Tesla’s next phase: Manufacturing powerhouse

Tesla Inc. didn’t put on a splashy product show at its highly anticipated Investor Day earlier this month.

There were no fresh details about its upcoming Cybertruck, no news on updates to the Model 3 sedan or Model Y crossover and no sneak peek at a coming mainstream model that’s expected to kick off a massive growth cycle.

Instead, CEO Elon Musk said there are more pressing challenges for the EV maker’s long-term growth — namely, reinventing the manufacturing process to make affordable Teslas financially possible.

Tesla is developing a plan to cut its manufacturing cost in half.

“The desire for people to own a Tesla is extremely high,” Musk said at the event, held at the company’s factory in Austin, Texas. “The limiting factor is their ability to pay for a Tesla.”

As part of the automaker’s “master plan” for Earth’s transition to sustainable energy, Musk and top executives presented a blueprint for Tesla’s future as a global manufacturing powerhouse, starting with a new factory in northern Mexico.

The ultimate goal is for global sales of 20 million vehicles a year in a decade’s time, a stratospheric number compared with Tesla’s 2022 deliveries of 1.3 million luxury cars and crossovers, with an average selling price of around $65,000.

Financial analysts are expecting an affordable Tesla, which has been informally called the Model 2, to have a starting sticker price of $25,000 to $30,000 and compete with popular gasoline cars like the Toyota Corolla.

Musk said this week that the new model will operate mostly as an autonomous vehicle, but he didn’t explain when that might happen. No Tesla vehicle is currently capable of autonomous driving.

Analysts are not only skeptical about Tesla’s ability to produce self-driving cars anytime soon, they also question the automaker’s optimistic sales goal and its ability to maintain high margins as it scales to a much larger player in the industry.

Bernstein analysts said in a research note after Investor Day that Tesla’s deep January price cuts suggest it’s already facing pressure from the competition.

“Tesla is unlikely to ramp up new models fast enough to meet volume expectations of 2.4 million in 2024, especially since the next-gen platform appears to still be in the design phase,” Bernstein wrote. Moreover, we believe that price cuts underscore the highly competitive nature of the auto market, where sustained high margins and high volume is unprecedented.

Tesla executives, on the other hand, say they have a detailed plan to transition to a high-volume, low-cost manufacturer.

“If we are going to scale the way we want to do, we have to rethink manufacturing again,” said Lars Moravy, Tesla’s vice president of vehicle engineering. “As part of the master plan, we have to make a step change in cost.”

That begins with a new vehicle platform, the third for Tesla, that will underpin a portfolio of more affordable models across multiple segments, Moravy said. Tesla intends to slash costs by assembling the smaller vehicles in less space with higher worker productivity. Factories will cost less to build and construction will go faster, he added.

In Tesla’s new plan, rather than the traditional method of having vehicles slowly move down a long assembly line with a small amount of work done at each station, workers will build large subassemblies and snap them together in a smaller space. Doing that will remove unnecessary steps, such as removing the doors to access the interior before putting them back on.

When we take all of these tested subassemblies and we put them together, we finally assemble the car only one time, putting the sides on with all of their parts to a front and rear that was already assembled, carrying the floor in with the seats, and finally boxing it out with the doors,” Moravy said.

Moravy estimated the results will achieve a 40 percent reduction in manufacturing space and a 50 percent reduction in manufacturing cost compared to the Model 3 and Model Y, which are built off the automaker’s compact platform.

The EV pioneer also expects to save money by producing its own low-cost parts, executives said. Tesla makes its own electric motors, and the next drive unit will cost about $1,000 each, said Colin Campbell, vice president of powertrain engineering.

“We don’t think any other automaker is even close to that number,” Campbell said. Even the future plant making those motors will be about half the size of its Texas counterpart, with the same output, he added.

Tesla also saves money by using large single-part front and rear vehicle castings, eliminating hundreds of parts, and making some of its own battery cells at plants in California and Texas, executives said. The automaker is also moving to less expensive lithium iron phosphate batteries for more affordable models.

“In this business, you survive or you die based on your ability to manage costs,” said Zachary Kirkhorn, Tesla’s chief financial officer. “All of this work on cost reduction is extremely important because we have a lot of money to spend ahead of us to achieve our goals within the master plan.”

Kirkhorn estimated Tesla will allocate $150 billion to $175 billion to achieve annual production of 20 million vehicles, along with dramatically increasing battery production and building out its Supercharger charging network.

Tesla has four vehicle assembly plants — in California, Texas, Germany and China — and expects to make about 2 million vehicles this year. Musk has forecast sales growth of 50 percent per year for the foreseeable future.

Sam Fiorani, vice president global vehicle forecasting at AutoForecast Solutions, said Tesla has the advantage of starting fresh on a manufacturing plan like this, compared to legacy automakers with less flexibility.

“Building traditional vehicles comes with many obstacles that are associated with the internal combustion engine,” Fiorani said. “Plumbing for exhaust, routing for fuel lines, integrating emissions control systems, managing heat, and integrating all of those components around other systems including HVAC and the traditional transmission.”

As an EV maker building vehicles with far fewer moving parts, Tesla can redesign the manufacturing process and refine it with every new assembly plant, increasing productivity and cutting costs.

“Eventually, this growth will level off to modest improvements and new plants will simply rely on the established system,” Fiorani said. “But Tesla hasn’t reached the plateau yet. They’re still learning and improving and the new Mexican plant will benefit from the lessons learned in Shanghai, Austin and Berlin.”

But Fiorani also pointed out challenges. Reducing the manufacturing footprint brings workers closer, making for more claustrophobic conditions. And a higher workload could lead to employee burnout, he said.

Tesla’s improbable target of 20 million in yearly sales with just 10 global models, as Musk suggested, would require car buyers to accept far less choice than what competitors typically offer.

“Expecting an unlimited number of consumers to suddenly not care about the individuality expressed in their car or truck shows a misunderstanding of this product and its buyers” Fiorani said. “If this is the case, Mercedes-Benz, BMW, Porsche and any number of other luxury brands should just fold up the tent now.”

But Cory Steuben, president of the auto consultancy Munro & Associates, said Tesla appears to have newfound confidence after successfully challenging the legacy auto industry.

“I feel like Tesla no longer has impostor syndrome,” said Steuben, who attended Investor Day and offered comments afterward on the Munro Live YouTube channel. “Developing a whole new [vehicle] architecture will allow them to hit all sorts of new markets, particularly the low end.”