Don't Extrapolate Tesla's Model X Shortfalls to Model 3

Model X. Image source: Tesla.

Past performance does not guarantee future results.

I know that you've likely heard that line way too many times by now in your investing career, but I'm using it in a different context. Tesla Motors has a pretty spotty track record when it comes to product launches. That includes in terms of timing and initial build quality with early production units. It's partially for this reason why investors and analysts are so skeptical about the company's ability to launch Model 3 in late 2017. They figure that Tesla has always been late, so this time won't be different.

What if it is different this time?

"Much tighter feedback loop"I've already argued why this assumption might be flawed. It's true that we have a limited sample size, since Tesla has only launched three cars to date, but it's important to analyze the actual underlying reasons for past product hiccups in order to appropriately assess whether or not those reasons even apply in the context of Model 3. Roadster was hand-built with an outsourced chassis, Model S just needed to work, and Model X was severely over-engineered.

On the last conference call, CEO Elon Musk gave some additional insight into how Model 3 development differs from its predecessors.

There are stories of Musk pushing back and overriding objections from his manufacturing team when it came to the Model X's falcon-wing doors. He simply had to have them. But those doors have proven to be a significant manufacturing challenge, and may end up being more trouble than they're worth (especially if we start talking about out-of-warranty repairs). Musk said he has taken "a lot of lessons learned from Model X."

It's encouraging to know that Tesla is taking additional steps to ensure Model 3's manufacturing feasibility, with different teams collaborating at a deeper level to minimize any risks to the production ramp.

From the brief views that investors have had of Model 3 so far, the prototypes do look simpler in many ways. For instance, the door handles are mechanically quite simple and don't look as flashy as the Model S retractable handles or the Model X falcon-wing doors; the front fascia is flat instead of having a complex recessed region.

Here's Musk warning against the prevailing assumption:

He continued:

There are many reasons why Tesla may still miss its target date for Model 3, but they probably won't have anything to do with past mistakes.

The article Don't Extrapolate Tesla's Model X Shortfalls to Model 3 originally appeared on

Evan Niu, CFA owns shares of Tesla Motors, andhas the following options: long January 2018 $180 calls on Tesla Motors. The Motley Fool owns shares of and recommends Tesla 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.

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