I think a good place to start would be if you could provide some background to how you first came into contact with Tesla.

At that point in time, we saw there was a small company that was on the rise and we were interested in getting in contact with them. It was rather difficult for us because they try to avoid any outside influence or close co-operation. From the beginning, their biggest threat or fear was to get too involved with a big external company as they are normally much more complicated, very bureaucratic, behind the times, et cetera. I think it was in 2005/6 that I had the chance to meet Elon Musk for the first time, when I was in California for another meeting. I visited him and we talked a little bit and he said, “Maybe it makes sense for us to have a meeting at Tesla.” It was a few months later when we met, and at that point Elon was on the advisory council, he was not CEO, and we talked. I had two colleagues with me and I asked him if he would be interested in delivering a battery for our Smart application, the small car brand. The CEO of Tesla was not very pleased about that and thought it wasn’t a good idea, but Elon thought “Maybe, we can do that.” To cut a long story short, that was more or less the entrance fee or ticket for that kind of co-operation. He was interested in doing that to get a little bit more in contact with the automotive industry. But, once again, he was very suspicious regarding that involvement and what that then means.

Then we started. Of course, from the beginning, we thought about buying shares from Tesla. But he refused totally and said, “That’s not my intention.” I think it was in 2007, he was on the edge of bankruptcy because he ran out of financials. He had a lot of big problems, kicked out 50% of his staff, a lot of the people working in the engineering department. From one day to the next, he was suddenly open to that kind of co-operation. We started negotiations for that, and finally we bought 10% shares of Tesla. From my point of view, maybe Elon would see it differently, that was more or less some kind of key success factor. On the one hand, getting fresh money, and on the other hand, he could get some reputation showing the world that he is in close co-operation with a big OEM. That was my impression. One or two years later, Elon said to me in a private discussion at dinner that he would never forget that I was the one who supported him in that regard. Today, of course, he's forgotten all of that, but that was his reflection at that point.

What was interesting for me in all those negotiations was that, of course, he needed the money, but he was not at all open to close co-operation, because the automotive industry normally thinks in engineering, production, aftersales, workshops, etc. We offered him - you could say just as a gift - the opportunity to use our workshops or our after-sales organization, or repair shops, magazines where he could offer his product, and he said, “No, I will not do that.” It wasn’t disappointing for me but it was interesting that he refused that. He refused that due to the fact that he did not want to be part of a complicated organization. For me, that is one of the success factors and the disadvantages regarding a big OEM and his startup.

Of course, you can see and find all those kinds of behaviors in lots of startups. Most startups think about how they can co-operate but they also don't want to be too close to a big organization. Of course, that was one of his big success factors. We made that contract and we bought the shares.

He said that he wanted to have me in his advisory council. We did that and it was interesting how uncomplicated and how focused on one decision maker it was. Normally, in a big organization, you have too many people talking about one topic, and this was definitely on the opposite end of the spectrum. It started a kind of learning curve for me. He didn't have those complicated big meetings that last 3 or 4 hours, which is still the culture in the big companies. And in small companies, it's still the issue. I admire that very much. There was a discussion about engineering topics. In our culture, we would have 30 people round the table, with only two or three discussing the content, and the rest are more or less being broadcasted to and would just listen. What they did was definitely the other way round: somebody presented his issue or problem and then in 5-10 minutes there was a clear decision. Elon did that and then he left. That was so unique for me and in my opinion, that is one of their success factors. They are very flexible and everything is tailored to the decision of the one person, Elon. Of course, there are advantages and disadvantages to that but it was always clear who the decision maker was, and how quickly he could do that. Employees don't have to bother themselves with a lot of additional activities. For me, that is one of their success factors.

He had the chance to build an electric car without any conflicts, without having to take care of what is going on with combustion engines, and how to match up with that. He was clear in saying “Build up an EV. I have a battery, and I now want to build the car around the battery.” This was totally different to our activities, of course. That, for me, is the second success factor. He did that very flexibly. He learnt a lot in a short period of time. He had people with him, but he was not that committed to them. He very often switched gears, got new people in. If he thought somebody was not the right guy for the corporation, he would kick him out. It was not a discussion over time, it was from one minute to the other. I saw a lot of good people coming and going. If they were not, let's say, on his track, he would fire them immediately. You could say that that's not the way you should do business, but that’s how he does business.

