On a call with analysts and investors to discuss the Q3 results, CEO Elon Musk returned to a preoccupation with manufacturing, an area that he believes could be Tesla's greatest achievement.
Musk wants Tesla to do things very differently from the rest of the car business, in order to go beyond building cars to developing a new, vertically-integrated industry.
Ever since Tesla's volatile profitability (or lack thereof) settled down a year ago, CEO Elon Musk has been able to spend more time talking about what he's really interested in.
It isn't cars. It's factories.
This preoccupation crept into Musk's comments on an earnings call with analysts and investors on Wednesday night after Tesla reported a fifth consecutive profitable quarter, with results that beat Wall Street expectations on both the top and bottom lines.
Unlike other earnings calls in Tesla's past — unpredictable, circus-like affairs ruled by Musk's moods and snits — Wednesday's conversation was downright plodding. But in response to a question from Baird analyst Ben Kallo, Musk dug into a theme that's been overshadowed by Tesla's struggles over the past few years: manufacturing.
"We're very vertically integrated," Musk said. "So we're designing and building so much more of the car than other [automakers] who will largely go to the traditional supply base and like I call it, catalog engineering." Which is why, Musk said, most new cars look a whole lot like old cars.
Musk is bucking the way that cars have been built since the 1980s
Since the 1980s, the global auto industry has utilized a manufacturing model based on the "Toyota Production System," a set of methodologies developed by the Japanese carmaker giant and later integrated with a late-20th-century approach to vehicle assembly called "lean" or "just in time" manufacturing.
Going lean relies on global supply chains that can produce and deliver components of relatively uniform quality to factories all over the planet. Automakers don't have to amass large inventories of parts or finished vehicles. They can dial up or dial down the system as needed, based on market demand.
This contrasts with the older, vertically-integrated model that Musk alluded to. The most famous example, one by which Musk seems captivated, is the River Rouge plant that Henry Ford opened in the late 1920s. River Rogue was almost completely vertically integrated: Legend says that rail cars filled with iron ore rolled up to one end of the facility, while finished cars rolled out the other.
Musk's version of this, in his wildest dreams, is what he's nicknamed the "alien dreadnought" — a factory so heavily automated and vertically integrated that it would look like nothing else on Earth.
Tesla's progress toward actually building the alien dreadnought has been halting at best. An ill-fated effort at automating the assembly of the Model 3 sedan in 2017 had to be abandoned. But Musk hasn't backed his manufacturing preoccupation.
"Tesla's long-term competitive strength will be primarily manufacturing," Musk said on Wednesday. "This is counterintuitive, but I'm quite confident this will be what happens."
Building factories is more important than building cars
Tesla's grand experiment with this ambition is now underway. Since about 2010 the company has operated one factory in Northern California (which was once jointly owned by Toyota and General Motors, as a test-bed for GM to learn the Toyota way of doing things).
Late last year, Tesla added a second assembly plant in China, the first to be wholly owned by a foreign company. The plant went from groundbreaking to production in about a year, a very quick process by the standards of the industry.
Tesla already has a heavily automated battery factory in Nevada that it runs with Panasonic, and over the next five years, it should bring new plants in Germany and Texas online. These "gigafactories" for cars could join new plants that make battery cells and solar panels, and overall they'll provide Musk and Tesla with ample opportunity to perfect, as Musk has put it, the "machine that makes the machine."
If you're weren't an established automaker and all you wanted to do was build electric cars, you wouldn't take this approach. You'd do what designer and entrepreneur Henrik Fisker is doing with his new car company, Fisker, Inc. Fisker just announced a deal with Canada's Magna International to build the startup's first vehicle, the Ocean SUV, at Magna's contract-manufacturing factory in Austria.
Fisker has the concept and the business plan, and thanks to a $3-billion merger with a blank-check firm funded by Apollo Global Management, the cash to hire somebody else to make its car.
"We don't want to be a vertically integrated car company," Fisker told me in an interview. "We're not going to do our own manufacturing. It would be stupid for any EV startup to make a brand-new factory."
Tesla has to do something radical to be worth as much as bulls expect it to be
To understand why Musk would take the opposite view, you have to consider seriously his manufacturing ambitions, separate from Tesla's position as the world's currently dominant EV maker. I touched on this back in June, when the coronavirus pandemic had thrown the auto industry into an unprecedented shutdown mode, with nobody sure how things would shake out. Even then, Musk was doubling down on his plan to create not just a new market for EVs, but a new way to make stuff.
"It wasn't the Model T that created Henry Ford's fortune — it was the moving assembly line that enabled workers to rapidly build the car," I noted. "It wasn't the Camry or Corolla that made Toyota the world's most valuable car company — it was the 'Toyota Production System' that replaced Ford's earlier innovation. For Tesla, it's the gigafactories that matter, more than the vehicles."
If you consider Tesla's market capitalization, which at almost $400 billion makes it the most valuable carmaker in the world, and compare it with the company's actual vehicle production ( less than what Ford or GM do with full-size pickup trucks in six months in the US alone), you'd have to conclude that Tesla needs to do a lot more than make cars to vindicate investor confidence.
How to bridge that gap? Imagine that the machine that makes the machine doesn't just make machines, but creates a level of vertical integration that's never been seen. Tesla would entirely own that machine-making machine and be able to leverage it to make many, many other things.
For that reason, some of Tesla's most outrageous bulls, the ones who think the company could be worth more than Apple or Amazon, might be right. And with Tesla's struggles evidently behind it, Musk is now free to feed their enthusiasm.
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