Last week’s post, Henry and Elon, discussed Elon Musk’s “problem” – ramping up production sufficiently to fill the 400,000 orders for Tesla’s new Model 3 in a timely manner. The production rate increases were compared to Henry Ford’s success at ramping up Ford Model T production a century ago. The situation Musk faces is remarkably similar to Ford’s, never mind the hundred years.
Last week, Tesla’s management held a conference call for business analysts and the financial community. The Model 3 production schedule was discussed at some length. Some points from that conference call follow the text from last week’s post – repeated below, (in case you missed it).
Henry and Elon
From 1 May 2016
I’m writing this post just one month after Tesla Motors’ Model 3 electric automobile was introduced and made available for advance orders. As you may have heard, in the first week following that introduction, Tesla received more than 325,000 orders, with $1,000 deposits – reportedly a record for any product, ever! Now, a full month from launch, the order book reportedly totals around 400,000.
The question now is “can Tesla produce enough cars to fill those orders before the folks in the queue get tired of waiting and demand their fully refundable deposit back?” Sounds like a fair question, especially considering: (a) that Tesla produced only about 52,000 cars in all of 2015, (b) that Tesla will want to continue to produce their existing Model S and Model X cars, presumably in increasing volumes, and (c) that lots of additional Model 3 orders will keep rolling in. As a practical guess, let’s rephrase the question this way: “can Tesla deliver a cumulative 400,000 Model 3 automobiles by the middle of 2019 without retarding growth of their other product offerings?”
Henry Ford’s Model T
Let’s start to answer the Model 3 production question by considering Henry’s Model T of a century ago. Ford introduced the Model T as a practical and affordable automobile for everyman in late 1908 and started deliveries in the 1909 – 1910 model year. Here are the production figures:
Starting at zero, it took Ford about four and a half years to produce the first 400,000 Model T Fords. Unlike Tesla, Ford did not start with 400,000 orders in hand. Henry Ford had no idea, from the start, how many he would be able to sell: “everyman” had not even dreamed of owning an automobile in 1908. So, Ford didn’t know how much manufacturing capacity he would need, nor did he know how raw materials would be sourced in sufficient and timely quantities.
For Ford, it was necessary to vertically integrate from iron ore deposits to metals castings all the way through finished vehicles in order to assure adequate supplies of all of the components necessary to keep production going. Tesla has integrated vertically to build a “gigafactory” sufficient to mass produce batteries in the quantities that Model 3 production will require. The “gigafactory” is already in operation, although far from full capacity.
Compared to Ford and his Model T, Tesla has a century of manufacturing technology to draw on, along with the infrastructure that supports an industry that can produce about 15 million vehicles annually. With 400,000 orders in hand (and the $400,000,000 from the deposits), Musk and Tesla are certainly in a much better position to find financing for the facilities and capital goods necessary to produce the Model 3 than Ford was in 1908.
Building and operating a 21st century automobile factory that can produce 400,000 automobiles by the middle of 2019 is a big job. The manufacturing technology is impressive, but it’s not rocket science. By the way, Elon Musk is a rocket scientist – he is the Chief Technical Officer of SpaceX, maker of 21st century rockets.
Will the Tesla Model 3 deliver fast enough? Bet on it.
Additional Comments – 7 May 2016
On 4 May, Elon Musk and Tesla’s management team held a conference call for business analysts and the financial community. Model 3 production planning was a primary area of discussion. Here are a few points that build on last week’s post:
>> Production Rate: Musk announced that Tesla intends to reach the 500,000 cars per year rate in 2018, instead of 2020 as previously indicated. I take that to mean total production of all three models, not Model 3 alone. The blue line on the graph labeled “Model T Production” indicates that Ford significantly exceeded the half million cars per year production rate in the 1916 – 1917 model year. The production rate in 1910 – 1911 was 53,192. So, within five years Ford increased production by more than ten times. Now, Tesla says they will do something similar – from about 52,000 in 2015 to about 500,000 in 2018 – in three years rather than Ford’s five. Also notice that the second 500,000 vehicle production rate increase took only about three years (until 1919 – 1920), even though production of military goods for the First World War (1917 – 1918, for Americans) significantly delayed the ramp-up.
>> Operating Leverage: In a discussion on costs, Elon Musk mentioned that “our operating leverage means fixed cost relative to variable cost is going to improve dramatically”. How much is “dramatically”? The red line on the graph labeled “Model T Production” indicates the per vehicle selling price. For the 1910 – 1911 model year, Ford charged customers $780 for a Model T. The price was reduced to $440 for the 1916 – 1917 model year. That 43.6% price reduction was made possible through Ford’s increase in operating leverage.
Ford was selling the Model T into an entirely new market. Each time he reduced the price, he created an entirely new customer segment. Ford used price to keep his production rates increasing. Improvement in operating leverage funded the price reductions – with some left over for Henry Ford and his Company.
>> “Hell-bent on becoming the best manufacturer on earth”: Musk pointed out that that:
“Thus far, I think we’ve done a good job on design and technology of our products. The Model S and Model X are generally regarded by critical judges as technologically the most advanced cars in the world. We’ve done well in that respect. The key thing we need to achieve in the future is to also become the leader in manufacturing.”
Excellence in manufacturing operations results in high product quality levels and high throughput rates – hence strong operating leverage. It worked for Ford a century ago. It is working for Tesla today,
Everybody in manufacturing should read (or re-read) Henry Ford’s autobiography. The parallels between what Ford said and did with what Musk is saying and doing are truly remarkable. Of course, it goes without saying that a century does make a difference and that a Tesla Model 3 isn’t a Ford Model T. But, the real point here is that what has been done must be possible, and Tesla’s task looks a whole lot like something that has been accomplished — a century ago.
By the way, last week rocket scientist Elon Musk’s SpaceX recovered (landed) a rocket on a barge at sea, at night. SpaceX designed and manufactured that rocket. SpaceX will reuse the rocket, reduce the price for future satellite launches, and increase their throughput and their operating leverage. Musk and his crowd do know how to do things well.
Thoughtful comments are always welcome.
… Chuck Harrington
P.S: Contact me when your organization is serious about thriving in the 21st century … CH
This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.
Image credits: 1910 Ford Model T photo – creative commons via Wikipedia