The Big Factor That Will Help Tesla's Model 3 Launch

By John Rosevear Markets Fool.com

Tesla (NASDAQ: TSLA) is gearing up for maybe its biggest moment yet: the start of production of its first true mass-market model, the Model 3.

Continue Reading Below

It's a moment that is fraught with challenges. The Model 3 is all-new and different from earlier Teslas, and it's going to be built on an all-new assembly line that incorporates much more automation than anything Tesla has tried to date.

A lot rides on Tesla's ability to deliver high-quality Model 3s, and there are a lot of things that could go wrong. But as CEO Elon Musk explained during Tesla's earnings call last week, Tesla has an important new factor working in its favor: its suppliers.

Tesla's upcoming Model 3 sedan, shown in concept form last year. Image source: Tesla.

Tesla is reaping the benefits of its growth with suppliers

All automakers, big or small, are heavily dependent on suppliers. In particular, suppliers that specialize in certain types of parts -- whether circuit boards or seats -- can produce parts to a higher level of quality much less expensively than an automaker could do on its own.

Continue Reading Below

Musk said that in Tesla's early days, it was hard to get the attention of the established auto-industry suppliers. Those suppliers are used to thinking in terms of production runs that will go into six or seven figures of volume -- and few in the auto industry thought Tesla's Model S would end up selling in the tens of thousands every year.

But now that Tesla has proven that it can (and will) build and sell cars in volume, the suppliers are much more interested in winning its business. Musk explained:

We're able to get usually the A team at the A supplier for Model 3. It's rare that we're not able to get that. Whereas, particularly for Model S and to some degree for Model X, when we were trying to get suppliers for Model S, a lot of the top-tier suppliers wouldn't even work with us. They didn't believe in the car. They thought we'd go bankrupt.

Having shown the results of the Model S and the Model X, the interest from suppliers went from basically getting like the worst team on second-tier suppliers to getting the best team on first-tier suppliers. It's really a big difference.

It should make a huge difference in some of the details of the finished product. Think of things like the fit and finish of interior panels, or the comfort of the seats, or the quality of the glass used in the windshield. These are all things that drew some criticism in the earlier Teslas, and they're all things that can be improved by having the A-list suppliers giving their best efforts.

If the Model 3's launch is smooth, suppliers will be a big reason

There's a lot -- a whole lot -- that can go wrong with Tesla's ramp-up to full production of the Model S. Some things will go wrong: A few suppliers will be late, a few early batches of parts won't fit properly, a robot or tool on Tesla's brand-new production line won't work as designed.

These things happen to all automakers. They're more likely to happen to Tesla with the Model 3, simply because this is the company's first-ever attempt at a high-volume production car.

Analysts have looked to the problem-plagued launch of Tesla's Model X for clues as to how the Model 3 launch might unfold (and have downgraded their near-term expectations accordingly). But the fact that Tesla has been able to significantly upgrade its relationships with suppliers since the X's launch might make that a misleading comparison.

Long story short: I think the Model 3 launch could go more smoothly than many expect. If so, suppliers will be a big reason why.

10 stocks we like better than Tesla
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Tesla wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

John Rosevear has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.