Tesla's "Hyper-Automated" Assembly Line Could Be Its Downfall

Elon Musk’s obsession with using robots to build cars is to blame for Tesla Inc.’s (TSLA) production setbacks and out of control cash burn, analysts at Bernstein have warned.

In a research note, reported on by Business Insider, Max Warburton and Toni Sacconaghi said Musk’s decision to use automation for final assembly is one of the main reasons why Tesla is unable to meet its Model 3 production commitments. Using robots to put parts into vehicles, they added, is a risky and complicated process and one that many of the world’s most established automakers and leading academics on the topic have determined “is expensive and… statistically inversely correlated to quality.”

The analysts claimed there’s plenty of research showing that “automation is often contrary to the principles of lean production.” Tesla, they added, appears to have ignored this advice and the fact that the Japanese, among the world’s best and most experienced automakers, only bring in robots after they get the process right.

"When it comes to auto production, Elon may have fallen in love with the wrong thing. He's fallen in love with robots and automation," the analysts wrote. “There is a body of academic and practitioner research. It appears [as] though Tesla has chosen to ignore it. Or perhaps Tesla is convinced it's out of date, in an age of better sensors and computers." (See also: Tesla Suspended Model 3 Production for a Week in Feb: Report.)

Bernstein also warned that Tesla’s obsession with automation isn’t providing much in the way of cost advantages. According to the firm’s estimates, the electric automaker spends about two times more what traditional manufacturers typically pay per unit on capacity.

Automating 50% of final assembly tasks, rather than the industry standard of 5%, could cut labor costs by “5 or so hours”, the analysts explained, saving the company about $150 per car, if each of those workers was paid $30 per hour. However, they warned that the benefits of removing five employees would be offset by the need to hire a skilled engineer to manage, program and maintain robots at an average hourly rate of $100.

“The net labor saving may be only $50 per unit,” the analysts wrote. “Yet putting the automation into the plant seems to involve an apparent capital cost that's $4,000 higher per unit of capacity than for a normal plant. If the product is built for 7 years, that's over $550 of additional depreciation per unit built. It's hard to see an economic case even if somehow the Fremont Model 3 line can be made to work. So why exactly has Tesla taken this route? It's unclear."

Tesla shares fell nearly 7.7% Wednesday, off more than 30% from its record high hit in September. The stock is down about 14.5% this week, following news of an investigation into a fatal car crash, a rise in short-seller interest and Moody's downgrade of the electric automaker's credit rating. (See also: Tesla Downgraded by Moody's Amid Model 3 Production Woes.)

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