Exclusive: Tesla aims to start pilot production of Model 3 cars on Feb. 20 - sources

By Paul Lienert and Alexandria Sage

DETROIT/SAN FRANCISCO (Reuters) - Tesla Inc has told suppliers it planned to begin test-building its Model 3 sedans on Feb. 20, according to people familiar with the matter, a move that could allay concerns about the company meeting its target to start production in July.

The sources did not know how many of the highly anticipated vehicles Tesla aimed to build in February, but it would likely be a small number to test the assembly system and the quality of vehicle parts.

Tesla Chief Executive Elon Musk last year told investors and more than 370,000 customers who put deposits down for a Model 3 that he intended to start building the cars in July 2017. At the time, many analysts and suppliers said the timeline was too ambitious and would be difficult to achieve, pointing to Tesla's history of missing aggressive production targets.

 

If Tesla succeeds in starting pilot production of the sedan at its factory in Fremont, California on Feb. 20, the company would be able to share the news with shareholders two days later when it reports fourth-quarter results and better answer any questions about the Model 3 rollout.

"What better way to stoke the fan base and Wall Street than to wheel out pre-production models" ahead of the earnings announcement, said one person familiar with Tesla's plans who spoke on condition of anonymity.

A spokesman for Tesla declined to comment on the company's production schedule, but said "our ramp-up in production moves as fast as the slowest and least lucky supplier."

Musk had told investors last year that the company could miss the July 2017 startup target if suppliers do not meet deadlines.

Tesla has a lot riding on the Model 3, which is priced at roughly $35,000 before government incentives. If successful, the sedan could raise Tesla beyond a niche luxury player in the automotive sector.

Tesla has not had a profitable year since going public in 2010, though the company's $41.4 billion market capitalization now equals that of Nissan Motor Co Ltd <7201.T>, which reported a profit of $4.7 billion last year.

Musk's bold approach to cars, space exploration and clean energy has fuelled investor enthusiasm for Tesla, but sceptics are waiting to see if Musk can fulfil his promise of producing 500,000 cars per year by 2018.

That would expand Tesla's annual production by four to five times compared to 2016 levels. In its fourth quarter, Tesla produced 24,882 vehicles.

Tesla disclosed in May that it had taken 373,000 refundable $1000 deposits for the Model 3, underscoring its appeal ahead of production. The company has not since updated that number. Total sales of fully electric vehicles last year in the United States amounted to just 84,275 vehicles, according to data compiled by the Electric Drive Transportation Association.

MOVING DESIGN TARGET

Sources with knowledge of the Model 3 timeline had called it extremely aggressive, with challenges compounded by Tesla making last-minute changes to the car's design. Such design tweaks can delay production, and add cost as suppliers rework tools and moulds to meet new specifications.

Musk said in July the design of the Model 3 was complete. The car, he told shareholders earlier in May, would be "easy to make" and free of the complicated design that led to production delays in the Model X sports utility vehicle.

It is common practice for automakers to make minor adjustments to a "finished" design for a variety of reasons, ranging from fit and finish to safety.

One source said last week that design changes were still underway for the Model 3, which could potentially hinder the ramp-up to full production. Tesla declined to comment on whether the design was still being tinkered with.

Tesla's previous launches for the Model S sedan and Model X sports utility vehicle were marked by production delays and initial quality issues.

That track record meant some analysts were sceptical that Musk would launch production by July. "We assume 0 Model 3 deliveries in '17," Barclays analyst Brian Johnson wrote in a Jan. 3 note, while Morgan Stanley's Adam Jonas in a Jan. 19 note said he expected a "soft launch" of the Model 3 to be delayed until late 2017.

(Writing by Alexandria Sage; Editing by Joe White and Tiffany Wu)