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David Robinson: The risks Tesla faces to fulfill Musk's vision

Tesla Inc. and its CEO, Elon Musk, have a lot on their plate. If any of it proves to be too much to handle, it could spell trouble for the long-awaited solar panel factory the company is gearing up to open in Buffalo.

Musk loves to think big. He wants to revolutionize the auto industry by bringing a more affordable electric vehicle to the masses. He wants to bring solar energy more into the mainstream by selling a solar roof – to be made in Buffalo – that looks like a regular roof.

And he is ramping up a massive battery factory to produce advanced batteries to power Tesla’s electric vehicles and store electricity from its rooftop solar systems.

Any one of those ventures would be a huge challenge to take on. Musk is doing all three at once (plus running a rocket business on the side).

There are plenty of potential risks. If Tesla – and Musk – stumble in one of its massive undertakings, it could create ripples that extend to the others, including its SolarCity factory in Buffalo.

What’s at stake for Buffalo Niagara?

SolarCity isn't profitable, so it has to rely on Tesla and its financing network to provide the cash it needs to stay in business.

If Tesla can’t pull off its Model 3 launch or has delays in ramping up the highly automated production lines at its Nevada battery factory, it could cause the company to lose even more money and delay its path to becoming profitable. That, in turn, could leave Tesla in a financial squeeze that limits its ability to fund SolarCity’s operations.

As it is, the $950 million solar panel factory, the centerpiece of the state’s Buffalo Billion economic development program, is more than a year behind schedule and without a firm target for production to start, although its partner, Panasonic, held the first of a series of job fairs last week to recruit the first 120 workers by August for the portion of the plant it will operate. In all, Panasonic expects to employ about 300 workers making solar cells that will go into solar panels and solar roofing shingles that will be the main products made at the Buffalo factory.

The state is paying $750 million to build and equip the factory for Tesla, which has promised to bring 1,460 jobs to Buffalo, along with another 1,440 from suppliers and service providers.

SolarCity supporters saw Tesla’s acquisition of the solar installer last year as a positive move that gave it greater access to capital and put a company that had never run a full-scale factory in the hands of an experienced manufacturer. Bringing in Panasonic as a partner to produce solar cells at the Buffalo plant brought in $250 million in new capital and gave Tesla access to proven solar technology. The changes also have pushed the target for hitting full production in Buffalo out three years from the original schedule to sometime in 2019.

“The RiverBend plant has moved up the clean-energy food chain,” said Howard Zemsky, the Buffalo developer who heads Empire State Development. “Any short-term delays are far outstripped by the exponentially enhanced stability, innovation and growth prospects that Tesla brings to bear.”

But Tesla still faces plenty of risks.

Electric vehicle competition is rising

Tesla has a head start on the electric vehicle market as it gears up later this month to deliver the first of its Model 3 sedans, selling for $35,000 and up.

But can it maintain its lead?

More than a dozen auto makers are planning to dive into the electric vehicle market. Jaguar, Audi, Porsche and BMW all are preparing electric vehicles. General Motors has its Bolt. Ford is working on an electric vehicle. Volvo announced this month that it will add five electric models by 2021.

“Tesla will face intense competition by next decade,” said Brian Johnson, an analyst at Barclays, in a research note.

Serial Number: 1. This Tesla Model 3 goes to CEO Elon Musk. (Photo courtesy of Tesla)

That makes the success of Tesla’s Model 3 especially important. The company has said nearly 400,000 customers have put down refundable $1,000 deposits to preorder the new sedan sight unseen.

Most will have a long wait before they get their keys. Tesla hopes to be producing 100 Model 3s a month by August, 1,500 a month by September and then 20,000 a month by December. At that pace, it will be 2018 before most of those buyers get their cars.

The clock is ticking

If Tesla can hit its production goals, those preorders could give it a solid foothold in the market just as the competition is heating up two or three years from now.

If it can’t, Tesla’s head start could vanish.

What also worries many analysts is Tesla’s habit of missing its deadlines. Setbacks in ramping up production of the Model 3 would cut into Tesla’s revenue stream and would at least delay the company, which reported a $685 million loss last year, from becoming profitable.

That also could hurt Tesla’s stock price, which was battered this month by a shortfall in second quarter deliveries, and make it harder – and more costly – for Tesla to raise new financing in the future.

Manufacturing is hard

If Tesla meets its production timetable for the Model 3, by the end of the year it will be manufacturing nearly as many cars in a month as it now produces in three months. That’s a big increase, and Musk expects even more. Tesla plans to build 500,000 vehicles next year and 1 million in 2020, Musk has said.

That’s a huge challenge on top of Tesla's other ambitious ventures: the expansion of production at its Nevada battery gigafactory and the launch of its solar panel gigafactory in Buffalo.

Tesla already has experienced some hiccups. The company this month blamed a “severe production shortfall” of its electric vehicle batteries, “made using new technologies on new production lines” at its Nevada gigafactory for a 12 percent drop in sales of its high-end electric vehicles from the first quarter to the second.

Both the Model 3 production line and the solar panel manufacturing plant in Buffalo will be heavily automated, part of Musk’s belief that manufacturing is centered around “the machine that builds the machine,” reducing the role of people in the production process. That focus, for instance, is expected to allow Tesla to reduce the number of production workers at its Buffalo solar panel factory to around 500 people, not the 1,460 factory workers originally anticipated.

New technology and manufacturing techniques, however, often bring unanticipated problems that could lead to production delays.

Solar is slowing

When plans for the Buffalo solar panel factory were unveiled, the industry was booming, with growth rates that averaged 63 percent a year from 2013 to 2015.

That changed last year, when growth slowed to 19 percent as utilities successfully fought back against some of the subsidies homeowners receive for installing rooftop solar and conventional electricity prices fell with lower fossil fuel costs, chiefly natural gas. This year, growth is expected to slow further to just 9 percent as subsidies continue to come under pressure, according to analysts at GTM Research.

That slowing marketplace, combined with a more competitive national market, reduced SolarCity’s market share from a peak of 36 percent three years ago to 25 percent in the third quarter of last year, according to GTM Research. SolarCity’s business has slowed even more since then, with installations dropping by 40 percent during the first quarter of this year as it curbed door-to-door sales and focused on higher-margin projects that generate more cash.

The capacity of the Buffalo factory initially appeared to be easily soaked up by SolarCity’s annual demand. Without further growth, its capacity may exceed demand.

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