- REUTERS/Bobby Yip
Failure is considered a badge of honor in Silicon Valley. If you aren’t failing, you aren’t trying. And if you aren’t failing big time, you aren’t aiming high enough.
But even by the standards of Silicon Valley, what Tesla CEO Elon Musk is approaching would be failure on a whole new scale.
Tesla reported first-quarter earnings last week, and while they were better than Wall Street expected, the earthshaking news that emerged was that Musk is taking the carmaker in a new strategic direction.
Tesla, which delivered about 50,000 vehicles last year, is aiming to deliver 500,000 in 2018. The production target isn’t new, but the timeline is. Tesla had previously said it would build half a million cars a year by 2020.
Prompting this change was the 400,000 pre-orders that Tesla has taken for the Model 3 mass-market vehicle, set to be priced at $35,000 and due to arrive in 2017. At $1,000 a pop, these pre-orders represent a nice no-interest loan for Tesla, but also a daunting challenge for a company that barely managed to deliver 50,000 vehicles in 2015.
No one thinks Tesla can pull this off. It would be the fastest ramp-up in production in a century, since Henry Ford used mass production to roll a huge number of Model Ts off his assembly lines.
Only hard for Tesla
Bear in mind that going from a 50,000 production pace to 500,000 wouldn’t be that difficult for an established automaker – a Ford or Toyota or GM or Honda, with numerous factories spread around the globe and decades of manufacturing experience. A traditional player could be hitting Tesla’s marks in six months, if necessary.
But for much of its history, Tesla was building one car, the Model S sedan, in one factory located in Northern California. (It now has some additional manufacturing capacity in Europe.) Last year, it graduated to building two cars. And that second car, the Model X SUV, has been beset with quality-control problems and has already endured a voluntary recall.
- Benjamin Zhang/Business Insider
Tesla is an impressive company and Musk is a visionary, but the automaker’s inability to get better at building its cars is alarming. Musk knows this and repeatedly stressed to analysts last week that, as awesome as Tesla is at design and technology, it must become a premier manufacturer of “large, complex objects.”
But Musk is also showing a touch of arrogance by continuing to push Tesla toward a vertically integrated production Model, avoiding the “lean” or “just in time” processes that the rest of the auto industry adopted in the 1980s and ’90s – and which Tesla’s factory, formerly a joint venture between Toyota and GM, was created to explore. This gives Tesla more control. But it also exposes the company to the critical issue that continues to bedevil it: complexity.
Cars are hard, right?
Musk has also begun to fall into a rather didactic pattern of reminding analysts how difficult it is to put cars together.
“[T]here are 6,000, 7,000 unique components in the Model 3,” he said, by way of explaining why supplier issues can prevent a car from being built on time. But of course everyone who follows the auto industry knows that cars have a lot of parts – and that established automakers can handle that complexity.
And Musk’s fixation on this point undermines one of the factors that’s supposed to make Tesla different: Electric cars are supposed to be much more simple and easy to assemble than their gas-burning counterparts.
- Benjamin Zhang/Business Insider
Musk isn’t afraid of failing. He could have played it safe when he and his partners sold PayPal to eBay, but instead he took his many millions and sunk them into Tesla and SpaceX, simultaneously risking everything on cars – a business that seems designed to obliterate capital – and rocket science.
He’s also gambled and won again and again with Tesla: When it was on death’s door in late 2008, just weeks from bankruptcy; when he sold stakes in the company to Daimler and Toyota, who would be eventual competitors; when he gave away Tesla’s patents to spur moribund electric-car development; and when he committed to building a massive battery factory in Nevada.
But Musk is also used to his flirtations with failure not being fatal.
A tall, tall order
Prior to last week, if you’d asked me if Tesla could hit 500,000 by 2020, I would have said that the goal was ambitious given Tesla track record, but not impossible. After all, GM can build that many cars in a few months without breaking a sweat.
Accelerate the schedule by two years, however, and I have to predict that Tesla is going to run itself until it potentially breaks to make it happen. Even if we do give Tesla the generous benefit of the doubt that it can improve its manufacturing pace, there’s still the question of whether the Model 3 can be assembly-line ready by 2018. So far, we’ve seen a very preproduction version, at its unveiling in California earlier this year. A prime-time car is a long ways off.
The skeptic in me does need to be reminded that I’ve underestimated Tesla before and been proven wrong. And we are talking about manufacturing here, not, say, landing a rocket on a floating platform in the Pacific Ocean. American companies have taken manufacturing from zero to 100 mph in very short time periods before – World War II leaps to mind. It can be done because it has been done.
But boy, has Musk ever set himself a humdinger of target with this one.
Then again, if you’re going to fail, epic failure is probably better than a slow fade. I just hope Tesla’s investors, who have rewarded the company with a $27 billion market cap based on expectations for a prosperous future, know what they’re signing up for.