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Here Is Why Elon Musk Says Tesla’s Model 3 Will Be In ‘Production Hell’

The hundreds of thousands of Tesla customers that plunked down $1,000 deposits for a new Model 3 could put a crimp in the Silicon Valley automaker’s mission to ramp up production on the inexpensive vehicle.

The highly-touted electric vehicle maker promised nearly a year ago to sell an electric vehicle designed for the everyman, but the backup orders for the Model 3 could seriously complicate matters. Tesla’s problems are not lost on CEO Elon Musk, who told reporters Friday during the vehicle’s unveiling that Tesla will be in “production hell” for at least six months, “maybe longer.”

Tesla delivered the first 30 cars to owners, and claims that it will begin rolling out vehicles with 220 miles of range that start at $35,000, which may not be enough for many customers, especially those who prefer a car with a longer range. But the Model 3 version with a 310-mile range has a $44,000 starting price tag, undercutting Musk’s promise to deliver a cheap vehicle to the masses.

The company has more than 500,000 deposits of $1,000 each for the Model 3, according to Musk, who owns more than 20 percent of Tesla. The deposits that customers made last summer do not specify which version they prefer, meaning that Tesla could be forced to produce more of the 310-mile range version than the lower cost versions.

Another vexing problem for the automaker is the federal tax credits vehicle makers can use to offset the high price for expensive electric vehicles — Tesla is running out of time to capitalize on the tax credit.

Tesla is nearly 80,000 cars away from hitting the point at which government credits for electric vehicles begin falling away, so customers that are counting on a $7,500 rebate to lower the sticker price might be forced to fork over more money for the Model 3 than they initially thought.

Musk’s competitors can capitalize on the federal tax credits, while Tesla’s customers must contend with the base price, minus the rebate. Companies can take advantage of the significant government reduction for the first 200,000 vehicles sold.

Data shows that the elimination of the tax credit could be a death knell for Tesla, especially considering the company’s inability to mass produce vehicles at the scale of its larger competitors.

A July 10 data analysis from the Wall Street Journal has shown that there were no new Tesla Model S sedans and Model X SUVs registered in Hong Kong the month after that country revoked the tax credit.

There were 2,939 Tesla vehicles registered in March before the April 1 redaction of the credit, according to the WSJ, and nearly 3,700 entering the department’s books for the first quarter of 2017. The end of the tax break was announced in February.

Its competitors, meanwhile, have had ample time to ratchet up their campaign against the smaller, less expansive Tesla. The Chevy Bolt, for instance, has the capacity to run more than 238 miles before needing a charge.

The company’s poor sales report in the second quarter, mixed with the news that Volvo Car Group intends on producing only electric vehicles and hybrid vehicles starting in 2019, drove Tesla’s stock down 13 percent at the beginning of July. The drop put Tesla below GM once again.

Tesla raised its market capitalization to $51 billion in April, a number that is valued at about $1.7 billion more than GM. The two companies wrestled for supremacy throughout that month. Analysts were not buying the surge, and some said the Model 3 unveiling would be the moment where the rubber met the road.

“Tesla still faces a lot of challenges,” Michelle Krebs, a senior analyst at Autotrader, told reporters shortly after Tesla’s stock dump earlier this month. The company “needs to focus on quality over speed as they ramp up the Model 3. The Volvo announcement drove home the fact that Tesla is going to face more competition.”

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