Tesla Motors Cuts Factory Cost to Try to Generate Profit

Tesla Electric Cuts Factory Cost as Shares Rise on Profits
Tesla Motor Inc. associates work on the Model S electric car at the company's factory in Fremont, California. Photographer: David Paul Morris/Bloomberg

Gilbert Passin surveys the 50-year-old factory where Tesla Motors Inc. plans to make electric cars, and he sees a manufacturing bargain.

The former engineer for Toyota Motor Corp., Volvo AB’s Mack truck unit and Renault SA designed the second-hand Fremont, California, plant. He equipped it with Ikea furniture and refurbished machinery to build battery-powered cars to take on the likes of BMW’s 5 Series, starting in about two months.

“The cost to set this up was very, very low compared to any new plant,” said Passin, vice president of manufacturing for Palo Alto, California-based Tesla. “Everything we are doing has a very good value return.”

Holding down plant costs is crucial to the success of Tesla, led by Silicon Valley entrepreneur Elon Musk and which has yet to record its first profit, because regardless of how many consumers may want environmentally friendly cars, no rechargeable vehicle will be economically viable unless it can compete on price with conventional models.

With the going price to build a North American auto plant averaging $1 billion, Tesla may have spent less than a third that much to buy, renovate and equip its factory. It paid $42 million for the plant in 2010, spent $17 million for some of its presses and machinery, and got other used equipment at a “fraction” of the original cost from parts suppliers including Tower Automotive Inc., said Passin, 51.

Time Capsule

Tesla on Feb. 15, when it released results for 2011, said based on its current business plans, “we have liquidity to reach profitability in 2013.”

The factory in California’s Bay Area is also something of a window into a half-century of U.S. auto manufacturing. Opening in 1962, it made Oldsmobiles, Buicks, Pontiacs and Chevrolets for the former General Motors Corp. It closed in 1982, then reopened two years later as New United Motor Manufacturing Inc., or Nummi, a joint-venture shared by GM and Toyota.

GM’s 2009 bankruptcy closed the factory again, until Musk announced plans to make it his production base in 2010.

Toyota and Daimler AG, maker of Mercedes-Benz cars and trucks, are investors in Tesla, which has risen 16 percent through April 11, matching the Nasdaq Composite Index’s 16 percent gain.

The factory currently employs about 600 people, including some former Nummi staff, and will have between 1,200 and 1,500 by year end, Passin said.

The activity in preparation for the start of production of Tesla’s Model S presents a contrast to competitor Fisker Automotive Inc., which has halted work on the Delaware factory it bought from General Motors Co.’s predecessor after losing access to U.S. loans. At Tesla, the start of Model S assembly is building confidence the company will survive and repay the $465 million made available by the Energy Department.

U.S. Loans

Tesla said it still had $189 million remaining on the federal loan in February. That same month, Fisker said access to its $529 million loan was suspended last year after it failed to meet the timetable for bringing its Karma sedan to market. The Anaheim, California-based company has said it’s in talks with the Energy Department to regain access to the funds and restart work on its plant.

Tesla’s timing was fortunate, said Michael Robinet, managing director for industry consultant IHS Automotive, in Northville, Michigan.

“Nummi had a relatively new paint shop, and that alone is a huge amount of cost for any factory,” Robinet said.

Tesla’s decision to design an assembly floor that can be quickly reconfigured as production patterns change is smart for the company’s relatively low production volume, Robinet said.

‘Flexible Space’

“They really got the benefit of not having a pre-determined build process,” he said. “It makes a lot of sense to have a very flexible space in their case. There are things you can do in a factory that’s only going to build 20,000 vehicles a year that aren’t possible in a 200,000-unit line.”

Tesla is using only about 20 percent of the factory that once built as many as 500,000 cars and pickups annually for Toyota and GM. That vast unused portion, walled off from the Model S assembly line, is referred to as the “Dark Side” by Passin’s team, because it’s illuminated only when someone walks under motion-activated lighting.

Fire-engine red assembly robots made by Kuka AG ring the factory’s assembly floor, coated with a bright white epoxy that gives the old facility a modern look. Large windows and skylights have been added to brighten the assembly space.

Bamboo Flooring

Instead of investing in a fixed conveyor-line system to carry vehicles to different production stations, the Tesla factory uses automated carriers that follow a magnetic tape strip guiding them through the production process.

At the end of the assembly line, finished cars roll onto an elevated platform with bamboo flooring for final inspection. The material was chosen because “it looks cool,” Passin said. Unlike conventional auto plants, Tesla also has a short indoor test track, something not possible with gasoline cars, and a rain-testing booth.

Model S prices start at $57,400 for a base version with 160 miles (257 kilometers) of range and rise to $105,400 for a “Signature” edition with a 300-mile range, before a $7,500 federal tax credit. The first 1,000 units produced will be the top-end models. Tesla says the sedan will compete for buyers with Bayerische Motoren Werke AG’s 5 Series line and Porsche AG’s Panamera.

Also, unlike large-volume auto plants that receive plastic and stamped parts from outside suppliers, the Tesla factory is set up to be self-contained, with on-site metal stamping, plastic injection molding and paint shop. Instrument panels, center consoles and seats are assembled in-house, with battery packs, motors and other electronics also made at the factory.

‘Ideal Job’

“Everything they are doing makes sense for a company of this scale,” said Jeffrey Liker, an engineering professor at the University of Michigan in Ann Arbor. “This kind of very flexible, self-contained approach is exactly what Toyota did in the early days of the Toyota Production System.”

Designing Tesla’s assembly system is an “ideal job,” said Passin, who began his automotive career in 1986 after receiving his engineering degree from the Ecole Centrale Paris in 1984.

Musk “asked me to build a team from the ground up, find a factory, make it happen, and two years later have a car on the road,” he said.

Tesla is on schedule to build about 5,000 cars this year in Fremont and 20,000 in 2013, Passin said. Output may grow to about 40,000 vehicles annually after that with the addition of the Model X electric sport-utility vehicle and other projects, he said, without elaborating.

Comparisons With Solyndra

The company’s success in staying on schedule with the plant is a contrast with Fisker as well as with its former neighbor in Fremont, solar-panel maker Solyndra Inc.

Solyndra’s collapse in 2011 stoked criticism and scrutiny of its $535 million loan guarantee from the Energy Department, as well as the loans the Obama Administration awarded to Fisker and Tesla. While Tesla is using an aging factory and second-hand equipment, Solyndra opened its $733 million Fab 2 factory with a state-of-the-art robotic production system in September 2009 to make its cylindrical solar panels.

The plant closed in August 2011 and the company filed for bankruptcy soon after. While an investigation of Solyndra continues, Tesla hired some former employees and purchased equipment from the factory, Passin said.

“They had some really good engineers,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE