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S3X Appeal

On July 3rd, Elon Musk handed over the first 30 Model 3s and tweeted

“Production grows exponentially, so Aug should be 100 cars and Sept above 1500.”

He added,

“Looks like we can reach 20,000 Model 3 cars per month in Dec”.

In 2016 he stated

“So as a rough guess, I would say we would aim to produce 100,000 to 200,000 Model 3s in the second half of [2017]. That’s my expectation right now.”

He confirmed this estimate early in 2017

“Our Model 3 program is on track to start limited vehicle production in July and to steadily ramp production to exceed 5,000 vehicles per week at some point in the fourth quarter and 10,000 vehicles per week at some point in 2018.”

Overall 2018 production guidance has been 500,000 units and 1,000,000 units in 2020.

The company shipped 220 Model 3s in the July, August and September months. This is well below the expectation of 75,000 that the 2016 guidance would suggest[1] or the 1,630 that might be suggested by the “production grows exponentially” July proclamation.

I entered the Q3 production data and kept the previous run rate predictions for Q4 and 2018 and 2020 in the following graph.

 

Note that the graph includes all previous shipments of Tesla cars throughout its history.

The red bar represents an estimate consisting of the sum of 10,000 Model 3 in October, 15,000 in November and 20,000 in December. This is consistent with reaching the target production of 20,000 in December.

The purple bars are distributing the planned production evenly throughout the 2018 and 2020 calendar years.

Before asking whether these predictions can be relied upon, I’d like to focus on the history of Model S and X production/shipments. Specifically the last five quarters.

  • Q3 2016: 24,500
  • Q4 2016: 22,200
  • Q1 2017: 25,000
  • Q2 2017: 22,900
  • Q3 2017: 25,930
  • Q4 2017: 25,845[2]

Growth in this total figure has been remarkably low. Only about 4% y/y in the last quarter and sequentially the total has bounced in a narrow range.

This level (about 24,000 units/quarter on average) is a distinct plateau but it’s also well above the average of the previous 4 quarters of about 15,000 units/quarter. It suggests that there was a “quantum leap” in production at the end of 2016, to a new plateau.

So the question is why, with so much pressure to produce cars to meet presumed unlimited demand, is output so limited?

To see just how limited, consider the rate of output. For the past 15 months and near future, the output is equivalent to 264 cars per day.  If the Fremont factory is running three shifts, 11 cars are produced every hour. This is equivalent to a cycle time or takt time of 5.5 minutes.

This would be an tragic cycle time.  Most car lines aim for run times between 1 and 2 minutes per station. For example BMW’s Spartanburg plant produces 1400 units per day which yields a cycle time of 1 min.[3]

This measure of performance is so important that it drives the depreciation and capitalization schedule for tooling and the very lifeblood of the company: capital expenditures. An underutilized factory is a giant hole in a financial statement and destroys value as much as inventory does. Every manufacturer strives for maximum utilization and is sunk if it does not achieve a minimum threshold.

So why, after a few years of Model S production, is Tesla running at one fifth the speed of a BMW or Toyota plant? One obvious answer is that the company is not running 3 shifts but perhaps 2 or even 1. But why would they shut down the line when demand is infinite? If it is finite, is it really only 25k at most per quarter? That’s a paltry number considering the size of the market they operate in. BMW alone ships 2 million vehicles a year. Tesla X/S topping out at 100k a year suggests a serious limit to their opportunity.

Another possible explanation is that there aren’t sufficient battery deliveries for continuous production. We hear about issues with battery throughput as transients that slow production. But the production data we have spans an 18 month period during which the speed has hardly budged. During this time additional battery capacity in the form of a Gigafactory has been announced.

If this giant new factory can’t reliably deliver batteries for 25k cars/quarter then how are we to believe that it can deliver for 125k units in a few months? If it’s not batteries, then what? I don’t know of other subsystems that are chronically constrained that we can point a finger at. Almost all other parts in a Tesla are sourced from existing supply chains.

The most likely suspect is that Tesla’s S/X line is not fully operational. When you study production lines, generally they either work at a decent clip or they don’t work at all. They are not designed to be dialed down to be as slow as 5 min for every 10 feet of car. It’s much more likely that the line is idle for long periods of time. Perhaps even 2/3 of the time.

This is what is so mystifying about Tesla’s exuberant predictions for the Model 3. The X/S line is bogged down and inefficient five years after production start but we are to believe that the Model 3 line will come to operate at >5x speed within weeks, on a new product? Maybe the X/S line is a failed experiment. Maybe the company is moving to “Version 2” and leaving the cruft in Version 1 without fixing it.

