Tesla’s Second Gear

Tesla launch The Registry real estate

Automaker looks for ways to rev up production.

THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN OCTOBER 2013

By Hayden Dingman

[dropcap]A[/dropcap]t full capacity, premium electric carmaker Tesla Motors Inc. could manufacture 500,000 cars a year at the former New United Motor Manufacturing Inc. plant in Fremont. But how long it may take Tesla to reach that threshold—if ever—is far from obvious.

When NUMMI occupied the Silicon Valley factory, it produced 24,000 cars a month. Tesla plans to deliver 21,000 automobiles this year. Next year, it expects to double its output, selling globally.

[quote]“I am trying to figure out how to make more cars.” Elon Musk, Tesla Motors Inc., co-founder and product architect[/quote]

The Fremont plant is Tesla’s sole manufacturing location though it has a new assembly operation in The Netherlands. Poor consumer demand is not behind production limits today. “I am trying to figure out how to make more cars,” Tesla co-founder, chief executive and product architect Elon Musk told analysts midyear. “The thing that prevents us from doing that is supplier parts.”

On April 1, 2010, NUMMI joined the ranks of America’s manufacturing departed. Workers finished one final red Toyota Corolla before closing the plant for good. Four thousand seven hundred NUMMI jobs disappeared. But that 4,700 was a fraction of the total jobs affected. Auto plants and similarly sized manufacturing operations traditionally rely on a vast network of external suppliers. In the wake of the NUMMI closure, everyone from injection molders to precision machinists were endangered—an estimated 20,000 Bay Area jobs.

Yet, mere months later and seemingly against all odds, the former NUMMI plant reopened: Tesla, the company most visibly attempting to kill the internal-combustion vehicle, was buying it for a seeming pittance. Building a new auto plant these days can cost $1 billion or more. Tesla bought the NUMMI plant for a scant $42 million. Even with retrofitting, equipment purchases and the recent $18.5 million purchase of an additional 31 acres just south of the factory, it’s unlikely the company has invested anywhere near the $1 billion mark.

Of course, the ultimate cost remains unknown. Tesla agreed to accept long-term liability for known environmental contamination, including groundwater pollution, at NUMMI. The company has set aside $5.3 million toward that end, but says it is “reasonably possible” that estimate could “change materially.”

Tesla was an early adopter of a trend to bring manufacturing back to the United States. For years, outsourcing to countries with less-expensive labor was considered a logical step for corporations—especially technology companies—looking to improve their bottom lines. This wisdom has come under increasing suspicion, especially as U.S. domestic energy costs have fallen.

A study earlier this year by business advisory firm AlixPartners LLP estimated the cost of production in China and the United States would reach parity by 2015. Well-seasoned commercial property landlord and developer Trammell Crow Co. said recently that it intended to build new manufacturing assembly buildings in Silicon Valley in anticipation of increased demand. Transport costs have become a greater consideration, and there seems a rising acceptance that short-term profits gained by outsourcing can get lost in certain intangibles including slowed innovation, less productivity and large divisions within company cultures.

“The location of the manufacturing plant close to [the Palo Alto] headquarters allows more face-to-face interaction among employees from different departments, which helps problem solving,” said Andrea James, a senior research analyst at Dougherty & Co. who follows Tesla.

Design engineers are always on hand at the Fremont plant, getting instant feedback on manufacturing processes. Musk’s desk is right next to the production line.

Tesla uses only about a quarter of the 5 million-square-foot plant. Yet, a full 3,000 people work there in two separate shifts—not so far off the NUMMI employee counts. Supplier issues caused Tesla to miss its 2012 build projection too, so it’s no wonder that the company is trying to produce everything it can in-house. “We’re convinced by integrating a lot of the manufacturing processes here, we save a lot of money with logistics,” Tesla’s head of manufacturing, Gilbert Passin, said in an interview with Bloomberg.

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Photography courtesy of Tesla Motors

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