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Elon Musk's extreme micromanagement has wasted time and money at Tesla, insiders say

Elon Musk, Tesla CEO

It was late 2016. Tesla CEO Elon Musk had confidently told investors that his company would be cranking out 500,000 electric cars a year by 2018.

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To hit those mass-market volumes, the CEO ordered a team of engineers to figure out how to "automate everything" about Model 3 assembly. The Model 3 was the future of Tesla. At $35,000 for the base model, it was supposed to be an affordable electric car that would vault Tesla from a niche car maker for the wealthy to a company that could serve everyone.

The team outlined four tiers of car parts that could be put together by machines, from the most rigid and easiest parts, to the most difficult items, which were the flexible components including wire harnesses, carpets and trim.

Musk told them to automate everything through tier 3. The team warned him robots aren't good at installing floppy parts like the big foam hoops that are the seals on Model 3 doors, and that Tesla needed more engineers to manage such extensive automation. But Musk insisted.

The company built big stalls into the Model 3 production line at its Fremont factory, including expensive robots that could, in a perfect setup, put seals on doors. They never worked correctly, and "primary seal automation" was designated for removal in the first quarter of 2018. The equipment remained for months with cars streaming through the stall. The robots were finally taken out this summer.

Musk eventually acknowledged in an interview with CBS and a tweet in April 2018 that he had been over-reliant on automation. He admitted it was "my mistake."

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This anecdote is emblematic of Musk's management style, Tesla insiders told CNBC. Interviews with 35 current and former employees depict an ambitious CEO whose drive to make everything from scratch sometimes impaired his decision-making, leading him to approve expensive projects that failed and delayed production. They also described occasions where Musk refused to consider methods pioneered by other automakers and ignored advice from industry veterans within Tesla's ranks.

Tesla's future as a mass-market car company hinges on efficient, automated production of the Model 3. Tesla will lose $6,000 for every $35,000 Model 3 it sells, says UBS analyst Colin Langan. It only breaks even if the car sells for over $41,000. Tesla has yet to produce the $35,000 base model of the Model 3.

Tesla did meet the goal of producing more than 5,000 Model 3 vehicles in a week during the third quarter. It made 80,142 vehicles (including 53,239 Model 3's), beating Wall Street analysts' expectations. But the company is nowhere near the 500,000 mark Musk promised in 2016. As of the end of Q3, Tesla has produced 167,975 cars this year. To put that in context, Ford makes that many cars approximately every 10 days.

Tesla promised investors that it will achieve positive cash flow and profitability in the second half of 2018. But some investors and analysts are deeply skeptical this will happen. Tesla's debts are quickly coming due: The company has to pay around $230 million in November, part of a larger $1.3 billion debt bill coming due in March 2019, according to AP.

Faith in the Tesla CEO is being tested like never before. Investors are wary of his social media and legal battles, attitude toward regulators and recreational drug use.

Many employees think Musk is essential to the company's success. They praise his creativity, sense of humor and inspiring speeches. Some credit his hands-on management style with building a great company. A former Tesla and SpaceX employee, Spencer Gore, who is now the CEO of Impossible Aerospace, explained:

"Elon Musk is in a position most will never experience — trying to deliver an industry-defining product on a limited budget. He can't afford to make decisions slowly, or even always compassionately. When he involves himself in low-level details it's to enhance execution speed. For some engineers, this can be frustrating, at times heartbreaking — but Elon's unconventional style is what built the Tesla we all chose to join."

But other employees describe how Musk's management style has increased costs and complexity in the factories.

Big expensive projects

Musk's ambition to make Tesla factories high-tech and distinct from all other carmakers led him to approve spending on systems that some of his direct reports had cautioned were unnecessary or at least unproven.

One example was a project known as the "vision system."

Among other things, the vision system was supposed to speed up end-of-the-line quality inspections for fully assembled Model 3s. Manufacturing engineers installed high-resolution cameras and aimed them at cars coming through to snap photos and transmit them to inspectors in another part of the factory. Inspectors should have been able to evaluate the pictures on a computer, then click "good to go" or flag the car for further reviews or rework. They would be helped by vision control software Tesla bought for the initiative.

Former Tesla employees said the cameras couldn't get a clear shot of some of the key parts and connections that quality inspectors needed to evaluate in every car, such as bolts that were holding air bags in place, or wiring underneath a package tray. Some cameras were repositioned, and new ones were added, but workers would frequently bump their heads on them.

Cameras from this part of the line were removed in the first half of 2018. However, computer vision systems are used elsewhere in the factory for simpler tasks, including body inspections.

Another example goes back to 2016, when Tesla began devising a "magic carpet" that would move parts to workers on the Model 3 production line with software-controlled conveyors and sleds that ran beneath them.

Tesla elevated the entire Model 3 line to make room for this system, and expected to spend around $40 million on the equipment, permits and installation alone, according to engineers familiar with the plans. Tesla dedicated 20 engineers full-time to this initiative for over 3 months, employees said.

