Tesla is making a risky bet with the Model 3 that could push the company over the edge

Elon muskOnInnovation/FlickrMusk has some risky ideas.

So far this year, Tesla has revealed two big surprises for its forthcoming Model 3, a $US35,000 mass-market electric vehicle that will serve up 200 miles of range on a single charge.

The Tesla-for-the-rest-of-us will likely be launched in July, ahead of schedule. That’s surprise number one.

Surprise number two is that Tesla intends to bypass the manufacturing prototype stage and go straight to full production, rolling cars off the assembly line and into customers’ driveways.

“Most automakers test a new model’s production line by building vehicles with relatively cheap, prototype tools designed to be scrapped once they deliver doors that fit, body panels with the right shape and dashboards that don’t have gaps or seams,” Reuters reported.

“Tesla, however, is skipping that preliminary step and ordering permanent, more expensive equipment as it races to launch its Model 3 sedan by a self-imposed volume production deadline of September.”

CEO Elon Musk’s goal is to ramp Model 3 production to 5,000 vehicles per week later in 2017 and then to 10,000 per week sometime in 2018. The run-rate of 10,000 would give Tesla a yearly Model 3 production of 500,000-plus vehicles, when the Model S and Model X are added in.

But even if Tesla doesn’t hit it’s lofty goal of producing 500,000 vehicles in 2018, if nothing goes wrong, it could achieve half a million cars a little later by 2019

For Tesla to achieve this, though, it’s critical that nothing goes wrong.

The big risk

Tesla skipping the manufacturing prototype stage and going straight to full production is risky because something has usually gone wrong with Tesla’s vehicles. There were early production challenges with the Model S when it launched in 2013, and after the overly complicated Model X arrived in 2015, Musk admitted to spending the first half of 2016 in production hell.

With a track record like that, Musk pushing his luck with the Model 3 seems like tempting fate.

Tesla model 3YouTube/Motor TrendThe Tesla Model 3.

But he doesn’t have a choice.

Launching the Model 3 in a few months shouldn’t be a huge issue. The concept version of the car we saw in early 2016 will probably translate into the production vehicle. And lately Tesla has been at pains to manage excessive expectations for the 3, which will be a smaller, cheaper, slower, less luxurious vehicle than the Model S.

What will be a big deal is Tesla going from relatively boutique production to satisfying the 400,000 pre-orders it has racked-up for the Model 3. In Musk’s mind, Tesla can’t wait another six to 12 months figuring out how to build a high-quality car with efficient pace.

The calculation is likely that the first batch of Model 3 owners will be tolerant of glitches and flaws — they’re, in effect, beta-testers of the car — and that only when the more exacting owners start getting their Model 3s will Tesla have to worry.

In the meantime, the company will simply fix everything that goes wrong. For the earliest Model 3 owners, the implicit warranty is going to be the best in the history of the auto industry.

But it’s all a short-term gain for a long-term loss. Technology companies are comfortable “shipping” buggy software, assuming that if it’s good enough, users won’t rebel and the problems can be fixed on the fly. That “shipping” lingo has begun to invade the car-of-the-future space, as people now speculate on Apple someday “shipping” a vehicle just like it ships iPhones.

I’ve talked to a few people in the auto industry about Tesla generally in the past few months and the company’s decision to skip prototyping has come up a few times. They think it’s a dangerous bet.

Tesla Detroit sales vs market capAndy Kiersz/Business InsiderTesla is bigger than Ford and Fiat Chrysler.

I did it my way

Now, more than ever, Musk is defying the accepted, traditional ways of auto manufacturing.

For example, he also just revealed that he intends to build Tesla Model Y SUV on a different platform from the Model 3 — a shocker given that everyone expected the two vehicles to share an architecture. Musk’s rationale is that he wants to use the Y to reinvent the manufacturing process, bringing a much higher level of automation into the picture.

Bear in mind that if Tesla successfully launches Model 3 production by July, the markets will probably serve up another Tesla rally, possibly one that rivals the beginning of 2017 when Tesla added $US20 billion in market cap and displaced Ford as the number two US automaker.

A large gap between launch and true volume production could engender investor scepticism and reduce the amount of money Tesla can raise from the capital markets. That would be bad because Tesla expects to spend somewhere between $US2 billion-$US2.5 billion to launch the Model 3 this year, but the company is also going to have to spend billions to construct Musk’s Model Y robot factory and will undoubtedly need to do additional fundraises over the next few years.

So again, Musk finds himself backed into a corner. Tesla needs to execute. So he’s going to sacrifice some potential goodwill to make the company execute faster.

Can he get away with it? Actually, yes. But he’s probably also counting on the Model 3 manufacturing process, by virtue of its simplicity relative to S and X, to generate fewer challenges overall. The looming disaster with that idea is that Tesla has never tried to build this many cars before.

As a result, if there’s a cascade of small problems, and maybe a few big ones, the design of the production system could fail catastrophically and Tesla won’t be building 5,000 Model 3’s per week in 2018 — it will be building zero Model 3’s and devoting resources to fixing a mess, in turn undermining Model X and Model S production.

But Musk is a gambler. He thinks he now holds a winning hand and is prepared to press. And to his credit, if he’s going to press, now is the time, with Tesla riding high in the minds of investors. The wildcard is the new Tesla customers who could find that the Model 3 they have been waiting for isn’t the incredible car they hoped for.

More from Matthew DeBord:

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