Since our last update on Tesla Motors production and supply chain management ramp-up challenges, new tell-all reports and a report of a building criminal probe related to Model 3 product ramp-up statements caste a much more concentrated eye on the electric auto maker’s operations.

Over the past several months, Supply Chain Matters has featured a number of blog commentaries focusing on Tesla’s production and supply chain ramp-up challenges. Our principle viewpoint was that the electric automaker was lacking in seasoned operational experience, process discipline and adequate controls to be able to maintain its volume production milestones in a consistent and controlled manner. Tesla Model 3

Our last commentary earlier this month focused on the electric auto maker’s Q3 operational performance which was somewhat good, and not so good.  From our lens, it called into question whether new management can once and for all overcome such challenges and allow Tesla to consistently meet its production targets without a lot of band-aids.

In a mere few weeks since that commentary, quite a lot has occurred.

On the positive side, the company reported what was termed as better than expected quarterly revenue and profit performance for the recent Q3 quarter. Revenues nearly doubled to $6.82 billion while earnings were recorded as $311.5 million, reversing a loss upwards of $619 million in the year-earlier period. The numbers caused investors great joy prompting an immediate jump in the company’s stock. CEO Elon Musk indicated to equity analysts that Q3 financial performance was an important step towards turning the corner to sustainable profitability.

On the flip side, new developments include a new report of a deepening criminal probe as to whether the company has misstated its prior Model 3 production performance, along with a number of tell-all and vehicle quality reports focusing on what really may have occurred in production and supply chain ramp-up.

Deepening Criminal Probe Reported

The Wall Street Journal, citing knowledgeable  sources,  reported this weekend that the Federal Bureau of Investigation (FBI) is examining as to whether Tesla misstated information about production performance of the Model 3 sedan, which is key to Tesla’s goal of cash-positive performance.

According to the report, FBI agents have been in contact with former Tesla employees asking for testimony in a criminal case. Tesla reportedly disclosed on September 18 that the company had received a request from the U.S. Justice Department regarding the investigation and for public documents related specifically to the Model 3 early production ramp-up and is cooperating in this probe. A Tesla public statement indicated the company has been “transparent about how difficultModel 3 production ramp-up would be and that “it took us six months longer than we expected to meet our 5,000 unit per week guidance.”

Citing sources, the WSJ indicates that the FBI is comparing the company’s statements about production capability during 2017 and whether the company knowingly knew it would be impossible to meet such goals.

The report indicates that this action is separate from the Securities and Exchange Commission’s (SEC) civil settlement with the company over Musk’s early August Twitter posting indicating that Tesla had secured funding allowing the company to be taken private. The SEC settlement called for the company to pay $40 million in fines and for Musk to give-up his Chairman’s responsibilities to another senior executive.

In the history of this blog, this is likely the first time that we can recollect of a criminal investigation involving the potential misstating of production capability as criminally material to a company’s statements. That should capture the attention of senior supply chain executives and their respective operational teams.

New Reports

A recent published Bloomberg report highlights a noted short-seller of Tesla stock indicating that the auto-maker faces risks to its supply chain because some suppliers are not getting paid, and further indicating “a massive supply chain disruption.” The particular short seller would not be specific as to supplier names or supply chain leadership turnover.  The report indicates that most likely, the supplier concern relates to an August report by the WSJ reflecting on an Original Equipment Suppliers Association survey of executives believing that Tesla posed a financial risk to certain suppliers. Such reports reflect on the uniqueness of the current Tesla investor community, short sellers and longer-term investors each seeking to influence stock price direction, each with a different frame of reference.

Other recent reports point to some frustrated customers experiencing delays in expected deliveries of new vehicles or initial quality issues with their vehicles. Consumer Reports magazine this week lowered its reliability rankings on three specific Tesla vehicles, including the Model 3, which had its ranking reduced to an “average’ ranking. The magazine further withdrew its prior “recommended” ranking of the Model S for the second time in 4 years, over owner reported issues.

From our lens, the most revealing report came from Business Network CNBC in its report: Elon Musk’s extreme micromanagement has wasted time and money at Tesla.

The report cites upwards of 35 current and former employees describing a culture that depicts Musk’s management style as a relentless micro-manager who insisted on total automation of absolutely all production activities. Once more, the report describes what we would term as a “not invented here” culture that rejected any industry-wide known methods and practices in volume manufacturing processes and initially insisting on big and expensive production automation methods without allowing adequate time for pilot testing.

One section titled “The Elon way, not the Toyota way,” reflects current and former employees indicating that Tesla rejects process approaches taken by Toyota, GM or Volkswagen along with the shunning of outside expertise in industry best practices. Common industry terms related to process methods were literally banned in favor of Tesla process terminology vernacular. In one cited episode, workers are noted as secretly resorting to implementing industry Kanban just-in-time inventory replenishment practices away from the eye of Musk and production senior management in order to be able to meet higher volume production needs.

In the area of business process systems support, the report indicates that Musk decreed that Tesla build its own customized software shunning available off-the-shelf systems. That could have been tolerable with the existence of responsive software support systems, but the report points to employee comments of systems not providing timely information relative to schedules, costs and performance. One source indicated to CNBC that he believed he was within budget only to discover $1 million in added invoiced charges to his team’s projects from unknown categories. Other employees noted challenges in in tracking information related to people, expenses and component parts.

Musk himself is reported as specifically visiting a Gigafactory battery production line and after discussing existing process glitches with workers, deciding on the spot to remove “parts, production steps and specs” that he deemed “unnecessary”. That well may be a CEO prerogative, and indeed production line workers indicated he helped them overcome that bottleneck. However, the result was felt with missing parts on final inspection of assembled Model 3 vehicles, including in a specific case, of some fasteners that connect the battery to the body of the vehicle, that were reportedly not performance tested until months later.

The report does indicate that Musk and Tesla have gradually begun to learn from prior mistakes. It validates that during the summer, an additional assembly line built under a tent allows workers to build Model 3’s with little automation and quotes a global ergonomics program manager as indicating that the structure is working so well that Tesla will keep using it for the foreseeable future.

Move Forward Situation

Observers are quoted as indicating that Musk’s management prowess is in his ability to accept failure and move on quickly, which is viewed as a positive.

As we and other have continually noted, there is no questioning of Musk’s brilliance and intellect. But, his creativity skills are not being channeled where they should be, in conceiving new products and businesses.

Continuing questions remain as to why day-to-day operational management has not been turned over to a seasoned industry chief operations officer. The CNBC tell-all provides some answers, namely that Tesla’s processes are painted in the notions of favoring Tesla’s own invented concepts and ignoring notions of industry best practices and years of learning in maintaining high volume production at targeted output, quality and cost benchmarks. Tesla’s processes therefore remain as discovery focused as contrasted with tested industry practices. Thus, any COO recruited from the auto sector is likely to face internal cultural challenges in driving needed change unless given leeway to do what is required. In contrast, existing internal stakeholders hold to beliefs of challenging industry norms and charting new pathways in process design. Time is running short on resolving a direction that can attain what needs to be achieved in volume output and in meeting quality and margin expectations.

Once again, from our Supply Chain Matters viewpoint, Tesla’s production ramp-up, customer delivery and service challenges will continue until scalable, consistent processes are evident. We are not likely to endorse a notion of mission accomplished until such tests are demonstrated.

The reality is that new competitors who have demonstrated scalable and consistent production processes have definitive plans to bring new electric models to the market in the not too distant future. That will change the dynamic as well as the reality for more seasoned operations management supported by far more responsive information technology and decision-making support.

 

 

Bob Ferrari

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