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14-157 July 24, 2014

This case was prepared by Milo Werner (MBA ’13) and Professor Charles Fine. Professor Fine is the Chrysler Leaders for Global Operations Professor of Management.

Copyright © 2014, Charles Fine. All rights reserved. No parts of this published material may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the MIT Sloan School of Management.

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The Tesla Roadster (A): Accelerated Supply Chain Learning Charles Fine, Loredana Padurean, and Milo Werner

The Tesla proposition for eco-conscious speed lovers: By 2008, $109,000 would buy you 0-to-60 mph acceleration in less than 4 seconds with zero tailpipe emissions.1 Was this a threat to Lamborghini, Ferrari, Porsche, or any other traditional auto manufacturer? Some people thought the disruption might be monumental. However, in late 2007, the emerging company was facing significant challenges in operating its global supply chain to manufacture the market-challenging Tesla Roadster. The company’s manufacturing strategy was built on a time-honored tradition in Silicon Valley: “Design in California, Manufacture Overseas.” However, problems in Tesla’s long-distance supply chain were threatening the viability of the production target to build 2500 Roadsters at a rate of 25 per week.2 The company’s cash position was precarious; it needed to produce and deliver cars, and to generate revenue.

Company Background

Tesla Motors’ early development was built on a collaboration among Elon Musk, JB Straubel, Martin Eberhard and Marc Tarpenning. The four had been working independently to commercialize a kit electric sports car created by AC propulsion. Tesla’s market strategy was to enter with a low-volume, high-end sports car and move down the cost curve into more affordable models.

1 Ze’evDrori, “We have begun regular production of the Tesla Roadster,” Tesla Motors Blog, March 17, 2008. <http://www.teslamotors.com/node/3939> 2 Milo Werner, Interview, June 12, 2012.

THE TESLA ROADSTER (A): ACCELERATED SUPPLY CHAIN LEARNING

Charles Fine, Loredana Padurean, and Milo Werner

July 24, 2014 2

By 2007, Elon Musk, a key initial investor in Tesla Motors, had increased his investment commitment.3 Musk was a highly successful entrepreneur who had co-founded Paypal and used some of his proceeds to invest in Tesla as well as Space-X, a space transport company designed to revolutionize space technology with the ultimate goal of enabling people to live on other planets. After three years and three rounds of funding, the first Tesla Roadster engineering prototype was produced. Less than a year later, the first validation prototype already incorporated a number of design changes from the previous version (Exhibit 1). Creating an automotive company from scratch is an audacious goal and doing it with an unproven powertrain technology seemed downright foolhardy to many. However, the vision, to bring electricity-propelled transportation to the road for the masses, was compelling to the founders and the band of believers they gathered to pursue their dreams. JB Straubel,4 CTO and co-founder, stated it simply: “What I care about is displacing oil.” From re-building an electric golf cart at age 14, he went on to build a custom electric bicycle, pioneer a hybrid trailer system, and set a world EV racing record with an electric Porsche 944. Straubel had been involved in every aspect of the company's development, from technology invention to supplier identification to prototype construction. Tesla’s strategy began with a focus on a segment of the high end of the market: people who wanted to drive fast but not feel as though they were damaging the environment while doing so. “We wanted to show the world that you could be both green and fast,” said Jim Dunlay, VP of Powertrain Technology. Dunlay came to Tesla in 2006 with an MIT degree in Electrical Engineering and 15 years of experience with a series of entrepreneurial ventures within Sun Microsystems. He believed that Tesla’s success would require aggressive pursuit of the company vision, a willingness to take necessary risks along the way, and preparedness to rapidly adjust course as needed. The central tenets of the Tesla culture, he believed, were “scrappiness, hiring the best people in the world, allowing people to exercise their judgment in the face of uncertainty, and leading by example (Source: interview, 2013).” 3 Larcker, David F. and Brian Tayan, “Tesla Motors: The Evolution of Governance from Inception to IPO”, Stanford Graduate School of Business, May 16, 2011.

4 “Prior to Tesla, JB was the CTO and co-founder of the aerospace firm, Volacom, which designed a specialized high-altitude electric aircraft platform using a

novel power plant. At Volacom, JB invented and patented a new long-endurance hybrid electric propulsion concept that was later licensed to Boeing. Before

Volacom, JB worked at Rosen Motors as a propulsion engineer developing a new hybrid electric vehicle drivetrain based on a micro turbine and a high-speed

flywheel. JB was also part of the early team at Pentadyne, where he designed and built a first-generation 150kW power inverter, motor-generator controls, and

magnetic bearing systems.“ (www.teslamotors.com/executives).



