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Tesla deliveries of its luxury cars fell short in Q1, and that could mean it has to change how it builds the Model 3

Tesla stumbled in attempting to meet its goal of delivering 16,000 Model X and Model S vehicles in the first quarter of this year.


Tesla announced late Monday afternoon that the company had delivered a total of 14,820 Model S and Model X vehicles in the first three months of 2016 — 1,180 fewer cars than the company expected.

The company attributed the delivery delays to Model X supplier shortages and “Tesla’s hubris in adding far too much new technology in the Model X.” While it expects to meet its goal of delivering 80,000 to 90,000 vehicles by the end of the year, investors weren’t buying Musk’s humble-brag and sent the stock down 2 percent in after-hours trading.

Tesla has no plans to change its production or distribution plans for the Model X and Model S this year given the company is back on track, but its forthcoming Model 3, a lower-priced vehicle aimed at the mass market, might require the company to reassess its production strategy.

Tesla took 276,000 preorders for the Model 3 by the end of Saturday — just two days after Tesla CEO Elon Musk unveiled the company’s first mass-market car. Even when preorders were just at 198,000, Musk suggested the company will have to change how it plans to build the car:

At the unveiling last Thursday, Musk said he was confident the company will be able to begin shipping the Model 3 by the end of 2017 as planned. But it’s the first time the company has had to produce and distribute a vehicle at this volume. Tesla’s luxury vehicles — the Roadster, the Model S and the Model X — have all been low-volume businesses and intentionally so.

The company is still susceptible to production and distribution hiccups, and at a larger scale, those hiccups — particularly supplier shortages or company “hubris” — would likely cause a lag that would cause a bigger difference between expected deliveries and actual deliveries.

In its statement, Tesla said it planned to address all three root causes — the last of which was not having the capability to build the parts in-house — so that “these mistakes are not repeated with the Model 3 launch.”

The company can still suffer from additional and unforeseen issues even if and when Tesla addresses those that caused this quarter’s delivery delays. Switching third-party suppliers, for example, would still leave Tesla’s production rate at the mercy of those suppliers. And the company has already unveiled — at least in part — the technology the Model 3 will include so if the company again bit off more than it could chew in terms of the technology, the damage has already been done.

If, say, the company chooses to move the bulk of operations in-house to address a supplier shortage, Tesla would have to first make sure it had the internal capability and infrastructure to support this additional burden. Already, the company has to produce more lithium batteries than the entire world combined currently manufactures in order to meet its goal of producing 500,000 cars a year by 2020. Producing more of the parts in-house would require pouring considerable resources and time into expanding its robot-powered factory, which Tesla already stopped production to do in July 2014.

The company plans to get its Nevada-based battery factory running and it’s expected to reveal additional details on its revamped plans for the Model 3 as the company nears production.

Musk has also promised a second act to the Model 3 unveiling, though it’s unclear whether that will have implications for production plans.

Though the company fell short of its vehicle production goal this quarter, Tesla is confident it will stay on track to deliver on its promises for both 2016 and 2017. Musk seems to have a plan — but investors are closely watching to see whether it will be enough to ensure the company can efficiently produce and distribute its mass-market vehicle.

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