The last point is the manufacturing. One of the reasons he has been successful up to now is the NUMMI plant. Of course, you can discuss whether or not it is a success, the company is still burning money but he is on the market and he is influencing the market intensively. He wouldn't have had that success without the gift from Toyota, who more or less sold him the NUMMI plant for $40 million, which was a real gift for him. I know that up to that point, or two or three months before, he did not even have a plan of how to build up the production line. He dreamed about taking over a big building that was used to produce some of the first aircrafts in the 1930s. He was always dreaming about history and roots, but he had no clue how to build that up. At that point, I was rather suspicious about whether he could really survive. But once again, from one day nearly to the next, the NUMMI plant from Toyota was on the market and he bought it. I saw it as a real gift for him. Of course, he took the opportunity. It wasn’t a rubbish or an old factory. He got the production line, and the vice president of Toyota's production line moved over because the NUMMI plant was his baby. He was well trained and knew everything about the plant. That was more or less the second or the third success factor.

The last one, of course, is that his motto was always “I will never give up.” It’s his brain and his commitment, he was always the guy who led that company. And all the nice stories you read were really true, that he lived in the factory, that he put a carpet of a few square meters in the assembly plant and said “there’s my desk,” that he was steering the whole thing, that he was there 18 hours day, and that he slept in the factory. Of course, that is a very, very important signal to the people working with him. For me, that’s the story of what might be behind the success of such a new entity.

Could we go into each of those points? I think they’re all very interesting individually. Firstly, the culture, you highlighted how Elon is the key decision maker and that is very flexible and fast-moving by comparison to the incumbent OEMs. Is there any major difference in the organizational structure, i.e. the way that the engineering team works with design or anything throughout the value chain of the organization?

Due to it being a small company, they sit together very closely. There are these nice little stories where someone has an idea and wonders whether it could be successful. Well, the design was very close to the engineering, they sit next to each other. And there wasn’t that hierarchy there because one guy responsible for the advanced engineering and there was one design guy and more or less, they made the decisions together with Elon. There were not that many people.

I would say in the generation of the product there were not many people involved in discussions, arguments or reflections. It was only a small group of 2 or 3 people who decided what to do.

What did you learn from Tesla when they were supplying batteries for the Smart program?

Of course, the flexibility, the atmosphere needed to do that, being encouraged enough to do that. I don’t want to tell you how many people internally came to talk to me to say, “This will never be a success. What are you doing?” Two or three weeks ago, I had a meeting with a startup in Berlin and the head of that said to me, “You are blinded by your competence.” I laughed a lot about that, but I thought a lot about it in the meantime. That’s actually the type of thinking that’s very important to me.

And the kind of encouragement we got from working with Tesla was priceless. You can read about them every day in the newspaper and you could ask yourself “Is that really true?” It is really true. They did that. They were not aware of what the risks could be out of doing that. But he did that because he thought that that was the right way to go. Of course, with a high-risk factor, you will fail at some point. But, up to now, but he hasn’t failed.

From the beginning, he decided that he would do it with much lower capacity. Assuming he might be right on that, but at the end of course, he pumped in a lot engineering capacity, in order to achieve the result. He was not able to do that with 200 or 300 people. At the end, when I was there, there were 1200-1300 engineers in the engineering department. That kind of thing, of course, being very reluctant with additional capacity, he totally refused to work with third parties, engineering supply companies from outside. He said he would lose too much of his know-how to those people.

From the technical side, we were not very pleased the asynchronous e-motor, for example. We thought that that was the wrong way to go, because we wanted to have the permanent one. It depends a little bit on the efficiency but finally he was successful due to that point. It was a much easier design and it was very flexible. We learned to think about a new way to go with technical inputs. What he did with the design, he integrated the e-motor in the rear axle for example and that was a very successful step forward. He was not bound to something that already existed at that point in time. He was flexible enough to say “I’ll do that from scratch.” And he had the capability to do that.

