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David Robinson: Why Tesla's Model 3 matters to Buffalo

Friday is a milestone day for Tesla Inc.

That's when Tesla has said it will hand over the keys to the first 30 buyers of its long-awaited Model 3 electric vehicle at an event in Los Angeles.

It's only 30 cars, but the public launch of the Model 3, Tesla's $35,000 electric vehicle for the masses, has a lot of bearing on Buffalo and the solar panel factory the company is gearing up to open on South Park Avenue. An estimated 800 job applicants lined up out the door on Tuesday night at a Buffalo employment training center for a crack at 300 jobs from Panasonic, Tesla's partner at the local factory.

Tesla is betting big on the Model 3, and it's counting on the new sedan to be the vehicle that turns it into a profitable, self-sustaining company.

If that happens, that's great news for the Buffalo Niagara region, because it means Tesla will be on stronger financial footing, and better able to withstand the financial drain from its money-losing solar panel business.

But if Tesla struggles with the Model 3, if it can't produce them fast enough or runs into quality control problems at its California electric vehicle factory, it could spell trouble for the company.

The anticipation has been immense. More than 370,000 consumers have plunked down a refundable $1,000 deposit for a place in the line to buy a Model 3, even though most will have to wait until sometime next year to get their keys – and that's assuming that all goes well. They put down deposits sight-unseen on a vehicle that, until this month, they hadn't even seen official photos showing what it looked like.

The interest in the Model 3 is a sign that electric vehicles have a place in the mainstream auto industry. With the Model 3 showing there's a market for an affordable electric vehicle, more than a dozen auto makers now are developing electric vehicles.

If Tesla can carry out its Model 3 launch without any major hitches, it will have a significant head start on the competition, which includes the Chevrolet Bolt made by General Motors.

If it can't, Tesla could squander that lead and lose its competitive edge in a more hotly contested market.

"We've long argued that Tesla, as an electric vehicle company, is not truly disruptive, in that legacy original equipment manufacturers will eventually wake up and offer fully electric vehicles by the early 2020s," said Brian Johnson, a Barclays analyst, in a report.

As the double-digit drop in Tesla's share price earlier this month showed, investors already have bid up the stock to meteoric levels, anticipating that the company will be able to deliver on its promises and position its electric vehicles as the next-generation challenger to the gasoline-powered cars and trucks from conventional automakers like General Motors and Ford Motor Co.

With investors valuing Tesla at almost as much as GM and at more than Ford, Tesla shareholders aren't in a forgiving mood. They're betting that the Model 3 will be a huge hit, and they're in no mood to tolerate any hiccups like the one shortfall in deliveries of the luxury vehicles that Tesla announced earlier this month, caused by troubles it encountered in April and May producing the sophisticated batteries that its vehicles rely on to go up to 300 miles on a single charge.

Tesla will need billions of dollars in fresh capital to carry out Musk's grand vision of creating a renewable energy juggernaut built around electric vehicles, solar panels made in Buffalo and the advanced batteries to both power the vehicles and store electricity from the solar panels.

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A strong stock price, built off Tesla successfully pulling off the Model 3 launch, will make it easier for Tesla to raise that money. A disappointing Model 3 launch, which likely would send Tesla's stock tumbling and cast doubt over the company's ability to carry out Musk's grand plan, would make it harder – and more costly – to raise that money.

What investors want to see now, said Keybank Capital Markets analyst Brad Erickson, is the Model 3 rolling off Tesla's California assembly line.

Production first, profits second.

Investors "may not hold the company's feet to the proverbial fire before 2018 in terms of actual profitability," Erickson said in a research note.

For now, there is very little Model 3 production, with just 30 vehicles expected to be turned over to their owners on Friday. But Musk promises that more are coming, with Model 3 production targeted to reach 20,000 a month by December. That's almost as many electric vehicles as Tesla now makes in three months.

Next year, Musk hopes to produce a half million vehicles, which would require its projected monthly production rate in December to more than double to average more than 40,000 vehicles a month throughout 2018.

That's a really tall order. In a span of just five months, Tesla is planning to go from making 30 cars a month to 20,000, and then more than double that a few months later.

"While it is nice to see Tesla finally hit a stated target on time, we question whether 30 vehicle deliveries essentially built by hand count as 'mass production,' " Cowen & Co. analyst Jeffrey Osbourne said.

How fast Tesla can get to its "mass production" goal will tell a lot about how successful Tesla will be – and whether it will able to deliver on Musk's renewable energy vision, including the Buf"falo solar panel factory.

While Tesla hasn't disclosed its plans for hiring the 1,460 workers it has promised to bring to Buffalo, Panasonic has. The company already has 60 to 70 workers in its portion of the plant, with plans to hire 150 by the end of August and another 150 by the end of March 2018.

"We think that things are moving forward. We have not heard any concerns about the process of building out the plant," said Buffalo Mayor Byron W. Brown, surrounded by Panasonic applicants at the Buffalo Employment and  Training Center on Tuesday night. "Clearly, Panasonic is hiring. That is very good news for the community and the job seekers who are here tonight."

David Robinson is deputy business editor and writes a column on Buffalo's business for The Buffalo News. 

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