Tesla Inc. TSLA 7.39% on Tuesday revealed it missed a crucial production goal for its new Model 3 sedan, though the auto maker showed progress toward building its first mass-market car and reassured investors about its capital needs.
The Silicon Valley auto maker said it produced 2,020 Model 3 cars in the past seven days—which includes two days in April—missing its goal of making 2,500 vehicles a week by the end of March.
Delaying that milestone adds more pressure for Tesla to crank up production to meet its oft-stated—and twice delayed—build rate of 5,000 Model 3 cars a week by the end of June. Analysts say that rate is an inflection point that enables Tesla to generate meaningful cash to support the business. Further delays could significantly squeeze Tesla’s cash.
Tesla hedged its goal of reaching the 5,000-a-week rate, saying it continues to target the milestone “in about three months.” On the plus side, the company is nearly tripling its weekly rate from three months ago, when it produced 793 in the final seven days of the year. And the company said it won’t need to raise any debt or equity, apart from standard credit lines.
Its progress, the company said, lays “the groundwork for Q3 to have the long-sought ideal combination of high volume, good gross margin and strong positive operating cash flow.”
The Model 3 production rate looked good to David Whiston, an analyst for Morningstar Research Services LLC. “The key now is to keep the momentum going and get closer to scale,” he said. “There’s a long way to go.”
Tesla is in one of the most critical phases in its history, a make-or-break period in which it must boost production of the Model 3 to prove it can create a car for the masses, or face severe financial consequences.
The company finished last year with $3.4 billion in cash on hand after its negative cash flow averaged about $1 billion a quarter on average—a pace analysts have said means the company would need to raise more money this year unless it significantly boosts production.
Shares of the auto maker, which have slumped in recent days, were recently up about 6%. The stock had fallen more than 36% since a peak in September when investors were enamored with Chief Executive Elon Musk’s vision for electric-powered cars that could drive themselves.
Mr. Musk has a reputation for setting ambitious deadlines that he fails to meet on time, a practice that has become unsettling in recent months as Tesla’s struggles have mounted.
Last week, Moody’s Investors Service downgraded Tesla’s credit rating, concerned about the company’s cash levels and production delays. “Prospects for addressing its liquidity requirements…will be supported if the company can establish credibility for reaching Model 3 production levels,” Moody’s said at the time.
The company last week also voluntarily recalled 123,000 Model S sedans because of a possible power-steering failure, and revealed that a fatal crash involving a Model X sport-utility vehicle on March 23 involved its semiautonomous driving system Autopilot.
During a troubled ramp up of the Model X SUV, Mr. Musk touted how he slept in a sleeping bag at the assembly plant. Tesla has run into snags at its Fremont, Calif., assembly plant and battery factory near Reno, Nev. On Monday, Mr. Musk said on Twitter he has returned to sleeping in a Tesla factory as he closely oversees production of the Model 3.
During the first quarter, Tesla said it made 9,766 Model 3s, up from 2,425 in the fourth quarter and 260 in the third. The latest data indicate it must have significantly boosted production in the final days of the quarter.
If it made about 2,000 Model 3s in the final week, that would leave it with roughly 7,800 units during the other 11 weeks of the quarter (not including one week when Tesla idled production). That would be an average of about 700 cars a week, less than the more than 1,000 a week Tesla said it was extrapolating during the final days of last year.
While Tesla focuses on the Model 3, production of its other two vehicles, the Model S sedan and Model X SUV, fell slightly to 24,728 during the three-month period, compared with about 25,000 a year ago. Combined deliveries of those two vehicles fell 13% to 21,800 from about 25,000 a year earlier.
Tesla delivered 8,180 Model 3s in the first quarter, giving the company a total of 29,980 deliveries during the period. More than 2,000 Model 3s were in transit and will be counted as sales next quarter, the company said.
Analysts surveyed by FactSet on average estimated Tesla would deliver 37,000 vehicles during the quarter, including 12,300 Model 3s. Several analysts expected Tesla to fall short of its 2,500-a-week Model 3 goal.
Demand for the Model 3 shouldn’t be an issue. After revealing the sedan in 2016, reservations shot up to more than 400,000, though there are signs customers are getting impatient with the delays. In August, Tesla said it had a total of 455,000 net orders for the Model 3.
Net reservations remained stable during the quarter, Tesla said.
“The reasons for order cancellation are almost entirely due to delays in production in general and delays in availability of certain planned options, particularly dual motor AWD and the smaller battery pack,” Tesla said.
Write to Tim Higgins at Tim.Higgins@WSJ.com
Appeared in the April 4, 2018, print edition as 'Tesla Makes Halting Progress With Its Mass-Market Sedan.'