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Tesla Model 3 production was slow because a supplier 'really dropped the ball' said Elon Musk

  • Model 3 was delayed because Tesla had to redesign a key piece of supplier software.
  • Tesla will be able to claw back some money from supplier, but not enough to make up for lost revenue.

Tesla CEO Elon Musk said production of the electric car maker's Model 3 sedan was held back in large part by a supplier who "really dropped the ball" at the Gigafactory.

Musk spoke in depth about the problem with analysts on Wednesday after Tesla posted third-quarter losses that widely missed analyst expectations.

"The primary production constraint by far is in battery module assembly," said Musk, who said he has been working out of the Gigafactory in order to be closest to the largest problems in Tesla's production line.

There are four "zones" in battery module production for the Model 3, and there was a particularly severe problem in one of them, Musk said.

"This is where a systems integration subcontractor really dropped the ball, and we did not realize the ball was dropped until recently, and we had to rewrite the software from scratch," Musk said.

The silver lining is that Tesla understands the process better now, Musk said. Going forward Tesla is "very confident" battery module manufacture will be more efficient in the future, Musk said.

Musk said Tesla will be able to claw back some of the money it paid the subcontractor, but not enough to make up for losses resulting from the problem.

Tesla's ability to ramp up production of the Model 3, is of particular concern to investors. Tesla produced only 222 Model 3 cars during the quarter, the company said in a letter to shareholders. The company had expected to produce about 1,500 during the period.

The company also said it plans to meet a key production benchmark of a weekly run-rate of 5,000 Model 3 vehicles by the end of the first quarter instead of the end of this year, as originally projected.

"[W]e see greater pressure on TSLA to meet its one-quarter delayed weekly run-rate of 5,000 Model 3 vehicles produced per week by the end of Q1," said CFRA analyst Efraim Levy in an email to CNBC.

Some analysts say the delayed target intensifies concerns around future Model 3 targets, and other dangers to Tesla's future.

"Not only does the [Model 3] miss undermine the credibility of future Model 3 targets, but it increases the near term risks," analyst Colin Langan wrote in a research note on Monday. "We believe the market should not ignore fundamental challenges that persist with regards to Tesla's Model 3 profitability, stationary storage & solar businesses, and eventual need to raise cash."