The Daily Kanban has obtained Tesla’s application [PDF here] to the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) for about $100m worth of Sales and Use Tax Exclusion (STE) on its purchase of about $1.2 billion worth of production equipment to be used to produce its affordable Model 3. An analysis of key unredacted portions of this CAEATFA application shows that this massive investment –along with CAEATFA documents related to Tesla’s expansion of Model S and Model X vehicle production— will only increase the electric automaker’s annual production to between 230,000 and 300,000 units per year, well short of the firm’s 500,000 unit per year goal for 2018.
Though Tesla could reach its much-discussed half-million per year production goal through other means, these CAEATFA documents appear to validate Daily Kanban‘s analysis of air quality permits at Tesla’s Fremont plant which indicates a current production limit of about 230,000 units per year. Tesla has yet to publicize any plans to apply for the new permits or make the new investments required to bring its production rate beyond these limits and towards its planned 2018 rate of 500,000 units per year.
The copy of Tesla’s latest application to CAEATFA’s STE program was heavily redacted to protect competitive secrets, but enough data points remain unredacted to allow for a number of significant conclusions. The most important of these points can be found in a single table:
Using the data in this table and program regulations available here it is possible to calculate the number of vehicles Tesla will build as a result of this $1.2 billion investment.
Since Tesla says this investment will increase its sales in California by $980,721,359 per year and that California makes up 20% of its sales, we can calculate a total annual sales increase of $4,903,606,795 as a result of this investment. We can also derive an Average Transaction Price (ATP) of $43,014 for Model 3 by dividing Tesla’s Marginal Increase in Sales by its Marginal Increase in Units. If the total annual sales increase calculated earlier is divided by the ATP, we arrive at a total increase of almost exactly 114,000 units per year.
Tesla’s previous CAEATFA application for an expansion of Model S and Model X (the so-called “Gen 2 vehicles”) called for the addition of 118,000 vehicles per year of production. Together with the Model 3 application, this would bring Tesla’s production increase to 232,000 units, or just about the limit indicated by Daily Kanban‘s analysis of Fremont paint shop environmental permits. The strong correlation between the sum production increase documented in Tesla’s last two CAEATFA applications and the limit apparently imposed by the Fremont paint shop permit suggests that Tesla is currently pursuing an investment and permit strategy targeting about half of its stated 2018 goal of 500,000 units of production per year.
In Tesla’s CAEATFA application for the Gen 2 expansion it did state that the 118,000 vehicle per year production increase was in addition to its 77,000 vehicle per year baseline production capacity. If Tesla maintains this “legacy” capacity, it could reach a total production capacity of just over 300,000 vehicles per year after these two expansions are complete. However, the latest CAEATFA documents make no reference to existing capacity the way the previous application did and instead provides only a single (redacted) projected production number. It seems likely that the 77,000 units per year of legacy production capacity referenced in the previous application could be eliminated at the end of the “start-up period” outlined in the Authority To Construct for Tesla’s paint shop expansion, at which time existing painting equipment will be removed.
Tesla’s latest CAEATFA application says the following about its paint shop capacity:
“We plan to start painting Model S and Model X vehicles in our new paint facility in Fremont. Should we achieve our design targets this new paint shop will set new standards for high volume paint shops worldwide in terms of paint quality, labor and energy efficiency and low environmental impact. It will also be flexible enough and have the capacity to paint Model 3 in the future. These and other investments should provide us with sufficient capacity to increase our production to 2,000 vehicles per week by year end.”
The amounts allocated to paint shop equipment in Tesla’s two most recent CAEATFA applications also reinforce the conclusion that the permitted “phase one” upgrade of the Fremont paint shop is still underway. The Gen 2 expansion application allocated just $3,155,000 to paint shop equipment, hardly enough to fund a meaningful expansion of capacity. The Model 3 application allocates a more-significant $62 million for paint shop equipment, bringing the total investment to just over $65 million. Because qualifying equipment may be purchased but not put into use prior to CAEATFA approval of related STE and because Tesla’s Model 3 application isn’t set to be approved until December, this might explain why equipment from Tesla’s “phase one” paint shop expansion has not yet been put into use.
Tesla’s Model 3 application also includes commentary on the Fremont plant that is worth considering in light of the controversy over the status of production ramp plans for that facility:
“We produced 35,259 Model S vehicles in 2014 and have steadily increased our production rate to meet our goal of 50,000 to 55,000 Model S/X vehicles in 2015. We believe that we will be able to increase the annual production capacity of this plant beyond this amount through additional capital spending.
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Vehicle production at the facility started in mid 2012 with the launch of the Model S, followed by the Model X and, in 2017, Model 3.
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With this additional capacity, Tesla is well positioned to meet future Model S/X production and future vehicle development requirements. Tesla’s factory will continue to be a state of the art, fully sustainable manufacturing plant, whose products and operations are unparalleled in their abatement of carbon emissions.
All permits for the use of the facility as an automotive production facility have been secured. While the expansion of activities at the site may require additional approvals, there are no approvals that are foreseen at this time for the proposed project. No additional financing is required to expand facility operations.”
This commentary further reinforces Daily Kanban‘s analysis that the current round of Model 3 investment will not result in a production capacity that exceeds the limit of about 230,000 units per year imposed by the Fremont plant’s most recently issued air quality permit. If the investment documented in this application were able to bring Tesla’s Fremont plant up to 500,000 units of production per year, an additional air quality permit application would be necessary based on Daily Kanban‘s previous analysis. Because Tesla states that such an application is not necessary for this expansion and because data in this document indicates a production rate roughly in line with the Fremont plant’s current permit, it seems clear that a new permit and fresh investment would be necessary before Tesla can reach its targeted 2018 production rate of 500,000 vehicles per year.
Tesla has made it clear in its responses to Daily Kanban‘s previous investigations that it will not clarify its production ramp plans even in the face of mounting evidence of very real constraints. The automaker’s most devoted fans and friendliest outlets have been happy to dismiss our concerns and attack our motivations based solely on Tesla’s word that its plans remain unchanged. And had one critical table in Tesla’s Model 3 CAEATFA application not been redacted as it was in its worksheet [PDF here] and its previous application, perhaps Tesla’s word might still have been enough to alleviate concerns that it won’t be able to hit its ambitious 2018 production goal on time.
With this latest piece of the puzzle, the time for recitations of faith has passed. Before the year is out Tesla will go back to the markets to raise more capital and when it does investors will be armed with information that Tesla saw fit to provide to its regulators and governmental benefactors months and even years before the general public. The sooner Tesla lays out a clear accounting of its current progress towards its oft-repeated Model 3 goals and a timeline for the further investments and permit applications it still needs to meet them, the better off all concerned will be.
Tesla did not immediately respond to a request for comment. This story will be updated with any official comment as it becomes available.
