Will Tesla’s Risky Manufacturing Strategy Pay Off?

As Tesla strives to ramp up production to meet 400,000 orders for its new Model 3, the company has already acknowledged big production problems. In the manufacturing sector, all big moves come with big risks, and all eyes are on how Telsa will perform in the next year with it’s unorthodox fix-it-as-you-go production strategy.

The company is currently working on its Model 3 all-electric compact sedan. At the vehicle’s launch in July, CEO Elon Musk stated a production rate goal of 20,000 vehicles per month by this time. Yet as of mid-September, the company had only produced 260 vehicles, something it blamed on “bottlenecks” and what Musk said in a tweet was “production hell.”

While Tesla already has 400,000 pre-orders for the vehicle, analysts question if the company can do it, noting that the Model S and Model X production still doesn’t exceed 100,000 units per year combined. Uday Karmarkar, operations and technology specialist at UCLA Anderson School of Management said that automobile manufacturing can be very challenging and it’s “amazing Tesla has been able to build cars at all.”

Yet Tesla isn’t a traditional auto manufacturer. It took the Model S from design to full production faster than any traditional auto manufacturer would have. Musk’s fix-as-you-go strategy aimed to push vehicles through production then use the company’s innovative over-the-air technology to make software updates and fixes for things like self-drive features and battery management.

“if there’s a cascade of small problems, and maybe a few big ones, the design of the production system could fail catastrophically.”

The trade-off was that the vehicle came off the line with numerous quality issues and mechanical malfunctions. Mike Ramsey, auto industry analyst at Gartner said, “they’re still trying to work out the bugs in that vehicle.”

Despite those quality issues, there has been strong interest from consumers in the Model 3. Most traditional manufacturers go through a period of prototyping and beta testing before moving to full production. Tesla’s strategy on its Model 3 is to skip the entire process, build the full production line and produce market-ready vehicles from the start. Car executive Bob Lutz, who worked for Ford and BMW in his career, said that selling cars while the production is in such a state presents “an increased risk of having problems with the vehicles. You’re putting quality at risk for the sake of a PR event.”

Even if the company meets its volume goals, there may still be questions about quality. While Silicon Valley’s strategy of fixing as you go can work well for electronic devices, it’s not a viable model for large products like vehicles. Fixing a bug on an iPhone with a quick update is different than fixing a bug on a vehicle whose door won’t open, especially when consumers are paying a premium. While the Model 3 has a more simple design than the S and X, the sheer volume is a big challenge for the company. “As a result, if there’s a cascade of small problems, and maybe a few big ones, the design of the production system could fail catastrophically,” said Business Insider transportation correspondent Matthew DeBord.

Bernstein analyst Toni Sacconaghi noted that the company could face significant “brand damage” should the Model 3 hit the market with issues. He surveyed 300 Tesla owners and found that many say the company’s service is weak and that 30% were not able to get a service appointment within 10 days of requesting one. Tesla hopes to overcome that issue by opening 100 new service centers this year along with company-owned body shops.

On the other hand, should Tesla overcome those issues, improve quality and deliver over the next year, it could solidify its places as a leader already years ahead of other electric vehicle competitors. The Model 3 starts at only $35,000 before incentives.

Jeffrey Osborne, an analyst for Cowen & Co., said there’s rising interest in the category of electric vehicles and Tesla is at the forefront. “We see the competitive tides shifting in 2019 and beyond as European [car makers] roiled by the diesel scandal and loss of share to Tesla in the high margin luxury segment step on the gas and accelerate the pace of EV introductions,” Osborne said.

SHARE
Craig Guillot
Craig Guillot is a business writer based in New Orleans, La. His work has appeared in Wall Street Journal, Entrepreneur, CNNMoney.com and CNBC.com. You can read more about his work at www.craigdguillot.com.

PARTNER CENTER