Tesla is rejiggering its car factory in Fremont, California, to make way for production of the Model Y crossover SUV, as well as a refresh of the Model S with a more minimalist interior design and longer-range battery, according to several current and former employees.
These initiatives could raise costs again for Tesla, just as CEO Elon Musk has vowed to review every 10th page of outgoing expenses, personally. But starting up production of the Model Y in 2019 allows Tesla to tap into the growing SUV segment sooner rather than later, while a Model S refresh would help it maintain or grow its share within the declining market for luxury sedans.
The company has barely begun to place orders for new equipment to manufacture the Model Y, employees said. And while Musk has suggested that Tesla would probably make the crossover SUV in Fremont, Tesla hasn't officially announced that preparations in the factory had begun.
Making way for Model Y production in Fremont will require Tesla to combine Model S and Model X production into one line, according to the insiders. These lines at the car plant take up a significant amount of floor space today, at least partly because the S and X are each made with a lot of parts. The Model X is particularly complicated to build — its features include falcon wing doors that open up, rather than out — leading Musk to liken it to a "Faberge egg."
In addition to the Model Y, Tesla is planning on a full refresh of the Model S, which employees say will likely include an interior with the minimalist look and feel of the newer Model 3, the same drive units and seats used in the higher-end Model 3, and a battery that delivers 400 miles of range on a full charge.
The company is aiming for a September start of production for that Model S refresh.
Tesla did not respond to multiple requests for comment.
Tesla has recently been canceling factory tours because of "upgrades" being made to the factory, according to Musk, who didn't say exactly what those upgrades entailed.
Meanwhile, production has already slowed on the current S and X models. In the first quarter of 2019, Tesla laid off a portion of its Model S and X production staff and cut hours for those who remained, as CNBC previously reported. Today, Tesla only manufactures the S and X on day shifts during the week in Fremont. There is no weekend or nighttime production of those cars today, according to the current and former employees.
Last week, Tesla cut prices on its Model S by $3,000 and Model X by $2,000, and rolled out a free supercharging incentive to entice customers, causing some analysts to question whether demand is softening for these older, higher-priced models. This follows a set of upgrades in April that improved the driving range and charging speed for both cars.
On investor calls recently, Tesla reiterated guidance that it would deliver 90,000 to 100,000 cars in the second quarter of 2019, and at least 360,000 in 2019. It has not said how many of these would be Model S, X and Model 3 vehicles or, eventually, Model Ys.
Tesla shares fell more than 10% last week on investors' concerns over demand, profitability and the impact of U.S.-China trade clashes on the company. They recovered slightly after an email leaked in which Musk promised that Tesla was on target to meet its second-quarter goals.