What exactly has happened at @Tesla and what will be the implications of it?

market-analysis

#1

@ElonMusk is definitely a well-recognised celebrity, and an ingenious although sometimes controversial manager. His recent decision to fire all the contractors caused a lot of questions and doubt in some environments [1], and a lot of applause from circles disappointed with consultants and consulting companies [2].

The reality of what has happened is, however, much more interesting than what the press describes. Let’s quote the e-mail [1]:

I have been disappointed to discover how many contractor companies are interwoven throughout Tesla. Often, it is like a Russian nesting doll of contractor, subcontractor, sub-subcontractor, etc. before you finally find someone doing actual work. This means a lot of middle-managers adding cost but not doing anything obviously useful. Also, many contracts are essentially open time & materials, not fixed price and duration, which creates an incentive to turn molehills into mountains, as they never want to end the money train.

There are two points here, and I do not know which is more important:

’middle-managers adding cost but not doing anything obviously useful’.

I would say @ElonMusk is extremely mild here. Each management line, especially at the border of two different companies, is in a constant conflict of interest, which covers:

  • @Tesla vs vendor interests. Both companies want to take the biggest possible share of a profit.
  • @Tesla vs personal interests. Individual managers are vitally interested in justifying their presence. Which may cause them to focus on appearing useful instead of actually being useful.

open time & materials, not fixed price and duration

This part is even more important (there is a catch which I’ll describe later), as it is very difficult to measure vendor’s efficiency in that space. That said, all of the issues caused by additional lines of management are multiplied.

It does not take a lot to draw an obvious conclusion - fixed price and duration contracts are way safer to the company given that the contract can be written that way. This is the catch. Sometimes it is not possible because nobody know what should be expected (f.e. in the case of doing real research). Experiments have to be conducted and they have to be based on time and materials.

Now, one thing that makes me wonder is how Tesla will survive such a drastic change. Setting up a proper company structure (as covered by my online course, includes outsourcing) usually takes time. Investors do not seem to be overly optimistic about it:

but my opinion is:

  1. through the employee recommendation, @Tesla will directly hire people who really contribute to it. It’s a very simple way of filtering out who is and who is not valuable for the company. Note that the @Tesla size will increase, which may worsen financial projections.
  2. through cutting management lines, @Tesla will regain control over research projects if they are some. It is never wise to let others learn at your expense.
  3. Depending on a number of those contracts, such a cut may be very dangerous. @ElonMusk has to have either a lot of faith in his people to execute such a change overnight, or have a thorough understanding of what those contracts (don’t) provide.

Overall, it is a right direction which should have a lot of positive impact on @Tesla ability to execution after the dust settles.

[1] https://www.extremetech.com/extreme/268948-elon-musk-fires-all-tesla-contractors-unless-employees-personally-vouch-for-them?utm_source=quora
[2] https://www.inc.com/geoffrey-james/elon-musk-cut-gordian-knot-of-corporate-spending.html


#2

You are raising some very interesting point here Daniel.

For the middle management point I am all with Elon on this point.
The issue is also 10 times worse in the IT industry. Management like a consultant to “take the problem away from them”. They nurture their pet consultants for this. Consultants rub their belly about keeping the client incompetence and sucking fees over the long term. Like Elon is demonstrating, clients are starting to wise up to this when they see consultants effectively sitting on their payroll and racking in twice a VP salary for an average developer.

That said, this is not only a middle management issue and this is what executives often fail to comprehend. If their attitude is to have the mid management take the problem away from them, then there is no surprise that the middle management behaves the same. Please note that I am still very supportive of delegation and not promoting at all micro-management. The senior management should be very much involved from a facilitation standpoint, coordinating the participation and implication of teams. This is much harder than it sounds, effectively building intelligence and resilience in the teams rather than promoting heroic efforts of singletons (who inevitably become psychopaths).

Re suppliers, it is interesting to see how Elon is going against most of the Lean Thinking that has defined the automotive industry over a few decades. Maybe he is a genius defining the next new way. As much as I have admired a lot of what he has done, I am really not sure on that one.

  • He is producing cars that have very little configurability in a high premium segment. If you look at all the German brands, the list of options is gigantic. This can only be achieved through single piece flow, which is a core lean concept. For now, he is owning the pure electric premium market. Once Porsche get on it with Mission E and no doubt all the VW group, this is going to be a different story. Porsche even has different models on the same assembly line which requires standardisation of assembly across the range. They do this for added flexibility.

  • Too much space is waste in Lean, and he created the giga-factory. If he was hosting the suppliers in there for a reduced transport waste, it would be an interesting concept, but I don’t think that this is the case.

