Tesla falters with Model 3 as initial output trails forecast

Tesla built just 260 Model 3s during September quarter - less than a fifth of its forecast. Photo / AP

Tesla struggled to produce its cheapest model shortly after the car debuted, setting back Chief Executive Officer Elon Musk's mission to reach mainstream consumers.

The automaker built only 260 Model 3s during the quarter ended in September, less than a fifth of its 1,500-unit forecast. Output of the sedan that starts at $35,000 -- roughly half the cost of the least expensive Model S -- was lower than expected because of unspecified "bottlenecks," according to the company.

Musk has engendered enthusiasm about the future of electric cars and has automakers including Volkswagen, General Motors and Daimler lining up to compete. But what Tesla hasn't done is prove itself as a mass manufacturer.

The slow start for Model 3, which was designed for easier assembly, reignites concern it will struggle to reach the lofty production targets set by its CEO.

"I would be surprised if anyone was surprised that they came up short," said Sam Korus, an analyst at Ark Investment Management in New York, which holds Tesla shares. "When Musk gives a prediction, you know it's an extraordinarily ambitious goal."

Tesla produced 25,336 vehicles in the third quarter, down slightly from the three months ended in June. Musk warned after handing over the keys to the first Model 3 owners in July that it would be "hell" ramping up output of the car, which racked up almost half a million reservations as of early August.

While Model 3 results were disappointing, sales of the Model S sedan and Model X sport utility vehicle climbed to a quarterly record. Deliveries in the second half of the year will exceed the first half by several thousand vehicles, according to the Palo Alto, California-based company.

"They're likely three or four weeks behind on the Model 3 ramp," Ben Kallo, an analyst at Robert W. Baird & Co, said by phone. "Bears will make this an issue, but this was a very good quarter for Model S and X demand and deliveries."

Musk has said that production of the Model 3 will grow exponentially and had tweeted Tesla would make roughly 100 of the cars in August and more than 1,500 in September. He projected the company would be able to build the sedan at a rate of 20,000 units per month by December.

"Elon's never made a number, ever," said Ross Gerber, chief executive officer of Gerber Kawasaki Wealth & Investment Management, which holds Tesla shares.

"Coming up short is what we expect of him."

While Tesla reported about 4,820 Model S and Model X were in transit to customers at the end of the quarter, it didn't give a figure for the Model 3. In its statement, Tesla said there were no fundamental issues with the car or its supply chain and expressed confidence in fixing its issues.

Gerber said he's not worried and has faith in Musk, who also runs Space Exploration Technologies. "This guy has figured out how to land a rocket on a ship," he said. "Whatever it is, he'll get it sorted out."