Just try to talk about the auto industry, green energy or the stock market without bringing up Tesla. Elon Musk’s auto venture has evolved into the most divisive debate I’ve ever seen in the consumer goods space. No one is lukewarm about Elon Musk or Tesla and there’s a reason why. No manufacturing company I’ve ever seen has done more to promote a new market space while revealing so little about company operations.
Here’s what we know: Tesla is currently building and shipping three EV models: Model S, Model X and Model 3. They’re all assembled in Fremont California and battery packs as well as some other assemblies are made in Tesla’s Gigafactory near Reno, Nevada. Another plant near Buffalo build solar energy products in an operation formerly owned by Solar City.
Here’s what we don’t know: How many cars Tesla builds each week. What it costs Tesla to build those cars. How many cars Tesla sells and how much profit or loss is earned on each sale. It’s a similar information black hole for the Buffalo solar energy/Powerwall operation. A major reason for his is Tesla’s use of accounting methods that are different from other automakers. The reason for that is twofold: Tesla has no dealers, so costs for sales and service must be handled differently, and put simply, unique accounting methods prevent investors from comparing Telsa financials to other companies.
Because of what we don’t know, enterprising media outlets like Bloomberg infer production numbers from DOT VIN number assignments and internal operations are reported by way of disgruntled employees, contractors and drone footage at Fremont. You can take a public tour of many auto assembly plants in the US, but not at Fremont.
Tesla plays their cards close to their vests, but there are some things we do know. One is that Tesla is ramping Model 3 assembly using temporary tent structures and hand assembly, not the advanced automation originally planned for the factory. We also know that Tesla has opened configuration invitations to reservation holders wide enough to drastically reduce the wait time for a new Model 3. They have also removed mention of a $35,000 MSRP for a base Model 3 and are having difficulty processing vehicles through the Tesla retail network. That’s no surprise given the lack of a railhead at the Fremont factory. The current estimated transaction price for a Model 3 is about $50,000, somewhat higher than the price that most Americans can afford.
And there’s the problem. At $50,000, the cars are simply too expensive. At that price, the only way to generate sufficient demand to achieve economies of scale would be to completely take over the mid priced luxury market, shutting out BMW, Lexus, Infiniti, Acura, Audi and Mercedes Benz altogether. That’s simply not going to happen, ever. As a result, losses per unit at Tesla are estimated at anywhere from 14 to 20-plus thousand dollars, an amount that is driving an unsustainable 700-million dollar a quarter loss these days.
Elon Musk needs money, lots of it and as a guy who multitasks better than anyone in history, he’s doing it by taking the company private. If successful, he will simultaneously keep Tesla alive long enough to have a chance to launch the next product, the crossover Model Y, and eliminate the disclosure requirements of a public company. That will achieve his goal of finally drawing the blackout curtain fully shut on Tesla operations. In the meantime, there’s an SEC investigation in the works and the blogosphere analyzes every Musk tweet like the Zapruder film while the financial press speculates openly about substance abuse. The irony is that, in my opinion, Elon Musk has committed only one real sin at Tesla: he’s disrespected the manufacturing problem.
Consider the Japanese. 50 years ago, Toyota, Nissan and Honda made lousy cars. I mean truly bad automobiles that were fragile, underpowered, cramped and would rust on the way home from the showroom. But their manufacturing processes were good enough to earn profits on those vehicles despite the rock bottom prices that the Japanese automakers had to accept when marketing bottom feeder products. Those profits were reinvested in better processes and better products, until today, the situation is inverted: Japanese makers can command a price premium and everyone else chases the low end of the market. The key was, and is, efficient manufacturing. Hand building cars in tents isn’t going to turn around the losses at Tesla. Vertical integration is a mistake, as is assembly in the cast-off factory in Fremont that Tesla bought at a fire sale price from Toyota. And rather than focus on correcting these structural errors, Tesla spend billions creating AI chips for their autonomous driving program.
It’s the Silicon Valley attitude in a nutshell: the future is software and nothing else matters. But Tesla is inching towards Chapter 11, and by the time you see this, Musk may have sold a big chunk of the company to Saudi investors. They’ll fail too, if they don’t pay attention to the mass production problem. Manufacturing is bound by the rules of physics and finance…and it’s humbled even great men like Edison and Ford. If Musk wants to make history like they did, he’ll need to make some drastic changes, and not through the ownership structure.