If you follow the ongoing saga of electric carmaker Tesla, and who isn’t, you’ve got to admit that Elon Musk’s flagship operation is the most divisive manufacturing company in modern American history.
I’ve been around manufacturing, including the automotive segment, for over 30 years and I’ve never seen anything like it, at least not since the GM bailout. For those of that have been in a coma, or in solitary confinement for the past year, here’s the breakdown: Tesla has finally ramped up to full production of the company’s make-or-break product, the Model 3.
Right now, it has a starting MSRP of 44,000 dollars. Everyone on Tesla’s waiting list that is willing to pay this amount has received their car and today you can take delivery of a new Model 3 in as little as two weeks from placing your order. Many thousands of people remain on the reservation list, waiting for the promised $35,000 version. Current estimates place the earliest appearance of this version at mid summer this year, and in the meantime, Tesla will be shipping cars to Europe as fast as possible.
Sustainable demand at the current MSRP will not be enough to lift Tesla into profitability. And it’s far from a sure thing that Model 3 can be built profitably to sell at $35,000. Over the last 15 years, Tesla has rung up considerable debt to keep operations going and to fund new products, with some estimates placing this debt as high as 11 billion dollars. Rolling this debt over is becoming a concern for Tesla shareholders and each quarter, new EVs from established automakers are appearing on the market. This is bad, very bad and it may kill the company. But there is a solution:
Stop making cars.
That’s right, I suggest that to sustainable way forward for Tesla is to stop building vehicles. Here’s what I’d do:
- Redesign Models S and X to use a stretched Model 3 platform and the same driveline. Contract the assembly of these cars to a major Tier One auto supplier like Magna. Jaguar does this with their EV’s.
- Shut down the Fremont factory and move the tooling and equipment to the new Shanghai factory and build them there for both the Chinese and US markets. Sell that very valuable Bay Area real estate to help pay for it. Sell Tesla China and contractually lock in production supply as the sole marketing agent for Model 3 worldwide.
- Stop development of all future models and transition to become a Tier One supplier of EV battery packs and drivetrains for existing automakers. Build the units in the Nevada Gigafactory, or in Buffalo.
There are many, highly successful companies that build components and assemblies for major automakers. The names are well known: Bosch, Denso, Continental, Delphi, TRW and many more.
Any one of the top Tier One suppliers have the technical capability to become automakers themselves, but don’t. They’re specialists that know how to make money by selling automakers solutions that are cheaper and higher quality than the same parts could be made in house. It’s a proven, winning formula. The biggest, Denso Corporation, has annual revenues of over $40 billion dollars and employs over 150,000 people worldwide. Yet the name is relatively unknown to the public.
This is where Tesla has an opportunity. Tesla, and especially Elon Musk, are highly marketable brands with high perceived value. As Tier One suppliers to major automakers, those car companies could do for their electric cars what laptop computer makers do with their major processor supplier.
Intel Inside? How about Tesla Inside? This strategy leverages Musk’s cool factor and works for both Tesla and automakers who want to electrify their product lineup. Consumers would get Tesla cachet and technology, in a lower cost car with local sales and service support. And for smaller automakers, this would allow them to be instantly competitive with majors like VW and Toyota who have far greater R&D resources. Win, win, win.
Will it happen? I think 2019 will tell. If Tesla is still losing money at the end of the year, change is coming. But if Tesla waits too long, the supplier community will fill the EV component void and it gets much, much harder for Musk’s flagship operation. This is going to be as entertaining as the Indy 500. Get the popcorn.