The Dangers of Trying To Reinvent An Industry, And A Few Notes on Tesla
I am often critical of Elon Musk and Tesla, and will be again later in this post, but I wanted to start by sympathizing with Tesla's plight. As you may know, Tesla set out not only to produce a leading electric car (which it did) but also to reinvent automobile manufacturing (which it is struggling to do). One of the hard parts about reinventing an industry is being correct as to what parts to throw out and what parts to keep. Musk, I think, didn't want to be captive to a lot of traditional auto industry thinking, something anyone who has spent any time at GM would sympathize with. But it turns out that in addition to all the obsolete assumptions and not-invented-here syndrome and resistance to change and static culture in the industry, there is also a lot of valuable accumulated knowledge about how to build a reliable car efficiently. In Tesla's attempt to disrupt the industry by throwing out all the former, it may have ignored too much of the latter, and now it is having a really hard time ramping up reliable, quality production. Musk even recently admitted it may have gone overboard on factory automation.
I don't agree with all the conclusions, but I thought this was an interesting article on Tesla vs. Toyota production practices and the industry lessons Tesla may have been too quick to ignore. One quote I liked, “Machines are good for repetitive things… but they can’t improve their own efficiency or the quality of their work.” I sympathize with Musk on this one. You CAN"T upend an industry by copying everything it does -- you have to go off in a different direction, at least on some things. It may be that Musk eschewed the wrong bits of industry practice, but this is an understandable mistake.
What is not understandable is Musk's lack of transparency, his self-dealing, his wild and unfulfilled promises, and his unprofessional behavior. Some notes:
- A few months ago, at the Tesla truck launch, I wrote:
But Tesla needs to stay hot. California is considering new vehicle subsidy laws that are hand-crafted to pour money mainly into Tesla's pocket. Cash is burning fast, and Musk is going to have to go back to the capital markets again, likely before the end of the year. So out came Musk yesterday to yell SQUIRREL!
Tesla's main current problem is that they cannot seem to get up to volume production of their main new offering, the Model 3. The factory appears to be in disarray and out of production and inventory space. They can't produce enough batteries yet for the cars they are already making. So what does Musk do? Announce two entirely new vehicle platforms for tiny niche markets.
I saw the truck launch as a cynical ploy to distract from Tesla's operating problems and perhaps to get a bit of financing in the form of customer deposits (a growing percentage of Tesla's available cash is from customer advance deposits). There was no way it could do anyting with this truck, given its operating problems and lack of capital. It seems that I was on target, because not even 6 months later Tesla has tired of pretending the truck is going anywhere. After Telsa did not even mention the semi in their earnings conference call, Musk said in answer to a question:
I actually don't know how many reservations we have for the Semi. About 2,000? Okay. I mean, we haven't really tried to sell the Semi. It's not like there's like an ongoing sales effort, so sales – orders for Semi are like opportunistic, really companies approaching us. Yeah, it's not something we really think about much.
- Elon Musk proved himself on the same conference call to be a spoiled brat who has spent too much of his time having people kiss his feet and compare him to Tony Stark.
One week ago, Elon Musk entered the history books for his unprecedented, petulant handling of "boring, boneheaded" questions from two sellside analysts, who merely wanted more details about the company chronic cash/rollout issues. And no phrase captures Musk's descent better than "These questions are so dry. They're killing me." That's what Musk told RBC analyst Joseph Spak in response to a question about Model 3 reservations.
My older readers will know that my dad was President of Exxon from the early 70's (a few weeks before the Arab oil embargo) until the late 1980's. In that job he never had to do analyst calls, but he did about 15 annual shareholders meetings. I don't know how they run today but in those days any shareholder with a question or a rant could line up and fire away. Every person with a legitimate beef, every vocal person who hated oil companies and were pissed off about oil prices, every conspiracy theorist convinced Exxon was secretly formulating chemtrail material or whatever, and every outright crazy would buy one share of stock and show up to have their moment on stage. My dad probably fantasized about how awesome it would be to just get asked dry financial questions about cash flow. And through all the nuts and crazy questions and outright accusations that he was the most evil person on the planet, dad kept his cool and never once lost it.
