The Nomura analyst Romit Shah, a Tesla bull, thinks Tesla's focus on quality control justifies its sluggish Model 3 production ramp.

But quality control should be a given for Tesla, not an excuse.

2018 will be the year when the Tesla bulls have their optimism tested.



Tesla missed badly on Model 3 delivery expectations for the fourth quarter of last year, selling only 1,550 vehicles.

When the carmaker announced its numbers on Wednesday, it added in a statement that as "we continue to focus on quality and efficiency rather than simply pushing for the highest possible volume in the shortest period of time, we expect to have a slightly more gradual ramp through Q1, likely ending the quarter at a weekly rate of about 2,500 Model 3 vehicles."

That prompted the Nomura analyst Romit Shah to offer some insight via a research note published Thursday.

"We believe that Tesla is prioritizing quality control," he wrote.

"While Tesla's repeated guidance revisions could begin to risk damaging its elite brand, a mass-recall would probably be far more damaging. We believe that Tesla is (correctly) taking advantage of its unique beta testing ecosystem. Issues caught by early customers can be rapidly addressed by Tesla's versatile assembly process."

Shah is bullish on Tesla, with a target price of $500 a share (in trading Thursday, the stock had slipped 3%, to $309). But more is at stake than brand damage here.

Quality control is a smoke screen

Tesla CEO Elon Musk. Mike Blake/Reuters

The Model 3 was supposed to be designed for mass production, and that process has been underway for half a year now (the vehicle launched back in July). Apart from the recognizable car parts of the car — the exterior features, the interior, wheels, brakes — the Model 3 isn't that different from the larger and much more expensive Model S, aside from the greater use of aluminum in the Model S construction.

Effectively, Model 3 production should be straightforward: Take car, add battery pack and drivetrain. In fact, when the Model 3 was launched, Tesla said it would initially build only the higher-spec, $44,000 model to reduce complications on the assembly line. That is why it made sense that the initial delays were due to battery bottlenecks at Tesla's Nevada factory: no batteries means no cars.

If you contrast Model 3's issues with the nonissues on Tesla's other vehicles — the Model S and the Model X, which together accounted for over 100,000 deliveries in 2017 — questions start to get thorny. It isn't easy to bring a new car to market, but this isn't some radical departure from either automotive norms or Tesla's own capabilities. It's a midsize sedan. Honda builds and sells well over 100,000 Accords every month.

The Model 3 launch. AP Photo/Justin Pritchard

The vehicle has over 400,000 preorders. If you signed up to get a car when it was revealed in 2016, you can now expect to wait until late 2018 or 2019 to get your ride. If you want a new Accord, you can head down to the dealership today and drive one home.

The point I'm making is that Wall Street keeps coming up with borderline nonsensical justifications for Tesla's increasingly glaring lack of a fundamental auto-industry skill: building cars at scale. Quality control obviously matters — nobody wants his or her car of the future to be a buggy mess, a "lemon" in old-world parlance — but quality control and mass production have been happy bedfellows for literally decades, since Toyota revolutionized auto manufacturing in the 1970s and '80s.

In other words, the days when quality control had to be ranked even someplace above first in an automaker's consideration are a relic of the 1950s, back when General Motors controlled half the US market and owners were accustomed to cars that routinely broke down.

Wall Street's Tesla bulls have been quite patient with Tesla's apparent enthusiasm for what CEO Elon Musk calls "production hell." It makes for an interesting story. But the idea that it should befall everything the 14-year-old company does is sort of crazy. So 2018 will be the year when investors are really put to the test, when it comes to what Tesla represents versus what it can actually come through on.