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In Dunlay’s eyes, perfect was the enemy of good. “We have stage gates,” he asserted, “but at Tesla, the gates are always open rather than closed.” He preferred that the organization go ahead with speed and resolve, even when doubts existed, but to be prepared to recover quickly if plans went awry. “We have to be prepared to make mistakes, but to fix them quickly. We fly very close to the treetops, but have great confidence in our pilots.” Contrasting Tesla’s culture with that of the large traditional automakers, Dunlay said: “The dinosaurs avoid risk. Their gates are closed, and they only open when the risk of proceeding has been eliminated. They move cautiously and very slowly. If we moved that slowly, we would die. We must err on the side of speed. We can always fix a problem if we are making a profit, but we cannot take the time to make it perfect. To move a program along, we often must release a Bill of Materials before it has been perfected. However, if there are problems, we are very good at following up rapidly and frequently with needed changes.” Tesla’s willingness to aggressively push technology barriers to delight their customers was the key to the “love” that customers felt toward the brand. “We got an emotional response to our brand,” he stated, “and that emotional relationship allowed us to get forgiveness from our customers if we pushed too far too fast.”5

Recent Electric Car History and the Tesla Roadster

The recent history of electric vehicles was marked by some spectacular failures. A decade prior to the launch of the Roadster, General Motors had developed and leased the EV1, an electric vehicle distributed ultimately to only 1200 consumers in the southwestern United States. In April 2003 GM infamously reclaimed its EV1s from the market and scrapped the cars and the concept. Several reasons were given for the program’s termination, including slower-than–expected progress in battery technology, a high cost of meeting the service requirements set down by the California Air Resources Board (CARB), and a major change in the regulations imposed by the CARB. Many observers, including some inside of GM, felt that termination of the experiment was premature, but ultimately GM had little to show for approximately $1B invested.6 In 2005, Shai Agassi, a software entrepreneur who had sold his startup company to SAP for $400M, began work on a company called Better Place. His concept was to build an all-electric, mid-market car with swappable battery packs that could be quickly exchanged in service stations that would be as ubiquitous as gas stations. Agassi raised almost $1B in capital, burned though it very quickly with an execution plan that was erratic and extremely optimistic, and eventually departed the company a short

5 Jim Dunlay interview November 13, 2013 6 http://en.wikipedia.org/wiki/General_Motors_EV1, accessed May 4, 2014.



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time before it went into bankruptcy 2013. Better Place succeeded in putting only about 1400 cars on the road before it was shut down.7 Tesla decided to launch its electric vehicle offerings with a high-performance sports car. The Roadster took advantage of the electric motor’s natural performance advantages over a traditional gasoline-powered internal combustion engine. Gasoline engines produce very low torque at low speeds and suffer from decreasing torque at high speeds due to friction and other limitations of the internal combustion engine. Electric motors, in contrast, can produce maximum torque from a dead stop. Tesla’s electric motor was designed to reach (rpm) speeds of at least twice the normal limit for a gasoline engine.8 These features allowed Tesla’s designers to achieve blistering acceleration with a simple one-gear transmission. (See Exhibit 2 for a comparison of torque and power vs. engine speed of the Tesla’s electric motor vs. a high performance 6-cylinder gasoline engine.) In part because electric motors don’t have the efficiency losses from heat generation that combustion engines suffer from, electric motors are significantly more energy efficient than internal combustion engines (Exhibit 3). Perhaps to their peril, none of the high performance market leaders such as Porsche and Ferrari considered the Tesla Roadster as a direct competitor. At the time, this was understandable. The Roadster’s top speed of 125 mph was significantly lower than any Porsche or Ferrari. Additionally, the interior design of the Roadster was minimalist, whereas Porsche and Ferrari offered a luxury interior experience. Tesla was targeting wealthy, environmentally conscious automotive enthusiasts, a market on which no other company was focused.9 The electric motor enabled a combination of acceleration and energy economy unmatched by internal combustion engines, and such motors had been available virtually since their invention by Nikola Tesla in 1909. However, the greatest challenge to electric vehicles had never been the motor, but rather energy storage. Gasoline has an energy density unmatched by any substance other than rocket or nuclear fuel, so that a conventional automobile could travel hundreds of miles between refueling stops. Although battery technology was continually improving, the energy density was low compared with fossil fuel, so driving range between charges had always been seen as the downfall of electric vehicles with batteries on board. This was the challenge that JB Straubel initially sought to attack: “I was building batteries in my living room. Although the automobile industry was very mature, battery technology for cars was very immature.” 7 Max Chafkin, “A Broken Place: The Spectacular Failure of the Startup that Was Going to Change the World,” Fast Company, May 2014, http://www.fastcompany.com/3028159/a-broken-place-betterplace?utm_source=facebook, accessed May 4, 2014. 8 http://webarchive.teslamotors.com/performance/acceleration_and_torque.php 9 Elon Musk. “The Secret Tesla Motors Master Plan”, Tesla Motors Blog, August 2, 2006. <http://www.teslamotors.com/node/3917>



