Capital Efficiency (Tesla’s Obsession)

I recall a quarterly Tesla conference call some years ago in which then-CFO Deepak Ahuja emphasized quite strongly and clearly that he had worked many years at another major automaker (Ford) and had never seen it or any other automaker focus as obsessively or effectively on improving capital efficiency as Tesla does.

Talking to Tesla President of Automotive Jerome Guillen earlier this year in Tesla’s Fremont factory, he discussed for several minutes Tesla’s focus on making almost nonstop incremental improvements in the manufacturing process. Top managers in the company’s unique seat factory told CleanTechnica about their efforts to shave milliseconds off of certain manufacturing processes as part of an ongoing effort to get more efficient. More recently, talking to a Tesla insider, I was told that Jerome required two manufacturing improvements a week from staff (at least, in years past, but presumably still today). To close out these examples (for now), Tesla CEO Elon Musk spoke last year about the “game of pennies” Tesla was engaged in to bring down manufacturing costs on each Model 3 the company produced.

I think you’re getting the picture. Capital efficiency is not the sexiest phrase in the world of manufacturing, but it’s got to be one of the most important. The noteworthy thing for Tesla supporters as well as critics is that the company seems to continuously improve on this matter. Tesla’s 3rd quarter shareholder letter highlighted capital efficiency in several places, but unless you were looking for info on this topic or you just keep a close eye on manufacturing lingo like this, it might not have jumped out at you. So, I thought I’d spend a little time showing how much Tesla actually highlighted this topic:

• “We have also dramatically improved the pace of execution and capital efficiency of new production lines. Gigafactory Shanghai was built in 10 months and is ready for production, while it was ~65% less expensive (capex per unit of capacity) to build than our Model 3 production system in the US.”
• “Model Y equipment installation is underway in advance of the planned launch next year. We are moving faster than initially planned, using learnings and efficiencies gained from our Gigafactory Shanghai factory design. Capex per unit of capacity is forecasted to be about 50% lower than our current Model 3 production system in the United States.”
• “While total volumes are expected to grow by approximately 50% in 2019, this year our focus has been cost control and preparing for our next phase of growth.”
• “… we returned to GAAP profitability in Q3 while generating positive free cash flow. This was possible by removing substantial cost from our business.”
• “GAAP Automotive gross margin improved by 393bp QoQ to 22.8% (improved by 366bp QoQ excluding regulatory credits). Margin was impacted in part due to fundamental improvements in our operating efficiency, including higher fixed cost absorption, reductions in manufacturing and material costs and continued improvements in vehicle quality and in part due to Smart Summon-related deferred revenue recognition, FX and other non-recurring items.”

Any other favorite examples of Tesla improving capital efficiency?

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Related:

Jerome — The Man, The Myth, The Tesla Super-Engineer — #CleanTechnica Interview

Our Interview With Tesla President Jerome Guillen, Part Deux