StoneBridge & K-Syran - Starry Night

The history of Tesla is rich vein of revealing insights and timely lessons about everything from technology to celebrity, but ultimately the whole thing boils down to a single phrase: making cars is hard. That much is clear even in the abbreviated version of Tesla's narrative mythology that Elon Musk recounted at last night's Model Y reveal, which couldn't gloss over manufacturing problems that have plagued every single one of its cars. And when the Model Y finally did appear, it was instantly clear that it is the result of Tesla's near-permanent "production hell":  barely distinguishable from the Model 3, Tesla's new crossover is the most lukewarm and evolutionary new product it has ever introduced.

Given that manufacturing has been a such a persistent problem for Tesla, this strategy makes a certain amount of sense. With 75% parts shared in common with the Model 3, the Model Y should be much easier to make efficiently and affordably than its more adventurous predecessors. Certainly, the well-documented problems that Tesla's hubris brought to the Model X (which ended up sharing just 30% of its parts with the Model S) won't be the issue here. But there are a million ways to fail in the car business, and the lessons from one challenge can easily drive an inexperienced automaker from one existential challenge to another. To paraphrase Tolstoy, profitable automakers are all alike; every unprofitable automaker is unprofitable in its own way.

In running the opposite direction from Model X's Fabergé Egg uniqueness and ambition, the Model Y has for the first time put Tesla in the position of facing criticism of a poorly-differentiated design. Now, auto industry watchers must all learn that taste is personal and the market may love what you hate, but there is one strategic design principle that transcends aesthetic preferences: the trick to a sedan-based crossover is to share as many parts as possible while maintaining a truly distinct look and package. Model X may have been too unique, but Model Y threatens to shift over to the opposite end of the spectrum, to a space inhabited by the worst examples of "brand engineering" and barely-distinguishable variants. 

Somewhere between those two extremes is a sweet spot that for decades has been defined by Volkswagen. Using common platforms, and later modular "kits," VW manages to make a wide variety of products from the same underpinnings that still manage to present as unique entries. For example, VW's MQB modular kit supports vehicles as diverse as the Skoda Octavia, Audi TT and VW Atlas. Its "PL73 platform" underpins SUVs as well-differentiated as the Volkswagen Touareg, Lamborghini Urus and Bentley Bentayga. Toyota may have mastered manufacturing, but Volkswagen has built its own 10 million unit per year empire on its mastery of this balance between shared internals and unique look and feel.

The Model Y's immediately-recognizable problem is that it looks like it shares over 90% of its parts with the Model 3, rather than the 75% Tesla claims. This is undeniably problematic for a brand that has nurtured expectations of bold innovation and surprising and unconventional product design. Though often self-destructive, this defiance of standard industry practices is what gets Tesla fans to put down deposits two years before a new car comes available and spend the interim fighting off the critiques of haters and losers like your humble correspondent on Twitter. If the Model Y inspires any such passion, it hardly shows so far… and what little enthusiasm it has generated is unlikely to survive the next two years (plus the inevitable adjustment for "Elon Standard Time").

Luckily for Tesla, many of its customers are also investors and surely they will appreciate the firm's apparent new commitment to boring but achievable profit-boosting. The problem with Model Y as an "investor car" (rather than a "fan car" or a "brand-builder") is that Tesla doesn't seem able to execute such a car in a way that will actually benefit investors. The point of a car like this is to build it on the same line as its sister model, reduce tooling investments and supply chain variation to a minimum and get it to market rapidly so it can start boosting profit margins. We don't know for sure where Model Y will be built, besides Tesla's new, under-construction Chinese plant but it seems increasingly clear that it won't simply be cranked out in huge volumes next to the Model 3 at Fremont.

With Model Y volumes rightly expected to exceed the Model 3, and with Fremont apparently unable to produce the long-ago promised 500,000 units/year of Models S, X and 3, the Model Y is an orphan. Without knowing for sure whether the constraint at Fremont is simply space (which has doubtless been squeezed by the two more or less unusable Model 3 general assembly lines built before the tent-based GA3 line) or paint shop air quality permits, it's impossible to completely rule out Fremont-based North American production and Tesla is staying cagey about manufacturing plans. But until journalists with actual access to Tesla squeeze more facts out of its leadership, the fact that Tesla is even considering building the Model Y at the Nevada Gigafactory and Musk's admission that it needs the Shanghai plant to hit a half-million units per year all indicate that Fremont is unable to build enough Model Ys to serve the kind of North American sales volume that Tesla hopes for.

This means the most likely scenario is that Tesla will have to make massive investments at its battery plant outside Reno, Nevada and obtain new environmental permits in order to build the Model Y there. It may be able to ship some shared parts from the Model 3 line at Fremont over the Sierras, but it will almost certainly have to build a new body shop, paint shop and general assembly line in Nevada with all the billions in CapEx, years of environmental planning and hiring/training that requires. These investments mean that Model Y will require roughly a billion more dollars for capital expenditures there, which won't offer any further efficiencies unless Tesla decides to shift Model 3 production there or build yet another variant of its underpinnings in Nevada. It will also stretch its supply lines even further, and increase truck traffic at Fremont and the Gigafactory, further straining the already-overwhelmed logistics infrastructure at both plants.

Obviously some of this is speculative, and if I've learned anything covering Tesla it's that you can never predict what they'll do when they have their backs to the wall. Maybe they'll simply put the GA3 "Alien Tentnought" on wheels, ship it to the Gigafactory and turn that plant into a single Model 3/Y facility, opening space at Fremont for the Semi and Roadster which also need a manufacturing location. But even that scenario requires walking away from even more months of planning and billions in expenditures for the existing Model 3 strategy, which has cost the company some $4.5 billion in capital raises to reach the elusive 500,000 unit/year mark since 2016. Like Tesla's abortive attempt to walk away from its stores, radically reshaping an already insanely capital-inefficient manufacturing strategy after finally recovering from "production hell" will come with costs that Tesla may not be able to bear.

All of which goes to prove that "moving fast and breaking stuff" works a lot better in the intangible world of software than it does in the all-too-tangible realities of automotive manufacturing. For all the design innovations and unique features that Tesla brought to the auto industry, its lack of long-term planning has made it the worst exemplar of the capital inefficiency that has long been the bane of auto industry investors. If the Model Y does away with Tesla's trademark consumer-pleasing uniqueness without improving its efficiency with investor capital, the Model Y could signal the beginning of the end of an automaker that will make a fascinating case study for generations… not with a bang, but with a whimper.