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https://electrek.co/2017/10/18/tesla-vp-production-secret-second-floor-vertical-integration/
https://www.wired.com/story/teslas-secret-second-floor/
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You can read the full post on wired:Greg Reichow is an experienced manufacturing executive. He was SVP of Operations at SunPower and he had a long career in the semiconductor industry before joining Tesla in 2011 and leading production until the automaker made a change in manufacturing leadership last year.
He is now a Partner at Eclipse Ventures and out of the blue today, he wrote a blog post on Backchannel about Tesla’s vertical integration and overall manufacturing effort.
The executive wrote about the not-so-secret second floor of Tesla’s Fremont factory:
“Unknown to most visitors, the factory’s “secret” second floor built many of Tesla’s battery, power electronics, and drive-train systems. It was home to some of the most advanced manufacturing and automation systems in the company. Some of the robots moved at such high speeds that their arms needed to be built from carbon fiber instead of steel.”
I say that it is “not-so-secret” because while Tesla rarely talks about its operations on that second floor, it used to allow some people, like investors and analysts, up there before.
Former Dougherty & Company analyst Andrea James talked about it last year:
“In the early days (~2012), when we used to tour the factory, we were allowed to go up to the second floor (where Tesla houses its secretive battery development group) […] I was one of the first to be allowed on that second floor. I wasn’t allowed to take pictures, but I got to tour it and see the floor, and see the machines that they had to build. Elon talks about “the machine that builds the machine” and you know – you’d look at these parts and you couldn’t procure these parts. They had to make these parts.”
She recalled emailing Tesla CTO JB Straubel after the tour to let him know how impressed she was by what they were doing: “tears came to my eyes when I was on the second floor. I can’t believe what you guys are doing” she said. Straubel responded: “Yeah, I don’t think people realize what is going on here”.
In his post, Reichow also explained that people don’t understand what they are doing there, like manufacturing high-voltage cables, displays, fuses, and other smaller systems.
He answered:
“The answer is simple: Our goal wasn’t to build the best electric vehicle. It was to build the best premium car in the world that just happened to be an EV. This meant integrating technologies that were not readily available. It also meant pushing the boundaries of what was considered “normal” for the design and manufacturing of a car. Furthermore, we needed to do this on an accelerated timeline that most automotive suppliers could not fathom. So, in many cases, this meant building components ourselves. Building your own core components has obvious benefits, but there are some other advantages that you might not immediately recognize.”
The executive explains that Tesla’s vertical integration of small and generally outsourced subsystems lead to faster turnaround and shorter improvement cycles.
He says that Tesla was implementing up to 50 changes per week on its vehicles instead of waiting for the next model year – that’s something that CEO Elon Musk has emphasized before.
In the industry, some are seeing it as a weakness due to reduced manufacturing efficiency, but Reichow says that Tesla decided that “building a product that was rapidly improving” is more important.
The final advantage of Tesla’s vertical integration is knowledge, according to Reichow:
“Finally, when you build something yourself, you develop a far deeper understanding of your product and how to improve it—and the pain of doing it yourself gets transmuted into gold. “
That’s some interesting insights – especially now that Tesla is again in “pain” due to the “production hell” of the Model 3 manufacturing ramp up.
https://www.wired.com/story/teslas-secret-second-floor/
While working at Tesla, I always enjoyed talking to people after they finished a factory tour. As much as they raved about the amazing automation, gigantic presses, and hundreds of robots, the reality was they only saw half of the actual manufacturing that was taking place in the building. Unknown to most visitors, the factory’s “secret” second floor built many of Tesla’s battery, power electronics, and drive-train systems. It was home to some of the most advanced manufacturing and automation systems in the company. Some of the robots moved at such high speeds that their arms needed to be built from carbon fiber instead of steel.
Though it was obvious why we were building the systems at the heart of our product, such as the battery and motors, many people had difficulty understanding why we manufactured high-voltage cables, displays, fuses, and other smaller systems. Had we spent too much time inhaling the “we know better” fumes of Silicon Valley? Why take on the madness of not only starting a new car company but also making it more vertically integrated than any car company since the heyday of the Ford Rouge plant in the late 1920s?
The answer is simple: Our goal wasn’t to build the best electric vehicle. It was to build the best premium car in the world that just happened to be an EV. This meant integrating technologies that were not readily available. It also meant pushing the boundaries of what was considered “normal” for the design and manufacturing of a car. Furthermore, we needed to do this on an accelerated timeline that most automotive suppliers could not fathom. So, in many cases, this meant building components ourselves. Building your own core components has obvious benefits, but there are some other advantages that you might not immediately recognize.
Speed is the first advantage. Launching a new product presents a team with thousands of small decisions. If you choose to outsource a component, you often need to send people to live in the factory for a prolonged period of time. This means accepting that it’s going to be harder to make choices and to influence outcomes. First, you’re operating within someone else’s environment. Second, you have far less of the product design team available for on-the-spot consultation and decision-making. Nothing beats the ability to have the full engineering team walk into the manufacturing area every day, talk to the people building the products, and gain insights on how to improve. Factory information has a very short half life. Despite what many contract manufacturers promise, the reality of outsourced manufacturing is that you are getting on an airplane to solve problems you could otherwise solve by walking across your building.
