Survival of the biggest

1 February 2022

Thinking small is the path to obscurity. Tesla doesn’t think small

Tesla has long been criticised for its failure to generate profits from car sales. However, such criticisms are short-sighted and fail to consider factors relevant to automotive manufacturing in general, and Tesla in particular. Suggestions the company will expire and allow us to go back to normal with the big names at the top are spurious. Normal is changing. The reality of decreasing main brand sales (in the US) and plant closures has foisted acknowledgment of that fact upon us. However, few use that knowledge to plot a path to a prosperous future. Tesla is one of the few.

One of the most effective ways Telsa could have assured its demise in the longer term would have been to focus on short-term profits. Doing so would certainly have induced purring among conventional analysts with traditional views on how things should be done. Such prognosticators would have been able to call the race by analysing things with which they are familiar. Tesla has confounded them. The impression seems to be that the company’s unwillingness to go broke on schedule is positively ill-mannered, not to mention inconvenient and embarrassing.

Critics of Tesla’s success so far suggest it has been easy for the company because it’s had no competition. No one much has been building electric vehicles (EVs).

Well, apart from the fact designing, building and mass manufacturing any car is the furthest thing from easy, they are correct. They are also correct when they say competition is coming for Tesla. GM, Ford, Chrysler (Stellantis) and others are all gearing up to build EVs. However, they’re not really the problem for Tesla. The most serious competition for Tesla, and for GM, Ford and Chrysler are Chinese brands like Great Wall, Kandi, SAIC, Wuling, Haval and other companies like TATA from India. These companies produce some strange little EVs but they are very cheap. Also, these companies make some models that perform well and are good-looking. Increasingly, they’re styled by Europeans. But what about quality?

Chinese manufacturers have been making all sorts of cars and components for conventional car companies around the world. They’ve also been acquiring traditional brands like MG, Lotus and Volvo. They know how to make good cars and they certainly know how to manufacture them at scale. Chinese, indeed Asian, EVs have been improving and will continue to do so. There’s also Hyundai and Kia from Korea. These are efficient and feature styling the West already finds acceptable. Indonesia also produces cars for its own market and for other major manufacturers like Toyota, Honda, BMW, VW and others. The only hope of competing with this slew of Chinese/Asian EVs is mass manufacturing. Where does Tesla sit in all this? 

Tesla understands it has to make a lot of cars to have any hope of competing with this onslaught. First, there was the 2016 Nevada Gigafactory, the New York Gigafactory in 2017, Giga Shanghai in 2019, and Giga Berlin and Giga Texas both set to start delivering cars this year. These are just the Gigafactories. There are another nine factories within the group. Most are considerably smaller than the Gigafactories except the original Fremont Factory in California, which is bigger than any other. This is an ex-General Motors/Toyota plant. It should be noted Giga New York doesn’t build cars. The focus there is solar panels but it also has to be considered part of the automotive group because it makes superchargers, which are vital for supporting the Tesla fleet. That the company produces the cars it does is impressive enough but it also had the foresight to realise none of it would work without charging infrastructure. 

Tesla isn’t finished building manufacturing capacity and doubtless there will be more Gigafactories. Everyone seems to want one. The UK has expressed interest in having one, as have a number of Asian countries. The latter region is probably the most likely recipient. Candidates include Japan, South Korea and India. In fact, it’s known Tesla is focusing on the Indian market. We also wouldn’t be surprised to see one in Indonesia. Indeed, we think eventually we’ll see Gigafactories in all these locations. The fact Tesla’s profits haven’t been what many analysts say they should have been is short-sighted. In any case, Tesla has been turning a profit in recent quarters.

Now, for most of the company’s existence it has shown an operating loss. However, for 10 quarters overall, and consecutively for the last seven, it’s logged a profit. By Elon Musk’s own admission these profits have been slim. Critics of the company point out sales of emissions credits have significantly contributed to these profits. They’re correct, although company CFO, Zachary Kirkhorn says sales of emissions credits do not figure significantly in future business plans. Looking at the company’s operations shows this to be true. This year, revenue from emissions credits has dropped each quarter, although it’s still US$279 million in Q3. Subtracting emissions credits still leaves a profit, albeit a slenderer one.

Regulatory credits are designed to compel auto manufacturers to produce zero-emissions vehicles. There are a number of schemes operating around the world, although the detailed differences between them isn’t our subject here. As a simple summary, governments mandate that a certain percentage of a manufacturer’s fleet has to have zero emissions. If a manufacturer doesn’t meet its targets it faces significant fines. Because all of Tesla’s vehicles are zero-emissions types it always has excess credits. It sells these to other manufacturers. It must irk them to have to contribute to Tesla’s growth.

Tesla has also received criticism for failing to meet production targets. Ironically, that’s the cost of expanding infrastructure to assure future production levels will meet demand. However, production has risen year on year and when the new production facilities come on stream they will contribute significant additional capacity. Tesla doesn’t suffer from lack of demand. Pre-orders for its yet-to-be-released Cybertruck stand at about 1.5 million. The Ford F150 has been the best-selling vehicle in America. An electric version is coming yet pre-orders for that are only about 150,000 at this point. Customers will wait for a Tesla.

