The Model 3 is a make-or-break vehicle for Tesla. But when it comes to building the more affordable electric car, things hadn't been breaking Tesla’s way.
The prototype was a week late. While Elon Musk promised to deliver more than 1,500 units by the end of September 2017, the company had shipped just 260. Musk suspended production in February, then again in April, which led the charismatic CEO to tear down and re-imagine his high-tech robotic assembly line to “improve automation and address systemic bottlenecks to increase production rates,” according to an internal memo. Why? “Excessive automation at Tesla was a mistake,” he subsequently tweeted. “To be precise, my mistake. Humans are underrated.”
This weekend, though, the company had a big win. Early in June, Musk pledged to increase production of the EV to 5,000 sedans a week by the end of the month, up from less than 3,000 a month at last count. The company just as the calendar turned to July.
However, any celebration might be a little premature. Analysts are still questioning whether the Silicon Valley EV maker can sustain this level of production, since ramping up to 5,000 required Tesla to hire hundreds of new people, build an additional production facility in what is in a parking lot outside the factory, and push its experienced employees to work for weeks on end without a break. Now Musk promises to increase production to 6,000 vehicles per week by the end of July.
Is this just another case of over-promising? We turned to a former Tesla insider, a supply chain manager from the Model S launch, for his assessment. Though reticent to talk to us, our insider agreed to chat on the grounds of strict anonymity.
We shared those answers with three experts in the field to see if our insider was being a little too optimistic: Siram Narayana, a professor and faculty fellow of supply chain management at the Eli Broad College of Business, Michigan State University; Willy Shih, a professor of management practice in Harvard Business School’s technology and operations unit and co-author of the seminal work on U.S. manufacturing, “Restoring American Competitiveness,” for the Harvard Business Review; and David Closs, chairperson of supply chain management at the Eli Broad College of Business, Michigan State University. You might be surprised what our experts had to say.
Seniorhelpline: Can Tesla get past some of the issues holding the Model 3 back? Or are the traditional automakers right that Musk bit off more than he can chew?
Anonymous Insider: My assumption is yes, [it will get past the issues.] But that's just my opinion. And biting off more than he can chew is the norm, not the exception, for Musk. It is why he is revered.
Narayana: Yes, to both. There are many fundamental differences in the way Tesla has approached the supply chain and assembly as compared to other carmakers. Musk is breaking new ground. It probably wasn’t smooth sailing for Henry Ford either when he built the Model T.
Tesla was going to see glitches. I am guessing he expected them. I’m surprised that people are surprised there were glitches. I am impressed with by Tesla’s ramp-up rates, [even if he’s not hitting expectations]. Musk set very high goals. Unrealistic goals. When the company didn’t reach them, the market came down on him hard. Unfairly. I suspect its ramp-up rates are much higher than other automakers.
PM: So, are the stoppages and automation issues cause for concern?
Anonymous: No. It’s common to see production suspended when building a new model. It's a very crude analogy, but production is like water running through a pipe. Minor changes can be done while the water is still running, but serious changes required the water to be stopped. That being said, the size of the problem and effort in its correction are not as correlated as you would expect.
Shih: That’s a very cagey answer. Musk’s goal was to build a highly automated assembly line. Show other automakers how it’s done. But unlike most automakers—Ford, GM, BMW, Toyota, [to name a few]—that automate to lessen the burden on their workers, Musk wanted to replace [the workers]. Reduce labor costs and, thus, cost-per-vehicle.
That’s okay if you have a well-understood and mature [assembly] process first. If you automate before you have a process in place, especially with the level of industrial robots [Tesla] is using and how [it is] arranging them on the [factory] floor, and you have a problem, that problem will ripple through the entire production line, not just the problematic area. So, the stoppages were necessary. Concerning? Possibly.
Narayana: It makes sense. Shutting down production was the right thing to do. If he didn’t, the problems would have gotten more severe and caused even more quality issues down the line. Traditional wisdom says fix [the problems], don’t work with them.
PM: Addressing the problems is one thing, fi them is another. Can that happen before the company runs out of money?
Anonymous: Yes. But I don’t know enough about the specifics to comment on that in detail.
Shih: Can [Tesla] solve the process and automation problems? Of course. It will take time. A better question is can [the company] fix the problem and start to generate cash before it’s cash reserves give out?
Tesla is living off the deposits from people that want to buy the Model 3. But, it needs the money that comes from selling cars to survive. If your production system is crippled, it reduces the number of cars you can sell. Tesla probably can’t survive another capital raise. [Its stock price would likely tumble]. So, I am pessimistic but wouldn’t count Musk out just yet.
Narayana: As long as Tesla considers this a learning opportunity, it should be fine. It’s relatively early in the ramp-up process for the Model 3. I am guessing [the company] will be stable a year or two. Can it last that long? Hard to say.
PM: Did the Model S have similar problems and how did the team solve them?
Anonymous: Yes, but not on the same scale. [And it featured a less automated assembly line.] We did everything physically possible to reach production targets, and I do mean that literally.
Shih: Typical Silicon Valley mentality. Individual acts of heroism to make targets with no concern about cost. The problem is that Tesla is trying to build a mass market vehicle in which cost-per-vehicle is essential.
PM: Will that strategy work with the Model 3?
Anonymous: Most likely.
Closs: I’m pessimistic. You can afford to [throw money at a problem] when you have a low-volume operation and a product that has a high price tag. You can’t do this with one that is high-volume with a lower cost product, especially if you’re experiencing cash flow issues. [The numbers] don’t add up.
PM: So, what is the solution?
Anonymous: I don’t know.
Closs: Musk is out there. But, his methods have been very successful. You have to give him credit. But I don’t think he understands the complexity of an automotive supply chain. Neither does his staff. He needs more expertise. He would probably tell me, “We don’t want people with warped minds on this project.” [Warped by traditional automakers that take years to ramp up and deliver a new model.] I can understand that. Still, he needs experienced people to get over the difficulties of building such a complex supply chain. Look at what he has done with SpaceX; hire the most qualified people in the world. Why hasn’t he done the same with Tesla?