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From "Production Hell" to "Delivery Hell" Tesla is at a Crossroads

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In what has already been a tumultuous year for Tesla (TSLA - Free Report) , iconoclastic CEO Elon Musk took to Twitter on Sunday to address a customer complaint about long wait times for deliveries of Model 3 autos. The customer appeared to be aware that the car she had ordered had been delivered to a nearby railway depot, but that Tesla was not yet able to make the final delivery to her.

Obviously, this is the final and arguably the most important piece in the Tesla puzzle. We’ve spent the last several months making prognostications about Tesla’s ability to produce large numbers of it’s first mass-market vehicle, analyzing their use of capital, speculating about Musk’s (now-scrapped) plan to take the company private and scratching our heads about some of his eccentric tweets and public appearances.

While all of that has made for many interesting and intriguing stories, what happens in the next few months will likely define the trajectory of Tesla for years to come. After all, the main goal for any business is to deliver their products to paying customers. We’re about to find out how well Tesla is able to do just that.

Part of the allure about Tesla to investors, despite their somewhat non-conventional operation and questionable valuation, is that there have been over 400,000 paying customers waiting over two years for a Model 3. Though specific details about the margin Tesla will achieve on the car remain uncertain, it’s extremely likely that if they can reach the goal of producing 10,000 Model 3s per week – and get them delivered to eager customers – they will become cash flow positive and profitable on a net basis in the next two or three quarters.

Much of the news about Tesla this year has had a common theme – growing pains. Starting an automobile company from scratch is an enormously complicated endeavor. It took Ford (F) and General Motors (GM) more than a century of evolution to become the global giants that they are today and it certainly hasn’t been an easy road, even for them. Musk pointed out recently that there are only two American car companies that have never gone bankrupt – Ford and Tesla.

Tesla has done a remarkable job in making the transition from a niche manufacturer of innovative – albeit very expensive – automobiles on a relatively small scale to a company that produces what is about to be the best selling mid-sized premium sedan in the U.S. Despite the frustrations of customers who have seen their deliveries delayed, it seems as though the finish line is finally in sight. After reported problems in the parts supply chain, manufacturing headaches and the expansion of production facilities and man-hours to their absolute extremes, Tesla is finally about to start getting those cars into the hands of customers – and collecting checks.

Throughout this journey, Tesla and Musk have shown a unique ability to adjust their operations on the fly in response to unexpected difficulties. It shouldn’t be all that surprising that there are some bottlenecks in the delivery process as they try to get all of those cars through the final step – delivery.

The finish line is in sight. Musk himself said that this problem is “more tractable” than previous production issues and recent experience would suggest that Tesla has become adept at quickly overcoming these types of hurdles. In July, they introduced a “5 minute sign and drive” delivery process that allows reservation holders to complete most of the paperwork and the process of acquainting themselves with the features of their new car online before they go to the dealership, driving away in as little as five minutes.

The steps outlining the new delivery process were sent in this communication to reservation holders:

Everyone who’s ever run a business knows that there are always unanticipated problems that creep up and have to be dealt with. Even the most established companies have to improvise from time to time to improve their operations in the face of changing conditions, but no one has done as much of it in a short time the way Tesla has.

We’ll still need to see the next quarterly earnings report, due on November 7th, to put hard numbers on Tesla’s efforts to sell a serious number of affordable electric vehicles to an eager set of customers - as well as get our first hard look at the critical gross margins on those sales – but right now, having finished cars only a few days or weeks away from delivery to reservation holders with their checkbooks in their hands seems like a good problem to have.

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