will show that TSLA's financial resources are stretched thin. There was nothing in Musk's email to disabuse me of that notion, and the extra costs he is adding to production make me believe the second quarter will be worse than the first. That will further tax Tesla’s balance sheet, and the fact that Tesla's senior management resources seem just as stretched is not reassuring.