Suppliers Not On Board With Tesla's Schedule For Model 3 Production

The real world comes home to roost. Suppliers will likely charge a premium and may even insist on guaranteed purchase volumes with cash up front just to protect their businesses from possible lower Model 3 sales if all those reservations don't turn into sales. Still believe that the manufacturing execs who left knew that Musk was demanding the impossible and didn't want to be part of a train wreck.

I agree with all you've said. Additionally, we have ignored the assumption that the suppliers have spare capacity, and it's just sitting idle, and Tesla's desire to double (or more) their output will benefit the suppliers by being able to put their idle capacity to work. This is a highly unlikely scenario.

Factories typically produce fairly close to capacity (say 85% or more, for argument's sake). They need a little spare capacity in case of machinery breakdowns, scheduled down-time (for maintenance), etc. Spare capacity costs money to finance, and it brings in no revenue, so it erodes their bottom line. That's why manufacturer's try to avoid it.

When Tesla says "I want to double capacity next year," the most likely scenario is that he expects suppliers to invest their own money to increase their supply capacity. This is a tough sell to a supplier, who will be reluctant to make massive capital expenditures to build up the additional capacity, all with the HOPE that Tesla will be around to buy it and pay for it, and that Tesla's increased production is a permanent change rather than a temporary blip. If any of these hopes don't manifest, the supplier will have made a huge personal investment to increase their supply capacity, and end up with spare capacity to produce products without buyers. This results in idle capacity, which erodes the bottom line.

Suppliers typically don't have mountains of cash sitting around, waiting to be invested in production capacity. They need to borrow it (like Tesla). Therefore creditors will need to be convinced that all their hopes are certain to come true, or that they can at least get their money back if they don't.

My prediction is that Tesla won't be able to grow their output as Musk has proclaimed, and they'll blame their suppliers. Eventually, investors will get jaded when the profit and production reality isn't as rosy as Musk's visions, and Tesla stock price will plummet.

Amen

Ditto!

If I were a supplier, I'd say find someone else. Suppliers gear up based on a manufacturer's speculation, so what of Tesla goes kaboom?

Actually - at this late date - it is probably not possible for Tesla to actually find another supplier. So - that makes Tesla dependent on the lowest producer in its chain. While it is likely that its producers also produce for other car manufacturers -especially generic all car have them parts - a supplier is reluctant to put all his eggs in one basket.

Frankly - if I were that supplier - my response would be to say that I will see WHEN and at what PRICE the model 3 actually appears - and how it sells before I would be interested in producing more since Tesla has a history of being late. Then production would depend on actual sales - not pie in the sky.I will bet a lot of those "reservations" are really speculators whose cars will show up on E-bay

Jaguar has 6-12 months waiting list on their new F-Pace SUV.. factory is running at max..
This goes to show that Tesla's expectation fo rtheir Model 3 is very unrealstic. There's ging to be alot of disappointed people come 2017., also the base prce will be way more that it claims.

I agree.

House of cards sidebar - I am in Kansas City this weekend visiting a sick relative and staying "On the Plaza" (i.e. KC's version of Rodeo Drive) where they have a Tesla store. They had a Model X outside, so being a car nut I checked it out (despite my longstanding concerns about Tesla's business model).

I test drove it with my son, it was beautiful, they don't have "stores" in NY State where I live so I asked the guy how he could get me one. (Tesla ships them FedEx/UPS in NY believe it or not).

He said that I could have one in my driveway in 60 DAYS! What, I thought there were deposits and a WAITING LIST. He said 60 days, that they have production reserved for retail customers like me. Huh?

Maybe I will next goto my local Ford Dealer and see if they will sell me a Ford GT - maybe they have production reserved for retail customers too!

So much for the need to make a deposit on a Tesla.