Tesla Model 3 Development Work Constrained By Tax Relief Program

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Documents filed by Tesla with the California Alternative Energy and Advanced Transportation Financing Authority and obtained exclusively by Daily Kanban have provided unique perspective on the electric automaker’s ramp-up to production of the Model 3. But there’s more to the story than the production side: Tesla’s equipment purchases are split between production equipment and tooling for the development and prototyping of Model 3, new versions of the Gen 2 vehicles and possibly even other vehicles hinted at in Tesla’s Master Plan Part Deux. This helps explain why the production volume increase from Tesla’s $1.2b investment in Model 3 is so modest, but what does it say about the state of the Model 3’s development?

Tesla’s Gen 2 expenditure was heavy on tooling equipment used for development and prototyping of new versions of the Model S, Model X and possibly new vehicles like the pickup truck and minibus that Tesla hopes will build volume on the Model S/X platform.  Less than half of that $463 million investment was spent on equipment that will be used in the long-term ramp-up of Gen 2 production capacity. About $263 million of it was spent on Component tooling, with the biggest line item being nearly $140 million for Body Shell tooling.

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Without stated plans for a major update to Model S and Model X or a clear timeline for the minibus and pickup truck from Tesla, it’s not obvious when these investments in Gen 2-platform vehicle development will bear fruit. But the fact that Tesla chose to invest in this development and tooling equipment before purchasing any equipment for Model 3 is telling. Given the the magnitude of the step from low-volume, labor-intensive Gen 2 vehicles to the high-volume, highly-automated mass production system envisioned for Model 3, this may suggest that Tesla’s Model 3-driven production transformation could affect Model S and Model X as well. Though re-engineering its established models will come at a high cost and could potentially slow the Model 3, it could improve flagging demand for Tesla’s Gen 2 vehicles and more importantly drive much-needed manufacturing efficiencies.

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The $1.2 billion expenditure for Model 3 is more heavily weighted towards production, but some $370 million is being spent on tooling. Here is how Tesla describes how it will use this development and prototyping equipment in its application to CAEATFA:

“The CAEATFA sales tax exclusion will support the new Model 3 electric vehicle design, development and prototyping with integration principally occurring in our design studio in Hawthorne, California and our corporate headquarters in Palo Alto, California. The results of ongoing design and development of electric vehicles will be leveraged for future production of Model S, Model X, Model 3 and other new line [sic] of electric vehicles.”

Development work on the Model 3 –of one kind or another– has been going on for some time at Tesla, but just how far along development really is can’t be definitively established. Clearly some of that work requires the use of the equipment Tesla purchased in its $1.2 billion Model 3 expenditure, which means this equipment is likely becoming a bottleneck. CAEATFA’s STE program rules allow Tesla to purchase equipment prior to approval, but forbids the use of the equipment prior to approval. CAEATFA staff tells Daily Kanban that Tesla’s Model 3 application won’t be approved until December, which means Model 3 development work that requires the use of this new tooling can’t take place until sometime in December.

That gives Tesla a little more than six months between the STE approval needed to use this $370m worth of Model 3 development and prototyping equipment and the July 1, 2017 deadline for suppliers to have production-ready parts ready. That’s an incredibly short time period to develop, prototype and tool up for what is essentially the entire car. Here’s the list of the equipment Tesla is purchasing for Model 3 tooling:

  • Dies, other tools & prototyping and design materials used in the creation of body shells.
  • Dies, other tools & prototyping and design materials used in the creation of closures.
  • Dies, other tools & prototyping and design materials used in the creation of exterior systems.
  • Tools and prototyping design materials used in the creation of powertrain components.
  • Tools and prototyping design materials used in the creation of chassis components.
  • Tools and prototyping design materials used in the creation of thermal components.
  • Tools and prototyping design materials used in the creation of 12V electric components.

In short, almost every aspect of the Model 3 will be touched by this equipment. Tesla has previously developed vehicles in as little as 18 months, which is far more aggressive of a timeline than any other OEM uses, but depending on how much work is waiting on this new equipment the Model 3 could have to be Tesla’s most rapidly-developed vehicle ever in order to begin manufacturing vehicles with production parts by mid-summer 2017.

In the meantime, Tesla has an extremely limited amount of time to test “Alpha” prototypes before “Beta” pre-production (using “production-intent” parts) begins. Tesla has two running development vehicles which have been spotted testing on public roads and which were highlighted at the reveal event earlier this year. But these must be hand-made machines using a mix of components borrowed from Gen 2 vehicles and one-off parts. The rumored fleet of 300 Alpha prototypes that Tesla plans to use for validation testing likely requires the equipment that Tesla can’t touch until December.

With about 6 months to build that fleet of Alpha prototypes, test them around the world in all kinds of conditions, make design changes and get design revisions to suppliers by July 1 Tesla is under the gun. Cutting corners on this crucial testing may help keep Model 3 moving roughly on schedule, but could come at a terrible cost. Lack of pre-production testing has plagued Tesla with a wide variety of quality problems, ranging from shortcomings in basic durability to more complex issues like the headliner mold problem I discussed in this interview with Vox. With six months between Alpha prototypes and Beta pre-production and the promised start of customer deliveries within the next six months, Tesla is tempting fate.

Tesla has already hinted that the Model 3 will be “beta tested” by the public, saying employees of CEO Elon Musk’s companies will be the first to get Model 3s. That will help catch some of the worst Model 3 quality problems before they hit the general public, but it also raises the question of when people whose paychecks aren’t signed by Musk will get their cars.

When true public deliveries do take place, Model 3 will have to have undergone the best testing and quality assurance of any Tesla ever built. That’s because consumers in the Model 3’s $35,000+ price range are actually far more demanding than consumers of the more expensive vehicles Tesla has sold thus far. With what looks like less than a year between true Alpha prototyping and customer deliveries, a major improvement in quality seems all but impossible to achieve.

Though investors and reservation holders are doubtless anxious to see Tesla hit its ambitious development and production goals, making cars is a long game and it probably makes far more sense to delay the timeline in order to make the necessary improvements in quality.