Test for Tesla: Luring suppliers to Calif.

For now, many parts are shipped thousands of miles

Tesla has transformed a vacant part of the former New United Motor Manufacturing Inc. plant in Fremont, Calif., left, into a trim line, right.
Challenges in supplying Tesla
  • Tesla’s Fremont, Calif., plant is 2,000 miles from the center of U.S. parts production.

  • There are no other California auto assembly plants.

  • Tesla’s premium-segment market is low volume.

  • Tesla remains an unproven customer in the industry.

  • Suppliers are uncertain about Tesla’s quest for vertical integration.

As Tesla Motors slowly increases the small production volumes of its assembly plant in Fremont, Calif., CEO Elon Musk is reliving a challenge that also bedeviled the world's biggest automaker when it owned the plant.

For all its scale and prestige, even Toyota Motor Corp. struggled to get its supply chain to manufacture nearby in California.

Musk is determined to build Tesla into a large-volume producer of electric vehicles. But the supply industry reality is that parts makers are reluctant to invest in capacity in a remote location where there are no other potential customers.

Especially California.

"Nobody wants to open a factory in California," says a former executive of Toyota's North American manufacturing operations, who worked with Toyota's suppliers but asked not to be named. "For all the reasons everybody knows too well: It's high cost. Real estate is expensive. The regulations are difficult. Environmental impact issues are trouble. You name it.

"We had some success recruiting suppliers -- but not as much as we wanted."

Tesla declined several invitations to talk about prospects for localizing its supply base around the Fremont factory, a huge plant that it bought from Toyota in 2010 for the bargain sum of $42 million. But sources familiar with its efforts say that while meaningful localization has not yet happened, the situation is subject to change.

"I'm hearing from a few of our fellow suppliers that they are really thinking about it now," says a supplier executive from the Midwest-Southeast U.S. automotive belt whose company supplies Tesla but asked not to be named. "A couple of them have told me they are at least considering the idea of a California plant. And I think some will do it.

"It's really hard to make it work. But when you talk to Tesla's people, they are so pumped about what they're doing that you really believe in the project."

The project is anything but modest.

Musk wants to build a full range of EVs at the former Toyota plant, which is in turn a former General Motors plant. Fremont is 2,400 miles from Detroit and the traditional U.S. supply base that is centered there. Toyota and GM operated the California plant from 1984 until 2009 as New United Motor Manufacturing Inc., producing Toyota and GM-badged vehicles. GM's financial crisis of 2008-09 caused it to bail out of the plant. Toyota continued to operate alone there until 2010.

Adequate volumes?

Musk told analysts this year that Tesla will produce 500,000 vehicles in 2018, up from about 50,000 last year. The company has frustrated onlookers by not reporting its sales volumes, so it is unclear how many vehicles a month the plant is building.

This year, Tesla unveiled its plan to produce the Model 3 there, a compact EV with a base price of around $35,000. Tesla subsequently said it has received 400,000 advance orders for the Model 3, although that number does not provide any measure of annual factory volume.

At least until then, a large share of the parts that supply the company's Model X crossover and Model S sedan are being shipped from 1,500 to 2,500 miles to the east. That is not the ideal just-in-time arrangement that the industry prefers. Most automakers are striving to work with synchronized deliveries of key parts, and suppliers operating close enough to meet face-to-face if production glitches occur.

Vertical integration

Trip Chowdhry, an analyst with Global Equities Research who is tracking Tesla's development, predicts Tesla will increase the number of components it brings in-house in a bid to become "the world's most vertically integrated carmaker."

That might be frustrating to traditional North American parts makers, Chowdhry says, but it represents what he believes will be a shift in the way automakers build vehicles.

"There are things that are true of the auto industry in general that are not necessarily the case for Tesla. And suppliers are one example," Chowdhry says. "Tesla will do well as a vertically integrated manufacturer, making its own parts. Making parts in-house depends on developing the skills to do it. And Tesla is very determined to develop those skills."

On the other side of the argument is Tesla's decision to outsource one of the most critical parts of its cars -- the electric-battery powertrain.

Tesla's electronics supplier, Panasonic, is helping Tesla build the "gigafactory," a lithium ion battery system plant near Reno, Nev., 240 miles from the Tesla plant. The gigafactory sits close to the Nevada-California state line, safely outside California for regulatory and legal purposes, but as close to Tesla as possible.

The former Toyota executive observes that the gigafactory is a supply chain improvement over what Toyota had at NUMMI. NUMMI relied on powertrains being shipped from Toyota's engine operations in the eastern U.S., more than 2,000 miles away, at considerable expense. By contrast, Tesla will ship its powertrain only 240 miles, starting next year.

Chowdhry believes the supply chain picture will continue to evolve as Tesla ramps up production.

"In the early days at Tesla, nobody wanted to even do business with them," he says. "They were unknown. You didn't know if they were going to fail.

"Now they're gaining speed and suppliers see them as a good customer to grow with," he says.

"So I believe, over time, you'll see a lot more suppliers getting close to them."

Challenges in supplying Tesla
  • Tesla’s Fremont, Calif., plant is 2,000 miles from the center of U.S. parts production.

  • There are no other California auto assembly plants.

  • Tesla’s premium-segment market is low volume.

  • Tesla remains an unproven customer in the industry.

  • Suppliers are uncertain about Tesla’s quest for vertical integration.
You can reach Lindsay Chappell at lchappell@crain.com

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