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Jason Mendez, Director of Manufacturing Engineering, added, “We built the battery, powertrain electronics, and motor from scratch. We are very proud of the powertrain.”

The Lotus Relationship

Driven by the willingness of Elon Musk to fund the company’s vision,10 and in part by leveraging technology from a company called AC Propulsion, a small startup team made significant progress in the battery, powertrain, and power electronics. Straubel believed Tesla could build a battery-powertrain combination that had the potential to fulfill their objectives – to produce a car with a range comparable to that of conventional gasoline-driven vehicles. However, they could not design and build an entire production automobile on their own. “We needed an automotive partner,” recalls Straubel. “We did an extensive search. None of the big guys would even talk with us. Even Lotus, a small, contract manufacturer, were only remotely interested in partnering with us.” Lotus manufactured its own range of gasoline powered, high-performance vehicles, and also generated a substantial portion of its revenues by contracting engineering work from other premium European automakers. Lotus was a relatively low volume manufacturer and, ultimately agreed to produce a maximum of 40 vehicles per week for Tesla. While other high-performance sports car manufacturers distinguished themselves by offering supercars with very large engines, Lotus instead flexed its engineering muscle by designing smaller, lightweight cars with small high-performance engines to create an exciting driving experience. In addition, Lotus engineers were focused on creating an exhilarating driving experience rather than a comfortable one. As a result, Lotus vehicles were typically minimalist two-seaters with stiff suspension and great handling. In order to save weight, Lotus vehicles generally lacked amenities such as power windows, cup holders, airbags, and carpeting. Tesla built a first “mule car prototype” by putting its electric powertrain into a Lotus Elise sport. Jason Mendez recalled the “insane ride” provided by that first car – a performance success that encouraged the team that their vision was on track. Tesla then signed a contract with Lotus to build Tesla-designed vehicles and accommodate a significant production run of Roadsters. Although the Roadster bill of materials shared very few parts with the Lotus Elise, the supply chains overlapped significantly. Even with Lotus as a partner, with a small revenue opportunity, no obvious market, and no track record, convincing suppliers to make parts for the Roadster was a huge challenge for Tesla. The Roadster‘s carbon fiber body was attached to an extruded aluminum frame, yielding a lightweight, rigid platform for a high-performance automobile. While the Roadster and the Elise 10 By the end of 2007, Musk had contributed almost half of the $60.5 million raised in three rounds of financing, and had the largest stake in the company. He also helped attract the interest of other investors that eventually joined Tesla Motors over financing rounds A – D from 2004 to 200710 in Addendum 1. The balance sheet from 2007 is in addendum 3.



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were not identical in appearance, they were similar. In fact, one of the best ways to distinguish the two if seen on the highway was to look for the exhaust pipes: the Roadster didn’t have any. The Lotus arrangement freed up Tesla’s engineers to focus on their electric drivetrain and allowed them to take advantage of Lotus’ extensive experience designing and building lightweight performance vehicles. As the drivetrain continued to mature, numerous changes were required to the chassis. Typical automotive design is structured so that the design is complete prior to the start of the manufacturing. When Tesla pushed Lotus to begin body manufacturing while they were still working on the gearbox design, Lotus was concerned. The redesigned gearbox required adjustments to the Lotus-built chassis. Lotus was unaccustomed to dealing with the ongoing changes required for the vehicle. This mismatch of philosophies stressed the relationship to some degree, but the push for speed and concurrency was a hallmark of Tesla’s evolving culture and modus operandi. In addition to providing the body and chassis for the Roadster, Lotus also integrated most other key components of the vehicle at their U.K. plant. The manufacturing plan called for Lotus to install the battery and Powertrain Electronics Module as well. Once complete, the Roadster (with powertrain) would be shipped to Tesla in California, where the finishing touches would be added and the car prepared for sale.

