SAN FRANCISCO: Elon Musk was fed up. The seats on Tesla Inc’s new Model X SUV were a mess. An outside contractor was having trouble executing the complicated design, spurring frustration and finger-pointing between Tesla and its supplier.
How would Tesla ever pull off mass production of the upcoming Model 3, the car intended to catapult the niche automaker into the big leagues, if it could not deliver on something as fundamental as a seat? Musk made a decision: Tesla would build the seats itself.
Tesla’s demanding chief executive vowed years ago to shake up the automotive industry with his line of electric vehicles and a futuristic manufacturing facility in Fremont, Calif. But industry experts say Musk’s insistence on performing much of the work in-house is among the reasons Tesla is nowhere close to its stated goal of building 500,000 vehicles annually by next year, most of them Model 3s.
The automaker this month revealed it built just 260 of the vehicles between July and September, badly missing its target of 1,500 Model 3s in the third quarter. In a statement, Tesla blamed manufacturing “bottlenecks.” It declined to elaborate, but assured investors “there are no fundamental issues with the Model 3 production or supply chain.”
Tesla has demonstrated a commitment to vertical integration not seen in the auto industry for decades.
The company has so far sunk US$2 billion into a sprawling Nevada factory to manufacture its vehicles’ batteries. In-house programmers design the bulk of the complex software that runs the Model 3, which Musk has described as a “computer on wheels”. Tesla controls its own retail chain, selling its cars directly to customers and bypassing dealers.
But it is Tesla’s 2015 decision to build its own seats that has some industry veterans scratching their heads. Seat making is a low-margin, labor-intensive enterprise that big automakers generally farm out to specialists. Tesla is operating its own seat assembly line inside its factory, and it is hiring engineers and technicians to figure out a way to fully automate the process.
“Is that really the core competency of an auto company? It is not,” said analyst Maryann Keller, who has been tracking the car industry since the early 1970s. “Why would you want to do that?”
Tesla declined requests to discuss its seat assembly efforts. The company is expected to reveal more about its production issues on Nov 1, when it announces third-quarter results. There is no indication that the “bottlenecks” mentioned previously by the company are associated with seat production.
Analyst Keller and others suspect Tesla eventually will be forced to farm out seat assembly to suppliers as the company transitions from a niche producer of pricey, hand-built luxury cars to a mass manufacturer. Seat makers including Germany’s ZF Friedrichshafen AG, France’s Faurecia SA and Detroit-based Lear Corp already are trying to win that business.
A lot is riding on Tesla’s ability to scale up operations quickly. Starting at US$35,000, the Model 3 is Tesla’s attempt to bring its electric technology to a wider audience. More than a half-million customers have already put down deposits.
Tesla has never turned an annual profit and it is burning through cash. Yet investors are betting big on its future. It is now the second most valuable US. automaker, behind only General Motors Co.
