Tesla Makes Its Way Through Production Hell

The art of the Model 3 deal

Todd LassaWriter

Elon Musk inadvertently sought to prove my sincere belief that he and President Trump share a singular type of personality, Wednesday, when Musk took questions from Wall Street analysts during Tesla's third quarter financial results conference call.

Musk revealed the extent of his distrust for journalists when he criticized recent stories that Tesla fired 700 employees as production of the intended-high volume Model 3 began. If there was anything to report, he said, it's that Tesla fired about 2 percent of its workforce of about 33,000.

"Any journalist writing these stories should be ashamed of himself," Musk said.

"Every company has performance reviews. Our standards are so high not because we like being mean to people; our standards are high because otherwise, we will die."

Before the Donald Trump supporters among you get up in arms over my comparison with Elon Musk, let me say that I see a similarity in their abilities to command a crowd, and to make deals. Musk has managed to leverage the future, or perhaps more accurately the promise of the future of his car company, into a steady flow of investment cash and a market cap higher than Ford Motor Company's, and at times even higher than General Motors'. The distaste these two leaders have for media is a more obvious similarity.

Per usual, Wednesday's Tesla Q3 Earnings call was open to Wall Street analysts' questions. We reporters, ashamed or not, had to listen in and gnash our teeth at softball questions. We wanted to know about the Daily Kanban's scoop about a Tesla Model 3 assembly line that was sitting in its manufacturer's Michigan factory.

Musk called the Tesla Model 3's launch "production hell." In past quarters, Musk projected that the new assembly line would be building Model 3s at the rate of 10,000 per week by the end of 2017. Tesla delivered 233 Model 3s in the third quarter just past (plus 14,065 Model Ses and 11,865 Model Xes). Tesla now expects to reach 5,000 Model 3s per week by the end of the first quarter of 2018, Musk said. Doubling that to the original goal of 10,000 per week is not quite such a big step, because the automaker can make the robots "go real, real fast."

Model 3 production is easier than Model S production, and "vastly" easier than Model X, he said, in part because it's modular, with battery cell production at the Gigafactory consisting of four zones.

"Zones Three and Four are in good shape. Zones One and Two are not. Zone Two in particular—the subcontractor really dropped the ball and we did not realize how much the ball was dropped until recently. We had to rewrite all that software—20 to 30 man-years of software—in four weeks."

"Is it worth your time trying to claw back some of these costs" from the subcontractor? Asked PiperJaffray's Alexander Potter.

No, Musk replied. In the end, it was his mistake for choosing the faulty subcontractor.

Morgan Stanley analyst Adam Jonas, ever the hard-hitting inquisitor, asked Musk for specifics about production hell: "How hot is it?"

"Let's say that Level Nine is the worst. We were at Level Nine," Musk replied.

"We're probably at Level Eight right now. I wish I could say 'Level Seven.' It's obvious what we need to do. It's just a matter of how to get to it."

It's all about robot calibration issues, Musk added. He repeatedly referred to the need for lightning-fast robots. If you can see them move without a strobe light, they're too slow.

Musk also addressed plans for Chinese production so that Tesla Models 3 and Y (the sport/utility based off the 3) could be sold in there without suffering 25-percent import duties.

"Don't set your watch by this," Musk said with a remarkable degree of self-realization, "but rough production starts in about three years."

At this point you have to be asking whether Tesla Models 3 and Y built in China for the world's largest market could also be cheaper coming out of China for other markets, and maybe cut a level or two off the Production Hell chart.

The Wall Street Journal reported last week that Tesla has struck a deal to build a wholly-owned factory in Shanghai's Free Trade Zone that would allow Tesla to maintain 100-percent ownership of the plant, which addresses the issue of how Musk could possibly give up 50-percent control of his Chinese operation to a local owner, as is custom among foreign automakers there.

Musk satisfied Wall Street analysts for yet another quarter, despite losing $619.4 million, a record for the company. Some analysts displayed a bit of soft skepticism though, and so Tesla common stock closed 6.8-percent lower Thursday, to $299.26, and piling on, the $7,500 federal tax credit for EVs could become a victim of the GOP tax reform plan, Bloomberg reported, quoting a House Republican. Whatever happens to the tax credit, promised production levels of 1,000 units per week remain a quarter or two away, but when the EV revolution takes hold, Tesla expects to become the GM of EVs.

If you're part of the crowd with a $1,000 (U.S.) deposit down on a Tesla Model 3, the only questions now are, how long will you have to wait? And, how long are you willing to wait?

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