Tesla needs to hire someone to build the Model 3 so it can focus on the Model Y (TSLA)

Tesla Model Y

Tesla needs to focus on production of its Model Y crossover, the market for which could be much larger than for the Model 3 in the US.
Sending Tesla Model 3 production to Europe and hiring a contract manufacturer could solve some of Tesla's logistics problems and free up US capacity for Model Y.
I'm under no illusion that Tesla will take this advice, as Musk & Co. have had years to contract out manufacturing and have stubbornly avoided that route.
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Tesla's Model 3 had a difficult birth, but the vehicle is now a success. The company built 63,000 in the first quarter, surpassing what was once considered a respectable yearly output before the Model 3 launched in mid-2016.

The Model 3 has also enabled Tesla to build a commanding, near-monopoly share of the US luxury electric-vehicle market. There's a catch, however: the Model 3 is a sedan, and consumers have shifted decisively away from four-doors.

While BMW, Audi, Mercedes and other premium marques have stuck with their stalwart sedans, they've also been on a tear of introducing crossover SUVs. Meanwhile, Detroit is jettisoning mass-market saloons: Fiat Chrysler Automobiles, Ford, and GM have each moved in this direction over the past two years.

The product trend is structural rather than cyclical; crossovers can deliver fuel-economy and a driving experience that's far more car-like, so consumers are choosing them over sedans for their versatility. In this context, Tesla can expect to sell at least twice as many of its newly unveiled crossover, the Model Y, as it can the Model 3.

Model Y vs. Model 3

Tesla Model 3

The Model Y should enter mass production in 2020, assuming Tesla can figure out how to build it — and where to build it.

On a conference call with analysts after reporting Q1 earnings last week, CEO Elon Musk said that Tesla had ordered the tooling it needs to manufacture Model Y, but that the company hasn't decided whether to expand its footprint at its California factory or to produce Model Y in Nevada at its battery factory, where the future vehicle's drivetrain will be manufactured.

There are no car factories in Nevada and one car factory in California for a reason: the US automotive supply chain is concentrated in the Midwest and in the South. West of the Mississippi, Tesla is basically the only game in town. Beyond that, Tesla should plan on Model 3 demand tapping out in the US due to the declining popularity of sedans. Whatever available US capacity Tesla has should be devoted to Model Y.

BUT ... what about Model 3? Well, in Q1 Tesla struggled to get the vehicles from California to Europe, contributing to a $700-million loss. Outside the US, there could still be some Model 3 demand to exploit. But any time wasted manufacturing it in the US is time robbed from Model Y.

Tesla could hire somebody to build the Model 3

Magna

Enter a contract manufacturer. The world's biggest is Magna. This Canadian firm builds vehicles for a variety of big names, including BMW and Mercedes. They have European capabilities, and when I spoke to CEO Don Walker in 2018, he said that Magna could theoretically bolster a carmaker's production in a year to a year and a half, assuming the company was being asked to build a vehicle that had already been designed and engineered.

"We're open to working for any customer," Walker said.

I'm under no illusion that Tesla would actually take my advice. Musk & Co. have had years to contract out manufacturing and have stubbornly avoided that route. The Model Y sounds like it's going to be very much an all-Tesla deal.

And that's fine, because various auto experts have been pointing out for years how bad Tesla is at building cars — and Tesla is still the only successful new US carmaker to emerge in decades. Musk has no shortage of critics, but with Tesla, he's defied odds so massive that they've turned away most aspirants to auto glory since the 1920s.

That said, if Tesla did hire Magna and begin to transition Model 3 to European production, it would be far better positioned to aggressively attack the crossover market before a sales downturn hits the US, probably in late 2020 or early 2021.

It's worth noting that as Tesla starts production on the Model Y, it should also be firing up manufacturing of its Semi and perhaps its new Roadster. I don't think the company has the bandwidth to deal with that many platforms coming through its systems — and I haven't even mentioned Tesla's Shanghai factory, which should be operational by 2021.

The upshot here is obvious: Tesla could use some help. Model Y could be the most important vehicle in its lineup and it deserves 110% of the company's attention. There's no shame in asking for an assist.

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