Tesla shares traded as high as $361.50 on July 2, 2018.  This was after its founder Elon Musk declared that Tesla was finally a “real car company”.  The declaration was prompted by Tesla’s meeting its goal to produce 5,000 Model 3 sedans per week for the quarter ended June 30, 2018.  Since then most of Tesla’s fans and shareholders have been perplexed. The share price did an about face and closed for the week ended July 7 at $308.91 representing a price reversal of more than $52 per share from the week’s high.

Tesla’s shares selling off on the good news did not surprise me.  The explanation that Tesla gave to USA Today for its July 3, 2018 article entitled “Tesla dropped new car braking test in final days of production goal” about Tesla’s ceasing its quality control for brakes on the assembly line was telling.   The company explained that the brakes did not require assembly line testing since Tesla has had a policy of in place that every car that it manufactures be test driven.  Upon any savvy investor learning about the policy they would have sold shares. It speaks volumes about Tesla’s manufacturing process not being scalable. Assuming that Tesla can eventually produce the same annual volume of vehicles as Ford or General Motors which produced 6.6 million and 9.6 million vehicles respectively in 2017, it will need to do the following:

  • Hire drivers to test drive the 38,000 cars manufactured every day.
  • Purchase real estate to build hundreds of race tracks near its factory to test its cars.

Tesla’s not having a scalable manufacturing process is a big issue for any investor.  It’s especially since Tesla’s market cap is in between the market caps of Ford and General Motors.

Tesla’s test-driving-of-all-new-cars policy begs two questions:

  • What other quality control issues does the test drive address?
  • Is the cost of test driving the vehicles and fixing the problems accounted for in its Cost of Goods (CGS) or Sales, General and Administrative (SGA) expenses?