Tesla has no difficulties selling all the cars it produces. Recently, Hertz placed an order for 100,000 cars and expected, as you would, a discount. Most companies would salivate over such an order. Tesla did not and said they would be willing to fill the order but Hertz would have to pay full price. There’s no contract as we write and Tesla is unlikely to do anything to discourage its very patient customer base.

It has to be said Tesla has suffered from quality issues in the past. Musk acknowledges this in an interview with Sandy Munro. Munro is an automotive expert who worked on tooling for GM in the 1970s and went to Ford in 1978, where he achieved significant manufacturing reform for Windsor production. Ten years later, he started his own consultancy. His team disassembles vehicles right down to their basic components and advises companies on how to improve their manufacturing processes. He really knows what he’s talking about and Musk respects him. An interview link is provided at the end of this article.

In the interview Musk said achieving high build quality at any static production level is easiest, but when ramping up production things become much more difficult. He gave the example of paint. When Tesla increased the production line speed for the Model 3, it effectively shortened the time available for the paint to dry. Only by a minute or two but that was enough to create problems with quality.

Tesla’s production methods are not fixed. The company is innovative and open to new ideas and methods. Probably the best example is the Gigapress. Musk said a couple of the biggest production difficulties are joining dissimilar metals and seam sealing. As with virtually all cars, various areas of earlier models were made from multiple pieces joined by spot welding, rivets, adhesives, or a combination of both.

The decision was taken to manufacture both the front and rear lower sections of the Model Y as single piece pressure castings out of a Gigapress. This eliminated the need for joining individual pressings and sealing them. It also allowed a reduction in the number of robots needed for building the body. Musk said there were originally a thousand robots in this section of the factory but moving to single piece castings for just the rear section of the Model Y reduced the number of robots needed by about 300. The total reduction of robots in this area is going to be about 600.

He explained the structure of a car is indicative of organisational structure. The reason earlier models used such a diverse range of assembly techniques was due, in part, to the company’s material science department, which Musk describes as the best in the world. The most suitable materials were chosen for every component. This resulted in a wide range of materials, each with different requirements. Although the individual components were excellent, these materials didn’t create the best results overall. Musk shouldn’t be misinterpreted on this. The cars were still extremely good, just not as good as they could be. 

The company had to develop its own alloy for use in the Gigapress. This was necessary because aluminium castings often need to be heat treated to achieve the qualities required in service. Such heat treatment often causes considerable distortion and would have done in the front and rear castings for the Model Y. The alloy developed doesn’t need heat treating. This is also beneficial in reducing manufacturing processes. 

Musk is probably one of the most unusual car company CEOs. He understands the intricacies of the various Tesla models and the manufacturing processes that produce them in ready terms. Munro asked him how many lines of code were in the Autopilot software; a seemingly valid question. However, Musk answered that lines of code was not the best metric to define program capability, and that he sees fewer lines of code in software as a better thing. “Generally, I’ll give two points for deleting a line of code and [just] one point for adding a line of code,” he said. In the case of Autopilot and neural nets, he pointed out there’s also a lot of matrix maths involved. Then, to phrase an answer in the terms of the question he said, although they hadn’t counted, there were probably a few hundred thousand lines of code and that he’d prefer it if there were fewer. Compare that with interviews of other CEOs like Mary Barra from GM. 

Musk doesn’t have an MBA and feels people who do don’t tend to know how things work. He feels it’s much better for leaders to have worked their way up doing physically useful things on the way. Tesla also tries to imbue its workplace with ideals different to conventional companies. Here’s an extract from the brief four-page company manual, or as it’s called, the Anti-handbook Handbook: If you’re looking for a traditional employee handbook filled with policies and rules, you won’t find one. Policies and rules tell you where the bottom is – they tell you how poorly you can perform before you get shown the door… We want to surround ourselves with people driven to do the right things and act with integrity even when no one is looking.

Laudable aims but we have to mention the weak link in the chain is always going to be people. The company has just lost a lawsuit brought by a former employee for continued sexual harassment and the failure of HR to act on the matter. That cost the company close to US$150 million. There’s also a racial discrimination case pending. All this is bad, but Tesla isn’t the only car company facing these problems. The big three have also had, and continue to have, these difficulties. People, who needs them? Well, car companies do. And it’s difficult, if not impossible, to find a veritable army of perfect individuals.

Tesla is a non-union company. Musk has said workers can join a union if they want but not many have. This upsets the UAW union (United Auto Workers) and US government. Recently, Biden called a meeting with all US EV manufacturers to discuss the future of electric car manufacturing in the US. GM, Ford, and others were invited. Tesla was not, which is a staggering omission. It seems pretty clear Tesla was excluded because of its non-union status and Biden courts the favor of the UAW.

While other US auto manufacturers have lagged on electric vehicles, Tesla has been leading (in the US) for years. Belatedly, they have developed strategies to reclaim a place in the American EV market while Tesla has, for years, developed and executed plans to maintain the number one position, not just against the efforts of local manufacturers but against imports. The company also seems to be well along with plans to secure a place in the wider world.

Words: Paul Tuzson.
Images: Tesla Inc. 

As featured in Australasian Automotive February 2022.