appointed himself CEO in October 2008 saying, “That’s part of the reason I decided to take over as CEO. I have so many chips on the table. I need to steer the boat completely.”108 Tesla’s nine-person board included several members with close ties to Musk’s various business interests: the CEO of Solar City (Musk’s cousin), the CFO of Solar City, and two directors of Musk’s rocket company SpaceX.109 The company had witnessed the departure of several key managers in 2018, including the VP of engineering and two high-ranking engineers who worked on the company’s automated production line. Tesla had roughly 34,000 employees worldwide, including 10,000 who worked in the company’s manufacturing plant in Fremont, California, and 1,000 at its battery and motor Gigafactory in Nevada. The company went public in June 2010 at a price of $17 per share, and by August 2018, the stock was trading at $335 share, putting its market capitalization higher than GM’s. (There had been no stock splits.) Tesla recorded its first profitable quarter ($11 million in net income) in March 2013 and booked profits a second time in October 2016, but posted losses for every other quarter. (See the Tesla financial tab in the Tesla case workbook.) Many investors were skeptical of Tesla’s long-term viability, and bet that its stock would drop in price.110
Tesla’s Master Plan
Tesla’s strategy was spelled out in the Master Plan that Musk posted on the company’s website in 2006, which included the following: “Almost any new technology initially has high unit cost before it can be optimized and this is no less true for electric cars…. The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.” Tesla entered the car market by focusing on a niche market – luxury electric vehicles that traditional automakers had ignored, and succeeded in winning market share from other luxury gas-fueled models. (See the Luxury car tab in the Tesla case workbook.) Each Tesla model, however, was late to market, experienced various technology glitches and quality issues, and missed sales projections.111 The two-seat Roadster was Tesla’s first car. As described by Car and Driver, the Roadster was “not just a car, but one of the strongest automotive statements on the road.”112 Retailing for $100,000 and able to hit 60 miles per hour in just four seconds, the electric sports car made its retail debut two years later than promised due to production delays. Tesla outsourced key components of the car to a couple of global suppliers, but struggled to manage the suppliers and integrate the components. By the time Tesla stopped making the Roadster in 2012, it had sold 2,500 units. For the Model S sedan, which launched in 2013, Tesla kept design and assembly in-house and produced a large number of components as well, rather than sourcing them from suppliers. By early 2018, nearly 225,000 Model S sedans had been sold. In 2017, the Model S sales nearly matched the combined sales
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of the BMW 6 and 7 series and the Mercedes-Benz CLS and S class. In 2013, the Model S won Motor Trend’s car of the year award, and two years later was declared “the best-performing car that Consumer Reports has ever tested.”113 Tesla also claimed that the lifetime costs of operating a Model S were lower than for a comparable vehicle. One analysis comparing the five year cost of owning a Model S to a BMW 6 Series found the Tesla required $3,000 in fuel versus $8,000 for the BMW, was more expensive to insure ($14,000 versus $10,000 for the BMW), and that maintenance cost approximately $3,000 for both cars.114 In 2015, the company introduced the $80,000 Model X, a midsize luxury crossover with falcon wing doors that opened upward. Nearly 81,000 Model X crossovers had been sold by early 2018. The Model 3 was Tesla’s first attempt at scaling to mass production. The lowest priced model, which had a range of 220 miles, cost $27,500 (after deducting a $7,500 federal tax credit); an upgraded model with a battery range of 310 miles started at $44,000. The Model 3’s competitors included the Nissan LEAF ($29,990, battery range of 151 miles) and the Chevy Bolt ($37,495, battery range of 238 miles).115 By summer 2017, Musk announced over 500,000 customers had put down $1,000 to reserve a Model 3.116 However, by mid-2018, nearly 25% of these deposits had reportedly been refunded.117 By the first week of September 2018, Tesla had manufactured almost 85,000 Model 3s, and was estimated to be producing over 4,800 per week.118
“Production Hell”