Sourcing Strategy

As a young company, Tesla Motors had promising technology but very little manufacturing capability. The young staff had technical engineering degrees from some of the top universities in the country including Stanford and MIT, but few of them had operations or manufacturing backgrounds. The team’s operations experience was limited primarily to having managed consumer electronics suppliers in Asia. However, this was not viewed initially as a constraint. Jim Dunlay stated, “We are a Silicon Valley startup. We first thought we should use the tried and true approach of outsourcing manufacturing to Asia. Only later did we reverse course toward a preference for vertical integration.” At the end of 2007, Tesla had 265 employees.11 Exhibit 4 shows how they were distributed across the organization. The powertrain engineering team was made up of 88 employees distributed across the battery, motor, PEM, systems engineering and transmission teams. The average age was early 30s and the majority of them had Master’s or PhD degrees from leading technical institutions. Many had previous work experience at startups and only a few had spent significant time employed by mature corporations. As a result, the team relied primarily on their intuition and outside advice for developing and executing the operations strategy.

11 http://www.sec.gov/Archives/edgar/data/1318605/000119312510149105/d424b4.htm



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The majority of Tesla’s venture capital partners had little experience with startup companies owning their own factories. Factories were often considered to be too capital intensive for a startup company. Building out an entire vehicle factory was projected to cost over half a billion dollars and take a minimum of 18 months to retrofit an existing facility. Greenfield construction from scratch would take two and a half years on top of that. Such speed bumps were outside the realm of consideration for the ambitious young company.

Outsourcing Battery Production

The Roaster was the first vehicle to use a lithium-ion battery to power its drivetrain. The 56kWh pack contained 6,831 cells and delivered 215 kW of electrical power. Each cell was roughly the size of a traditional AA Alkaline Battery, and cells were individually packed into bricks that were wired in parallel. These were made into 11 sheets, which were installed into a formed sheet metal battery casing (Exhibits 5, 6 and 7). Additionally, the battery pack had a cooling system that would pump liquid coolant through the pack in order to keep it at a consistent temperature, increase battery life, and increase performance. The pack weighed approximately 900lbs. While the battery was a complex assembly that resulted from innovative systems engineering and 20 years of advances in Lithium Ion technology, the performance it enabled was outstanding. The Roadster had a rated range of 236 miles on a single charge, efficiency reported at 120 mpg (gasoline equivalent),12and could rocket from 0-60 mph in 3.9 seconds, approximately the same as a Porsche 911 GT2.13 As well, because the Roadster had a Lithium Ion battery, it was much lighter than a similar vehicle using Nickel Metal Hydride batteries. Further, the battery pack did not have the “memory” effect that plagued other kinds of rechargeable batteries. The Li-ion cell had twice the energy density of a standard nickel metal hydride automotive grade battery.14 Higher energy density meant increased vehicle range; since Tesla’s mission was to produce an electric vehicle “without compromises,” range was a key performance metric. Other companies had dismissed the use of these high energy density batteries because they had not identified ways to safely contain the energy in the packs during crashes or the unlikely event of a cell malfunction. Tesla engineers designed a massive aluminum enclosure with contactors, which were connected to the vehicle monitoring system and were programmed to automatically disconnect in the event of an accident or airbag deployment. The aluminum enclosure protected the pack in case of impact, and the contactors isolated electricity inside the pack, allowing the first responder teams to rescue passengers without any risk of high voltage shock. The cells themselves might also malfunction and release much of their energy in the form of heat. When uncontrolled, this heat could

12 http://en.wikipedia.org/wiki/Tesla_roadster#cite_note-Tesla_2008-09-09-11 13 http://www.edmunds.com/porsche/911/2008/?sub=gt2&ps=used#fullreview 14 http://www.teslamotors.com/roadster/technology/battery



