Can Tesla Build 500,000 Cars a Year?

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Tesla Motors Inc. (NASDAQ: TSLA) has released bad news. The electric car company only produced 18,345 vehicles last quarter. That was another blow to its claim that it will build 500,000 cars a year “by the end of the decade.” Tesla’s Gigafactory must come online soon, and it must operate without any glitches, or the company could face the wrath of customers and shareholders alike.

First among Tesla’s short-term goals involves delivery of its inexpensive Model 3, scheduled to go into production next year. Orders hit 400,000 in April. Tesla may need another year to eat through those back orders until they get delivered. That should be about the same time it reaches its 500,000 annual delivery goal.

Tesla announced:

Tesla’s mission is to accelerate the world’s transition to sustainable transportation. To achieve that goal, we must produce electric vehicles in sufficient volume to force change in the automobile industry. With a planned production rate of 500,000 cars per year in the latter half of this decade, Tesla alone will require today’s entire worldwide production of lithium ion batteries. The Tesla Gigafactory was born of necessity and will supply enough batteries to support our projected vehicle demand.

Tesla broke ground on the Gigafactory in June 2014 outside Sparks, Nevada, and we expect to begin cell production in 2017. By 2020, the Gigafactory will reach full capacity and produce more lithium ion batteries annually than were produced worldwide in 2013.

In cooperation with Panasonic and other strategic partners, the Gigafactory will produce batteries for significantly less cost using economies of scale, innovative manufacturing, reduction of waste, and the simple optimization of locating most manufacturing process under one roof. We expect to drive down the per kilowatt hour (kWh) cost of our battery pack by more than 30 percent. The Gigafactory will also be powered by renewable energy sources, with the goal of achieving net zero energy.

Its latest news:

Due to the extreme production ramp in Q2 and the high mix of customer-ordered vehicles still on trucks and ships at the end of the quarter, Tesla Q2 deliveries were lower than anticipated at 14,370 vehicles, consisting of 9,745 Model S and 4,625 Model X. In total, 5,150 customer-ordered vehicles were still in transit at the end of the quarter and will be delivered in early Q3. That amount was higher than expected (there were 2,615 vehicles in transit to customers at the end of Q1) and is more than a third of the number of cars that completed delivery in Q2.

Not much encouragement.

Other car companies have begun to move into the all-electric car business. This also threatens Tesla’s 500,000 delivery goal. There will not be enough demand if many of these other manufacturers are successful.