Can Grohmann Engineering Be Tesla’s Answer To Its Production Challenge?

+16.04%
Upside
180
Market
209
Trefis
TSLA: Tesla logo
TSLA
Tesla

After its Model 3 sedan received an overwhelming response when the company began bookings, Tesla Motors (NYSE:TSLA) increased its production output target to 500,000 cars per year by 2018. This is 10 times higher than the 50,000 cars delivered by Tesla in 2015 and there are several challenges which the company is likely to face to meet this target. Revamping the production process and strengthening the supply chain will be critical to meeting this target. However, Tesla is now looking at automation to manufacture high quality products with economies of scale by acquiring engineering talent in automated manufacturing systems. The company recently announced that it will acquire Grohmann Engineering, a world renowned engineering company in Germany that will now serve as the initial base for Tesla Advanced Automation Germany headquarters. The company expects to add over 1,000 advanced engineering and skilled technician jobs in Germany over the next two years. We believe this acquisition is a critical milestone in Tesla’s journey to scale up its operations. While it has established itself as a strong player in the high end electric vehicles segment, success with a mass market vehicle, the Model 3, is crucial for the company’s future profitability. We believe this acquisition will address several production challenges and play a key role for the company to meet its production goals in the next few years.

See our full analysis for Tesla Motors

Acquisition Can Play Crucial Role In Accelerating Pace Of Production

Relevant Articles
  1. Down Almost 20% This Year, Is Tesla Stock Good Value?
  2. Down 9% Year-To Date, Will A Q4 Earnings Beat Drive Tesla Stock Higher?
  3. With Delivery Growth Cooling, Is Tesla Stock Still A Buy At $250?
  4. Following A Lackluster Cybertruck Debut, Is Tesla Stock Overvalued At $240?
  5. Will Weak Earnings Follow Tesla’s Mixed Delivery Report?
  6. With Deliveries Missing Estimates, What’s Next For Tesla Stock?

According to our estimates, Model 3 (Gen III) accounts for nearly 45% of Tesla’s valuation and we expect its market share to reach around 22% by the end of our forecast period.

This market share translates into 725,000 units per year by the end of our forecast period. Given that Tesla delivered only 50,000 cars in 2015 (all models put together), this constitutes a huge production ramp. Tesla is looking to resolve this challenge by making the factory more of a product. With the acquisition of Grohmann Engineering, the company is looking to yield exponential improvements in the speed and quality of production through an advanced automated production process, while substantially reducing the capital expenditures per vehicle. Grohmann Engineering specializes in highly automated manufacturing techniques and aligns with Telsa’s aim to make its production process as automated as possible to boost production.

The success of Model 3 (Gen III) is a key factor for Tesla’s future growth and valuation. While the company has proved the popularity of this model from the overwhelming number of pre-orders, timely deliveries are the next challenge. Tesla’s ability to build mass scale vehicles is also on test with the Model 3 delivery schedule. We believe an advanced automated production process can help meet this challenge and the acquisition of Grohmann Engineering is a key step in this direction. This should resolve production challenges and bring the company closer to its ambitious production goals for the next few years.

Understand How a Company’s Products Impact its Stock Price at Trefis

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap More Trefis Research