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set off a chain reaction with other cells and could propagate, ultimately causing a vehicle fire. Tesla identified multiple ways to contain such an event, so in the low probability of a thermal event, a single cell would remained isolated and have little impact on the battery unit as a whole. The methods used to assemble the battery pack were designed internally by Tesla’s manufacturing engineers. They spent a significant amount of time with the design engineering team identifying new materials and developing new machinery needed to produce Tesla’s novel battery design. The use of lithium ion cells in such a large format had never been done before and Tesla was developing a whole new manufacturing process. Although the Tesla team was deeply involved in every aspect of battery pack design, they had no intention to do the high-volume manufacturing themselves. According to Tom Colson, VP of Manufacturing at the time, Tesla decided to outsource the battery both to avoid the cost of building its own manufacturing facility and to minimize the cost of the assembly labor. As JB Straubel recalled, “Once we decided to outsource battery manufacturing, I set off to China to try to find a supplier. I literally wandered around China for several months with a guide, trying to find some factory that could manufacture the battery packs we had designed. I found nothing.” Previous Tesla executives had experience working with Xcellent, a Thailand supplier with inexpensive labor, available capacity and an eagerness to enter the high tech manufacturing sector. After months of fruitless search in China, Tesla awarded the battery assembly to Xcellent Manufacturing. Straubel reflected, “We concluded that, rather than seek out rock-bottom labor costs, we should compromise between low labor costs and technological capability, and so we ended up choosing Xcellent.” At the time the battery assembly was moved to Thailand, Tesla had built fewer than 10 production battery packs at their engineering shop in California, and had built those by hand without specialized production tooling. Xcellent specialized in the manufacturing of aluminum forming for BBQ grills, which surprisingly had a very similar geometry and fabrication process to the battery pack enclosure. Xcellent’s available capacity consisted of an essentially empty warehouse that could be purposed for whatever needs Tesla deemed necessary. However, as Xcellent was a small manufacturer and the battery cells were expensive, Tesla needed to pay for raw materials up-front at Xcellent in order to have enough inventory on-hand to keep up with production. Each cell cost approximately $2.50 at the time. The battery pack with 6,831 cells would contain more than $17,000 worth of cells. The assembly process included packing the cells into the 11 sheets and encapsulating them in plastic. It also included fabrication of the enclosure and assembling the sheets into the pack. On average,



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assembling one sheet took an assembly worker one day. The majority of the time was spent packing cells and connecting the cells into the circuit. Both of these tasks were simple and required little training. The pack enclosure and installation of the 11 sheets took an assembly worker approximately half a day. This was a relatively complex electro mechanical assembly that required significant training. Tesla manufacturing engineers Jason Mendez and John Williams were sent to Xcellent to teach employees how to assemble the li-ion cells into sheets and then assemble the sheets into the battery pack. When they arrived at Xcellent, they received a warm greeting and were given an office filled with BBQ’s proudly displayed, all products Xcellent had made in its factory (Exhibit 8). Jason Mendez said, “Making a battery pack was nothing like building a BBQ but they were ready to learn and excited to enter the high tech industry. We built the battery factory in Thailand factory together with the Xcellent team.” The Xcellent team was very excited to have the opportunity to enter into a new cutting edge technology. But their resources to support the development of the manufacturing process were very limited. Even development of the equipment to build simple parts and subassemblies was challenging. Exhibit 9 shows the Xcellent team examining a prototype part against the engineering drawing on the floor. Tesla had not anticipated that Xcellent would have virtually no design or quality control capabilities. Jason and John did not speak Thai, but being on-site allowed them to communicate with the workers by showing them what needed to be done. As well, Tesla engineers in California would send pictures of the tooling that would be needed and detailed instructions and drawings of how the battery should be manufactured. However, it soon became apparent that parts readily available in California stores where not easily found in Thailand. It was not an uncommon occurrence that engineers would hand carry or FedEx Home Depot-sourced materials from California to their Thai counterparts. Because the battery pack (and the Roadster vehicle) were still being developed and improved by Tesla’s engineers in California, engineering changes were frequent and the process was difficult to standardize. John Williams and a number of other engineers were stationed at Xcellent for weeks at a time. While the learning curve was steep, Xcellent was able to produce its first production battery by December 2007. Once the batteries were completed at Xcellent, they were shipped through the Panama Canal to Lotus in the United Kingdom for integration into the vehicle.



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Manufacturing The PEM (Power Electronics Module)

The Power Electronics Module (PEM) was essentially a very large power converter. Whereas the electricity from the grid that would charge the battery and the electricity supplied to the motor was AC, the power stored in the battery was DC.15 As a result, the power from the charging station needed to be converted from AC to DC for storage, and then back from DC to AC for use. This was critical because DC power could not produce the torque necessary for the Roadster’s acceleration performance. A good design of the power electronics for the Roadster was essential. As Nick Kalayjian, the Director of Power Electronics put it, the Roadster had “the electrical power for a small neighborhood going through the motor when you hit the pedal.” Tesla initially licensed the design of the PEM from AC Propulsion, which was responsible for the development of power Electronics for GM’s EV1. While the EV1 had not been a commercial success, the technology that AC Propulsion provided was promising. Rather than designing an electronics architecture that employed a small number of large semiconductors, their design required a large number of small semiconductors and enabled a more efficient use of the energy stored in the vehicle battery. This was a very different approach from what other automakers were taking. According to Kalayjian, “The range of the Roadster would be less if we used a Power Electronics architecture that was more like what you would find in a typical hybrid car.” Tesla hoped that the advantage provided by the battery and PEM architecture would help ensure the Roadster’s success. The actual technology licensed from AC Propulsion consisted of the basic design, including the drawings and schematics to build the PEM, as well as a patented conductor used in the Roadster’s motor. While the technology was proven to work, it had only been produced in very small quantities – much lower than the volume that Tesla was expecting – and had not been designed for assembly-line manufacturing.