If you asked him about it, he likely would not have talked about it. Dad -- who grew up dirt poor with polio in rural Depression Iowa -- was from that generation that really did not talk about their personal adversity much and certainly did not compete for victim status. He probably would just have joked that the loonies at the shareholder meeting were nothing compared to Congress. My favorite story was that Scoop Jackson once called him to testify in the Senate twice in 6 months or so. The first time, just before the embargo, he was trying to save the Alaska pipeline project and Jackson accused Exxon of being greedy and trying to produce more oil than was needed. The second time was just after the embargo, and Jackson accused Exxon of being greedy and hiding oil offshore in tankers to make sure the world had less oil than it needed.
Through all of this, the only time I ever saw him really mad was when Johnny Carson made a joke about killing the president of Exxon (he asked his audience to raise their hands if they thought they would actually get convicted for killing the president of Exxon) and over the next several days our family received hundreds of death threats. These had to be treated fairly credibly at the time because terrorists were frequently attacking, kidnapping, and bombing oil company executives and their families. We had friends whose housekeeper's hand was blown off by a letter bomb, and I was not able to travel outside of the country for many years for fear of kidnapping. (For Firefly fans, if you remember the scene of Mal always cutting his apples because he feared bombs in them from a old war experience, you might recognize how, to this day, I still open packages slowly and carefully.
This is a long way of saying that Elon Musk needs to grow the hell up.
Hell_is_Sartre:
Older readers may also remember a certain conference call with analysts by another long-gone energy executive of a long-gone energy company.
May 10, 2018, 11:45 amThe_Big_W:
Turns out that re-imagining the automobile production line is harder than landing and reusing a rocket. Who knew??
May 10, 2018, 11:53 amMaddog:
Coyote points out problems at Tesla: Musk is not an auto executive!
https://www.maddogslair.com/blog/coyote-points-out-problems-at-tesla-musk-is-not-an-auto-executive
The fact that Musk is not an auto executive could be a benefit, but it has not been. In the education industry, Salman Khan revolutionized learning with his Khan Academy's free learning platform, and incredibly high-quality tools to help parents and teachers understand when and where each child is and the problems they are having learning whether it be math, economics or something different.
Khan experimented on YouTube to teach his cousins. When others found his videos and let him know how valuable they were, he began to produce more. In the end, he built K-12 math program and likely has now addressed most of the college-level math. This slow process allowed Khan to experiment with education and the tools necessary to track the students' educational progress. Mistakes and hiccups were worked through by the users and Khan, so the learning process and Khan's ability to learn and integrate knowledge was never compromised. This organic model is probably the best but is very difficult to produce in the real world. The YouTube compensation scheme allowed this to happen until Khan was able to attract a few high dollar donors.
An analogy for the Khan model was that Khan was trying to learn to ride pro PBR level bulls. He did so by starting on a hobby horse, then moving to a well-mannered horse, to a strong-willed horse, to a green broken horse, to an unbroken horse, to smaller bulls moving incrementally to larger and more aggressive bulls until he finally was riding pro PBR level bulls.
On the other hand, Musk decided to experiment on automating final assembly during production. This was essentially the opposite of what Khan did and quickly created serious, intractable problems which dog Tesla and Musk today. A reasonable analogy would be that Musk was trying to learn how to ride pro PBR level bulls by riding pro PBR level bulls right out of the first gate. That is not possible.
The problem Musk has run into is the Peter Principle which is a variant of the Dunning-Kruger Effect. Once the individual high centers it is all but impossible to continue to learn and integrate experiences into his knowledge base. The reason is he is in uncharted territory, and the problems are too tricky and come too fast leaving him off balance; his means he cannot learn and integrate knowledge. The solution is to backtrack to the point where the individual is competent and start again. The failure to backtrack was Obama's core problem and the reason he was not just incompetent but incapable of learning his way out of his myriad problems.
No one is willing to walk back to the place of their competence and start over. I am not knocking Musk or Obama. These people must be walked back by others. Usually, this requires employment termination. I suggest Musk take control of SpaceX and hire an actual auto executive to run Tesla. The shareholders may need to walk Musk back.
Mark Sherman
May 10, 2018, 12:21 pmC078342:
Ford & GM have been making alot of cars for quite while. Why would this egotist think he could improve on the process? I've read that Teslas coming off the line often have one-off fixes allowing them to proceed. Who wants one of these cars: if service is required, it is also a one-off service. And why would anyone want an electric car? I'll take my Porsches any day.
