A Blog by Jonathan Low

 

Jan 29, 2019

Why Tesla Should Pull An Apple, Leaving 'Production Hell' To Others

If Tesla is to survive and prosper it may want to give up on manufacturing as a fascinating math problem to be solved and focus on what it does best - imagining and designing products that excite consumers, leaving the tough, dirty business of actually making them to enterprises who do it best. JL

John Stoll reports in the Wall Street Journal:

Apple has long contracted with Foxconn Technology Group to make its iPhones, protecting itself from the expensive, cyclical world of manufacturing. The iPhone isn’t soaring as high lately, but it has been a cash cow since 2007 and remains the envy of consumer product makers. Foxconn is a big reason why. Tesla churned out five cars built per person employed. Luxury auto makers churn out three to four times as many cars per employee. Tomorrow’s car will be valued for its software, artificial intelligence and ease of use. Every auto maker is asking ‘do we get to have a relationship with the end user or are we just going to be the next Foxconn.’
It’s been two years since Elon Musk changed the name of his company. Like Apple Inc.’s AAPL -0.93% decision a decade ago to hit delete on “Computer” (nodding to its focus on mobile devices), he dumped the “Motors” from Tesla Inc. TSLA -0.22% to send the message that his was more than just a car company.
The move has flopped. Yes, Tesla now offers batteries and solar panels for homes, but all investors care about are its sleek electric cars.
For proof, refer to the intense focus paid to Mr. Musk’s “production hell” of trying to ramp up assembly of the least expensive Tesla car yet, the Model 3. His repeated retellings of his factory-floor sleepovers and how he parachuted in to solve production problems made it hard for Tesla to calm worries about its ability to build enough cars at the right price.
Mr. Musk might want to turn to a different page in Apple’s playbook, the one that outlines that the real money isn’t in building beautiful, well-designed things, but finding another company to put together your must-have products.
Apple has long contracted with Foxconn Technology Group to make its iPhones, protecting itself from the expensive, cyclical world of manufacturing. The iPhone isn’t soaring as high lately, but it has been a cash cow since 2007 and remains the envy of consumer product makers around the world. Foxconn is a big reason why.
Last spring, I flew to Tesla’s California factory in Fremont and asked Mr. Musk whether a better solution to his production puzzle might be to hire out the job to an experienced auto-production shop. He scoffed: “If we don’t solve the production we’re going to die. I need to create a case example of what can be done.”
Once upon a time, Apple felt the same way. Co-founder Steve Jobs built a gleaming state-of-the-art computer factory, also in Fremont. Mr. Jobs was fascinated by the exploits of Henry Ford and Japan’s Sony Corp. , but his efforts to replicate them failed and the plant closed.
To Mr. Musk, car production is a math equation that should be solved. By adding automation and continually improving processes, efficiency will rise and costs will plummet, all while keeping Tesla’s fate in its own hands. That’s been costly, though, with Tesla reporting very little profit over the past 15 years and burning through a bundle of cash. Last week, the company said it will lay off about 7% of its workforce, sending its stock falling on fears the company has become bloated. The 16% decline in its share price since then pulled its market capitalization below General Motors Co.
Tesla started its life reliant on contract manufacturing, hiring the U.K.’s Lotus to build its Roadster more than a decade ago. As Mr. Musk took increasing control of the company, he acquired an abandoned car factory and set out to create a manufacturing scheme that rivaled the storied Toyota Production System. TPS has influenced everything from airplane manufacturing to health care.
Mr. Musk has recently knocked it as being insufficient. Auto makers struggle to increase production of new models in a timely manner, he has said, and run their assembly-line speeds at rates that are slower than “grandma with a walker.” And, yet, despite all the sleepovers and rescue missions, grandma is still outrunning Mr. Musk.
What does he do better than grandma? Dream up the kinds of products that keep gearheads awake at night. The Model 3 sedan, aimed at the mass market, has been a hit, nearly outselling the Ford Fusion and Chevrolet Malibu last year despite costing much more. As we wait on other products he’s promised—the Model Y SUV, an electric pickup truck, a battery-powered semi—it’s fair to wonder if his time in the factory is holding Tesla back.
Tesla churned out 260,000 cars last year with a workforce of 45,000 people, or equivalent to about five cars built per person employed. True, Tesla performs more production tasks in-house (such as manufacturing seats) and makes solar panels, but consider luxury auto makers churn out three to four times as many cars per employee. Tesla’s job cuts will help narrow the gap, but a chasm remains.
Automotive experts say there is no shame asking for help. BMW AG , Daimler AG’s Mercedes and even Toyota pay a separate company to assemble certain products to alleviate capacity constraints. Many of those experts say contract manufacturing will play a more prominent role as vehicles increasingly resemble smartphones on wheels.
Phil Martens, Ford Motor Co.’s former product chief and a retired CEO of a top automotive supplier, said tomorrow’s car will be valued mostly for its software, artificial intelligence and ease of use. He owns a Tesla himself and is more concerned about its software, design and operating system than who bolted it together.
He noted Waymo, the Alphabet Inc. unit developing an autonomous car, already taps various traditional auto companies, including Fiat Chrysler Automobiles NV. Waymo is expected to continue doing that so it can focus on improving the way drivers interact with technology.
“The traditional car companies could struggle with this transition,” Mr. Martens said.
Jaguar Land Rover PLC has a foot in both worlds, having agreed to produce SUVs for Waymo while also using Canadian company Magna International Inc. to build its futuristic electric i-Pace SUV. Turning to a third party helped the company cut thousands of jobs earlier this year and free up resources to develop more electric vehicles. The Waymo deal is a reminder, though, that car companies struggle to abandon their roots.
“Every auto maker right now is in the battle for their soul, asking ‘do we get to have a relationship with the end user or are we just going to be the next Foxconn,’” said Alisyn Malek, co-founder of the Ann Arbor, Mich.-based May Mobility Inc. autonomous-vehicle company. A former GM executive, Ms. Malek said her company is using contract manufacturers to produce a low-speed driverless car, allowing her young company to avoid tying up capital in a factory.
Sandy Munro, an expert on automotive design and production, warned that companies can go too far. He said that if a company like Tesla contracts out manufacturing, it will give away “tribal knowledge,” or all the stuff a firm learns about its products as it works to improve efficiency and quality.
Still, Apple’s success proves there’s a business case for Mr. Musk’s consideration.
“It’s funny, but I do open up my Apple iPhone, and it says designed in California and made in China,” Brad Ledwith, a Morgan Hill, Calif., financial planner told me this week. His main concern is that it do what it was designed to.
He feels the same way about his Tesla Model X SUV. Now on his second X, he said his first one felt like a “prototype” with clunky door closures and substandard seats. The second one has worked flawlessly, but he doesn’t really care who made it. “To me, I just want this thing to work.”

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