Tesla’s big Model 3 bet rides on risky assembly line strategy

Alexandria Sage

(Repeats to additional customers with no changes to text)

April 24 (Reuters) - Tesla Inc Chief Executive Elon

Musk took many risks with the technology in his company's cars

on the way to surpassing Ford Motor Co's market value.

Now Musk is pushing boundaries in the factory that makes

them.

Most automakers test a new model's production line by

building vehicles with relatively cheap, prototype tools

designed to be scrapped once they deliver doors that fit, body

panels with the right shape and dashboards that don't have gaps

or seams.

Tesla, however, is skipping that preliminary step and

ordering permanent, more expensive equipment as it races to

launch its Model 3 sedan by a self-imposed volume production

deadline of September, Musk told investors last month.

Musk’s decision underscores his high-risk tolerance and

willingness to forego long-held industry norms that has helped

Tesla upend the traditional auto industry. While Tesla is not

the first automaker to try to accelerate production on the

factory floor, no other rival is putting this much faith in the

production strategy succeeding.

Musk expects the Model 3 rollout to help Telsa deliver five

times its current annual sales volume, a key target in the

automaker's efforts to stop burning cash.

"He's pushing the envelope to see how much time and cost he

can take out of the process," said Ron Harbour, a manufacturing

consultant at Oliver Wyman.

Investors are already counting on Tesla’s factory floor

success, with shares soaring 39 percent since January as it

makes the leap from niche producer to mass producer in far less

time than rivals.

There are caution signs, however. The production equipment

designed to produce millions of cars is expensive to fix or

replace if it doesn't work, industry experts say. Tesla has

encountered quality problems on its existing low-volume cars,

and the Model 3 is designed to sell in numbers as high as

500,000 vehicles a year, raising the potential cost of recalls

or warranty repairs.

"It's an experiment, certainly," said Consumer Reports' Jake

Fisher, who has done extensive testing of Tesla's previous

Models S and X. Tesla could possibly fix errors quicker,

speeding up the process, "or it could be they have unsuspected

problems they'll have a hard time dealing with."

Musk discussed the decision to skip what he referred to as

"beta" production testing during a call last month with an

invited group of investors. Details were published on Reddit by

an investor on the call. (https://www.reddit.com/r/teslamotors/comments/5zrb7t/tsla_investor_call_notes/).

He also said that “advanced analytical techniques” – code

word for computer simulations - would help Tesla in advancing

straight to production tooling.

Tesla declined to confirm details of the call or comment on

its production strategy.

The auto industry's incumbents have not been standing still.

Volkswagen AG's Audi division launched production of a new plant

in Mexico using computer simulations of production tools – and

indeed the entire assembly line and factory - that Audi said it

believed to be an industry first. That process allowed the plant

to launch production 30 percent faster than usual, Audi said.

An Audi executive involved in the Mexican plant launch,

Peter Hochholdinger, is now Tesla's vice president of

production.

MAKING TOOLS FASTER

Typically, automakers test their design with limited

production using lower grade equipment that can be modified

slightly to address problems. When most of the kinks are worked

out, they order the final equipment.

Tesla’s decision to move directly to the final tools is in

part because lower grade, disposable equipment known as “soft

tooling” ended up complicating the debut of the problem-plagued

Model X SUV in 2015, according to a person familiar with the

decision and Tesla’s assembly line planning.

Working on a tight deadline, Tesla had no time to

incorporate lessons learned from soft tooling before having to

order the permanent production tooling, making the former's

value negligible, the source said.

"Soft tooling did very little for the program and arguably

hurt things," said the person.

In addition, Tesla has learned to better modify final

production tools, and its 2015 purchase of a Michigan tooling

company means it can make major equipment 30 percent faster than

before, and more cheaply as well, the source said.

Financial pressure is partly driving Tesla’s haste. The

quicker Tesla can deliver the Model 3 with its estimated $35,000

base price to the 373,000 customers who have put down a $1000

deposit, the closer it can log $13 billion.

Tesla has labored under financial pressure since it was

founded in 2003. The company has yet to turn an annual profit,

and earlier this year Musk said the company was "close to the

edge" as it look toward capital spending of $2-2.5 billion in

the first half of 2017.

Tesla has since gotten more breathing room by raising $1.2

billion in fresh capital in March and selling a

five per cent stake to Chinese internet company Tencent Holdings

Ltd .

Musk has spoken to investors about his vision of an "alien

dreadnought" factory that uses artificial intelligence and

robots to build cars at speeds faster than human assembly

workers could manage.

But there are limits to what technology can do in the

heavily regulated car business. For example, Tesla will still

have to use real cars in crash tests required by the U.S.

government, because federal rules do not allow simulated crash

results to substitute for data from a real car.

(Editing by Peter Henderson and Edward Tobin)