May 10, 2018, 3:40 pmJK Brown:
Ford, GM or Chrysler are hardly good models for quality production. Toyota and Honda on the other hand.
May 10, 2018, 9:23 pmJK Brown:
Musk is a flim-flam man who has shown he can move things from concept to even limited production. But he apparently doesn't have the focus on the mundane to run a producing company. Not unusual for entrepreneurs.
May 10, 2018, 9:24 pmOrion Henderson:
Is Musk Tesla's biggest shareholder? If not, I'm guessing he's going to get ousted in the next few months. They need to move from start up stage to mature company real fast if they are going to be successful. Hard to see Musk as the exec to do that. Maybe "Maximum" Bob Lutz can come back for one more ride.
May 11, 2018, 5:33 amkarl_lembke:
Pity he couldn't have had his mail distributed to members of Carson's studio audience to be opened.
May 11, 2018, 7:45 amCapnRusty:
Dr. Jordan Peterson makes a point that echoes your first paragraph. Those who wish to "fundamentally" transform Western Civilization should pause to realize that it took us three million years to get to the place we are now, which is quite good. They shouldn't tinker with it until they understand how it go here*, and then, very cautiously.
*But of course, the "tinkers" refuse to study history because it was made by white males.
May 11, 2018, 9:12 amMike McDonald:
Oil company people have always had stories. My wife's uncle, now deceased, was president of (I think, old stories) Mobil SA in the 50's or early 60's. The entire time he lived in Rio de Janeiro, he traveled in a chauffeured, armored car with body guards. The kidnapping possibility was taken very seriously.
May 11, 2018, 10:34 amC078342:
Never owned (nor would I) a Toyota or Honda -- and haven''t owned a Ford for years. I suspect the Jap brands are subject to a cult hero worship, and that American brands are unfairly tarnished by innuendo. Last 20 years, I've been very happy with VW (first VWs and then Porsches) and Audis. Good German engineering.
May 11, 2018, 11:19 amErikTheRed:
Exactly, but they screw it up on another dimension as well. Politics (pretty much everyone besides the libertarians, who are by definition against this crap) are full of people who think the world is a giant version of the computer game Civilization full of dials and knobs and settings and if they can just find the right combination then everything will be Utopia. Of course, this is wildly hubristic nonsense that backfires spectacularly on a regular basis while sucking up an estimated 85% of the Western world's productive value (in terms of direct and opportunity costs). Think about that - as well off as we are in the West, we could be as much as six times wealthier. We'd never hit perfection, but could be a hell of a lot closer to it.
Which brings us to the other dimension they screw up: the regulatory state don't allow us to experiment much with new ideas. Some excellent arguments have been made that things like the FDA create net losses of both life and health because they slow progress in the name of preventing negative outcomes (which, of course, we get mountains of anyway). The statist answer to this is always "yeah, but if we didn't do this then things would be worse" - these are the people who believe that every line they see on a chart goes on forever. And, yes, crazy and rampant experimentation does create negative outcomes, including suffering and death. But it also provides the huge chunks of human progress at minimal time and cost.
So where do you draw the line? Volition. It's your life and your body. You should be free to do what you want to the extent that it doesn't harm others or their property. If you decide to roll the dice on something, then the dice are yours to roll. You take the consequences, good or bad. There will be plenty of both to go around. That idea scares the crap out of many people, but they forget that not rolling the dice creates just as many consequences, many of them much, much worse. The only fair way to manage this is by freedom of choice.
May 11, 2018, 11:24 amNot Sure:
My dad was a mechanic, owned three shops. Growing up, he drove nothing but GM products but when it came time to buy my first car, he told me to buy Japanese. The last two vehicles he owned were Japanese, also. I suspect there's more to it than cult hero worship.
May 11, 2018, 11:35 amErikTheRed:
Yes and no. I think Musk is an extremely bright guy - he made a legitimate fortune with PayPal and good for him. The problem is that like many extremely bright people he believes that he's extremely bright at everything and not just some things, which is never the case, and where extremely bright people develop severe cases of hubristic behavior.
On the other hand, I suspect that the excessive confidence / bloated ego is what is necessary to attract the sort of capital that Musk burns through regularly, and is why is bank account will probably always have a few more zeros in in than mine.
May 11, 2018, 11:36 amErikTheRed:
I'm not ready to give up my M-series BMWs anytime soon (and my wife isn't either). That being said, the new Panameras have been tugging at me...
