By David Herron · November 06, 2013

Tesla Motors released its third quarter financial results yesterday, indicating that the company is on track to sell 21,500 units for 2013, falling short of a previous target of 25,000 cars. The company showed a slight loss on its books (based on a GAAP basis), with an expected decline in income from Zero Emission Vehicle (ZEV) credits. The primary message of the analyst conference call was to communicate strong demand for the Model S—and to assign any concerns regarding production to capacity to limited supply of battery cells.

Tesla could be producing more Model S units now, if not for supply constraints on several parts, primarily battery cells. Tesla's management is working on improving the Model S production rate, reducing the cost to manufacture Model Ss, while keeping quality high. But during the conference call, Tesla CEO Elon Musk spoke repeatedly about battery cell supply constraints, explaining that it doesn't make sense to increase sales if the company can't ramp up production to match.

Tesla sold about 5,500 Model S electric cars in the last three months—or roughly 1,800 a month.

Tesla Motors uses automotive-grade cylindrical cells in the 18650 format—18 mm diameter and 65 mm long. Musk said every time the company studies which cell format to use, it always find that 18650 cells provide the best cost-per-kilowatt-hour ratio.

Panasonic is the company's primary cell provider. Last week, Tesla and Panasonic signed an agreement in which Panasonic will supply 2 billion cells over the next four years. But based on Tesla's projected ramp-up of electric car production over the next few years, 2 billion cells isn't enough. In the next year, the company wants to increase Model S production, while introducing the Model X SUV, and beginning to produce drivetrain and battery pack components for the Mercedes B-Class electric car. By 2017, Tesla wants to start high-volume production—200,000 cars per year or more—of its more affordable electric car.

Something Giant in the Works

What is Tesla doing to remedy the battery supply situation? Musk explained that Tesla's management is “not quite ready to make a big announcement on the cell and battery Giga-factory, but we are exploring a number of different options right now.” He described a broad outline for a major factory, to be built with partners, to make both battery cells and battery packs under one roof. The vision is to use solar power, produce no toxic emissions, and have recycling capability at the factory so that old battery packs will be reprocessed and used to build new packs. Musk described the scale of this factory as “giant,” and that its capacity will be “comparable to all lithium-ion production in the world, in one factory.”

Tesla management believes there is still large untapped demand for the Model S in North America, and they saw an increase in new Model S reservations in the third quarter of 2013. The drop-off of deliveries of Model S units in North America in Q3, compared to Q2, did not reflect lower demand, according to the company. It was due to increased deliveries for European customers. Going forward, Tesla expects demand in both Europe and Asia to equal demand in North America. Meeting that demand will depend on solving the supply problems currently constraining production.