  • Toyota very early on understood the need for suppliers and the need for suppliers to work in a true lean model / minimum inventory. Porsche has clearly matrixed their organisation with a focus on in-housing what differentiates them, whilst outsourcing what doesn’t. This changes overtime too. Eg. The stereo interface or Sat Nav is better outsourced. Now the more integrated tech in the car may make the case of deploying a specialist function. This naturally fluctuates according to the maturity against evolution too.

  • Lastly, Toyota Production System (and Porsche which I have seen from the inside) have integrated the Human in their production model. The workers on the chain have an active role of contributing to continuous improvements (Kaizen) of their tasks as well as the product / quality.
    Elon has robotised its production chain which requires to determine everything up front, get it right and precludes from any practical improvements. You are talking Agile vs Waterfall here and he picked up the second. Though you could envisage this in a bolt factory where you do not expect any variation, this is certainly not the right approach for industrialising your processes (custom / product). I think that this has come back to bite him on the production of the Model 3.

History will tell if Elon is rewriting the rulebook. My sense is that Toyota and many others have been at this game for a while and have embraced change rather than resisted it. Maybe they cannot see the wood from the trees, though I doubt that.

I would not be surprised that Elon will not be able to compete on the car business once Electric alone won’t be a differentiator anymore. I would not be surprised either to see him focusing on battery technology to serve the industry as well as the home. Cars would only have been a means to an end with a view to develop the battery and make this market. Maybe that was his genius master plan all along after all.


#3

I have always look at this as a way of extracting money from buyers, basically a low-margin on the car itself, and high margins on all the additions. Plus, it looks great in the advertisement ‘A new car starting from $X’. You’ve made a very good point about Tesla owning the market right now - and indeed, the question is whether Tesla will have to adopt that money extracting approach and what it will mean for the company in terms of the production line.

While I agree, I have no knowledge about his value chain. It might be the case that most of components are indeed created and assembled in that factory. The time for componentisation will come after standards for electric cars emerge, and that would require at least 2-3 companies holding together a significant portion of the car market. Still plenty of years ahead. This also addresses the point about minimal inventory - it works only if you have standards and some certainty and trust about suppliers. It will not work in a highly changing environment, as the cost of change management will be to high - just imagine ammending all those agreements all the time.

Actually, he has admitted that it was a mistake, as he underestimated the learning potential of humans.

The more I think about what you have wrote, the more I am convinced you are right, and that Tesla future as a car maker is not as rosy as Elon paints. Timing is critical - as Tesla has to get a positive return on existing investments (years) and earn time to adapt to the competition (configurability, parts, service).

You have just made me realise that Tesla may go the route of the Commodore 64 - prosperity time unless new standards get adopted, and then steady decline.

And that means, I might never own one :sob:.


#4

You can think like this. On the premium segments people need the opportunity to differentiate their car from the rest, hence why the lot of options. Regardless of how we approach this philosophically, the real question is the ability to organise a single piece flow as a result and standardise the takt time despite the different components. I have seen Porsche which is impressive. Some manufacturers rather load the options on a standard definition of the model to avoid variability.

The EV do share an amount of parts with other cars, though there are indeed much space for uncharted. I don’t think that Tesla makes their own electric motors - I might be wrong. They definitely do the batteries.
Porsche is working on a different technology for the motor so there is no degradation of performance in quick successions (apparently this is an issue on the tesla).

Minimal inventory works in any case. If you don’t have a standard you want even less inventory because once it changes you can bin your stock. If you have standards, you are likely to be more commoditised and though the stock will be used, it takes space / capital / etc. - whilst you are obviously conscious of margins.

Good he did recognise this. Toyota figured that out 40 years ago and as a principle I like the fact that robots have not quite kicked us out yet. All the buzz is about AI at the moment and banks even making money out of this (BS!!). The truly successful companies will be the ones that can commoditise with automation possibly, but especially redirect the human potential on the uncharted as a result.

I do think that Tesla has a future but I don’t see it in cars once the big giants start occupying the space. I do imagine Tesla playing the commodity game on battery though and becoming the biggest supplier of those in the automotive industry. I can also see him stretching into the home and clean energy with distributed power grids, etc. Electric has a performance advantage for instant power. That said, I am increasingly reading that fuel-cells are a much cleaner approach as batteries have a production & recycling challenge. I wonder if Elon is looking into Hydrogen as well…

Don’t worry so much about your Model S. I don’t think that it will age well. When the Mission E will be out and if it looks anything near the prototype, I think that many of the model S clients will move on. It looks totally gorgeous, and should offer 15min charge time on high power units.