When I was younger and my income was lower I owned an Acura and it was a fantastic car - incredibly reliable and sporty for the price. I have nothing bad to say about Honda (Acura's parent company), other than they don't really compete well with BMW or Porsche for high-end performace.
May 11, 2018, 11:39 ambannedforselfcensorship:
Everyone has now copied Toyota. Its not some intrinsic ethnic ability to decide rework is a bad idea. (Deming came up with the idea, for example.)
May 11, 2018, 12:09 pmbannedforselfcensorship:
Musk has been very successful. These are all large, large gambles. I agree he's flubbing Tesla now, but he should still be admired for even creating the car company in the first place. Paypal, Space X are doing well. Solar City...not so much.
2/5 is not bad for businesses.
May 11, 2018, 12:11 pmOrion Henderson:
Put another way-we always underestimate the risks of the path we're on-and we always overestimate the risks of the path we are not on. So we continue as we were-oblivious to the potential of even rolling the dice.
This is something I force myself to use when considering making any major change. It's helpful to break the status quo and could be helpful to others when considering the regulatory state-or just about anything really.
May 11, 2018, 12:21 pmC078342:
Like to see comprehensive repair cost record records. I expect you would not see appreciable differences between Jap brands and Detroit (with the probable exception of Fiat/Chrysler). German brands are higher, of course, but look what you are getting. The point I was trying to make was that all of them know how to mass produce cars. For Elon to think he can reinvent the wheel is sheer hubris on his part.
May 11, 2018, 12:38 pmirandom419:
It would be different, if he actually brought something new. Sure, his batteries seem to be high quality that despite rapid charging, don't seem to be wearing out that quickly. But that is about it. Eventually, reality will catch-up with you and that seems to be happening. Show me someone with a non-toxic electrolyte that can be swapped out with something like a gas pump and I'll get interested. Lund and his bioelectric cell comes close. Although sugar is usually the bad guy in the news, but seems to be portrayed as bad when used as fuel.
https://www.caranddriver.com/features/nygrd-lnd-has-the-future-of-the-car-in-his-hand-feature-every-ion-is-my-friend-page-2
May 11, 2018, 1:31 pmNot Sure:
" American brands are unfairly tarnished by innuendo."
Growing up, "Made in Japan" meant "cheap crap". Japanese auto companies had a huge hurdle to clear, to be accepted as a quality product. In such an environment, how is it "Made in USA" autos managed to find themselves unfairly tarnished by innuendo?
May 11, 2018, 5:56 pmbillyjoerob:
Another problem with machines is that you can't go to overtime or layoffs to ramp up/down production . . . You're either producing at 100% or you're paying for unused capacity that is rapidly depreciating.
May 11, 2018, 11:40 pmCraig:
A look at the Consumer Reports car ratings will back up the superiority of "the Jap brands."
May 12, 2018, 7:44 pmC078342:
Communist Reports never liked a car that was in fact fun to drive. Their view is that cars are a utility that must be tolerated. You're entitled to have your prejudices, but you might try balancing them with opinion by those who actually like cars and write for Road & Track, or Car & Driver, or even Motor Trend.
May 13, 2018, 4:07 pmNot Sure:
"but you might try balancing them with opinion by those who actually like cars"
I gave you the opinion of someone who repaired cars for a living and you pretty much just blew it off. It would appear you only want to hear what you want to hear.
May 13, 2018, 4:58 pmC078342:
Actually, it appears "you only want to hear what you want to hear." You gave an "opinion" and represent it as must be accepted fact. You are the authority. It may be, but you cannot prove it so.
May 14, 2018, 5:01 pmNot Sure:
"You gave an "opinion" and represent it as must be accepted fact."
I didn't represent that opinion as 'a must be accepted fact". It was presented based on the experience of someone who repaired cars for a living for 40 years. Take it or leave it.
I'm willing to be convinced otherwise, but I'm not interested in performance reviews for new cars. You want me to consider the opinions of some magazine writers? Ok- how much experience do the writers for Road & Track or Car & Driver have in actual hands-on auto repair?
May 15, 2018, 2:53 pmC078342:
"some magazine writers" --- like Consumers Reports writers? Car ownership comprises much more than repair costs. Both of the magazines I referenced conduct long term car evaluations and one of the metrics is repair costs. Ownership costs are comprised of vehicle cost, financing cost (if applicable, I pay cash for my cars), insurance, fuel and maintenance (oil changes, etc), and upkeep. Repair costs shouldn't play a part until old age sets in. By then, most people have moved on to a newer vehicle.
