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Baird analyst Ben Kallo recently took clients to Fremont, Calif., to tour Tesla’s primary manufacturing plant. The electric-vehicle pioneer often allows investors to poke around—supervised—inside its huge factory.
There is a lot going on under the hood at
Tesla
these days and Baird’s visit was timely. Understanding what is going on in Fremont can help investors plot the trajectory of costs at the company as Tesla’s production lineup and global manufacturing footprint get more complex.
Tesla (ticker: TSLA) is bringing a smaller sport-utility vehicles, the Model Y, to market in 2020 and ramping up production of the Model 3 sedan. The company is also set to begin production of its Model 3 sedan at a new factory in Shanghai. After that, production is scheduled to begin on its new Cybertruck.
“Model Y is expected to begin volume production in mid-2020, and we continue to believe the product will be margin accretive,” Kallo wrote in a Wednesday research report, adding that the Model Y has “similar manufacturing cost as the Model 3 at a higher [average selling price].” Kallo predicts 1,000 Model Y SUVs rolling off Fremont assembly lines each week by mid-2020.
He also thinks vehicle production in China will boost profit margins. China is the largest new-car market in the world, and local production allows Tesla to qualify for government electric-vehicle subsidies.
Tesla plans to build 150,000 Model 3 vehicles annually in Shanghai, according to Deutsche Bank analyst Emmanuel Rosner. The Chinese plant will have an annual capacity of 250,000 vehicles. That is about 4,800 cars a week. “Tesla has plans to ramp production up gradually, aiming to make about 1,000 vehicles a week by the end of [2019],” Rosner said in a Monday research report.
Tesla production capacity is growing rapidly. Tesla delivered almost 250,000 vehicles in 2018, which were manufactured in Fremont. Tesla bought the California plant in 2010 from joint venture owned by
Toyota
(TM) and
General Motors
(GM). (It was the part of GM that didn’t survive the 2008-09 credit crisis.)
Elon Musk bought low, paying $42 million for 210 acres and 5.4 million square feet of manufacturing space. The GM-Toyota joint venture had spent billions on the factory over time, after the plant opened in 1984. Tesla, of course, had to outfit the plant with its own tooling. At its peak, the plant dubbed NUMMI, for New United Motor Manufacturing, made more than 400,000 vehicles annually. Tesla’s production is much lower, but it matches output to demand.
Today, investors can see giant presses stamping aluminum body panels and robots picking batteries and placing them into battery packs that power the electric vehicles. Different model Tesla vehicles run on the same assembly line. Flexibility like that is common in automotive factories. Soon more models, such as the Y, will sit between other vehicles being produced.
Kallo rates Tesla shares the equivalent of Buy and has a $355 price target for the stock. He thinks shares can rally into the Model Y introduction and ramp-up of Model 3 production in Shanghai. Rosner, for his part, rates shares Hold and has a $290 target price for the stock.
Tesla stock has been on a tear recently, up 41% over the past three months, far better than comparable gains of the
S&P 500
or
Dow Jones Industrial Average.
But profit, not new products, propelled shares. The rally was catalyzed by better-than-expected third-quarter earnings.
Write to Al Root at [email protected]