After tearing down Tesla Model 3, analyst says profit potential huge, but ‘this body is their single biggest problem’

Posted on

DETROIT – The production analysts who spent 6,600 hours in a warehouse north of Detroit who disassemble a Model 3 have good news and bad news for Tesla Inc. The company now possesses the best technology of an electric car, with potential profit margins that are the envy of most car manufacturers. But Tesla wastes that limit with wasted expenses associated with poor design and inflated production.

Sandy Munro, the founder of Munro & Associates, a small company that is demonstrating new cars, concluded that the Model 3 costs about $ 2,000 more than a similarly priced BMW i3 and possibly has more cost problems in its assembly plant. Some compact car & # 39; s and family dance produced by conventional car manufacturers do not make a total profit of $ 2,000 per vehicle.

Many of the problems stem from unconventional choices made by Tesla CEO Elon Musk. "If that car was made somewhere else and Elon was not part of the production process, they would make a lot of money", Munro said in an interview. "They only learn the old mistakes that others have made years ago." Munro said he admires Tesla's technology, so he sent the company a pro deo list of 227 suggested improvements.

Take the steel and aluminum frame at the bottom of the car, a design intended to increase safety. Tesla's battery is already in the floor and adds stiffness, Munro said, so Tesla made the car heavier and more expensive without much benefit.

The aluminum trunk is now made of several pieces that are held together with rivets and welding points instead of one lighter, cheaper fiberglass trunk that is preferred by other car manufacturers. The rear wheel of the Model 3 also has nine metal rivets, sealed or welded together. The Chevy Bolt? It has a stamped piece of steel.

"This body is their biggest problem," Munro said. "It kills them."

Tesla declined to comment, although the company quoted a statement from April stating that Model 3 line has become better since Munro's cars were built. "We have considerably refined our production processes ever since and although there is always room for improvement, our data already show that Model 3 quality is improving rapidly."

30% margins?

Munro's team sees the fully loaded Model 3 as a car with the potential to make 30 percent gross margins, with 10 percent margins on the cheapest versions. The lagging behind of that potential risk undermines Musk's efforts to generate profit and cash, which he is aiming for the second half of this year after a $ 1.2 billion operating loss in the first half of the year.

Munro demonstrates cars on behalf of its customers, looking for strengths and weaknesses in their designs. Before he breaks down the cheapest sedan from Tesla, he tears a Chevy Bolt and the BMW i3 to get a detailed picture of how other electric vehicles are made. In his store outside Detroit there is a disassembled BMW 328i and broken models from Honda Motor Co. and Fiat Chrysler Automobiles. Doors, body parts, valves, cable harnesses and printed circuit boards hang on peg boards throughout the warehouse.

Munro's team has dismantled about 400 different vehicles from almost every car manufacturer. The company has also done work for aircraft manufacturer Boeing Inc. and defense contractor Raytheon Co., among others.

The Model 3 that got the finishing touch was a $ 50,000 version with a black paint job. Munro estimated that the total cost of building was $ 34,700. The addition of logistical costs and a generous assumption for labor, Munro estimates that the gross profit margins would exceed 30 percent.

A cheaper version of the Model 3 that his team researched would cost less than $ 30,000 to build, said Munro, because the smaller battery is less expensive and some other equipment would come out of the car. By comparison, Munro estimated the cost of producing the Chevrolet Bolt at just over $ 30,000 in parts, while the BMW i3 costs less than $ 33,000. Munro said that his margin estimates do not include costs such as R & D investments and engineering.

Rare access

Musk has described that consultants working for Tesla should be scraped off as "barnacles", but Munro is the rare outsider who has caught his attention. After he released a first report in April and identified problems with the design of the Model 3, Musk & # 39; s team made a phone call.

The production analyst warned the CEO of Tesla that his car was heavy, too expensive and unnecessarily complicated to assemble. According to Munro, Musk replied that he had already discharged the engineer responsible for the design of the body.

"Not fast enough," Munro recalls, adding in the interview that Musk, "never had rented him."

Musk did not say who he fired, but there has been a lot of turnover in the company in top positions. Doug Field left Tesla as head of vehicle construction in June. He never developed cars before he arrived in Tesla.

"Tesla wants to do things the way they do, not the conventional way," says Morningstar Inc. analyst David Whiston, whose $ 179 target is one of the lowest analysts to cover the company. "The company is still young and has many things to work out."

Musk has said that the company is working on increasing efficiency, especially in the body shop. "There is a lot that we can do that, which is easy to improve, such as design for production, and changing some of the joining approaches we use, and actually make the car lighter, cheaper and better, and actually safer," said Musk on an income call in August.

Human factor

The profit potential of the Model 3, as judged by an outsider like Munro, is impressive – but it comes with a huge reservation. Tesla has not visited Munro at the company's car factory in Fremont, California. Munro created his estimates as if the Model 3 had been built in an average Toyota or GM plant. Tesla has many more employees than Toyota and GM had when they ran the same factory in Fremont together, and that inefficiency could hamper profits.

Tesla has about 10,000 employees at the Fremont factory. At their peak, Toyota and GM had 4,400 workers who made 450,000 cars a year at the same location, said Ron Harbor, senior partner at consulting firm Oliver Wyman. Tesla, he said, has far too many employees.

If Tesla consistently delivers 5,000 Model 3 units per week, the plant would build up to 350,000 total vehicles next year, including Model S and X. Part of that staff can be explained by Tesla's decision to do a lot of work to do that other car manufacturers do not, such as building their own seats. But Munro said that even with extra work, the staff seems bloated.

"It is impossible that you need 10,000 people, even with three services and a lot of work in the house," said Munro.

Another reason for the increased headcount is that the indoor assembly line, which Tesla GA3 mentions, had an automated transport system that failed. In the spring Tesla finally tore it out and used the parts to build the new assembly line under a gigantic tent.

Here too the design of Model 3 contributed to the problem: Munro said that the many welding points and rivets were not designed for heavy automation. Musk admitted as much when he tweeted in April that excessive automation at Tesla was a mistake & # 39 ;.

"There is clearly too much human integration into production, and so is the Model S and X," said James Albertine, an analyst at Consumer Edge Research LLC. "Elon & # 39; s focus was on a better battery range and better performance."

Technical advantage

Although the production process of Tesla would have benefited from a more old-school approach, the company has a head start in the field of technology. The 75 kilowatt-hour battery in a Model 3 goes 310 miles on a charge, about 70 miles further than a Chevy Bolt and about three times what the BMW i3 can do. The Tesla battery costs more than $ 13,000, Munro estimates, about $ 1,000 more than a bolt.

Model 3 not only continues, but it is a lot faster thanks to the advanced electric motor. The Tesla engine costs $ 754 per car compared to $ 836 for the Bolt. The disassembly by Munro's team revealed an advanced design that uses powerful magnets to spin faster and generate more power. "This electric motor is a game changer," he said. "Everyone should benchmark this."

The software and electronics are also better. Munro discovered that Tesla reduced the amount of wiring by the car by concentrating much of the electronics in small printed circuit boards. That is knowledge from Silicon Valley that the car manufacturers do not have.

The trick is to turn this established technological advantage into consistent gains – and to do so, Musk must hire executives with experience in the nuts of carmaking. If he does, Munro said, "he is not far away from earning money."