Tesla Bankruptcy Chances 50% in Next Two Years

Tesla Bankruptcy Chances 50% in Next Two Years, by Seeking Alpha.

In a stunning call with investors, Elon Musk, Chairman of Tesla (NASDAQ:TSLA) apparently communicated to investors that the company expects to have first cars with largely production tooling in about 1 to 2 weeks. … We believe that this call … has fundamentally changed the risk profile of Tesla.

According to Mr. Musk, based on its experience with Model S and Model X, the company is going to skip the beta testing phase and jump straight to “release candidates”. Musk believes Tesla can do this because of “advanced analytical techniques”. These techniques, Mr. Musk believes, have made the Model 3 design significantly higher quality compared to Model S and Model X. The company apparently is focused on production tools and process to quickly ramp Model 3 manufacturing. …

But hang on. Other car companies test their cars before manufacture:

Based on Musk talk, one would think that automobile manufacturers with much better reputation would also skip past beta testing phase and get to market more rapidly. But, as you can see from Toyota, that is not the case. New cars need to go through intense reliability and life time testing before they become production worthy.

If Toyota, which tops the charts on reliability and durability, needs to test then what makes a company like Tesla with sub-par reputation in reliability and serviceability think that they can skip testing and go straight to production?

We suggest two answers: staggering ignorance and hubris. …

What Tesla management also does not seem to realize is that, in manufactured products, the cost to fix an error increases by about an order of magnitude at each step of the product life cycle. Evidence exists in many different industries that if an error caught at concept phase costs about $0.10 per unit to fix, then:

  • An error caught in the design phase could cost about $1 per unit to fix
  • An error caught in the test phase could cost about $10 per unit to fix
  • An error caught in the production phase could cost about $100 per unit to fix
  • And, finally, an error in the field could cost $1,000 per unit to fix. …

Tesla Model S, multiple years in to production, still has middling reliability and there are customers still complaining of problems even on the newly minted 2017 vehicles. …

Consider that 4 out of past 5 quarters the company cited a manufacturing problem of one kind of another to justify missing guidance. All of this on mature Model S (and in some cases the newer and less robust Model X). Why will the company have a better track record with a brand-new Model 3 design? …

What the author predicts will happen:

Tesla will put a buggy model 3 out that will swamp Tesla infrastructure and create humongous losses and customer issues leading to massive capital needs to fix the problems. …

The risk that Tesla is taking here by skipping a testing stage is huge and the chance of success with the approach Tesla is taking is next to nil. With the approach articulated by Mr. Musk, we are not really talking about chances of success but gradations of failure. …

The faster the company ramps, the bigger the capital needs and the less a chance of recovery. It is because of these reasons the we now believe that Tesla is better than 50% probability candidate for bankruptcy in the next 12 to 24 months.