by Jean-Louis Gassée

Courtesy: TechCrunch

Once again, Tesla has missed a production forecast, this time for the highly expected Model 3. According to the Tesla optimists, it’s business as usual for Elon Musk…but Musk’s skin-of-your-teeth, renegade improvisation is about to meet a serious challenge from “Mary and Carlos”.

Less than three months ago, on August 2nd, 2017, Elon Musk exuded optimism about Tesla’s new mass-market, moderately priced Model 3 electric car:

“We are confident we can produce just over 1,500 vehicles in Q3, and achieve a run rate of 5,000 vehicles per week by the end of 2017.”

Musk foretold a rapid rise to “10,000 vehicles per week at some point in 2018”, a rate that would put Tesla within reach of 500,000 Model 3s for the year. With that goal achieved, a yearly volume of 1,000,000 vehicles would look eminently achievable, transforming Tesla from a quirky, small-scale outlier into a big-league automaker.

On October 2nd, the story changed. Far from the promised 1,500 cars, Musk let us know that Tesla had shipped only 220 Model 3s in Q3. In its SEC 8-K form (know as Current Report) Tesla management insisted everything was under control [as always, edits and emphasis mine]:

“It is important to emphasize that there are no fundamental issues with the Model 3 production or supply chain. We understand what needs to be fixed and we are confident of addressing the manufacturing bottleneck issues in the near-term.”

To many, Musk’s latest miss sounded like business as usual. As the Wall Street Journal noted last year:

“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.”

The Tesla optimists were undaunted. In the past year — since the time that the WSJ article was published — Tesla shares have gone up by more than 80%:

And so it goes with Tesla’s latest miss. Did the stock price fall after Musk’s October 2nd announcement? Quite the opposite: TSLA was already in the middle of a slide — it had lost 10% in the preceding two weeks. The announcement not only stopped the slide, the stock ticked up about 4%.

Tesla optimists appear to see the latest Model 3 news as the result of Musk’s sunny pronouncements and heroic manufacturing improvisation, a combination that has worked well for him so far.

But the optimists might be wrong this time.

My first serious doubts about Tesla didn’t stem from missed schedules, I’ve been guilty of too many of these, they’re part of tech life. What seriously worried me was a July 2016 visit to Tesla’s manufacturing plant in Fremont, California. In taking delivery of my wife’s Model S, we were treated to a group tour of the site. Everyone marveled at the robot porn, at the activity on the assembly line, at the endless stores of spare parts piled to the ceiling.

Everyone but yours truly.

I couldn’t help check off the sins against the “Toyota Bible”, prescriptions for car manufacturers that are lucidly detailed in The Machine That Changed The World (a great and, in parts, sad read). In particular, one mustn’t stockpile parts on the floor, they must be fed in small quantities at small time intervals. If a part has a problem, only a small quantity needs to be shipped back to the supplier who can inspect, correct, and quickly adjust their own production process.

(Ironically, the Fremont plant is prominently featured in “The Machine…” as the locus of the ultimately failed GM-Toyota cooperation.)

As I watched Tesla’s messy, hiccuping line, with workers dashing in to fix faulty parts in place, my mind travelled back to the Honda plant I had visited years ago in Marysville, Ohio. Clean, calm, everything moved smoothly. I was so shocked by the contrast that I imprudently voiced my concern. That didn’t go over well with my fellow Tesla owners. I was a killjoy, I was calling their choice into question.

I forgot about the episode until recently. In an exchange with a trusted industry observer, I found out that he had had exactly the same experience only weeks ago, but he couldn’t write about it by “virtue” of the NDA he’d signed.

The Wall Street Journal wasn’t so bound. In an October 6th article titled Behind Tesla’s Production Delays: Parts of Model 3 Were Being Made by Hand the WSJ sheds doubts on the maturity of Tesla’s production process:

“Unknown to analysts, investors and the hundreds of thousands of customers who signed up to buy it, as recently as early September major portions of the Model 3 were still being banged out by hand, away from the automated production line, according to people familiar with the matter.”

Here, I have to interject: How many people in the mediasphere and elsewhere had insider information prior to the October 2nd announcement? Could this explain the 10% drop in Tesla’s share price before shareholders were notified of the production shortfall?

The WSJ wasn’t alone.

The Electrek blog discusses replac[ing] Model 3 headlights, battery, seats and more while going through ‘production hell’.

Another industry blog, the felicitously named Daily Kanban, tells us, also after the Tesla official announcement, how Tesla’s “Pilot” Model 3 Body Line Still In Development Near Detroit.

We must now turn to Horace Dediu’s Asymco blog. I’ll extract two related observations from his recent post titled S3X Appeal.

First we have the relative stagnation of Model S and X production, a mere 4% year-to-year growth in the most recent quarter. Second, and more alarming, is the slow cadence of Tesla’s production machine, meaning the long pause between successive starts:

“[…] why, with so much pressure to produce cars to meet presumed unlimited demand, is output so limited? To see just how limited, consider the rate of output. For the past 15 months and near future, the output is equivalent to 264 cars per day. If the Fremont factory is running three shifts, 11 cars are produced every hour. This is equivalent to a cycle time or takt time of 5.5 minutes. This would be a tragic cycle time. Most car lines aim for run times between 1 and 2 minutes per station. For example BMW’s Spartanburg plant produces 1400 units per day which yields a cycle time of 1 min.”

Dediu’s cautious words throughout the piece can’t hide his conclusion: Tesla’s production process — the machine that makes the machines — isn’t there yet, and maturity isn’t around the corner.

Moving from fewer than 100K cars a year to 500K and up isn’t “more of the same”, it can’t be achieved through clever, conventional-wisdom-defying improvisation. That sort of growth is a bold jump in scale that requires a smooth, well-oiled and well-understood manufacturing process.

But perhaps Tesla’s greatest challenge isn’t within the company. It’s the “Mary and Carlos” threat. Mary Bara is GM’s CEO; Carlos Ghosn is the emperor of the Renault-Nissan-Mitsubishi-Avtovaz conglomerate that recently jumped to the #1 position in the auto industry. Both industry chieftains now wield credible competitors to Tesla’s Model 3: the Chevy Bolt and the newer Nissan Leaf. The Bolt is in production, I see it in parking lots around Palo Alto, and the newer Nissan Leaf, promised for early 2018, succeeds the unsung, world’s best-selling electric car, the “older” Leaf introduced in 2010.

The Bolt and the Leaf come from experienced manufacturers. Elon Musk ran the table with with his earlier Model S and X creations, reigning supreme at the high-end of EVs — and, in the US, beating Mercedes at the S game. But now he may be facing competent competition. Bolts and Leafs (Leaves?) might not be as sexy as Model 3s, but they're more real.

— JLG@mondaynote.com