Tesla: Building the Machine that Builds the Machine
Tesla's mission to accelerate the world's transition to sustainable energy will require them to be able to produce more vehicles at a faster rate and lower cost, and they believe factory automation is the solution.
Tesla is an innovative company that has combined technology with automotive production to build clean energy electric vehicles that are competitive to gasoline cars in quality, performance, and cost. As Tesla faces increased market demand for their cars, specifically with the latest release of the Model 3, their focus on production speed and yield has become the company’s priority. Despite reporting record net orders and deliveries of the Model S and Model X, Tesla’s stock dropped 5% after Q3 earnings due to greater than expected losses spent investing in the Model 3 production [1], and under-delivering only 266 of an expected 1,500 Model 3s. Elon Musk attributed the cause to cars having been built by hand, rather than automation [2]. For Tesla to achieve their production goals on both timing and output, they must thoroughly leverage technology to automate production and digitize their logistics network to accurately manage their supply chain.
Investments in Automation
Tesla has actively been investing and acquiring resources to improve the factory’s automation capabilities. Elon Musk frequently speaks about “building the machine that builds the machine,” where the factory first becomes a product in their overall process. In a manufacturing facility, this means investing in resources to increase the velocity of production and the density of manufacturable goods to increase output [3]. Musk sees at least an order of magnitude improvement in overall manufacturing efficiency by improving automation and increasing yield. Tesla acquired the German company Grohmann Automation in November 2016, which Elon Musk acknowledges as their first major investment towards automation and improved manufacturing capabilities [4]. This acquisition reflects Tesla’s goals to accelerate production and increase yield, with a long-term plan to drive down production costs through their investment [5].
Another example of Tesla doubling down on this space is their latest acquisition of PERBIX, a factory automation company. On Tesla’s website, they state “With the acquisition of PERBIX, Tesla further advances its efforts to turn the factory itself into a product.” [6] Prior to the acquisition, PERBIX was already a supplier that helped design and build automated manufacturing equipment for Tesla’s factory for almost three years [7]. As the supply chain becomes more automated and consistent, Tesla will be able to improve their production processes and output rate. Additionally, without the constraints of labor laws, Tesla will be able to run their factory for longer periods of time at a lower cost, further increasing productivity. These costs savings can then be passed on to the customer, which will make Tesla vehicles more affordable and attractive to a greater customer base. These benefits all align with “Tesla’s mission to accelerate the world’s transition to sustainable energy [8].”
How to Increase Predictability in Supply Chain
As automation within the factory increases, the supply chain must be monitored even closer through technology since the human awareness within the process has been reduced. As they continue to scale, Tesla will need to find trusted partners and develop deep supplier relationships while still maintaining the quality and focus that the company is known for. Data and predictability will be powerful tools to ensure that their supply chain is well-managed and coordinated. There are many innovative companies such as Samsara (www.samsara.com) and Shoof Technologies (www.shooftech.com) which have developed technology to digitize supply chains and track assets and inventory in real time [9] [10]. Tesla can leverage the tools these startups are building (and as a key customer even influence product development with feature requests) to improve their supply chain logistics and ensure that all their assets are monitored. Being able to track all the inputs for each vehicle on the line will be important to reducing variability and proactively addressing any potential disruptions to the flow. With such a complex supply chain, parts coming from various external suppliers, and an increased focus on production speed and yield, Tesla must ensure they have visibility into their inventory and where components are in the supply chain.
Considerations for the Future
Tesla has captured the car and technology industries’ attention with their innovative design, but all eyes are on the company’s ability to transition from a loss making and low volume carmaker into a profit generating and high volume one. This is a challenge that will require the company to manage its manufacturing, supply chain, and logistics with new technology and data that will become critical assets to the company as they scale. While the plan to build an automated supply chain seems to be aligned their goals of speed and quality, how fast can Tesla truly move to automate their factories in order to meet customer and shareholder demands? Another major consideration is with such a transparent strategy of moving towards automation, how will Tesla manage their current labor workforce and will this transition cause internal uncertainty and new challenges?
