Ludicrous: The Unvarnished Story of Tesla Motors

by Edward Niedermeyer

The more I questioned and deeper I dug, the more I found evidence that the company’s popular image was a consciously constructed facade that concealed underlying dysfunction.

By parting with the flock and building a fast, beautiful electric sports car, Tesla attracted customers who were less price sensitive, more forgiving of quality problems, and constantly on the lookout for a car that helps them stand out.

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Though its software-style culture had helped it create deeply appealing cars and a powerful brand that pushed the entire industry forward, when it came to the core challenges that determine the fates of large manufacturing companies, Tesla was not only not leading, it was miles behind.

But the automotive business is, at its core, a low-margin, manufacturing-based industry. From the start, Tesla rejected the values that are needed to succeed in this sort of enterprise, and it shows no signs of changing, even now.

Tesla has never figured out how to overcome the most fundamental challenge in the modern auto industry: earning a sustainable return on invested capital.

the shortcomings of the startup-style culture that makes Tesla’s vehicles and brand so appealing also highlight the importance of the “boring” traditional auto industry cultural values that have been refined by decades of competition.

If Musk conceived this strategy prior to 2006, he wasn’t the only Tesla founder to do so. Eberhard and Tarpenning’s initial business plan, written well before Musk joined the company as its chairman, called for the same top-down approach.

Tarpenning’s research found that buyers of the earliest green cars tended to be wealthy enough to afford almost any car they wanted,

Eberhard and Tarpenning incorporated Tesla Motors in 2003, fatefully naming it after the brilliant electrical engineer who never reaped the financial rewards of his breakthrough inventions.

Founding a startup car company in 2003 required either a total lack of familiarity with this history and unchecked optimism . . . or a high level of arrogance.

None of the electric cars launched since Tesla was founded—least of all any of Tesla’s—has generated enough profit to pay off all of its development and factory investment costs.

Though Tesla’s immense popularity took the entire auto industry by surprise, its inability to deliver returns to its investors has been entirely predictable since day one.

Ultimately, as we will see, Tesla would struggle to get the costs of making and selling a car under control—and it would pay a high price for its first lesson in the economics of the car business.

Their fundamental challenge is not so much designing the most innovative or desirable cars possible, but rather, designing vehicles that can be built at massive scale and at high levels of quality. Maximizing consistency and minimizing waste are the name of the game, and planning, structure, and regimentation are the keys to success,

Its public profile was soaring, technical challenges were multiplying, and cash was being incinerated at a shocking rate.

But as the scope of Tesla’s ambitions kept expanding, the startup was also entering a fundraising treadmill that would require significant new investments every year. Over time this dynamic, which required always having a next big thing, would start to take on a life of its own.

After working with three different vendors, Tesla still couldn’t get a multigear transmission to hold up to the drivetrain’s instant torque without destroying itself or performing with unacceptable harshness.

With the clock ticking, the first five hundred Roadsters would have to be built—and delivered—with a transmission that didn’t work.

Having failed to properly study the cost of developing and producing the Roadster up front and neglecting to track costs along the way, Tesla had fallen behind and been forced to raise money as it blundered along.

New investments intended to fix old problems gave rise to new promises—which, in turn, would need more cash.

This pattern would become a defining characteristic of Tesla’s culture: The company would be stuck having to hype ever-bigger new ambitions to raise the money needed to deliver on earlier endeavors that had bogged down in execution. “We never had the time or money to do things right the first time, but we always found the time and money to do things twice,”

Once caught in the startup trap, Tesla’s incentives shifted away from lean execution and toward generating the kind of hype and anticipation that would keep fresh investment flowing.

By definition, every manufacturing business must produce real results. But to raise the cash it would need to survive, Tesla appeared to focus mainly on producing grand visions for investors—producing cars seemed secondary.

Single-digit defective parts per million produced is a standard goal for most major automakers.

Whereas the building blocks of software are abstractions—ones and zeroes that exist in computer memory—every part of a car is made in the imperfection of the real world.