Chroma

Again, for the Power Electronics Module, Tesla followed Silicon Valley dogma to outsource manufacturing to Asia. Tesla contracted with Chroma, a Taiwanese manufacturer that primarily designed and built test equipment for high-end power supplies. The test equipment business was very low volume with high margins and frequent product introductions. While the PEM wasn’t identical to the products Chroma manufactured, it was very similar – both contained magnetic windings with significant labor content, and the PEM’s underlying electronics were very similar to those of a tester. Tesla chose Chroma for a number of reasons. Chroma’s fully equipped factory was ready to start building PEMs as soon as material arrived (Exhibit 10). Their well-trained engineers on staff would support the ramp of the product including the creation of manufacturing instructions, quality inspection points, process and change controls (Exhibit 11). Chroma also had a complete supply 15 http://www.teslamotors.com/roadster/technology/power-electronics-module



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chain in place, which enabled Tesla to avoid some of the legwork in finding good second and third tier suppliers. According to Kalayjian, “Partnering with Chroma allowed us to do a better job at sourcing components for the PEM in Taiwan. For instance, we would have had a hard time getting a good price on the labor-intensive magnetic windings in the relatively low overall volumes that we needed had we negotiated on our own. With Chroma, we could tap into their local supply chain to get their existing partners to make the windings at a good price” Additionally, Chroma’s R&D team had already been working on a small electric vehicle, having built an electric scooter in 2007.16 As a result, the company was somewhat aligned to what Tesla was trying to do. Furthermore, the relationship between the executives of the two companies was good, and Chroma was a respected player in the test equipment industry. If they were manufacturing the PEM, it would be relatively easy for them to supply appropriate test equipment to Tesla as well. While there were many benefits to the arrangement, it also had its challenges. Chroma primarily built products directly for low-volume business customers and had little experience acting as a supplier of subsystems for a manufacturing line. As a result, Tesla staff frequently had to iron out problems that wouldn’t have existed with an established contract manufacturer. For example, while it is common practice for the customer to set up the initial round of tooling for production and the supplier to handle all repairs or replacements, Chroma was not accustomed to doing business this way. As a result, every time a tool would wear out or otherwise need replacement, the partners ended up negotiating who would pay for the tooling. Above the expense for the tooling, this distraction for Tesla required they dedicate precious resources to re-negotiating issues rather than focusing on production. As well, the test equipment business was fundamentally different from automotive manufacturing. With the low volumes of unique products, Chroma’s customers weren’t typically concerned if their products were completed a day or two off schedule. However, in automotive manufacturing, it is critical that parts be on time, neither late nor early, so that the components can flow well into a just-in-time supply chain. While there were challenges, the relationship was strong and the parties were typically able to talk through their differences. Both parties worked hard to learn and develop skills to meeting the needs of the Roadster production line. As well, just as in any good supplier/customer relationship, each party spent significant time at the other’s site in order to make sure that the PEM would be produced on time and with high quality.

16 http://www.bravoelectricvehicles.com/News/2007/



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Once completed, the PEMs were to be shipped to Lotus in the U.K. for integration into the vehicle. Completed PEMs were shipped in the same method as the batteries, over sea via the Panama Canal.