This system never worked. Today, factory employees bring parts to the Model 3 line with trucks, tuggers and pallet jacks. Portions of the magic carpet have been repurposed and used in Model 3 general assembly. (Tesla says the project did not end up costing $40 million.)

Musk acknowledged in the company's second-quarter earnings call that the original plan didn't work and said that some parts of the conveyor system were adapted for use elsewhere in the factory.

"So we actually didn't have time to order new equipment because it would have taken too long to arrive. So we took the conveyors that we discarded from the GA 3 line, which didn't work. Or it was way too complex to actually move our products."

Damien Boozer and Paul Jacob work on the general assembly of the Tesla Model 3 at the Tesla factory in Fremont, California, on Thursday, July 26, 2018.

The Elon way, not the Toyota way

Current and former employees say that Musk rejects approaches taken by big carmakers, especially Toyota, GM or Volkswagen. This even extends to industry-standard acronyms, which are discouraged at Tesla. Employees who work with suppliers or other outsiders have to translate Tesla-specific jargon into industry standard terms. For example, an ASRS — automated storage and retrieval system — is called a "vertical storage" system at Tesla.

Rejection of outside expertise has extended to best practices that made production more efficient elsewhere.

For instance, in early 2016, parts were stacking up in ill-organized boxes alongside the Model X line, according to people who worked in the factory in Fremont, California. Workers would have to scramble to find the right part, and sometimes sent Model Xs down the line with incorrect or missing parts, hoping they would be caught in final inspections.

Musk heard about a drag on Model X production and was outraged. He marched down to the line and mandated that the team solve the parts shortages by moving a warehouse of pallets closer to the line and bringing in more parts than needed.

The fix only created more clutter. The production rate didn't improve.

Behind his back, employees turned to a method pioneered by Toyota, known as "kanban," to solve their problems. In its simplest form, workers using "kanbans" put up workflow charts, schedules and cards around a production line to help keep track of items they have and items they need.

In this case, workers took all the parts out of the boxes around the Model X line, arranged the parts with a clear sequence and labels, and put the parts back into the boxes. If one part was out of sequence or damaged, they'd remove a card and leave it in a box or bag to let the supply team know what needed to be replenished.

The cards helped the teams reduce the clutter, keep a small stock of spares nearby, and find the right parts quickly.

But because kanbans were pioneered by Toyota, workers thought they had to hide their kanban cards from Musk during his visits to the factory. Half a dozen current and former Tesla workers say that supervisors in Fremont warned them that if Musk discovered kanban cards posted around their work areas, they were in danger of being fired.

In another part of the factory, some engineers created a digital kanban app, which they used on iPads to avoid scrutiny.

Within Tesla's MOS factory software, there are digital kanban modules, but workers say this was named a "schedule based replenishment" feature to get around the term that Musk hates.

A Tesla spokesperson suggested this widespread perception is wrong, that kanban methods are used widely in Tesla factories and that no workers have ever been fired for using them.

DIY software

Musk has decreed that Tesla should build its own software where possible, instead of relying on business factory management programs like SAP or Sage, or service center and dealership software like QuickBase, DealerTrack or ADP. (The company does use some outside apps, like Atlassian JIRA and Coupa, but aims to become completely self-reliant, employees said.)

Among Tesla's many homemade business applications is a purchasing order system called WARP, previously known as Warpdrive. WARP is also used for car work orders in service centers.

While most Tesla-made software tends to improve over time, recent employees say WARP is seemingly never complete and has made it hard for them to keep track of whether their projects are staying within budget.

Factory workers say they can't easily see what's been invoiced to the projects they're responsible for in WARP and how much their team may have left to spend. Getting such information typically requires an email to accounts payable, where a finance professional has to pull and send a custom report back.

A worker at the Tesla Motors factory in Fremont, CA.

More often than not, several Tesla employees said, accounts payable was too busy to send a detailed report and simply asks how much they need to spend, then replies with a quick approval or denial.

Workers said detailed invoices are hard to find in the WARP system, which does not allow for easy searches. One said he thought he was within budget and found nearly $1 million in charges had been invoiced to his team's project by unknown colleagues. They were now over budget, but he couldn't find out why or who was responsible.

Former Tesla service supervisors and regional managers said Tesla's disparate homemade programs made it hard to know when their purchase orders were going to be approved and when spare parts were coming in for them to fix customers' cars.

Besides WARP, Tesla has created several other programs, including:

  • TMOS, its "manufacturing operating system," to track where a Model 3 is in the process of manufacturing, repairs and testing.
  • MES, a "manufacturing execution system," to support production of its Model S and X vehicles
  • A Tesla Executive Factory dashboard to show equipment effectiveness and line data, and high-level production numbers to executives
  • Garage (or Garage Portal) to let workers locate a Tesla vehicle and see which firmware updates customers may have gotten or may need.

Across the many programs, it can be easy to lose track of information about people, expenses or any particular part and its whereabouts.