And unlike software, which can be patched at any time, cars need to be built right the first time, every time to realize the efficiencies of standardized production.

the car companies that emphasize creativity and passion are the luxury and sports car makers who build tiny volumes of vehicles that are bought more as artwork than a mobility tool. Outside of this rarified group, the core function of companies making the other 99.9 percent of all cars is to build those cars well.

But continuous improvement can’t rely on talent to create one-off fixes; defects need to be traced to their source so a permanent solution can be put into place. Every defect is a symptom of a flaw in the production system, and thus the solution must be a systemic one.

The engineers increasingly seemed to think Frank’s fixation on finding the source of seemingly tiny problems was a waste of time better spent getting the car out the door.

As Frank remembers it, “Elon Musk came out and said, ‘We’re not building Toyotas.’” The message was clear: unlike other car companies, Tesla was not focused on consistent quality.

At the high end of the market, factors like performance, styling, and brand prestige are the main concern, and customers are a lot less demanding of quality and reliability.

These two tactics—excusing Tesla’s quality problems by portraying it as cutting-edge technology and attacking anyone who dared complain—would become Tesla’s go-to response to anyone who was surprised to find that its cars didn’t match the rest of the industry’s high-quality standard.

The Detroit automakers chose V8 power and tailfin fashion over efficiency and quality in the first half of the twentieth century, printing record profits until the Japanese invasion turned the US market toward more pragmatic values.

The great miscalculation of Tesla’s cultural choice is that its plan all along was to enter the affordable mainstream, where operational efficiency and high levels of quality are mandatory. Having battled for more than a decade against impossible odds, Tesla arrived at the brink of mainstream success without the ability or desire to truly embrace the role of a major automobile manufacturer. Somewhere along the way, Tesla had decided to be a startup forever.

In reality, customers suddenly were being asked to either accept an additional $1,000 “destination charge” and reduced standard options or pony up $6,700 to $9,350 more for previously included options.

Once again, Tesla had done just enough to create the perception that the car was real and was relying on Musk’s bluster and showmanship to deliver the cash needed to turn that perception into reality.

However, the brush with oblivion would not provide the humility and focus that both he and Tesla needed to make the most of their second chance.

Let’s recap the measures Musk took to survive the gloomy winter of 2008–2009: Musk prematurely claimed to have secured a $40 million convertible debt round and a DOE loan that Tesla hadn’t even successfully applied for yet. He followed that up by raising cash deposits on the strength of a cobbled-together prototype, raising prices, and putting on a misleading show of profitability for a single month to secure the low-cost government loan that he’d already claimed to have secured.

Profitability would once again have to be delayed for Tesla to grow into its world-changing potential.

But once a piece of software is complete, it costs virtually nothing to produce copies of it, and as soon as the development costs are paid off, each additional sale enjoys an eye-popping profit margin.

In reality, Tesla was still learning just how hard it could be to profitably develop, build, and sell cars.

Though Tesla was holding more than $100 million worth of customer deposits when it began delivering the Model S, implying more than twenty thousand reserved vehicles, those reservations were not converting into sales as fast as Tesla needed them to.

Like the Roadster, the Model S was turning out to be considerably more expensive to build than Tesla had assumed.

But despite the slower production ramp, quality problems were evident in the cars that were delivered to customers; threads soon began to appear on Tesla forums complaining of poor body panel fit, creaks and rattles, and missing software features

According to Tesla, the credit would be available even if cars weren’t delivered to customers until 2013 despite the fact that the IRS clearly states that tax credits are to be taken in the year the vehicle is “placed in service” by the taxpayer.

According to a former factory manager, a lot of Tesla’s conversion problems were simply waiting for configurations and options that Tesla hadn’t started building yet, and one of the major factors in the 2013 “miracle” was simply making a single color available: red.

This eliminated the entire problem of reservations that wouldn’t convert to orders, and it finally provided Tesla with data about the configurations that customers wanted. That way it wouldn’t overproduce configurations that weren’t in demand.

With media and political sentiment behind it, Musk told Tesla’s PR staff that he wanted the company to make one announcement per week.

Each of these announcements struggled to withstand close examination, ranging from mere exaggeration to quasi-delusional fantasy. Still, many outlets reported these developments unquestioningly,