Supply Chain Logistics

As mentioned, Tesla planned to have the battery packs and the PEMs shipped to Lotus via ocean container. These components would be assembled into the vehicle body at Lotus in the U.K. and then the whole vehicle would be transported to California via sea. The freight company contracted to handle the shipping was Elite Logistics. When Xcellent and Chroma finished their first shipments, Tesla engineers where eager to test their functionality. They insisted that the battery packs and PEMs first be shipped to California for testing before being sent on to Lotus. Instead of shipping the assemblies by sea, they requested air-freight deliveries to speed the learning cycle. The PEM cost $320 to air ship but since the battery pack was considered to be a hazardous material, it could only be transported via ship. It took four weeks for the first shipment of batteries to arrive in California for testing. Once the battery and PEM were back in Tesla’s San Carlos (California) facility, the engineers started rigorous testing. They found they needed to retrofit parts to compensate both for weaknesses in the design and for challenges to manufacturability. These changes were then communicated back to the Asian suppliers. However, the second wave of assemblies, already in process or en route, would need to flow through California for updating and/or double-checking, before being shipped on to Lotus, to assure that the changes were properly implemented. This triggered a long loop that required all batteries and PEMs to come through the San Carlos engineering labs before going to Lotus. Limited to ocean shipping for battery packs, the precious cargo spent four weeks on the water between Thailand and California and then another four weeks to get to England. Desperate to speed the prototype development cycle, Tesla applied for a Competent Supplier visa, which would allow it to export the battery packs via air. Once the battery and PEM cleared engineering testing in California it was air shipped to Lotus. Interestingly, it was cheaper to air ship goods from the US into Lotus since California to England was not a main freight route. The PEM cost $115 to ship. Once the first vehicles were completed, Tesla executives couldn’t wait to see them and start testing. They decided to forgo the four weeks it would take to have them ocean shipped and instead air freighted them to California for a whopping $29,000 per vehicle including the custom crate. The management team felt the supply chain they had designed was failing them, but with limited capital and a production plan already behind schedule, what could they do?



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Discussion/Assignment Questions

1. How would you characterize Tesla’s supply chain strategy for the Roadster?

2. What should be the key factors in determining whether to outsource or vertically integrate?

How does this differ for an established company versus a startup?

3. Why would a technology startup with a physical product want to partner with a much larger, established company? Describe the pros and cons of such a partnership.

4. What advantages and disadvantages would you anticipate in having manufacturing and engineering collocated? Consider the case where the company is young and is building its manufacturing capabilities internally.

5. If you were tasked with restructuring Tesla’s Roadster supply chain, how would you change it and why?

a. Please include a table showing the advantages and disadvantages for each of the 3

suppliers described.

b. Use a map to draw the “before” and “after” global logistics footprint.



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Exhibit 1 High Level Timeline

Source: Andrew Simpson, “Where the Rubber Meets the Road”, Tesla Motors Blog, September 24, 2007.<http://www.teslamotors.com/node/3849>; Ze’evDrori, “We have begun regular production of the Tesla Roadster,” Tesla Motors Blog, March 17, 2008. <http://www.teslamotors.com/node/3939>

Exhibit 2 Tesla Roadster Sport Torque and Power Curves vs. 6 Cylinder Gasoline Engine

July%2003%Tesla%Motors%Founded%

May%2006%%First%Engineering%

Prototype%

March%2007%First%Valida>on%

Prototype%

March%17,%2008%Produc>on%Starts%

2004% 2005% 2006% 2007% 2008%2003%



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Exhibit 3 Accelerations vs. Well-to-Wheel Efficiency

Source: Martin Eberhard, Mark Tarpenning. “The 21st Electric Car”. Stanford University, October 6, 2006.

http://web.stanford.edu/group/greendorm/participate/cee124/TeslaReading.pdf.



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Exhibit 4 Tesla Motors Organizational Structure December 31, 2007

2

19

68

Manufacturing Engineering 12

Manufacturing Test 7

Motor Operations in Ta iwan 15

US Operations 3

Roadster Operations in UK 2

Product & Suppl ier Qual i ty 10

Supply Chain 19

88

ESS Engineering 22

Motor Engineering 6

PEM Engineering 14

Admin 1

Research & Development 14

Transmiss ion Engineering 5

Systems Engineering 25

13

20

22

33

265

Roadster Development

Sales & Marketing

Val idation & Testing

Model S Development

Tota l

Department EmployeesOffice of the CEO

Office of the CFAO

Operations Tota l

Powertra in Tota l



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Exhibit 5 The Open Roadster Battery Pack

Source: http://www.teslamotorsclub.com/showthread.php/3810-Roadster-battery-(ESS).

Exhibit 6 CAD Model of the Roadster Battery Pack, Showing One of the Eleven Sheets Pre-Installation

Each 900 lb. pack consisted of eleven vertical sheets, and was suspended in a custom-‐built jig called a rotisserie, which allowed the pack to be rotated for different assembly operations.



