U.S. Markets closed

Tesla Model 3 production shuts down, stirs up new concerns


Tesla shares were down 1 percent in early trading on Tuesday, with a temporary halt in production of its Model 3 sedan adding to nerves about the electric car maker's consistent failure to keep its promises on vehicle output.

Model 3, the most affordable sedan from Tesla, is seen as crucial to the company's future profitability, but has so far missed several production goals.

The carmaker said the halt — the second since February — was to improve automation and systematically address bottlenecks to increase production, a regular move by car companies.

"While temporary suspensions to production, in order to improve manufacturing engineering/line rates, are not uncommon in the auto industry, particularly during a ramp-up, we believe that the news will once more be taken negatively by the market; providing more honey to the bears," Evercore ISI analysts said.

In an interview on Friday, Musk acknowledged for the first time that he had overrelied on automation in the Model 3 assembly line, leading to more complexity and delays. It was a stunning concession from Tesla's leader, who has previously scoffed at competitors' manufacturing prowess and bragged about creating an "Alien Dreadnought" within the Fremont factory by 2018. Musk acknowledged on Friday in a tweet: "Excessive automation at Tesla was a mistake. To be precise, my mistake. Humans are underrated."

> Related: Our first-drive review of the Tesla Model 3

According to Bernstein analysts, Tesla has not only automated stamping, painting and welding like most other manufacturers, but also tried to automate final assembly. This is where the U.S. electric car maker seems to be facing problems.

"Tesla's been trying to run full tilt," said Chaim Siegel, an analyst at Elazar Advisors. "He's (Musk is) sleeping overnight on the production floor. I don't think there is any way they'd purposely want to slow production. It tells me something's not quite right."

Model 3 production fell short of the weekly target of 2,500 at the end of the first quarter and a number of Wall Street analysts say they do not believe it will succeed in producing 5,000 Model 3s per week in the second quarter, as Musk has promised.

"I can' t imagine that Tesla can reach an output of 5,000 cars per week until the end of June," said Frank Schwope, an analyst with NORD/LB. "I expect that Tesla is going to fail (in) their aims for this year, as they did so often."

BuzzFeed, which first reported the shutdown, said workers were expected to use vacation days or stay home without pay during the four- to five-day production pause.

Shares of Tesla were down 3 percent on Monday, pressured by Musk's acknowledgement, a report alleging that Tesla undercounted worker injuries — which the company denies — and an amended lawsuit originally filed last year that alleges Musk misled investors about Model 3 production.

Reporting by Munsif Vengattil

Related Video: