Last week, amid a highly publicized groundbreaking ceremony, Tesla Motors embarked on construction and operational ramp-up of a new manufacturing plant located in China. Once again, CEO Elon Musk has publicly stated aggressive, perhaps unrealistic operational goal setting. The question becomes transferred learning.  Tesla Model 3

Last week, Tesla Motors CEO Elon Musk was on-hand for the ceremonial groundbreaking ceremony at the site of a proposed new China based manufacturing plant located just outside the city of Shanghai, with the capacity to build upwards of 500,000 vehicles annually.

We first alerted our Supply Chain Matters readers to the October 2017 initial agreement to build this factory. The arrangement called for the plant to be constructed in a free-trade zone and subject to automobiles being classified as imports subject to existing import tariffs which were 25 percent at the time of the announcement. With this first of its kind arrangement with China’s provincial authorities, Tesla would not have to share profits nor technology intellectual property with a mandatory local partner.

The ceremony highlight was the “switching-on” of the plant, but as The Wall Street Journal and other business media reported, the reality was the existence of a literal empty field.

True to Musk’s usual persona, were statements on plans to build and operationalize this manufacturing plant “in record time”, going so far as to indicated that Model 3 production could start by the end of the year, with “volume production” anticipated in 2020.

After reading such reports, the best analogy that comes to our mind is that we have likely seen this movie before, and it had very mixed reviews. A very aggressive set of financial, operational and market milestones has been declared with very little margin for the usual setbacks.

Tesla has the opportunity to be the first automaker  to be able to take advantage of recent government policy changes allowing foreign based companies to have majority ownership instead of a mandatory requirement to have a Chinese manufacturing partner. On the other hand, the landscape for new electric auto manufacturing plants is already troublesome.

The WSJ reported in December that at least 32 new electric car plants with a combined annual capacity of 7.5 million vehicles are already in the pipeline. Electric car sales this past year amounted to a total of 1.26 million vehicles. Volkswagen, who has always viewed China as a key strategic market, is building a 300,000-annual capacity EV factory in Shanghai as-well.

Each of these factories will require their own skilled factory workers and domestic or regional supply networks including electrical batteries and components. Similarly, many future fortunes are pinned to the best advanced technologies for electric vehicles and hence the looking glass of potential IP theft is significant. Tesla has already experienced a public incidence of IP theft from a disgruntled worker at the U.S. battery production facility.

Tesla has yet to achieve the milestone to be able to volume build a $35,000 Model 3 sedan profitably in the U.S. That goal takes on more strategic importance in the China scenario.

On the positive side, quite a lot of painful learning has occurred, and the opportunity is to apply experienced learning for the China facility.

Apple and Samsung are now painfully discovering that premium priced products or a well-recognized global brand do not necessarily attract the attention of China’s cost-conscious consumers. Overall cost vs. functionality and actual need matter more. The purchase of an automobile can be a rather significant buying decision as is loyalty to domestic brands. With the domestic economy showing increased signs of slowing, auto makers will likely face a tepid market over the coming two years. Chinese vehicle sales in 2018 fell for the first time since 1990.

Finally, there are the ongoing trade tensions among the Trump Administration and China.  Tesla’s added China manufacturing presence is a hedge to added tariffs or trade restrictions. On the other hand, if tensions heighten over the coming months, Tesla could be a target for unforeseen governmental regulations, bureaucracy  and oversight.

The bottom-line of this Supply Chain Matters commentary is that CEO Musk may well have aggressive plans for China, but it is best to keep such plans grounded to the realities of on-the-ground learning.  Best to leave declarations for volume production goals and milestones to seasoned operational executives that will be managing this new plant.

Tesla has incurred a large amount of executive leadership turnover because of the aggressive stance of its founder. Profitability has been and remains an ongoing concern. China presents the opportunity for a new beginning and for transferred learning.

Then again, brilliant people have tendencies that are not easy to change.


Bob Ferrari

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