Some service employees said they were surprised to learn that when they sent mechanics to help out with "bursts" to build new vehicles in the Fremont factory, their time was billed either to "training" or "research and development," rather than service or vehicle assembly. One said he was relieved that travel, per diem expenses and overtime wasn't charged to his region.

Troubleshooting on the fly

Toward the end of April this year, Musk was troubleshooting at Tesla's Gigafactory in Sparks, Nevada, where the company makes batteries for its electric vehicles and energy storage systems.

The CEO had promised investors the company should be able to produce 5,000 cars per week by the end of June. Battery production had been a major bottleneck, however, as quality checks ate up time, and automation wasn't working. Employees were still making battery modules partly by hand.

Musk spent time with workers on the line, and swiftly decided to take out a number of "parts, production steps and specs" that he deemed "unnecessary," as he explained to all employees in an email he sent in the wee hours of May 15. He emphasized in the email that all executives should "go on the production line and perform the most arduous tasks personally" to look for inefficiencies that could be stomped out.

Then, to drive his point home, he attached a flattering message that a process technician had sent him, which said:

"I just wanted to express my gratitude for CEO Elon Musk coming down to the 'front lines' at Giga 1 this last week. I can not speak for everyone; but from where I work he came in and eliminated 80% of the problems we were having in about 20 minutes. It was amazing. He re-engineered process and final product on the spot and in 'real-time.' In completely cool fashion he actually 'talked and listened' to the workers on the line where the work is being done and the 'tires hit the road'...That same night we blew away the record for the most production by a long shot! My coworkers and I were all giving high fives at the end of shift."

But not everybody was excited about Musk's revisions.

Several workers at the Gigafactory and Tesla's car plant in Fremont, California, said the vehicles and batteries being made with the new process omitted some parts — including some fasteners that connect the battery to the body of a Model 3 — and were not tested for crash-worthiness until months later.

Members of the media film machinery inside the Tesla Gigafactory in Sparks, Nevada.

In the weeks following Musk's visit, former employees said, they remained under pressure to improve their production numbers.

At the Gigafactory, one manager told quality engineers to keep using parts that were "red-tagged" for scrap or further review, according to one current and two former employees. Employees responsible for quality control repeatedly saw battery modules come through with cells that were raised too high or slightly out of place, and an insulating material called Fiberfrax in the wrong places, they told CNBC.

The manager didn't want modules to slow down battery pack production and told them to pass the parts or quit. Employees filed several complaints about this issue and manager using an HR system called the "answer bar." More than one person was asked to leave in May after pressing the matter.

In a statement, Tesla said:

"During a production ramp where production processes are not yet mature, sometimes additional parts or steps are added, and sometimes, when it becomes clear that certain parts or steps are duplicative or unnecessary, they are eliminated. This is completely normal and to be expected, and no action is ever taken if it impacts safety, as that is more important than anything.

The allegation that any batteries were not properly tested is wrong, and if someone is saying this, they clearly do not have the full set of facts. Every battery goes through rigorous testing before it is used in a vehicle. Notably, after more than a year of Model 3 production, there have been zero battery safety issues in the field. This would not be possible if we had sacrificed safety or overlooked important tests.

Production will never take precedence over safety – which is confirmed by the fact that the National Highway Traffic Safety Administration (NHTSA) awarded Model 3 RWD a 5-star safety rating in every category and sub-category."

'Fail fast and move on'

While Musk may have slowed progress with his hands-on approach and reluctance to use methods invented elsewhere, he seems to be learning from his mistakes.

Tesla more than doubled its production volume between the first and third quarter of 2018, and was able to meet its production goals for the third quarter. It did this in part by acting more like a traditional carmaker.

Over the summer, Tesla built an additional assembly line in Fremont in a gigantic tent, or "sprung structure," with an aluminum frame. Workers there now assemble Model 3s with little automation. Michael Kirschner, a global ergonomics program manager at Tesla, said the structure is working so well that Tesla will keep using it for the foreseeable future.

"In a sense, the tent is going back to basics," said Model 3 quality manager Dexter Siga, who has worked at Tesla for 7 years.

A tent is seen at the Tesla factory in Fremont, California, U.S. June 22, 2018.

"Elon Musk himself agrees that he automated too much, too soon," says Ram Ramasamy, Frost & Sullivan's industry director for automation. "He probably could have avoided a lot of problems by starting small, failing fast, then driving adoption and changing the culture to scale what works."

But Ramasamy says Musk's ability to experiment then move on quickly is a good sign for the long run.

"I'm amazed by his ability to fail fast and move on. He does not lay down but gets up and moves quickly. That really will serve the company well."

Steve Finch, a former GM plant manager with about 40 years of automotive experience, agrees that Musk's approach could eventually set Tesla apart.

"Elon Musk is not afraid of a mistake. He thinks it's probably the way Tesla will actually achieve success. You have a number of failures, but that one idea will really propel you and take the industry to the next level."

He adds, "The question is: Will this put your people at risk, or will you have enough time and money to weather the inevitable failures?"

CNBC

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