By on August 8, 2017

tesla model 3

Tesla Motors launched the Model 3 last month and has been scrambling to improve production volume as over 500,000 eagerly await delivery. However, by the time Tesla hits its targeted production rate of 10,000 units per week in 2018, it is still going to have months — if not a full year — of orders sizzling on the back burner.

It’s not the worst problem to have, since each reservation holder tossed down a $1,000 deposit. But CEO Elon Musk is aware that meeting demand is going to be an uphill battle. “We’re going to go through at least six months of manufacturing hell,” Musk told the press ahead of Model 3 launch event.

With the company already having spent over $2 billion in capital this year, restocking the safe is probably a good idea. As an upstart automaker framing itself as going into battle with traditional manufacturers, Tesla is issuing $1.5 billion in junky war bonds to fund the coming onslaught. 

Granted, the company used less flowery language in its press release when it announced that it “intends to offer, subject to market and other conditions, $1.5 billion in aggregate principal amount of its senior notes due 2025.” But the funds will, no doubt, go to “strengthen its balance sheet during this period of rapid scaling with the launch of Model 3, and for general corporate purposes.”

Tesla isn’t broke. It still has “slightly over” $3 billion at the ready, according to its second quarter financial report. But that same report specifies that it also expects to spend $2 billion over the next six months — and while the company has seen an overall growth in its operations this year, it still isn’t profitable. In fact, Tesla claimed a $401.4 million loss in the quarter that ended June 30th, compared to a $293.2 million hit in the same period for 2016.

That might make it sound like Musk is trying to pull a fast one on the public, but this has always been a faith-based company. So long as investors continue believing in Tesla, there’s no reason to think it won’t persist as an automaker and make good on most of its promises. Despite a modest dip after Musk’s “manufacturing hell” comment, the company’s share price rebounded for August almost immediately and is presently trading at $365.28 as it progresses toward a record high.

Before that, Goldman Sachs said it could see the company’s production levels about to plateau and slashed its 12-month price target valuation by roughly 40 percent in July — when share prices initially began slipping. However, Musk has stated there should be “zero concern” about Tesla achieving a production rate of 10,000 cars a week before the end of next year.

If anything, the junk bonds will likely serve as a buffer as Tesla enters into unknown territory. Any number of disasters could befall it, and most of them have little to do with Wall Street. As calm and collected as Elon appears, ramping up production at this rate is a massive undertaking. Whether you’re of the EV faithful or a disbeliever, you have to appreciate what it’s trying to accomplish.

Last year, the automaker averaged 1,465 cars a week in total. Under ideal circumstances, Tesla wants to see 5,000 weekly deliveries of the Model 3 by December — plus however many Model S and Model X deliveries it can manage.

However, that doesn’t mean the company will suddenly become profitable. In fact, most analysts seem to agree that Tesla will be cash flow negative until 2019. Currently, the California company has total debt of around $8.2 billion, over half of which is long-term debt.

[Image: Tesla Motors]

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32 Comments on “Tesla Hoping to Scrounge $1.5 Billion With Automotive War Bonds...”


  • avatar
    thelaine

    Labor problems would hit them pretty hard right now.

    • 0 avatar
      indi500fan

      The UAW would be happy to help. Does Local 2244 from Nummi still have the union HQ building out there? Surely Elon would welcome the assistance of his progressive labor “partners”.

  • avatar
    4x4

    Maybe a stupid question, but why , if demand is way above production, are they not making money?

    • 0 avatar
      dukeisduke

      I imagine they’re losing money on every car. And, 5,000 deliveries a week? I’ll believe it when I see it.

      • 0 avatar
        kurkosdr

        It’s called the Gillette business model. Sell the Razors at a loss, and they will come for the blades. Maybe toss some free blades to the direction of early adopters so they’ll tell their friends how good the product is.

        Tesla has a USA-wide charging network that now sells their electricity. In fact, they have a monopoly on USA-wide charging networks.

    • 0 avatar
      danio3834

      Because expenses are above revenue.

    • 0 avatar
      RRocket

      They lost $1.3 Billion last quarter…

    • 0 avatar
      bienville

      Demand for both S and X are flat and they just announced price cuts on both. They lose money on every car and are about to lose even more.

    • 0 avatar
      Ugliest1

      Here’s a straight answer: they’ve invested all their profits in massive growth, continually. Those who say “they lose money on every car” have been taken in by clickbait headlines, or have other problems. Tesla makes about 25%+ on every Model S and Model X sold (which gets funnelled back into further growth).

      From the 2Q report, after the predicted production hell and once ramped enough to hit 5,000 cars a week (Nov, Dec?), about 4-5 months after that the Model 3 will also begin to bring in 25% margins. Up to that point, they won’t have had sold enough cars to pay for the manufacturing line installs (thus the 4-5 months after). I hope they can do it; it’s a massive undertaking.

      • 0 avatar
        tnk479

        “Here’s a straight answer: they’ve invested all their profits in massive growth, continually.”

        I am sorry but that doesn’t compute. If you invest your profits, you would still break even. I think what you are saying is that Tesla is investing far more than it would otherwise profit on existing model revenues in order to more rapidly scale up to a larger company, right? I am not being needlessly pedantic. You are alleging that others are falling victim to “clickbait” and yet here you are making obviously incorrect statements.