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Exhibit 7 Open Roadster Battery Sheet


The drawing on the left shows the bottom plastic enclosure with metal tubing before the Lithium-‐ion cells are populated. The drawing on the right shows the densely packed cells before they have been connected into the battery



July 24, 2014 19

Exhibit 8 Tesla's Office at Xcellent

Source: Jason Mendez personal collection

The BBQ’s and heat lamps displayed around the office are all products Xcellent manufactured.



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Exhibit 9 Xcellent Developing the Tubing in the Roadster Battery Pack



July 24, 2014 21

Exhibit 10 Chroma's Manufacturing Facility

Exhibit 11 A Chroma Engineer Inspecting a Prototype

51!

Manufacture information!



July 24, 2014 22

Addendum 1 Tesla Motors Financing, 2004-

Series A B C D Year 2004 2005 2006 2007 Amount Raised $7.5M $13M $40M

Investors

Elon Musk Compass

Elon Musk Compass Valor Equity

Elon Musk Capricorn Compass Draper Fisher Google JP Morgan Valor Equity VantagePoint

Addendum 2 Tesla Board Members, 2007

Elon Musk, Chairman Ze’ev Drori, CEO Kimbal Musk Ira Ehrenpreis Antonio Gracias Steve Westly



July 24, 2014 23

Addendum 3 Financial Statement (In Thousands)

As of December 31,

2005 2006 2007 Consolidated Balance Sheet Data:

Cash and cash equivalents $ 5,827 $ 35,401 $ 17,211

Property and equipment, net 1,622 7,512 11,998 Working capital (deficit) 4,587 8,458 (28,988 ) Total assets 7,856 44,466 34,837 Convertible preferred stock warrant liability — 227 191 Capital lease obligations, less current portion — — 18 Convertible preferred stock 20,384 60,173 101,178 Total stockholders’ deficit (13,995 ) (43,923 ) (117,846 )

Years Ended December 31, ,

2007 Consolidated Statements of Operations Data:

Revenues:

Automotive sales $ 73 Development services —

Total revenues 73 Cost of revenues:

Automotive sales 9 Development services —

Total cost of revenues 9 Gross profit (loss) 64

Operating expenses:

Research and development 62,753 Selling, general and administrative 17,244

Total operating expenses 79,997 Loss from operations (79,933 ) Interest income 1,749 Interest expense — Other income (expense), net 137



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Loss before income taxes (78,047 ) Provision for income taxes 110

Net loss $ (78,157 )

December 31, 2007

Cash flows from operating activities Net loss

$ (78,157 )

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

2,895 Change in fair value of convertible preferred

stock warrant liability (36 ) Gain on extinguishment of convertible notes and

warrants

— Stock-based compensation 198 Loss on abandonment of fixed assets

2,421

Inventory write-downs — Interest on convertible notes

—

Changes in operating assets and liabilities Accounts receivable

(59 )

Inventory (2,108 ) Prepaid expenses and other current assets

(1,884 )

Other assets (64 ) Accounts payable

523

Accrued liabilities 7,572 Deferred development compensation

—

Deferred revenue — Refundable reservation payments

15,230

Other long-term liabilities —

Net cash used in operating activities

(53,469 )

Cash flows from investing activities Purchases of property and equipment excluding

capital leases

(9,802 ) Decrease (increase) in restricted cash 40



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Net cash used in investing activities

(9,762 )

Cash flows from financing activities Proceeds from issuance of Series F convertible

preferred stock, net of issuance costs of $122

— Proceeds from issuance of Series E convertible

preferred stock, net of issuance costs of $556 — Proceeds from issuance of Series D convertible

preferred stock, net of issuance costs of $59

44,941 Principal payments on capital leases and other debt — Proceeds from long-term debt and other long-term

liabilities

— Proceeds from issuance of convertible notes and

warrants — Proceeds from exercise of stock options

100

Deferred common stock and loan facility issuance costs —

Net cash provided by financing

activities

45,041

Net increase (decrease) in cash and

cash equivalents (18,190 ) Cash and cash equivalents at beginning of period

35,401

Cash and cash equivalents at end of period $ 17,211 Supplemental Disclosures

Interest paid 9 Income taxes paid (refunded)

—

Supplemental noncash investing and financing activities

Issuance of convertible preferred stock warrants

— Conversion of notes payable to Series E convertible

preferred stock — Conversion of Series A convertible preferred stock to

common stock

3,936 Exchange of convertible notes payable —

Source: http://www.sec.gov/Archives/edgar/data/1318605/000119312510149105/d424b4.htm

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