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[1] Ferris, Robert, “Tesla shares drop after posting wider-than-expected loss,” CNBC (November 1, 2017), https://www.cnbc.com/2017/11/01/tesla-q3-2017-earnings.html
[2] Guess, Megan, “Sales up, revenue up, but still losing money: A Tesla story,” Ars Technica (October 3, 2017), https://arstechnica.com/cars/2017/11/sales-up-revenue-up-but-still-losing-money-a-tesla-story/
[3] Fehrenbacher, Katie, “Tesla’s Quest to Build the Machine behind the Machine,” Fortune (June 6, 2016), http://fortune.com/2016/06/06/teslas-the-machine-behind-the-machine/
[4] Etherington, Darrel, “Tesla acquires Grohmann engineering to boost production,” TechCrunch (November 8, 2016), https://techcrunch.com/2016/11/08/tesla-acquires-grohmann-engineering-to-boost-production/
[5] “Accelerating a Sustainable Energy Future,” Tesla Grohmann Automation (2017), https://teslagrohmannautomation.de/
[6] “Accelerating a Sustainable Energy Future,” Tesla (2017), https://www.tesla.com/perbix
[7] Thompson, Cadie, “Tesla just bought an automation company to help it build the factory of the future — here’s what we know about it,” Business Insider (November 7, 2017), http://www.businessinsider.com/tesla-buys-perbix-facts-details-2017-11/#the-company-will-continue-to-operate-as-part-of-tesla-in-minnesota-where-it-has-a-70400-square-foot-facility-according-to-a-cached-version-of-its-website-about-half-of-this-space-is-used-for-machine-shops-and-assembly-bays-7
[8] “About Tesla,” Tesla (2017), https://www.tesla.com/about
[9] Lynley, Matthew, “Fleet management tracking provider Samsara raises $40M,” TechCrunch (June 21, 2017), https://techcrunch.com/2017/06/21/fleet-management-tracking-provider-samsara-raises-40m/
[10] Burdo, Kae, “Keep An Eye On Your Assets At All Times With Shoof Tech,” Killer Startups (August 31, 2017), https://www.killerstartups.com/startup-reviews/shoof
Thanks for the thoughtful essay.
There is no doubt that Tesla has sky high potential as a disruptor at the forefront of electric vehicle technology. However, I am concerned that the company is too focused on investing in automating its factories and this focus threatens its long-term viability. Some level of digitalization and automation is likely table stakes to compete in the automotive industry today. However, Tesla’s obsession with “building the machine that builds the machine” is unnecessary, and it’s causing the company to miss its production and financial targets.
Investing in automation in supply chains should improve efficiency and lower the cost of vehicle production. Good manufacturing companies should always be looking for opportunities to make incremental investments in automation. However, Tesla is trying to make a giant leap that likely is not required to compete effectively in the market today. By seeking perfection in automation rather than simply producing best-in-class electric vehicles, Tesla is actually failing to meet demand in the market, and it is risking losing the confidence of its investors.
Tesla may eventually earn an attractive return on all of the capital it is spending to automate its factories, but if it doesn’t start actually producing more vehicles, it risks losing in the marketplace. That said, there is no denying that Tesla stands to gain significantly if it can actually pull off the home run of “building the machine that builds the machine.”
I definitely agree that Tesla’s move towards manufacturing automation is certainly aligned with their overall goals of speed and quality but I also believe that Tesla and its founder Musk have largely underestimated how difficult of a task this truly will be for the organization. This I think is evident in their acquisition strategy and hiccups they have faced in meeting customer demand. I would argue however that they have taken the right approach for them of quickly getting the product to market and then tinkering with the production cycle and automation to drive down future costs. This has enabled them to increase their cash inflows, deliver on their customer promise to early adopters, and invest this money back into their automation efforts.
As you note though, more importantly I think is what you question around, “with such a transparent strategy of moving towards automation, how will Tesla manage their current labor workforce and will this transition cause internal uncertainty and new challenges?” I think recent news certainly would point to the issues you are alluding to here. Business Insider reported last May about Tesla saying, “There’s been chatter about a union-organizing effort at the company’s Fremont, Calif. factory.” As you noted above about them having been failing to meet customer demand for existing orders because of the manual work required “by hand,” Tesla could be in for even more trouble if they aren’t able to temper the arising issues with their workforce.
Thanks for this well-written article.
I am firmly in favor of Tesla’s pursuit of additional automation. I also agree with RVD’s comment–I think Elon has massively underestimated the increase in difficulty of manufacturing thousands of cars per quarter, as opposed to hundreds. Traditional car companies have spent decades optimizing their supply chain with suppliers, not to mention the actual efficiency and quality of manufacturing itself. Tesla is just beginning to scratch the surface of volume manufacturing, and it’s not pretty. Automation could certainly be a way to short-circuit this learning process. It offers increased quality, fewer labor issues, and scalable output–all fixes for current areas of concern.
My fear, however, is that Tesla doesn’t have the know-how, time or capital to make this a reality. It seems like they want to make their factory the world’s most advanced, which is a tall order. They are clearly trying to build the know-how, but factory innovation isn’t quite as nimble as product innovation. And it certainly will cost a lot of money and time to get it working well. The factory might be another product for Tesla, but given that all of their other products have been released years late, I’m not sure if they can afford that mindset.