Tesla reports mounting losses while ramping up Model 3 production

PUBLISHED : Thursday, 03 August, 2017, 7:50am
UPDATED : Thursday, 03 August, 2017, 7:50am

As Tesla begins ramping up production of its crucial Model 3 sedan, the company on Wednesday reported a second-quarter net loss of US$401.4 million, or US$2.04 a share.

The loss was better than analysts had expected, but still 37 per cent higher than what the company reported in the same quarter last year.

Tesla recorded revenue of US$2.79 billion in the second quarter, up 34 per cent from a year earlier.

The report comes days after the company began selling its long-awaited Model 3, which the earnings release called “a huge milestone.”

The future of the company hangs on the Model 3, described as a mid-market car with a price range of US$35,000 to US$60,000. The company delivered the first 30 to buyers on July 28, all of them Tesla employees. A hundred more will be built in August, 150 in September, followed by a ramp up to 20,000 a month rate by the end of December, the company said.

Tesla, which sold 76,000 Model S and X luxury cars in 2016, said it plans to turn out 500,000 cars by the end of 2018.

But to get there, Tesla faces six to nine months of “manufacturing hell” and “production hell,” Tesla Chief Executive Elon Musk told workers and reporters last week.

If Model 3 sales meet Tesla’s expectations, the federal government’s US$7,500 consumer credit per vehicle will run out for its customers, with unknowable effects on Model 3 sales. The company is lobbying the California Legislature to make up the difference if the federal subsidies run out. A bill to spend US$3 billion on electric car subsidies is currently in a state Senate committee.

Aside from the Model 3, some investors and analysts wonder whether growth in Model S sales is tapped out. For this year’s second quarter, which ended in June, Tesla had reported 22,000 Model S and X deliveries. That’s 53 per cent higher than the second quarter of 2016, the company said. It also marks four consecutive quarters of flat or declining unit growth.

“We expect Model S and Model X deliveries to increase in the second half of 2017, as compared to the first half of the year,” Tesla said.

The company said second-quarter deliveries would have been higher but for severe production problems at its massive Gigafactory battery plant in Nevada, involving new technology on a new production line. Those problems have been resolved, the company has said.

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It’s unclear whether those problems are related to the departure of Kurt Kelty, senior director of battery technology at Tesla.

Asked whether Kelty quit or was fired, a company spokesman offered a statement: “We can confirm that Kurt Kelty has left the company to explore new opportunities and we want to thank him for everything he’s done for Tesla. Kurt’s responsibilities will be distributed among Tesla’s existing teams.”

Kelty could not be reached for comment.

Kelty was in charge of battery cells for Tesla. Cells are the basic components in an electric vehicle battery pack. The lithium-ion cells look similar to AA batteries, but a bit bigger. Hundreds or thousands of them are clustered and packed together to power modern electric vehicles.

Tesla has a contract with Panasonic of Japan to manufacture cells at the Gigafactory. Kelty worked in research and development at Panasonic for 15 years before he joined Tesla in 2006. At Tesla, according to his LinkedIn profile, he negotiated cell prices and oversaw quality control and battery pack testing.

Tesla is locked in to a take-or-pay contract with Panasonic, which Kelty negotiated. That means Tesla is bound to purchase set amounts of cells at the negotiated price. The terms have not been made public.

Some analysts say lower cell prices from other manufacturers in Asia could put Tesla’s battery costs above those of competitors. Cell pricing is publicly opaque, however, and absent Tesla disclosures any effect would be hard for outsiders to determine.

Tesla shares rose US$6.32, or 2 per cent, to US$325.89 on Wednesday before earnings were released. They rose sharply in after-hours trading.