by Jean-Louis Gassée

Photo: Scott Olson, Getty Images

No one would have given Elon Musk the money to start a “normal” car company. And yet, Musk went ahead, improvised, vaulted over one obstacle after another and created an iconic electric car company. In doing so, Musk incurred a deeply rooted Improvisation Debt, one he must now pay back in order to free himself from his heroic low-volume car-making past and become a truly industrial, million cars a year enterprise.

Critics love to point to Tesla’s misses. They’re right, Elon Musk’s company has a history of missed deadlines, quarterly deliveries below plan, higher than planned cash consumption and other sins, all summarized in an August 15th WSJ article:

“In the past five years, though, Tesla has fallen short of more than 20 projections made by Mr. Musk, ranging from car-production output to financial targets, according to an analysis by The Wall Street Journal. The company missed 10 of his stated goals by an average of nearly a year.”

Undoubtedly accurate but missing a larger point: In spite of its minuscule size (50K cars in 2015, perhaps 80K this year, vs 62M cars sold worldwide) and its many stumbles, Tesla has achieved a unique status, one for which the oft-abused iconic adjective is fully justified.

What Elon Musk has accomplished with Tesla goes beyond good and bad company numbers. Electric cars used to be associated with moderation bordering on self-denial. With the Model S, Musk has given us an electric car that looks like the luxury car that it is… and is a blast to drive (I know, my spouse lets me drive hers). As an impolitic Valley wag once said: Before Tesla, e-cars were for vegetarians; Musk made an electrifying chariot for carnivores.

I have no data on eating habits in my Palo Alto neighborhood, but this small university town has become Tesla City. No block without a Tesla in a driveway, sometimes two. Ten Teslas or more in the garage at work (plus one or two BMW i3s, and the odd Chevy Volt, Nissan Leaf or electric Kia). Granted, Palo Alto holds money and green politics in unusually high concentrations, but it wasn’t that long ago that it was Prius City, an early adopter of what became the successful hybrid genre.

Looking at Tesla’s trajectory, I’m reminded of the original 1984 128K Mac. It was a tour-de-force, complete with a LaserWriter driver and an AppleTalk networking stack, but its improvised software foundation lacked a fully functional OS. The Mac languished and almost died until Steve Jobs’ return for Apple 2.0, with a full team of computer scientists who finished the job. They made good on the Improvisation Debt by sliding a Unix foundation under the edifice and gave us the modern Mac.

Is this what we see, today, with Tesla?

Elon Musk didn’t start Tesla. Martin Eberhard and Mark Tarpenning did, in 2003. But it’s Musk who swooped in, changed management, and saved the company by investing $70M of his own money and leading rounds of financing. By January 2009, Tesla had narrowly avoided bankruptcy, raised $187M, and delivered a grand total of…147 cars.

A few months later, Tesla announced the Model S and took the company public, raising $226M in its IPO. Of course, the Model S was late, by a lot: First deliveries didn’t start until June 2012. Another model, the X, a quasi-SUV derivative of the S was announced in February 2012 and delivered more than three years later, in September 2015. Plagued by bugs, mostly because of it unusual “falcon doors”, the Mode X led Musk to confess his hubris — in those very words — an honest admission well received by his many fans.

And the Tesla fans spoke loudly, putting down 375K pre-orders for the upcoming Model 3, a $35K (or a little more) sedan with a 200 mile range, to be delivered “mid to late” 2017 (or a little later).

With this in mind, we can now turn to skeptics who doubt Elon Musk’s ability to join the league of “real” automakers, to fulfill the 375K Model 3 pre-orders, to make 1M or more cars per year in the 2018–2019 time frame. With Musk’s preternatural skill to overcome mistakes, delays, and cash incineration, is there any doubt that Tesla will find the resources, people, time, and money required for Tesla 2.0?

The answer can be found in two places.

One is Tesla’s filings with the Securities and Exchange Commission (SEC). In its latest 10-Q (as in Quarterly) dated August 5th, 20016, the company cautions shareholders [as always, edits and emphasis mine]:

“We have no experience to date in manufacturing vehicles at the high volumes that we anticipate for Model 3, […]

Additionally, plans for the design and build out of our production facilities for Model 3 are still in process, […]

Moreover, our Model 3 production plan will also require significant investments of cash and management resources.”

Later in the same 10-Q, we find a laundry list of risks involved in the design and manufacturing of the upcoming Model 3, including a reference to Tesla’s lithium ion battery plant, the Gigafactory:

“[…] that we will be able to build and bring online the Gigafactory in a timely manner to produce high volumes of quality lithium-ion cells and integrate such cells into finished battery packs for Model 3, all at costs that allow us to sell Model 3 at our target gross margins;”

The document paints a sobering picture of a company that has had trouble meeting its quarterly production volume plan, whose operations consume large amounts of cash, $99M, about $6.9K for each of the 14,404 vehicles delivered during the just elapsed quarter.

The 10-Q contains customary lawyerly language, a prophylactic against law suits filed by disappointed shareholders: “These are all the things that can go wrong, hereby dutifully described in unadorned terms. Don’t blame us for your investing decisions.” But even if we use more positive language and draw a picture of all the things that need to go right for Tesla to achieve its transmutation, it’s still a daunting task list.

The second place that breeds doubt is the factory floor. Here, we see signs of the company’s permanent improvisation: Musk got a low price for a “used” car manufacturing plant in Fremont, did the same for a huge stamping press on the other side of the country, took it apart, moved it faster than anyone thought possible, and ended up with an operation that, today, still struggles to achieve its 80K cars target for 2016.

Tesla’s factory is messy, it hiccups, modules are repaired on the line, stockpiles of parts lie around in “semi-organized” fashion. It goes against all the tenets of the lean manufacturing operation pioneered by Toyota, celebrated in The Machine That Changed The World, and universally adopted for its advantages in reliability, cost, and higher job satisfaction. This is not a manufacturing line that can, by the force of Musk’s will and charisma, produce 10X more cars two years from now.

This is true Improvisation Debt: Something rapidly improvised yields quick results, but the less-than-industrial-strength scaffolding, swiftly assembled, cannot stand a heavier load, or be merely reinforced. Think of a skeleton bone such as the femur. Its load bearing capacity is proportional to the square of its section. But the body’s load varies with the cube of its dimensions. Beyond a certain size, the skeleton fails.

Investors seem to think Musk will make good on Tesla’s Improvisation Debt. They can read company documents, compare factory floors, survey customers and competitors: Tesla market capitalization stands at $32B vs. $48B or $49B for Ford and GM.

Impressive as the collective wisdom of financial sages is, one still wonders about 2018 or 2019. Even if Musk finds the money and people to build a lean manufacturing process for the Model 3 and derivatives, BMW, Mercedes, Volkswagen, and many others are sure to have already deployed Model 3 competitors. GM will even start shipping a 200 mile-range e-car by the end of 2016.

This is the real threat. Elon Musk created a car company unlike any other. Will he next succeed in shedding his admirable acrobatic past and make Tesla a normal car maker?

— JLG@mondaynote.com