Tesla makes last-ditch Model 3 delivery push as pressures mount

SAN FRANCISCO -- With pressure escalating after one of the worst weeks in its almost 15-year-history, Tesla raced to manufacture and deliver its mission-critical Model 3 sedan to burnish the numbers it's about to report to rattled investors.

Tesla Inc.'s Fremont, Calif., delivery hub was packed with people Saturday evening as the last hours of the quarter drew to a close. Red couches and tall white tables were set up outside, a DJ played music and a truck selling Vietnamese food was on hand. Behind the scenes, a company that's struggled to figure out how to mass manufacture cars had implored workers to get production on track and disprove their doubters.

Meanwhile, CEO Elon Musk told employees in an email early Monday morning that the electric-car maker may exceed a weekly production rate of 2,000 Model 3 sedans, according to the blog Jalopnik.

“If things go as planned today, we will comfortably exceed that number over a seven day period!” Musk wrote in the email obtained by the car-enthusiast blog. The email was sent at 3:01 a.m. Monday California time, Jalopnik said.

But Tesla's skeptics are getting louder after the last few days.

The electric-car maker has come under regulatory scrutiny for the second crash this year involving Tesla's driver-assistance system Autopilot, the latest of which resulted in a fatality. Moody's Investors Service downgraded the company's credit rating further into junk, citing the combination of production problems and mounting obligations that could necessitate a more than $2 billion capital raise soon to avoid running out of cash.

Tesla shares fell 5.1 percent to close at $252.48 during a down day on Wall Street.  

“It’s about the magnitude of the miss,” Philippe Houchois, a Jefferies Group LLC who rates the shares a hold, wrote in a report to clients Monday. Tesla probably fell short of a company-supplied consensus estimate of 10,000 Model 3 deliveries in the first quarter and may have trailed its target to end March making the sedan at 2,500-unit weekly rate, he said.

"Tesla is testing our patience," Gene Munster, a managing partner at venture capital firm Loup Ventures who's been bullish on the carmaker, wrote in a report after the company last week announced it would have to repair a power-steering issue with the Model S. "When we heard the recall news tonight we asked ourselves, do we still believe in the story?"

Musk risked coming off as tone deaf to investor concerns, sending a series of April Fools' Day tweets to joke that Tesla had gone bankrupt. The CEO first unveiled the Model 3 on March 31, 2016, and Tesla's manufacturing woes have kept hundreds of thousands of consumers who placed $1,000 deposits for the sedan waiting.

From the looks of social media posts by customers who took delivery of their Model 3 over the holiday weekend, Tesla still maintains an army of true believers who are staying put in line for their car.

"Two years ago to the day, I put down a deposit on a car I'd never even seen before," Amanda Bell, a software developer in Nashville, wrote Saturday on Twitter. "Today, I picked up my dream car."

Bell, 26, said by phone Sunday that she likes that Tesla's cars have the ability to roll out new features via software updates.

Since starting Model 3 deliveries in July of last year, Tesla has pushed back production goals for the car several times, citing issues with battery output and automating its assembly lines. The company forecast back in January that it would likely end the first quarter making about 2,500 units of the car a week.

Tesla reports production and deliveries results within a few days of each quarter ending. 

"While the April Fool’s tweet, to us, was poorly timed and likely frustrating to TSLA’s IR team, there is likely nothing to see here,” James Albertine, an analyst at Consumer Edge Research who recommends buying the shares, wrote in a report Monday

Bloomberg is tracking the Model 3 rollout with an experimental tool that estimates production using vehicle identification numbers. The tracker estimates that Tesla is building about 1,190 Model 3s a week as of Sunday, though that figure may not capture any last-minute burst in output.

Analysts are projecting total Model 3 deliveries for the quarter of about 8,800 units, the average of seven estimates. Bloomberg's tracker estimates Tesla may have produced almost 9,300 of the sedans in the quarter.

The tracker shows an increase in production in the last few weeks as Tesla invited a limited number of workers from the Model S and Model X factory lines to volunteer to work on the Model 3. Heading into the final week of March, Doug Field, senior vice president of engineering, urged workers to safely ramp up output to more than 300 vehicles a day and to "prove a bunch of haters wrong."

Barclays analyst Brian Johnson has warned clients to watch out for a potential "burst rate bear trap," in which Tesla beats Wall Street's lowered projections for Model 3 deliveries. He estimated Tesla was producing 1,500 to 1,700 units of the Model 3 each week.

"We think it's possible Tesla may have stockpiled batteries amid Fremont downtime, allowing production to be higher in the final week," Johnson wrote in a report Thursday. "Any such 'beat' is unlikely to be sustainable, and questions remain on Tesla's ability to sustainably reach" its goals.

Tesla faces a pileup of other challenges, including scrutiny of Autopilot. The National Transportation Safety Board is investigating a fatal Model X crash that occurred March 23 in Mountain View involving a driver who had engaged the driver-assistance system.

Tesla published a blog post late Friday that said the driver didn't have his hands on the steering wheel for six seconds before colliding with a highway divider, despite receiving several visual and one audible warnings earlier.

The NTSB is "unhappy" that Tesla is disclosing information during an active crash investigation, spokesman Chris O'Neil said Sunday. The agency will look into all aspects of the incident, including the driver previously raising concerns about the Autopilot system, he said.

"This is another potential illustration of the mushy middle of automation," Bryant Walker Smith, a University of South Carolina law professor who studies self-driving cars, said in an email. Partial automation systems such as Tesla's Autopilot "work unless and until they don't," and there will be speculation and research about how safe they are, he said.

Tesla's nightmare week also included a Moody's downgrade of the company's corporate family rating to B3, six levels into junk, which sent its unsecured bonds to all-time lows. Late Thursday, the carmaker recalled all 123,000 Model S cars built before April 2016 to retrofit a power-steering component.

Still, Munster said the answer to the rhetorical question raised in his report -- whether Loup Ventures still believes in Tesla -- is yes.

"The company is uniquely positioned to capitalize on a dramatic shift" in the auto industry, Munster said. He added that he thinks Tesla will "innovate in both EV and autonomy, and usher in a new paradigm of manufacturing efficiencies."