We’ve seen issues in production for Tesla over the last year or so. They were targeted to ramp up to 5,000 vehicles per month in the 2nd or 3rd quarter of 2018, but faced some issues. What do you think were the root causes of those production issues?

He dreamed about being very flexible and automated, especially at the assembly plant and that was one of his big failures, which could ruin the company from one day to the next. The second thing is that he always told outside people that ramping up from 1,500 to 5,000 is not a big step, that it’s only a small step forward, and that’s definitely not the case. This is one of the second big failures he’s met, thinking “Well, for me, it’s not a big problem to make that step.” That was a big failure.

With that kind of flexibility, everything isn’t 100% fixed. You have to do some kind of repairs. For example, for me, that’s not an issue at all. I don’t have any repair stations. That is of course the big advantage of not being that flexible.

What was the basis of Elon’s view that it wasn’t an issue to ramp from 1500 to 5000?

He felt he had demonstrated that he could do that, therefore it wasn’t a big issue for him. To double the capacity, or increase it by a factor ten, it wasn’t an issue. He just wasn’t aware of what could come up at that point. That’s one of the disadvantages of that kind of organization, he wasn’t prepared to listen to any good proposal from the more experienced people working for him. In the meantime, he hired guys from Audi, that guy from Toyota I told you about, but he wasn’t listening. I can easily see what those people would have wanted him to do that at that point that would reflect the kind of experience that they have. And he said, “I’m not doing that. I make the decision and what I’m dreaming about is an assembly plant that is more or less 100% automated, with robots doing everything.”

In that instance, he is missing his flexibility. That was his biggest failure, in my opinion. I don’t know the finer details. But seeing it from the outside and hearing bits and pieces from people, that was the key factor causing the problems he had and that he is still having with the Model 3.

From your experience of the assembly process, could you walk through the major differences between Tesla and Daimler?

In normal OEM-related manufacturing, you maybe have 20-30% of the assembly plant automated. Tesla does that with 80-90%. In the beginning of my career, I started in manufacturing. After the body-in-white part, the paint job is more or less 80-90% automated. Of course, they have thought about automation: how they could do it and how it would make sense to map the assembly plant with that high automation rate, let’s say by comparison to a paint job. The result of those kinds of studies was always that it was not worth doing, you lose flexibility. Elon said “I’m not interested in those experiences; I have my own model and I will go in that direction.”  I think that was the big failure.

Do you think it’s possible for Tesla to have that level of automation and produce 300,000-500,000 cars a year?

I don’t think so, because the conclusion that came out of that was that he is reengineering the assembly plant. You’ve seen the pictures; he is still doing a lot of hand working. He is still reengineering his assembly plant with a clear focus to throw out a lot of the robots that he put in with that dream to make that step forward in automation.

There’s been issue with the paint work and some other issues with the body in white. Is there any part of the process that you think doesn’t work for this level of automation?

The problem with the paint was perhaps related to the fact that the paint job itself wasn’t stable enough and the quality control wasn’t good enough in order to reduce the running rate. Additionally, he is not willing to have higher running rates, 10-20% running rates, which is more or less a given. in most of the OEMs, you have some kind of reduced running rate, not 100%, maybe 85-90%, which is quite remarkable. He was not prepared to do so. Where customers complained about the quality issues, those paint problems, were more related to that.

The assembly plant with the highly automated equipment means that he couldn’t put through the capacity. A failure here, a failure there and this robot with some kind of a mismatch or something like that, that reduces their running rate and the efficiency in the assembly plant.

Now, he’s intensively re-engineering the whole plant. So what’s the end game here from a manufacturing standpoint? Do they need to go back to the standard OEM assembly method?

