Why Tesla will Prioritize Model 3 Delivery over Production

Tesla Model 3 Delivery Event Fremont California

As we enter the final lap/final week of third quarter production, Tesla is looking all set to make good on its promise to build 50,000 to 55,000 Model 3s for the quarter.
VIN registration numbers are the only reliable source of information that we can rely on to gauge Tesla’s production.

According to Bloomberg Tracker that uses VIN registration numbers to estimate Model 3 Production, Tesla has built 50,279 Model 3s in the third quarter and the company is now building little more than 3,000 Model 3s per week. If Tesla sustains the current production rate, the company should easily hit the mid-range of its third quarter guidance.

Tesla’s Q3 2018 Targets (Guidance): 

  • We expect to produce 50,000 to 55,000 Model 3 vehicles in Q3, which will represent an increase of 75% to 92% from the prior quarter.

  • Model 3 gross margin should grow significantly to approximately 15% in Q3

  • Our target of delivering 100,000 Model S and Model X vehicles this year remains unchanged

  • For the rest of this year, total non-GAAP operating expenses should remain relatively stable at Q2 levels excluding restructuring costs, as a result of our overall drive towards operating efficiencies

  • The higher import duties on Chinese components and unfavorable currency movements are likely to cause negative pressures. That said, we still expect to achieve GAAP profitability in Q3 and Q4

Source: Tesla Q2-18 Shareholder Letter

Is it possible to hit the high end of the guidance range?

Tesla exited the second quarter with a peak production capacity of 5,031 Model 3s/week. If Tesla makes an end of the quarter push and repeats its past feat of building more than 5,000 Model 3s in a week, it will allow Tesla to sail over the top end of its guidance range and build more than 55,000 Model 3s for the quarter.

Tesla Model 3 VIN registration pace slowed down in September

After registering more than 21K VINs in July and 32K VINs in August, Tesla only registered 6K VINs in September. Tesla make have taken the foot of its production pedal to help the company overcome what CEO Elon Musk calls as delivery logistics hell. It has been well documented that the company is struggling to deliver Model 3s as production ramped up furiously in the last three months.

That coupled with the fact that Tesla has already reached the lower end of third quarter production target may have granted Tesla the room to concentrate on delivering cars that it has already built, instead of further ramping up production.

Tesla Model 3 VIN Registration
The Pattern: Tesla Slows down Model 3 VIN Registration during the last month of the quarter.

It must also be noted that the number of cars Tesla delivers now will have a direct impact on the company’s third-quarter revenues while ramping up production further will only have an impact on the company’s Vehicle Production and Deliveries report for the quarter. Simply put, Tesla has a financial incentive to concentrate on delivery instead of trying to build as many Model3s possible in Q3.

The Numbers: Why Tesla will prioritize Model 3 delivery?

  • By the end of the second quarter, Tesla had 11,166 Model 3s in transit. All those cars need to be delivered in the third quarter.

  • Data from Model3VINs show that Tesla registered 59,366 Model 3s since July 31. (Refer to the chart)

  • As of September 23rd, 2018 Bloomberg tracker says that Tesla has already built 50,279 Model 3s in the third quarter. With one more week left for the month, that number could easily go past 53K.

  • More than 70% of VINs registered since AWD registrations began on June 28th is Dual Motor.

  • Average Selling Price of Model 3 will easily stay above $54K as AWD Model 3 carries a starting price of $55K.

  • If Tesla can deliver 11,166 Model 3s that were in transit at the end of the second quarter and also deliver the 50K+ cars that it has already built, then it will do a world of good to their overall revenue for the quarter.