Maybe.

Tesla’s asymmetric approach to automobile product development and distribution and ownership experience are key advantages but their asymmetry to functioning best practice production systems is a key disadvantage. The big competitive question is will incumbents get good at intelligent EV experiences faster than Tesla gets good at production.

Outsiders might ask “How hard can car building be?” and vote for Tesla winning this race.

There is no data on how fast an incumbent learns the EV experience delivery process, as it’s never been tried before, but there is data on how fast a manufacturing company learns lean production. Those times were measured in decades.

[UPDATE]

In the week that followed this post new claims have been made on Tesla’s production system by other publications.

  • Wards Auto published a story on problems with automating the Model 3 production line.
  • Wall Street Journal published a story on claims that Model 3 production was constrained by hand-building on parts of the line.
  • Edward Niedermeyer wrote in the Daily Kanban about regulatory documents that show limitations in production of the Model 3.

The most relevant quote to this post is the Wards claim that:

Its current production line in Fremont, CA, can’t build vehicles at [5,000 weekly] rate unless it runs two 10-hour shifts seven days a week, which is not likely for an all-new vehicle, even if everything goes smoothly. The plant presently runs two 8-hour shifts five days a week.

If this is true then the current Model S/X line is limited to about 50% of capacity or about 25 cars/working hour. This is equivalent to a takt time of 2.4 min/station. This is certainly much better than the estimated 5.5 and within a range of reasonableness, but one has to ask why is the line not operating more than half the time?

When I wrote about there being “infinite demand” for the X/S, the logic was that the X/S was still a niche product at 100k/yr and the category into which is sells is assumed to have a lot more headroom for their entry.

The observation that production is topping at 50% capacity for 18 months in a market that is quickly being targeted by competitors remains interesting to me.

Notes:
  1. 100,000 to 200,000 for the second half of 2017 suggests an average of 150,000 for the six months or 75,000 per quarter []
  2. This is an estimate based on another point of guidance: 100,000 models X and S for the 2017 year. []
  3. This assumes one line. The chassis/engine marriage step is clocked at 3 minutes so the worst case is  that there are three lines running at 3 min. cycle time each. []
  • I don’t think this would be the issue but you didn’t mention labor (or a lack thereof) as a limiting factor. Can they not get enough trained personnel to run the assembly line?

    • I don’t think they are constrained in this regard. There is a high degree of turnover but I believe there are many people who would like to build Teslas.

      • Sam

        In Fremont CA?

      • Childermass

        Is that a higher degree than most car lines? If so this could be your answer right there. Enthusiastic hires do not experienced line workers make.

  • Luis Alejandro Masanti

    Thanks, very good analysis.
    Just a thought.
    Other than ‘3 shift’ and local efficiencies, I think that the other only way to rise production is by building a new line… and all money is going to Model 3’s production.
    Also, maybe Musk idea could be to only produce Model 3 in the years to come, although it seems not a good idea for me.

    On the other hand, did you applied all those thoughts while building your DIY electric car? 😉

  • Pointebasic

    Wow, this is a bit “scary” for Tesla.

    In the mid 90’s my job often had me in Dodge Ram truck production facilities. The Warren Truck Assembly Plant was running at a vehicle/minute!! This was a pick-up truck line with multiple pickup bed lengths, axle ratios, regular or crew cab, 6 different engines (Cummins diesel, 2 v8’s and a v6, almost forgot the V10!), manual and automatic transmission for each engine, 2wd and 4wd etc.

    An electric Drive train should be a production dream! The only “non-standard” part is the battery? Possibly the motor controller? Even that is nothing unique.

    As always Horace, an eye opening analysis.

    Cheers

  • claimchowder

    Given that Tesla still appears to be losing money on every car they make, is it not likely that they’re deliberately limiting the rate of production, while at the same time trying to blame “temporary production issues” to keep their investors from worrrying?

    • They are not losing money on each car. Operating margin is quite high on S and X.

      • stoyan ganev

        not

    • Net margin is negative because they spend a lot on tooling, R&D and other initiatives to drive growth.

      • claimchowder

        OK, thanks for clearing that up 👍.

  • Walt French

    I didn’t see you consider the possibility cited in Wikipedia about Say’s Law:

    “Paul Krugman writes:
    Not only doesn’t supply create its own demand; experience since 2008 suggests, if anything, that the reverse is largely true — specifically, that inadequate demand destroys supply. Economies with persistently weak demand seem to suffer large declines in potential as well as actual output.”

    • r00fus

      Case in point: I waited months and months for a Nintendo Wii about 10 years ago. I stopped waiting and ended up not buying anything.

