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Shutdown or Not, Tesla Production, Cash Flow Targets on Track

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Tesla (TSLA - Free Report) has done it again. After shutting down its Model 3 operations for four days in February, it closed down for another “planned” five days. The stock message from the company was also repeated, that shutdowns are “used to improve automation and systematically address bottlenecks in order to increase production rates.”

Last time it was a question of battery module production that had fallen behind schedule. This time, it’s about excessive automation. “We had this crazy, complex network of conveyor belts… And it was not working, so we got rid of that whole thing,” Musk told CBS. “Humans are underrated” he tweeted for good measure.

And yet, while struggling to sustain a weekly production rate of 2,000 units, Tesla’s goals remain ambitious: to do 5,000 units a week by the end of the second quarter.

The “bottlenecks” are most likely because Tesla jumped into production before some of its advanced assembly line was ready. But one might argue that the company has taken a unique approach to manufacturing that doesn’t compare with others. And weeding out the excess while cranking up production was probably the fastest way to get to market.

Moreover, it’s understandable that a highly automated production line will have to be closed down entirely if there’s an issue with any link. So introducing a human element may optimize output. Ironing out these details makes sense at this stage so it can churn out higher volumes in the future.  

Setting public production targets is just a way to keep Musk excited and buyers interested. After all, Musk is a big part of the publicity for Tesla models. And the company has hundreds of thousands of units in back orders that it needs to fulfill. Some people have been waiting two years to take delivery of the first all-electric affordable car. If you can’t keep them interested, there could be defections.

Which brings us to the question of competition. And in this respect, the Model 3 appears to be in a league of its own. The cars that come closest to it are entry-level luxury sedans like the BMW 3 Series, Mercedes C Class and Audi A4. Or, all-electric cars like the Nissan Leaf, Chevy Bolt, BMW i3 and BMW Mini E (Subaru and Volvo are also about to jump in).

Since these automakers are foreign, there’s likely to be a lag until the new models launch in the U.S., allowing Tesla more time to consolidate its lead in the country. Tesla’s Model 3 sets a high standard in size, performance and design, but the company has less manufacturing experience, which is the reason that some people are skeptical about its ability to deliver.

And deliver it must, because any delay brings the competition that much closer.

But that isn’t the only concern. Tesla’s other models have been doing rather well, so it isn’t far from the 200,000 EV threshold. Once sales cross that point, the $7,500 federal tax incentive that the government gives to EV buyers on their Teslas will start phasing out, so the same car would appear more expensive. On the other hand, its competitors that have entered the market later will continue to enjoy the benefit. 

So for Tesla, which is touting the affordability of the Model S, there is a big need to sell more of these than its other cars to avail of the advantage and not turn customers off.

Also, part of the excitement around Tesla is its ability to sell into China, where the government is focused on going green and where EV sales have soared in recent years. President Trump’s approach to China trade has raised a question on this front.

But Beijing appears to be looking to alleviate the tension with the announcement yesterday that ownership caps on manufacturing operations for commercial vehicles, such as buses or delivery trucks, would be lifted by 2020, with passenger cars following in 2022.  Musk is likely to stick to his plan of a new plant in the country, but with the new rules, he may not have to go for a 50-50 JV with a Chinese company.

Elon Musk seems as confident as ever. In response to The Economist, which projected that Tesla would have to raise more debt this year, he tweeted “Tesla will be profitable & cash flow+ in Q3 & Q4,” so there would be no need to raise more debt.

 

Recommendations

Tesla has a Zacks Rank #3 (Hold). So for exposure to the space, you might instead consider auto/truck original equipment stocks like Dana Inc. (DAN - Free Report) , AB Volvo (VLVLY - Free Report) , Allison Transmission Holdings (ALSN - Free Report) , BorgWarner (BWA - Free Report) or Lear Corp. (LEA - Free Report) , since all of them have a Zacks Rank #2 (Buy). Or, take a look at the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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