Maybe that’s the difference between a startup and a big company. If you’re dealing with high capacity, that requires a lot of know-how, knowing how to deal with people and cooperate with people. You are not able to direct 15,000 people in the way that you did in your startup philosophy, which was a small group of people who wanted to demonstrate to the world that they are doing things differently. Of course, the mood in a new company is always a little bit better than in an older one. But you have to keep them on track in the day to day. But if he’s missing the throughput and he’s not managing to have his 5,000 units per month, then he’s not successful enough from an economic standpoint then he said “I’ll kick out 20% of my capacity,” which goes against what experience taught you. Experience should have taught you that you have to have more people to guarantee the volume and the throughput. It’s counterproductive. I don’t know how it will end up. That is maybe one of his biggest failings. Besides his engineering know-how, he is able to tell the world nice stories. He is a good story-teller, fulfilling wishes and so on. But, on the other hand, from my point of view, he is very arrogant. He doesn’t think anything could be wrong under his guidance. But that’s not the important issue for me. It’s one of the advantages and disadvantages of that kind of behavior.

How far ahead do you think Tesla are from a technology perspective? What do you estimate today that the kilowatt per hour price is at the sale level for Tesla? I’ve seen some say that it’s as low as $95 per kilowatt hour.

I've heard those kinds of numbers as well. He is gambling a little bit, of course. What he's dealing in is one of the most expensive parts, that’s cobalt. Some people are even dreaming about substituting cobalt in total. But, as far as I know, he reduced the cobalt content maybe 50% by comparison to all the others, which runs risks regarding safety. Cobalt gives you more stability regarding overheating effects. What we should not forget, which more or less gives him the opportunity to do that, is that he is very well connected to every car he has sold so far on the market. That gives him the capability over-the-air to check all kinds of topics over the car’s lifetime: what’s going on, the behavior of the battery, the temperature inside, et cetera. He knows that information from more or less every car in the meantime. He has collected a lot of data so far, which is one of his advantages. Of course, he studied software, maybe that’s the explanation. He implemented those kinds of technologies from the beginning, where the OEMs did not even think about that. Therefore, he’s still playing an important role in new innovation and optimization.

Some believe that the imagery that Tesla is collecting and the data they are collecting from the vehicles driven by Tesla customers potentially puts them in the lead in the autonomous race. They’ve reduced the cobalt in the batteries by a significant amount, which seems to fit with the narrative that Tesla's capital structure is pressuring the business on cost. We’ve seen them reduce cost. It’s a fast-growing business yet they are cutting employees, which doesn’t make sense to me, they’re also shutting down their stores and moving purely online. Like you said, they’re running the risk of taking shortcuts in the engineering or the safety in order to make this dream for Elon work at $35,000 for a Model 3.

He is willing to accept much more risk than anyone else on the market. He is brutal on that point. Nobody else is doing that. I don’t think that that is a strength. I’m still skeptical that he can ever achieve the $35,000 goal. But, he sees his material costs, and he believes he can calculate it very easily and he says “Okay, I have too many labor costs in the car that means I’ll kick out 20%” and try to flatter some guys on a freewheeling basis to support him, which is definitely not a success factor over a longer period of time. Maybe in the short-term it could work because of his visionary and iconic status in Silicon Valley, which gives him a lot of reputation.

So you don’t think it’s possible for a Model 3 to work at 25% gross margin target that he’s sighted? Excluding the credits they sell, it’s impossible for that to work at $35,000.

I don’t think so. We’ll see what the future will bring and what the developments will be. I’m really interested to see about that.

Tesla's Culture and Manufacturing Challenges

Former VP Daimler and Executive Board Member at Tesla

inpractise.com/articles/tesla-manufacturing-challenges

Why is this interview interesting?

Executive Bio

Herbert Kohler

Former VP Daimler and Executive Board Member at Tesla

Interview Transcript

Related Content

Tesla: Manufacturing Innovation

Former VP Daimler and Executive Board Member at Tesla

Tesla: Service, Support & Operations Network

Former Senior Director of Service, Support & Operations EMEA at Tesla

Tesla EV Battery Innovation and Strategy

Former CEO, LG Chem Power

Tesla Battery Unit Costs versus Competitors

Former CEO, LG Chem Power

Audio

Tesla's Culture and Manufacturing Challenges(December 4, 2019)

PARTNER

Speak to Executive