Tesla Motors Operating Results Indicate Some Supply Chain Strains

This week, Tesla Motors reported both fourth quarter and full 2014 financial operating results with indications of certain supply chain strains and perhaps growing pains.

For the fourth quarter, the company’s loss widened to $108 million and reflected a shortfall in the delivery of 1400 vehicles along with described manufacturing inefficiencies related to the recently introduced Model S P85D as well as Autopilot functionality. Currency headwinds reflected by the current strong value of the U.S. dollar further weighted on earnings. The bulk of Tesla’s manufacturing supply chain is within the U.S.

Revenues in the quarter increased to nearly $957 million from $615 million recorded in the year earlier quarter.  The electric car company sold 9834 vehicles vs. 6892 in the year earlier quarter. Operating expenses nearly doubled.

During the fourth quarter, production increased to a record 11,627 vehicles, meeting its target to produce 35,000 vehicles in 2014. However, deliveries in the quarter amounted to 9834 vehicles. Tesla has adopted a rather industry-unique finished goods distribution model electing to take more end-customer orders directly online and delivering new cars direct to consumers, shunning the need for a vast dealer network. As a result, Tesla could not deliver 1400 vehicles because of challenges described as either customers being on-vacation, severe winter weather and termed shipping problems.  According to its 8K report, the 1400 vehicles have since been delivered in the current quarter, but weighed on revenues in Q4. Keep in mind that Tesla has invested in advanced technology to provide deeper visibility to overall delivery and customer fulfillment needs.

For the full year, Tesla recorded nearly $3.2 billion in revenues and an operating loss of $294 million, roughly three times the losses recorded for 2013. Inventories increased nearly $613 million. According to its SEC filing, about 55 percent of new Model S vehicles were delivered to North America customers while 30 percent were delivered in Europe and 15 percent were delivered to Asia Pacific customers. More vehicles were directed into Asia Pacific markets to support the initial year of deliveries for that region.

Looking toward 2015, Tesla faces a number of added supply chain challenges in order to support its global sales goal of 55,000 vehicles. A number of added investments in expanded manufacturing capacity are planned to increase production volume to 2000 vehicles per week by the end of 2015. Tesla entered 2015 with over 10,000 orders for its Model S and nearly 20,000 customer reservations for its new Model X, which is expected to begin customer deliveries in Q3 of this year. G&A expense growth is expected to be more modest with a particular emphasis on increased operational efficiency.

Added production capacity investments include a new state-of-the art automated casting and machining operation for various aluminum components and increased production volume investments to meet expected demand for All-Wheel Drive Dual Motor product demand. A new paint shop operation is further planned for combined painting of Model S and Model X models. Tesla additionally plans to further increase its sales and service resources in all existing markets including China.

One rather positive note is Tesla’s indication that steel fabrication is underway at the planned battery manufacturing Gigafactory near Reno Nevada.  That new facility, being constructed in partnership with major battery supplier Panasonic, is reported as on plan to begin equipment installation later in 2015 and battery production in 2016.

Thus while showing some supply chain strains at the end of 2014, even more challenges remain for Tesla’s supply chain in 2015. Tesla has often demonstrated the effective use of advanced technology applied to manufacturing and supply chain business processes, and 2015 will be no exception to that trend.

Bob Ferrari