Tesla Inc. (TSLA, Financial) has been beating the drum for its planned Gigafactory 3, a vehicle and battery factory to be built in Shanghai. With production at its Fremont, California factory apparently running at full capacity, it is now clear another factory is necessary if Tesla is to achieve the production volume it has long promised.
Tesla claims it will be able to achieve volume production in Shanghai before the end of 2019. Specifically, CEO Elon Musk believes Gigafactory 3 can hit a production rate for the Model 3 of 3,000 vehicles per week.
The latest promise is certainly in keeping with Tesla’s pattern of overly aggressive targets. To achieve this goal, it would require Tesla to break all known speed records for modern auto factory construction. That looks like a tall order for a company that has never built an auto plant from scratch.
Rolling out the red carpet
Tesla has been talking about China for a number of years, but not much material came of all that talk. Then, in October, the company announced it had leased a plot of land in Shanghai’s Lingang area. The swampy land had found little interest among potential domestic anchor developers, which goes some way to explaining the slightly below-market $140 million price Tesla agreed to pay.
The Shanghai municipal government was certainly pleased to host Tesla, rolling out the literal red carpet when Musk came to town in January for the formal groundbreaking ceremony. Musk also got some facetime with Chinese Premier Li Keqiang. That meeting, while obviously highly choreographed, added weight to Musk’s big promises.
Progress to date
When Musk broke ground at Gigafactory 3, the plot was still nothing but a field with a temporary wall erected around it (and a worryingly muddy field at that). Tesla had claimed to be ramping up construction efforts even before the official groundbreaking, but there was little sign of construction activity, despite the convenient presence of heavy construction machinery at the event.
Since then, updates have been somewhat scant. Some intrepid observers, however, have provided independent status reports via aerial drones. The most recent video footage of the site was recorded and released on Feb. 5. It shows little in the way of progress. There appears to be some poured concrete, yet there is virtually no visible work activity or sign of life around the place. That is certainly inconsistent with Tesla’s own extremely aggressive timetable.
The history of auto manufacturing plant construction stands in stark opposition beside Tesla’s claimed timetable. With little in the way of activity on the ground on recent inspection and external financing not yet secured, it is hard to see how Tesla can keep its promise of achieving volume production in less than 11 months.
Even with the experience, expertise and resources of a major automaker, Tesla’s timeline would appear extremely implausible - at best. Of course, no major automaker would even attempt such a feat, given the added cost and risk involved in accelerating a timetable to such an extraordinary degree.
Auto plant construction is a meticulous and complex affair that usually takes multiple years to complete. Volvo's (VLVLY, Financial)Â recent experiences in China offer a solidly grounded counterpoint to Tesla’s pie-in-the-sky plans. The Swedish luxury car company broke ground on its Chinese factory in December 2013. The project was completed at the end of August 2017. It took more than three and a half years to go from groundbreaking to cars coming off the lines.
Strangely enough, Musk used to be more realistic about the factory construction process. Back in 2017, he conceded it would take at least three years to get a Gigafactory up and running in China.
What has changed since then? Physics certainly has not. The disciplines of construction and manufacturing engineering have not advanced by any discernible measurement in the past two years either. The answer lies in Musk’s need to feed a growth narrative that cannot be supported by the production at Fremont.
Alas, no amount of disruptive Silicon Valley jiggery pokery can get around hard physical realities and engineering limitations. Complex structures take time to build. Cutting corners leads to bad outcomes.
Musk can dream of factories being built in a third of the time (and for a third of the price) it takes established automakers to do it. But eventually he and Tesla will have to wake up to a harsh reality.
Disclosure: Short TSLA via long-dated put options.
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