Tesla once faced a crisis in the production of the Model 3. Due to issues with its automated production line, Tesla was brought close to the brink of bankruptcy, but made a resurgence after upgrades were made to its production line and operations commenced at its factory in Shanghai. The crisis soon became history, and Tesla’s stock price multiplied nearly tenfold in the months that followed.
In recent days, Tesla appears to be on the verge of entering another crisis. In its Q3 report, core indicators such as production and sales volume, revenue growth, and profit margins notably fell short of the market’s most conservative predictions. Tesla’s market value plummeted by nearly USD 140 billion in the wake of the report’s release.
Despite the seemingly poor financial performance, Tesla’s report does not reflect such dire numbers. It attributed the lower sales numbers to ongoing upgrades at its factories, particularly the temporary halting of production at its Shanghai factory, which has ostensibly affected the pace of delivery. This effect is expected to diminish once production capacity is restored. Tesla also remains optimistic about its annual sales target of 1.8 million vehicles, indicating that it aims to deliver at least 475,800 vehicles in the fourth quarter, which would set a quarterly sales record if the target is met.
The market has nonetheless responded negatively, alluding to a precarious phase that Tesla is entering. Here is an overview of the key factors:
- While production capacity may restore in due course, Tesla may only be able to deliver around 250,000 units of its new Cybertruck by 2025 due to technical differences with the Model 3 and Model Y. The company has received over a million pre-orders for the Cybertruck but won’t be able to fulfill them timely unless extensive upgrades are made to its production line.
- The challenges in producing the Cybertruck may not only affect new vehicle deliveries but also impact the company’s current financial performance. To adjust production requirements in accordance with the specifications of the Cybertruck, Tesla may impede the pace of delivery for its Model 3 and Model Y orders, diluting economies of scale and increasing manufacturing costs, thereby reducing its profit margins.
- While its profit margins have declined due to price reductions and production line adjustments (to accommodate Cybertruck deliveries), Tesla will need to continue managing its ongoing expenditures. This includes the cost of a new factory it is constructing in Mexico as well as substantial investments in autonomous driving and artificial intelligence. Tesla’s capital expenditures and R&D expenses in Q3 exceeded the market’s expectations.
An unprecedented decline
For the first time since Q2 2019, Tesla’s revenue and earnings per share (EPS) have fallen below expectations. Its revenue in Q3 this year was USD 23.25 billion, 9% higher than the previous year but below the expected USD 24.1 billion. The adjusted EPS was USD 0.66, lower than the anticipated USD 0.73.
The main reason for Tesla’s underperformance has been its subpar vehicle production and sales. In Q3, it produced around 430,500 electric vehicles globally and delivered around 435,100 units. This represents a year-on-year increase of 18% and 27% respectively, but a quarter-on-quarter decrease of 10.3% and 6.7%. While this could be an anomalous phase, this decline can be attributed to several short-term factors. For one, recent factory and model upgrades have affected Tesla’s production processes, particularly in its Texas and Shanghai factories where the lines were primarily producing upgraded Model 3 units. This setback will likely be rectified as production capacity is gradually restored.
Nonetheless, Tesla is seemingly optimistic about annual sales, maintaining its target of 1.8 million units for the year. The company is aiming for a 50% compound annual growth rate (CAGR), which would require the delivery of at least 475,900 vehicles in the final quarter of this year. Achieving it would set a new quarterly record.
While Tesla’s short-term sales outlook is positive, long-term obstacles may exist. Despite frequent price reductions, its inventory grew 7% in Q3, primarily in the US market. Elon Musk attributed this to higher interest rates in the US, which have seemingly influenced car loan costs and hampered the anticipated boost in sales from price reductions.
Even if interest rates are indeed hindering Tesla’s growth in the US, its older models could also impact the outlook of its sales globally. Tesla currently relies significantly on the Model 3, recently redesigned after seven years, and the Model Y, which is expected to undergo a minor update next year. Tesla’s model update cycle lags behind competitors, with Chinese rival BYD launching nine models this year alone. Considering a typical vehicle ownership cycle that spans 4–7 years, customers who already own either model may delay purchasing another similar model.
To stay competitive, Tesla needs to release new models at a quicker rate. This explains the introduction of the Cybertruck, though this has brought new production challenges.
Is Tesla in another production crisis?
Musk openly acknowledged that Tesla’s recent circumstances remind him of the company’s previous production crisis. After all, production capacity is crucial for the survival of automakers, Tesla included.
