(Bloomberg) -- The manufacturing analysts who spent 6,600 hours inside a warehouse north of Detroit picking apart a Model 3 have good news and bad news for Tesla Inc. The company now boasts the best technology of any electric car, with potential profit margins that would be the envy of most automakers. But Tesla is squandering that edge with wasted expenses linked to poor design and bloated manufacturing.
Sandy Munro, the founder of Munro & Associates, a small firm that disassembles new cars piece by piece, concluded that the Model 3 costs about $2,000 more to produce than a similarly-priced BMW i3 and may have additional cost problems in its assembly plant. Some compact cars and family sedans produced by conventional automakers don’t make $2,000 in total profit per vehicle.
Many of the problems stem from unconventional choices made by Tesla Chief Executive Officer Elon Musk. “If that car was made anywhere else, and Elon wasn’t part of the manufacturing process, they would make a lot of money,” Munro said in an interview. “They’re just learning all the old mistakes everyone else made years ago.” Munro said he admires Tesla’s technology, so he sent the company a pro bono list of 227 suggested improvements.
Take the steel and aluminum frame at the bottom of the car, a design meant to increase safety. Tesla's battery already sits in the floor and adds stiffness, Munro said, so Tesla made the car heavier and more expensive without getting much benefit.
The aluminum trunk well, meanwhile, is made from multiple pieces held together with rivets and weld points instead of one lighter, cheaper fiberglass trunk preferred by other carmakers. The rear wheel well on the Model 3 also features nine pieces of metal riveted, sealed or welded together. The Chevy Bolt? It has one stamped piece of steel.
“This body is their single biggest problem,” Munro said. “It’s killing them.”
Tesla declined comment, although the company did cite a statement from April saying that Model 3 line has gotten better since Munro’s cars were built. “We have significantly refined our production processes since then, and while there’s always room for improvement, our data already shows that Model 3 quality is rapidly getting better.”
Munro’s team sees the fully-loaded Model 3 as a car with the potential to make 30 percent gross margins, with 10 percent margins on the cheapest versions. Falling short of that potential risks undermining Musk's efforts to generate profit and cash, which he is targeting for the second half of this year following an operating loss of $1.2 billion in the first half.
Munro takes apart cars on behalf of his clients, looking for strengths and weaknesses in their designs. Before breaking down Tesla’s cheapest sedan, he tore up a Chevy Bolt and the BMW i3 to get a detailed sense of how other electric vehicles are made. In his shop outside of Detroit, there’s a disassembled BMW 328i and broken apart models from Honda Motor Co. and Fiat Chrysler Automobiles NV. Doors, body panels, valves, wiring harnesses and circuit boards hang on peg boards throughout the warehouse.
Munro’s team has taken apart about 400 different vehicles from almost every carmaker. The firm has also done work for aerospace giant Boeing Inc. and defense contractor Raytheon Co., among others.
The Model 3 that got the tear-down treatment was a $50,000 version with a black paint job. Munro estimated the total cost to build was $34,700. Adding in logistics costs and a generous assumption for labor, Munro estimates that gross profit margins would exceed 30 percent.
A cheaper version of the Model 3 examined by his team would cost less than $30,000 to build, Munro said, because the smaller battery is less expensive and some other equipment would come out of the car. By comparison, Munro estimated the cost to produce the Chevrolet Bolt at a little more than $30,000 in parts, while the BMW i3 costs less than $33,000. Munro said his margin estimates don’t count costs like R&D investment and engineering.
Musk has described consultants working for Tesla as “barnacles” that need to be scraped off, but Munro is the rare outsider who did get his attention. After he put out an initial report in April, identifying problems with the design of the Model 3, Musk’s team arranged a call. The manufacturing analyst warned the Tesla chief that his car was heavy, too expensive and needlessly complicated to assemble. According to Munro, Musk replied that he had already fired the engineer responsible for the body’s design.
“Not fast enough,” Munro recalls saying, adding in the interview that Musk, “never should have hired him.”
Musk did not say who he fired, but there has been a lot of turnover at the company in high-level positions. Doug Field left Tesla as chief of vehicle engineering in June. He never developed cars before arriving at Tesla.
“Tesla wants to do things their way, not the conventional way,” said Morningstar Inc. analyst David Whiston, whose $179 a share price target is among the lowest of analysts covering the company. “The company is still young and has a lot of things to work out.”
Musk has said that the company is working to boost efficiency, especially in the body shop. Tesla can better design for ease of manufacturing and change its approach how it joins different parts of the car together so that it's lighter, cheaper and stabler, he said on an earnings call in August.
The Model 3’s profit potential as assessed by an outsider like Munro is impressive—but it comes with a huge caveat. Tesla hasn’t let Munro visit the company’s car factory in Fremont, California. So Munro created his estimates as if the Model 3 had been built in an average Toyota or GM plant. Tesla has far more employees than Toyota and GM had when they jointly ran the same Fremont factory, and that inefficiency could hinder profits.
Tesla has roughly 10,000 employees in the Fremont plant. At their peak, Toyota and GM had 4,400 workers who made 450,000 cars a year at the same facility, said Ron Harbour, senior partner with consulting firm Oliver Wyman. Tesla, he said, has way too many workers.
If Tesla can consistently turn out 5,000 Model 3s per week, the plant would build at most 350,000 total vehicles, including Model S and X, next year. Part of that workforce can be explained by Tesla’s decision to do a lot of work in house that other carmakers don’t, like build its own seats. But Munro said that even with extra work, the staff appears bloated.
“There’s no way you need 10,000 people even with three shifts and with a lot of work done in house,” Munro said.
Another reason for the elevated headcount is that the indoor assembly line, which Tesla calls GA3, had an automated conveyance system that failed. In the spring, Tesla finally ripped it out and used the parts to build the new assembly line under a gigantic tent.
Again, the design of the Model 3 contributed to the problem: Munro said its many weld points and rivets are just not designed for heavy automation. Musk admitted as much when he tweeted in April that “excessive automation at Tesla was a mistake.”
“There’s clearly too much human integration in manufacturing, and that's true with the Model S and X, too,” said James Albertine, analyst with Consumer Edge Research LLC. “Elon’s focus has been on better battery range and performance.”
While Tesla's manufacturing process would have benefited from a more old-school approach, the company has an edge with regards to technology. The 75 kilowatt hour battery inside a Model 3 goes 310 miles on a charge, about 70 miles further than a Chevy Bolt and about triple what the BMW i3 can do. Tesla’s battery costs more than $13,000, Munro estimates, about $1,000 more than a Bolt.
The Model 3 not only goes farther on a charge—it’s a lot faster due to the advanced electric motor. Tesla’s motor costs $754 a car compared to $836 for the Bolt. The teardown by Munro’s team revealed an advanced design that uses powerful magnets to spin faster and generate more power. “This electric motor is a game changer,” he said. “Everyone should be benchmarking this.”
The software and electronics are also better. Munro found that Tesla reduced the amount of wiring snaking through the car by concentrating a lot of the electronics in small circuit boards. That’s knowledge from Silicon Valley that the carmakers don’t have.
The trick now is turning this established technological advantage into consistent profits—and to do that Musk needs to hire executives with experience in the nuts and bolts of carmaking. If he does, Munro said, “he’s not far away from making money.”
--With assistance from Dana Hull.
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