Tesla has to overcome a major problem for its massive new Gigafactory to succeed

A graphic showing a proposed Gigafactory is shown as Tesla Motors CEO Elon Musk unveils large utility scale home batteries at the Tesla Design Studio in Hawthorne, California. Photo: David McNew / AFP/Getty Images

Tesla held a grand opening for its $5-billion Gigafactory in Nevada last week.

This massive facility, which will have the largest foot print of any building in the world when complete, is critical to achieving CEO Elon Musk’s lofty goal of building 500,000 vehicles annually by 2018.

That many cars will require more lithium-ion batteries than are currently available.

By all recent accounts, Gigafactory 1 is an impressive, huge, still-under-construction space filled with industrial robots and Tesla vehicles. The partnership with Panasonic and the state of Nevada is slated to employ 6,500 people.

And it’s an integral means to an end for Musk’s overarching vision, Tesla’s Master Plan: accelerate the end of humanity’s dependence on fossil fuels by attacking major challenges, such as carbon emissions into the atmosphere, at a monumental scale.

But if Tesla is going to succeed with the Gigafactory — nd the future Gigafactories he want to build around the world — it needs to overcome a problem — one that we’re familiar with from its current factory, in Northern California.

Get better at building cars

Tesla has the capacity to build 500,000 vehicles a year at its Fremont, CA plant. But last year it barely managed to build 50,000. This year, it will probably struggle to build 80-90,000. Meanwhile, it has reservations of 375,000 for its forthcoming Model 3 mass-market car, which was unveiled earlier this year and should arrive by 2017.

Tesla Factory
Tesla’s Fremont factory. Benjamin Zhang/Business Insider

This is the biggest mystery about Tesla: Why can’t the company get better at building cars?

Any other major automaker with almost 400,000 pre-orders for a vehicle that should be relatively simple to build would be rolling sheet metal in a matter of months.

Tesla’s argument is that it has to improve its manufacturing capabilities. It has made some moves to that end this year, bringing on a former Audi executive to oversee car building and proposing that the Model 3 will be far simpler to construct than the Model X SUV, whose complicated design led Musk to admit that Tesla had been guilty of “hubris” is creating it and that they probably shouldn’t have built it the way it was engineered.

We can give them the benefit of the doubt in this point. But we should also note that with the opening of the Gigafactory, Tesla has just added yet another manufacturing challenge to its already overfull plate.

Is making batteries different from making cars?

Lithium-ion batteries aren’t as difficult to construct as Tesla’s vehicles. In theory, the Gigafactory’s output should be limited only by time, physical scale, and the available lithium supply. But that oversimplifies the problem, because Tesla will obviously have to participate in managing Gigafactory production.

Tesla has thus far shown itself to be bad at managing production (and making money, but that’s beside the point at this stage of the company’s growth).

The past 50 years of the industrial economy have been ruled production management philosphy called “lean” production. “Lean” production was a system so perfected by Toyota that the rest of the auto industry copied it. In fact, Tesla’s factory used to be a collaboration between Toyota and General Motors, called NUMMI, to perfect these systems in the US.

Tesla’s approach is different — a throwback to the pre-war era of “vertical integration,” symbolized by Henry Ford’s legendary River Rouge plant, where trains loaded with iron ore rolled up to one side of the factory and finished cars rolled out the other.

Vertical integration enables Musk and Tesla to have control of every aspect of production, but it also means that they’re responsible for managing that production themselves, rather than managing a system of producers who feed in to Tesla.

No other choice

Tesla has had to operate this way because it is in an outlier in car manufacturing. Electric vehicles are still unpopular. They are, of course, exciting to onlookers, but consumers have yet to shift to them in droves. Tesla is the only carmaker whose fate is tied to the electric model If it wants to get as big as it says it can get, batteries are a limiting factor.

Nobody else would even consider doing something as risky and out-there as the Gigafactory. They would assume a battery supply chain would develop at some point, to service demand — if that demand ever actually showed up.

That’s the lean way.

The Gigafactory looks like it may propose fewer issues than Tesla’s car factory despite the Gigafactory’s enormous scale. It’s going to be more like a printing plant than a car factory: once a lithium-ion template is established, it’s just a matter of ensuring that the “machine,” as Musk now calls it, can crank away and make its targets.

However, it is yet another manufacturing challenge for Tesla, and the company’s history with that aspect of its business has been checkered. Tesla has no trouble innovating. Its biggest problems are with building those innovations, at a scale that can change the world.

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