        • 0 avatar
          Ugliest1

          tnk you’re forgetting Tesla has had year over year 50%+ growth of sales. The increased cash flow from increasing sales is helping this. Plus they have borrowed tons as mentioned. In terms of obviously incorrect statements, I see your later comment about “transferring taxpayer dollars to Tesla” – the $7,500 tax deduction goes to the CONSUMER, not Tesla, and it’s only up to $7,500 if the consumer has that amount of room to claim it. And that’s only in the US.

          • 0 avatar
            tnk479

            The 7500 appears to go to the consumer but it doesn’t. The car was priced with the 7500 tax credit in mind, so, in reality it is mostly a benefit to the manufacturer. No one who can afford a 50k+ vehicle is unable to take full advantage of that federal tax credit. The Bolt and the Volt are no different. I stand by my statement.

            I don’t know what 50% YoY growth has to do with the above. Look at the last four consecutive quarters and growth of MS and MX would appear to have flat lined. Perhaps that will be temporary. I don’t know anyone who can confidently say one way or the other. M3 might juice MS and MX sales or it may cannibalize them. Time will tell as the Tesla saga carries on.

    • 0 avatar
      APaGttH

      Because they are applying the GM model from the 90s. Sell at a loss and make it up in volume.

      The challenges are different, for GM it was a bloated cost structure that drove up production costs and resulted in vehicles selling for a loss.

      In the case of Tesla, to sell their technology at a profitable level would make their pricing models unprofitable. So instead of the customers eating the “early adopter tax,” Tesla is in a hope they can achieve critical mass, and reduce production costs (mostly for batteries).

      The breakthroughs we were promised in battery production, along with plunging costs have not come to be.

      It’s one thing to sell a Fiesta/Yaris/Spark/Sonic/Versa at razor thin margins where almost any incentive results in the vehicle being a loss leader. It is a whole different situation when your luxury marks in the same boat.

      Case in point, GM/Ford/Toyota/Honda/FCA/etc. don’t make a lot of money on their A, B and C segment offerings – but they make fat stacks of cash on trucks, BOF SUVs, and CUVs built on the same platforms as those B and C segment vehicles. Translation, they can take the hit — Tesla is burning piles of cash, and they aren’t Amazon.

      So it is a bit of a race, can they build vehicles for a profit before the equity they have built with investors (metaphorically speaking equity) runs out.

      When you’re a Wall Street darling, investors are willing to look the other way (look at Amazon’s miss last quarter and how the stock was unscathed). If you lose the faith of Wall Street, your ability to spend without profit disappears instantly.

  • avatar
    fishiftstick

    Companies tend not to borrow money at junk terms when they can do so at better rates. Apparently the market assesses the concern as somewhat greater than zero.

  • avatar
    Master Baiter

    They should let Model 3 reservation holders buy their way up in line by either paying more $$$ (expedite fee), or agreeing to pay for the car, or a portion of the car, in advance. Either option would help their bottom line.
    .
    .

    • 0 avatar
      indi500fan

      That “buy your way to the front of the line” is an interesting idea, and might be economical for the customer if Tesla can guarantee you’ll get your “3” before the $7500 tax credit runs out.

      • 0 avatar
        tnk479

        “…might be economical for the customer if Tesla can guarantee you’ll get your “3” before the $7500 tax credit runs out.”

        Actually it just even further transfers taxpayer dollars to Tesla than is already occurring.

    • 0 avatar
      bienville

      They aren’t set up to deliver cars that way. That’s why they said that California customers would get delivered first. It’s cost prohibitive to deliver thousands of one offs to California, New York, Texas, South Dakota etc.

    • 0 avatar
      Luke42

      Since Tesla always has waiting lists for their vehicles, they already do allow people to buy their way to the feibt of the line.

      Higher spec cars have historically been delivered first, and the rumor mill suggests that the Model 3 production will be prioritized similarly.

      So, all you have to do to buy your way to the front of the line is check all of the expensive boxes when you receive your “Invitation To Configure” e-mail.

      Tesla wants to sell the most profitable cars first. I can’t think of any downside, at least from their perspective.

  • avatar
    indi500fan

    Is anybody familiar with the production format at Fremont?

    10,000 cars a week on 6 days, two 10 hour shifts, is 83/hour.

  • avatar
    karonetwentyc

    It’s difficult to believe that there’s nobody at Tesla who knows how to set up a Kickstarter / Indiegogo / GoFundMe / Patreon account. It’d fit perfectly with the rest of their funding model.

  • avatar
    thelaine

    They are going to have to convert a lot of infidels after they satisfy the congregation.

  • avatar
    Cactuar

    Unrelated question: I see on the picture above that the rocker panel is welded to the quarter panel. Typically these are a plastic part bolted on. Why would Tesla weld them in place? Won’t the costs associated with body repair be significantly higher this way?

  • avatar
    stingray65

    Tesla has been in the business since 2003, and producing cars since early 2008. So in almost 15 years of business, and 10 years of car production they have had exactly 1 quarter of profitability, which was entirely due to selling zero-emission credits. Did Ford, or Chrysler, or any of the original GM divisions need 10 to 15 years to reach profitability? Has any car company in history had 10-15 continuous years of losses and stayed in business, much less been valued at more than some of the biggest and/or most profitable companies in the business (i.e. Ford, GM, BMW)? I seems that most Tesla analysts and investors must also be big users of medical marijuana.

  • avatar
    Car Ramrod

    Not a bad move, Telsa. Low interest rates for high quality debt and tight credit spreads in high yield mean they’ll be historically low rates. Companies that don’t even need the liquidity, like Apple, have taken advantage.

  • avatar
    beachy

    They sold $1.8 billion of these bonds due to extra high demand.

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