The Model 3 was designed to be easy to manufacture, with 8,000 parts, or 25% fewer components than its predecessors. While the typical automaker outsourced the majority of its components, Tesla, by some accounts, made up to 80% of the Model 3’s components in-house in a dedicated casting foundry in California, a tool and die plant in Michigan, the Gigafactory, and the second floor of the Fremont plant.119 According to Tesla’s former VP of production, the company made its own battery, power electronics, drive-train systems, cables, displays, and fuses, and was “more vertically integrated than any car company since the heyday of the Ford [River] Rouge plant in the late 1920s.”120 Tesla’s decision to vertically integrate was in part due to the hard lessons learned during the manufacturing process of previous models. Seat production, which had originally been outsourced for the Models S and X to an Australian seat manufacturer, was one example. Musk was dissatisfied with the seats’ quality and comfort. In addition, voluntary recalls involving the seat belts on the Model S and a faulty locking mechanism on the second-row seats on the Model X led the carmaker to move seat manufacturing in-house.121 Tesla’s move perplexed some analysts. “Is that really the core competency of an auto company?” one asked.122 Most OEMs outsourced seat manufacturing to specialists due to high labor and design costs.123 The Model 3’s battery and motor were manufactured at Tesla’s Gigafactory, which opened in 2016. The idea behind the factory came to CTO JB Straubel back in 2012 upon realizing that Tesla’s plan to sell 500,000 cars a year by 2020 would require the world’s entire 2012 output of lithium-ion batteries.124
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To scale, Tesla would need to produce its own batteries. Located in the Nevada desert, the $5 billion factory, which was built in partnership with Panasonic, was the largest manufacturing plant in the world with a footprint of 5.5 million square feet, equivalent to 35 Costco stores. The plant was manufacturing 3,000 battery packs a week. Each battery pack contained 2,170 cylindrical cells (each one slightly longer and thinner than a C battery) in a pack weighing 1,054 pounds.125 Musk noted that the company had reduced the time it took to make a battery pack from seven hours to less than 17 minutes.126 He also indicated in early June 2018 that the company expected to achieve a battery cell cost of $100 per kWh by the end of the year. GM was spending $145 per kWh for batteries purchased from LG Chem for the Bolt.127 The Model 3 was manufactured 240 miles to the west of the Gigafactory at Tesla’s 5.3 million square foot manufacturing plant in Fremont, California. The 50-year-old plant was previously run by GM and then by a joint venture between GM and Toyota. At its height, the plant produced up to 500,000 cars a year. Tesla bought the factory from Toyota in 2010 for $42 million and invested nearly $1.3 billion in expanding its footprint for the Model 3 production and in creating a highly automated production line. Musk envisioned an “alien dreadnought” factory that used artificial intelligence and robots to build cars faster than any human assembly line.128 Workers would be used to maintain and fix the robots and machines. Ninety-five percent of the Model 3’s production line was automated.129 Musk explained: “The true problem, the true difficulty, and where the greatest potential is, is building the machine that makes the machine. In other words, it’s building the factory. I’m really thinking of the factory like a product.”130 When introducing new car models, automakers spent up to six months testing the production line by building vehicles with lower-grade equipment and prototype tools designed to be scrapped once all the manufacturing kinks were worked out.131 For the Model 3, Tesla chose to skip “beta” production in an attempt to save time and money.132 When production began, the automated line was not complete. Some Model 3 parts were being assembled by hand, off of the automated assembly line, including the welding of huge pieces of steel.133 There were issues with the quality of components, and one Tesla engineer estimated that 40% of parts made or received at the Fremont plant required rework.134 The company was making tweaks to the production process even as cars were “rolling off the line.” Musk’s desire for full automation before perfecting the production process first was puzzling to some. One industry consultant noted, “The Japanese style of production is to try and limit automation initially as it is expensive and statistically inversely correlated to quality. The approach is to get the process right first, then bring in the robots.”135
Sales and Service
Tesla not only had to make the Model 3,
