Will tesla become a victim of its own success?
With 400,000 model 3 pre-orders and counting, i fear tesla has bitten off more than it can chew
Five years ago almost to the day, a British baker called Rachel Brown put a cupcake offer on GroupOn where a box of 12 buns was sold for £6.50, a huge saving on the regular price of £26.50.
Rachel would lose £2.50 on every box sold, but they would act as a loss-leader, attracting customers would hopefully come back and buy more from her in the future. Unfortunately, she forgot to set a limit and 8,500 orders came steaming in. Rachel had to produce over 100,000 cakes instead of her usual 100 per month. Long story short, she had to spend £12,500 on extra staff to meet demand and it nearly put her out of business. "Without doubt, it was my worst ever business decision," Rachel later said.
This little story has been on my mind a lot since Tesla revealed the Model 3 back in April and promptly received over 400,000 pre-orders. To give you an idea of how quickly Tesla will need to ramp up production, it built 50,000 cars in 2015, yet is aiming at 500,000 annually by 2018.
This growth rate is unprecedented in the car industry and will require a herculean effort from Tesla and boss Elon Musk. I have huge faith in Musk, given his success with PayPal, SpaceX and Tesla, but he has time-and-again put it all on the line and sometimes found himself just hours from bankruptcy. Brave, sure, but also perhaps a little reckless?
This worked in the early days when he had little to lose, but Tesla now has 400,000 pre-orders in the bank ($10,000 or £10,000 each), and has said all circa $4 billion is fully refundable should customers change their mind. So it can't be spend and it might all have to go back if the worst should happen.
Tesla is starting to make a small profit and production has gradually ramped up to around the 100,000 cars per year mark already. But can this figure quadruple in just 24 months? I really hope Musk and Tesla succeed, but I just can't shake the story of Mrs Brown and her cupcakes from my head.