Tesla's real capacity problem: Too many people

Tesla CEO Elon Musk said last week the company has run out of space at its Fremont, Calif., plant and is looking to build a second factory.

"There's no room at Fremont," Musk said. "It's bursting at the seams."

But that statement left plenty of industry watchers scratching their heads.

Tesla's Fremont plant is the old New United Motor Manufacturing plant, otherwise known as NUMMI. The joint operation between General Motors and Toyota began in 1984 and was intended to help the Japanese automaker learn about doing business in America and teach GM the principles of lean manufacturing.

The plant, 32 miles from Tesla's headquarters in Palo Alto, is large enough to handle around 500,000 vehicles a year in 5.3 million square feet of office and manufacturing space. Tesla, meanwhile, produces about a fifth of the plant's capacity.

So what gives? Why is the electric-vehicle manufacturer running out of room?

It's because in this temple of lean manufacturing, Tesla uses far more workers than NUMMI employed to build far fewer cars. In 1985, its first full year of production, NUMMI had 2,470 employees and produced 64,764 vehicles — about 26 vehicles per worker per year. By 1997, it had 4,844 ​ workers and produced 357,809 vehicles — about 74 vehicles per worker per year.

Tesla, on the other hand, had between 6,000 and 10,000 workers in 2016 and manufactured 83,922 vehicles. That puts its vehicle-per-worker number between 8 and 14, about one-seventh the efficiency of NUMMI at its peak.

"The number of people Musk's got in there has a great deal to do with why he doesn't make money building vehicles," said automotive manufacturing consultant Michael Tracy of Agile Group in Howell, Mich. "Toyota's numbers reflect the number of people you expect to have if you were going to efficiently build vehicles for a profit."

Tesla's plant is so overwhelmed with workers, employees have to fight to find space for their cars. Musk said on Tuesday that parking at Fremont has been a major problem, and that recently, employees "practically had a riot" over trying to find space.

In a recent Wall Street Journal report, one former Tesla recruiter said some employees would make deals with workers on other shifts to hold parking spots for them, paying in cash or cigarettes or bartering. The story cited an Instagram feed that highlighted the parking problems in the Tesla employee lot. The feed was taken down for a while but has been resurrected, and shows SUVs sitting atop parking lot dividers and cars parked extremely close together.

Tesla, which declined to comment for this report, has added many workers in the past year as it tries to quickly ramp up production.

The Fremont factory assembles the Model S sedan, Model X crossover and the soon-to-launch Model 3. Musk said the upcoming Model Y will be built in a separate factory.

In Tesla's fourth-quarter earnings call in February, Musk said that once the Model 3 launches, he plans to begin producing 5,000 vehicles per week in the fourth quarter, and ramp up to 10,000 vehicles per week by 2018.

"Going from 100,000 to 500,000 units is a huge leap for any company," said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions. "For them to build a half a million units next year, it would be an amazing ramp-up for what is still a startup company. There's all kinds of red flags."

When the plant was NUMMI, GM executives worked alongside Toyota executives and tried to soak up as much information as they could about how the Asian automakers worked. Many traveled to Japan to tour Toyota's Takaoka plant to observe the difference between American plants and Toyota's. There, the executives saw clean plants where workers had autonomy to stop the production line if they spotted a problem. That way they could fix the problem before passing the vehicle to the next worker.

Several high-level executives made their starts at NUMMI: John Krafcik, former head of Hyundai's U.S. operations and now CEO of self-driving car company Waymo; former Chrysler CEO Tom Lasorda; and Mark Hogan, who held several senior executive jobs at GM and is now the only foreigner on Toyota's board.

Another concept that flowered at NUMMI was just-in-time production, where suppliers deliver parts to the plant just before they are needed on the production line. That saves the plants from having to store parts, reducing waste and inventory costs.

Tesla is taking its own approach to manufacturing. Mike Ramsey, a transportation and mobility analyst at Gartner Inc., said Tesla does a lot of things itself that other companies hand off to suppliers. It makes its own seats in the Fremont plant, assembles battery packs on-site and houses hundreds of engineers in Fremont.

"That's the reason why the parking lot is overflowing," Ramsey said. "When the Model 3 goes in, I have no idea where people will park."

Additionally, the body shop and many assembly functions are not on a traditional production line, he said, and they take up a lot of floor space.

Tesla acquired the Fremont plant for $42 million in 2010 after GM went bankrupt and Toyota decided to sell its stake in the plant. Since then, Tesla has leased the neighboring 500,000-square-foot building that formerly housed defunct solar company Solyndra and has been approved by local regulators to increase the operation's campus by 4.6 million square feet.

While Tesla has taken a Silicon Valley approach to everything from product development timelines to sales, the decision to invest in more real estate brings it closer to its Detroit rivals.

"If they're going to be a real automaker like the rest of them, they're going to have to spend billions of dollars on new plants," Ramsey said. "They're becoming less of a tech company and more of a manufacturer."

To build a factory from the ground up, Tesla will have to invest more than $1 billion, in addition to developing a new vehicle in the next two years. But as long as there is demand for Tesla vehicles, Ramsey said, Musk will be able to raise that cash from capital markets.

"There seems to be no appetite for cutting off their capital," Ramsey said. "As long as it's related to growth, they're not going to have any problem selling it."