      The story keeps repeating itself with Nintendo (Nintendo Classic). I hope Tesla doesn’t become a Nintendo (who got scooped by Sony with the Playstation).

  • BMc

    I admire Elon Musk. He has tried to take his success from his first couple of internet ventures and head into areas in the hopes of being both a dreamer and disrupter. The world needs more figures like him who look to use their billions to solve interesting problems (other than figuring out better ways surveilling and monetizing the population).

    However, as will happen in our on-line and attention adverse society, it moves beyond admiring to taking everything at face value. I don’t know how many comments I have seen that boil down to “…but Elon said…”, as though the messiah himself had spoken.

  • tmay

    I have a couple of young acquaintances working at the Gigafactory, and I’ve heard third hand that Model 3 battery packs are being shipped in better volumes, and I’m under the impression that powertrain subassemblies are also produced there.

    I’m quite happy about the benefits that Tesla/Panasonic is bringing to Northern Nevada, but why do I have to keep telling myself that the Model 3 isn’t the world’s largest Kickstarter funding effort?

  • Alex Park

    If takt time is really 5.5 minutes, then it means car design was not reviewed by production engineers … they are building ‘art pieces’, not ‘industrial products’… or maybe there is one bottleneck step that can’t be decomposed/parallelized … (also production engineering failure…)

  • NewThinks

    Apples/oranges comparison. S and X were not designed for mass manufacture. Model 3 was. No real mystery here. A lot of detail provided by mgmt on this topic in last few earnings calls.

    • phatejack

      automakers know EV, they have been experimenting with it (and many other technologies) long before Tesla even existed. Their problem is not technology; it’s mixing it with an existing product lineup.

    • Kizedek

      “That ASP is far higher than BMW’s blended ASP, so comparing S/X demand to BMW is apples/oranges.”

      The Spartanburg plant Horace referenced produces SUV’s, not cheap. And it is a state of the art plant.

      I have also lived near two productive BMW Mini plants (Oxford, UK, and Born, NL). The Mini is certainly cheaper, but they aren’t the Ford Fiesta, and they attract a certain clientele.

      “Did Tesla ever claim “infinite” demand for S & X? If so, I missed that”

      From what I have read in other Asymco/Asymcar articles, heard in Horace’s podcasts: An automotive “disruptor” needs to target 1% of the worldwide annual new car market (800k out of 80M). (As Apple targeted 1% of smartphone market).

      That’s not infinite, that’s just one order of magnitude higher (for all of its models combined) than Tesla is currently doing.

      It sounds like Apple would be aiming to do this at the outset, when it finally realeases a car. That means innovation/disruption in current production processes is necessary, which Horace is saying that Tesla is not displaying.

      Apple has shown it can buy/lease assembly lines, or add new machinery to assembly lines, of its manufacturing partners of iPhones. Apple would probably take at least the same level of interest in the means of production of its car, were it to deliver one.

    • BMc

      But if what you say about production is true, then should Tesla management not have known this, and if so, why were public statements made quite recently that implied much higher volumes than actuals showed?

  • G A Mercer

    I agree that no one ever said S/X (I can see why Tesla supposedly wanted to call the 3 the E) demand was “infinite.” But repeatedly Mr. Musk has said S/X production was constrained by supply not by demand: that demand was always ahead of the rate at which they could make cars. I was always baffled by this given that Tesla has from time to time handed out incentives for Tesa owners referring new buyers to Tesla, and has started selling new cars (not just demonstrators and service loaners) from inventory. If D is always > S, why ever stimulate D further? Why ever produce for inventory? (Please, Tesla fans, do not swoop down upon me now as some sort of knuckle-dragging Tesla “bear,” I am more than impressed by the numerous incredible achievements of the company!)

  • Tatil_S

    > “Maybe the X/S line is a failed experiment. Maybe the company is

    > moving to “Version 2” and leaving the cruft in Version 1 without fixing
    > it.
    > Maybe.”

    Tesla has already removed lower price versions of S & X models. (Smallest battery and 2WD models) Still no advertising campaigns, either. It seems to be purposefully trying to reduce demand, which otherwise would force them to figure out ways to increase volume. Assuming the operating margin is positive for each new unit, this is the opposite of what a car company would do to increase profits and spread R&D or tooling costs across more cars.

    On the other hand, if you have limited resources in money, engineers and management attention, it might make more sense to focus on what will make or break the company in the long run. Why distract yourself with producing 10%, 50% or 100% more of S or X, when that is arguably just a side show and Model 3 is what really matters?