Tesla Motors, Inc. Is Gearing Up for Model 3

By Daniel Sparks Markets Fool.com

At about half the price of its Model S sedan, electric-car maker Tesla Motors (NASDAQ: TSLA) expects its upcoming Model 3 to turn the company into a high-volume auto manufacturer. But it will need faster, bigger production lines in order to pull it off. And its recent approval to double the size of its car factory in Fremont, CA, suggests the company isn't messing around.

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Model 3. Image source: Tesla Motors.

Tesla needs more space

Earlier this week, the city of Fremont approved Tesla's plans to boost the square footage of its factory from 5.3 million to 9.9 million, Electrek reports.

The expansion, which will include 11 new buildings at Tesla's Fremont property, reaffirms the company's commitment to continue expanding in California, and it will give the company more space to ramp up and optimize production.

Already the state's largest auto-industry employer, following the expansion, Tesla will be an even more formidable employer in the Golden State. Reflecting the significant investments needed to support higher volume Model 3 production, Tesla anticipates hiring an additional 3,000 employees as part of its plan to grow its production in Fremont, putting total Tesla Fremont employees above 9,000.

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But the company isn't waiting for this expansion to start building production capacity for Model 3. In its most recent shareholder letter, Tesla said it had already completed its production line layouts for Model 3 and will soon begin installing new body welding and final assembly lines for the vehicle.

Beyond obtaining approval to expand its factory in Fremont and preparing to begin tooling for Model 3, the company also continues to rapidly expand its Gigafactory, where it plans to build batteries for Model 3 and its energy-storage business. Tesla's Gigafactory construction remains on track to support volume Model 3 production in the second half of 2017, according to the company's most recent quarterly update.

Building a mass-market electric car

Big investments will likely be a major theme for Tesla in the coming quarters, as the Model 3's planned launch for the second half of 2017 draws closer. Tesla is aiming to achieve high-volume production before 2017 ends.

Tesla's plan to double the size of its Fremont factory, which once supported production of 500,000 vehicles annually as part of a General Motors and Toyota partnership, comes shortly after Tesla decided to double down on production targets -- a decision that was spurred by a surprising 373,000 deposit-backed reservations for Model 3 within a month and a half of the vehicle's unveiling.

"[G]iven the demand for Model 3, we have decided to advance our 500,000 total unit build plan (combined for Model S, Model X, and Model 3) to 2018, two years earlier than previously planned," Tesla announced in its May 4 quarterly shareholder letter.

This revised target marks an astounding fivefold increase in the company's current annualized vehicle build rate in just two years' time. With such ambitious plans on such a short timetable, the company is obviously going to require some significant investments -- and doubling the size of its car factory is apparently one of them.

Tesla factory in Fremont. Image source: The Motley Fool.

Ahead of its Model 3 ramp up, Tesla expects its capital expenditures (capex) to jump sharply, starting with this quarter. In the first three quarters of 2016, Tesla's capex amounted to $759 million, but the company expects to spend just over $1 billion on capex in the fourth quarter alone.

Going into 2017, Tesla has said its annual capex will continue to increase as the company makes payments on Model 3 investments.

Investors should keep an eye on the company's investment progress, with particular interest in whether Tesla is staying on track with its goal to achieve volume Model 3 production in the second half of 2017.

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Daniel Sparks owns shares of Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.