In 2017, challenges with its automated production line significantly affected the production speed and quality of its Model 3 units, resulting in a severe capacity shortfall. Failure to deliver cars on time affected its cash flow and financing, bringing Tesla perilously close to bankruptcy. Subsequent upgrades to the production line and the opening of its Shanghai factory helped overcome this crisis. Tesla eventually recovered, and notably with significant gains in its stock price.
The Cybertruck, widely considered the driver of Tesla’s new growth curve, could once again push the company into another production crisis. Despite receiving a million pre-orders, Tesla said it expects to deliver 250,000 Cybertrucks by 2025.
The main reason for this stems from the technical differences between the Cybertruck and older Tesla models, which require production line upgrades to accommodate. For example, the Cybertruck’s steel alloy body weighs about 300 kilograms more than an all-aluminum alternative, complicating the die-casting process. Directly reusing the die-casting process employed to produce Model 3 and Model Y units may prove to be overly challenging.
According to Musk, it may take at least 18 months before the Cybertruck model “contributes any significant cash flow.”
Beyond its short-term inability to take over the growth relay, the Cybertruck will adversely impact Tesla’s current performance. Musk even said Tesla “dug [its] own grave with the Cybertruck.” Specifically, as several production processes for the Cybertruck are not interusable with the Model 3 or Model Y, modifications to be made to Tesla’s existing lines will impact its pace of production.
This phase of transition could deal a double whammy to Tesla, affecting its sales while increasing its production costs. In Q3, its amortized cost per vehicle sold increased to USD 2,800, around USD 300 more than the previous quarter. The increased amortized cost stems largely from the conversion of production lines to produce the Cybertruck.
Additionally, the production speed of Cybertruck units lags significantly behind other Tesla models, leading to a decrease in production capacity utilization and higher production costs per vehicle. This bodes badly for Tesla which is already facing significant pressure as price reductions are already chipping at its profit margins—its Q3 gross margin dropped by nearly 8% year-on-year.
While the Cybertruck may eventually be crucial for Tesla’s revenue growth, it is currently dragging down the company’s production capacity and profits.
High investment, low output
While Tesla is earning less due to the ongoing transition in production, its spending has not decreased. In Q3, its capital expenditures added up to USD 2.5 billion, around 36% more than the previous year and exceeding market expectations by USD 500 million. It spent USD 1.161 billion on R&D, with a year-on-year increase of over 58%.
Tesla is spending more than expected because it is presently in a new investment phase. Whether it is to expand production capacity, or iterate new technology like autonomous driving and AI, significant capital investment is typically required. For example, its upcoming factory in Mexico has a planned annual capacity of 1 million units and will start production in 2025, but it requires an investment of USD 5 billion. Tesla must inevitably outlay a significant amount to construct the facility before it can resolve the issues at hand.
In addition, substantial investments are being made in new technology. Specific to AI, Tesla’s new generation of vehicle platforms will require utilizing large models that will create a huge demand for computing power. Tesla has already purchased 10,000 H100 processing units to meet this demand. The initial price for each H100 unit was USD 33,000, and the secondhand market price has risen beyond and into the range of USD 40,000–50,000. Using the initial price as a point of reference, the total cost already amounts to USD 330 million, excluding the energy costs required.
As AI continues to advance at a rapid rate, Tesla likely views the utilization of large models as necessary and is aggressively investing to expedite this development. The company is anticipated to purchase more H100 units in due course. According to GPU Utils, Inflection AI, a newly established company, has purchased 22,000 units. Larger and more financially robust entities, such as Meta, may purchase 100,000 of them or even more.
Autonomous driving is also a field that Tesla will want to conquer as it determines whether a company is perceived as a high-tech enterprise or an automotive manufacturer. According to Morgan Stanley, Tesla’s revenue from its network services business, primarily comprising self-driving and in-car entertainment services, is projected to constitute a substantial portion of its EBITDA by 2030 and the majority by 2040.
Tesla’s progress in the area of autonomous driving will hinge on the supercomputing power of Tesla Dojo and the development of its D1 chip, which Tesla Dojo utilizes. Extensive investments in this area have increased Tesla’s capital expenditure by USD 1 billion in 2024 alone, and this will eventually reflect in its R&D and amortization expenses.
Tesla is entering a phase of high investment, and low output. While it is seemingly counterintuitive to the average observer, Tesla is aggressively betting on the future, making significant near-term commitments to set itself up for success in the times ahead.
This article was adapted based on a feature originally written by Yang Yang and published on Dudong (WeChat ID: dudongcj). KrASIA is authorized to translate, adapt, and publish its contents.