July 31, 2017 / 5:55 PM / 15 days ago

Tesla drops after Musk warns of 'manufacturing hell'

3 Min Read

Customer employees receive some of the first Model 3 cars off the Fremont factory's production line during an event at the company's facilities in Fremont, California, U.S., July 28, 2017.Alexandria Sage

SAN FRANCISCO (Reuters) - Shares of Tesla (TSLA.O) dropped 3.5 percent on Monday after Chief Executive Elon Musk warned that the electric carmaker would face "manufacturing hell" as it ramps up production of its new mass-market Model 3 sedan.

At a launch event on Friday, Musk said customers had made over half a million advance reservations for the Model 3 as he handed over the first 30 cars to employee buyers, setting the stage for a major test of Tesla's strategy to become a profitable electric car maker.

Tesla is counting on the Model 3 to help turn the cash-losing company into a profitable one and transform it from a niche player to a heavyweight in the automobile industry.

Investors already skeptical of Tesla's aggressive growth targets focused on a warning by Musk that early production would be challenging.

"We're going to go through at least six months of manufacturing hell," Musk told journalists ahead of the event. He later made similar comments on stage.

Investors may get an idea of how "manufacturing hell" will affect Tesla's rate of cash burn when the company posts its quarterly results on Wednesday. The Palo Alto, California company has spent over $2 billion in cash so far this year ahead of the launch.

Also on Monday, a group of workers at the Fremont, California factory where the Model 3 is made sent an open letter to the independent members Tesla's board. The employees, who are trying to start a union, requested access to company safety plans and information on compensation.

Tesla's stock has gained 53 percent in 2017, although it is down from a record high in June.

The $35,000 Model 3 is designed for easy production, with output targeted to reach 20,000 per month by December. Tesla's last launch was the luxury Model X SUV in 2015 which had several production problems and a price tag starting around $80,000.

Tesla has promised to boost total car production to 500,000 vehicles next year, close to six times its 2016 output, a target that many auto industry experts believe is unrealistic. It sold 76,230 cars last year.

At the event, Musk said the price of a Model 3 with all of available options could reach $59,000. That level could scare off potential Tesla customers, wrote Barclays analyst Brian Johnson in a note to clients.

Tesla's stock was down $11.85 at $323.21 at mid-afternoon.

Reporting by Noel Randewich; Editing by Richard Chang

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