May 15, 2018, 3:14 pmBram:
I worked on a GM production line for a few summers in the 80's. That description of Tesla's bad processes and fixes sound like the bad old days for GM. I used to see Chevy towed off the end of the line becuase the motors didn't run or the transmission wasn't installed correctly.
May 17, 2018, 10:42 amfreereel:
What's your take on Netflix?
May 19, 2018, 9:47 pmPaul L McKaskle:
An article in today's Wall Street Journal:
Is Tesla Abandoning the Mass Market?
By Charley Grant May 21, 2018 11:40 a.m. ET
Tesla has given the first signals that it is giving up on its ambition
to become a mass-market car maker. Prospective customers should be
angry, and investors ought to be wary.
Over the weekend, Chief Executive Elon Musk announced a new, $78,000 version of Tesla’s car for the people, the Model 3. More important was his admission that his promised $35,000
version would cause the company to “lose money and die” if built right
away.
Tesla has struggled to produce a $50,000 version of the Model 3,
and as the company burns through cash, the question is how many of
those will be available once the faster $78,000 offering is ready. If
Model 3 is suddenly a high-end car, then Tesla, whose other offerings
start around that price, would be more comparable to Maserati than to
Chevy, which is producing a $36,620 electric car.
The problem is investors have given Tesla a near $50 billion market cap in the belief
the company will upend the global auto industry, not become a niche,
high-end electric car maker. What that latter company is worth is hard
to say, but it is not the current market valuation.
Then there are the nearly 500,000 Tesla die-hards who put down $1,000 deposits for
what they thought was a car that started at $35,000. How many can
afford, or would be willing to pay for the higher-end models? These
refundable deposits account for a third of the cash on Tesla’s rickety balance sheet.
Mr. Musk said Tesla would produce a low-end Model 3 toward the end of the year, though Tesla’s forecasts are typically optimistic.
Granted, Tesla would hardly be the first auto company to
promise a cheap base model with limited availability. And there are
sound business reasons to hold off on production. Tesla burned more than
$1 billion in cash last quarter, and the $35,000 Model 3 would be
unsustainable to produce, Mr. Musk said.
If Tesla gives up on the mass-market, the company will produce a lot fewer cars than investors
expect and its valuation should be questioned. Tesla’s market value is
about $450,000 per car sold last year; that is more than 16 times the
value assigned to peers like BMW AG .
Would a shift by Tesla make potential customers ask for
their money back? The company hasn’t said how many depositors were only
interested in buying the cheapest version of the car. Watching those
numbers will be hard, too. It can take several months for customers to
get refunds processed, so a refund request issued today might not show
up in financial statements until November, when Tesla reports
third-quarter results.
Giving up on the mass market may be the right decision for Tesla, but not for shareholders.
May 22, 2018, 11:29 am.
Epstein's Mother:
You know, Consumer Reports and JD Powers actually do have records for these things. Japanese cars are traditionally on top. And German cars have slipped quite a bit.
And, no, it "financing" doesn't factor into "comprehensive repair costs". You can either afford the car or you can't. If you're looking for absolute ownership cost, I strongly suspect German cars would not be on top of that, either -- probably Korean would win out.
May 22, 2018, 5:34 pmC078342:
"it "financing" doesn't factor into "comprehensive repair costs"." Have no idea what you are trying to say -- proofread first. And I have no interest in "absolute ownership cost." And I admit German cars will not win. But for many of us, they can't be beat.
May 22, 2018, 5:44 pmEpstein's Mother:
Below you asked about financing costs. Those aren't really a subject for comparison because they are just a loan. You can't get loans from different sources, and the interest rate will vary according to the lender and your credit. Above you asked about comprehensive repair costs. Those are actually measured by both Consumer Reports and J.D. Powers. And on those, German cars have been plummeting.
German cars used to be known for their quality. But that's not been the case for nearly a decade. Both VW and Mercedes have had serious repair issues over the past 10 years.
May 22, 2018, 7:30 pmstevewfromford:
How awful that you and your family had to go through that sort of fear. The left is too blind to see how shallow their "compassion" really is.
May 23, 2018, 5:14 am