The second reason building your own products makes sense is that it enables you to drive faster cycles of learning and improvement. The idea of bundling improvements and building them into the next platform every three to four years (the typical development cycle for the car industry) made absolutely no sense to us at Tesla. Rolling many improvements into a package often means that some items get delayed waiting on some other item that’s essential to their production, which results in a lower cumulative improvement rate.
Our approach at Tesla was to adopt improvements as soon as they were ready. This meant we were implementing up to 50 changes per week. We often joked that if you wanted to know the “model year” of your Tesla, you needed to look at the individual car’s VIN number. Despite mastering real-time changes to products, this approach created minor inefficiencies in our manufacturing system. Yet what was more important: extracting a couple percentage points of manufacturing efficiency, or building a product that was rapidly improving and pulling farther ahead of the competition? Nothing beats the speed and ability to change like having your own manufacturing operation.
Finally, when you build something yourself, you develop a far deeper understanding of your product and how to improve it—and the pain of doing it yourself gets transmuted into gold. A great example is the innovation that allowed Tesla to make “Ludicrous Mode” possible. One of the constraints in increasing the power output of the battery in the early Model S was the safety fuse and switch system that was integrated into the pack. A fuse? How hard could it be to find a fuse that enables the increased current levels needed for this performance?
It turns out that it is really hard to build a fuse that allows a massive amount of current to flow during normal operation while also protecting the car in milliseconds if there’s an abnormal spike in current flow. Building fuses in-house helped us solve this problem. The coupling of deep product knowledge with a fundamental understanding of the underlying physics allowed us to do what most people thought was impossible. As a result, Tesla drivers everywhere are grinning slyly as they shock their passengers with the thrill of a 0-to-60 sprint in under 2.8 seconds.
While working at Tesla, I always enjoyed talking to people after they finished a factory tour. As much as they raved about the amazing automation, gigantic presses, and hundreds of robots, the reality was they only saw half of the actual manufacturing that was taking place in the building. Unknown to most visitors, the factory’s “secret” second floor built many of Tesla’s battery, power electronics, and drive-train systems. It was home to some of the most advanced manufacturing and automation systems in the company. Some of the robots moved at such high speeds that their arms needed to be built from carbon fiber instead of steel.
Greg Reichow is a Partner at Eclipse Ventures. Previously he was Tesla’s VP of production where he led growth from low volume Roadster production to the fully integrated manufacturing of the Model S and X.
———
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Though it was obvious why we were building the systems at the heart of our product, such as the battery and motors, many people had difficulty understanding why we manufactured high-voltage cables, displays, fuses, and other smaller systems. Had we spent too much time inhaling the “we know better” fumes of Silicon Valley? Why take on the madness of not only starting a new car company but also making it more vertically integrated than any car company since the heyday of the Ford Rouge plant in the late 1920s?
The answer is simple: Our goal wasn’t to build the best electric vehicle. It was to build the best premium car in the world that just happened to be an EV. This meant integrating technologies that were not readily available. It also meant pushing the boundaries of what was considered “normal” for the design and manufacturing of a car. Furthermore, we needed to do this on an accelerated timeline that most automotive suppliers could not fathom. So, in many cases, this meant building components ourselves. Building your own core components has obvious benefits, but there are some other advantages that you might not immediately recognize.
Speed is the first advantage. Launching a new product presents a team with thousands of small decisions. If you choose to outsource a component, you often need to send people to live in the factory for a prolonged period of time. This means accepting that it’s going to be harder to make choices and to influence outcomes. First, you’re operating within someone else’s environment. Second, you have far less of the product design team available for on-the-spot consultation and decision-making. Nothing beats the ability to have the full engineering team walk into the manufacturing area every day, talk to the people building the products, and gain insights on how to improve. Factory information has a very short half life. Despite what many contract manufacturers promise, the reality of outsourced manufacturing is that you are getting on an airplane to solve problems you could otherwise solve by walking across your building.
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The second reason building your own products makes sense is that it enables you to drive faster cycles of learning and improvement. The idea of bundling improvements and building them into the next platform every three to four years (the typical development cycle for the car industry) made absolutely no sense to us at Tesla. Rolling many improvements into a package often means that some items get delayed waiting on some other item that’s essential to their production, which results in a lower cumulative improvement rate.
Our approach at Tesla was to adopt improvements as soon as they were ready. This meant we were implementing up to 50 changes per week. We often joked that if you wanted to know the “model year” of your Tesla, you needed to look at the individual car’s VIN number. Despite mastering real-time changes to products, this approach created minor inefficiencies in our manufacturing system. Yet what was more important: extracting a couple percentage points of manufacturing efficiency, or building a product that was rapidly improving and pulling farther ahead of the competition? Nothing beats the speed and ability to change like having your own manufacturing operation.
Finally, when you build something yourself, you develop a far deeper understanding of your product and how to improve it—and the pain of doing it yourself gets transmuted into gold. A great example is the innovation that allowed Tesla to make “Ludicrous Mode” possible. One of the constraints in increasing the power output of the battery in the early Model S was the safety fuse and switch system that was integrated into the pack. A fuse? How hard could it be to find a fuse that enables the increased current levels needed for this performance?
It turns out that it is really hard to build a fuse that allows a massive amount of current to flow during normal operation while also protecting the car in milliseconds if there’s an abnormal spike in current flow. Building fuses in-house helped us solve this problem. The coupling of deep product knowledge with a fundamental understanding of the underlying physics allowed us to do what most people thought was impossible. As a result, Tesla drivers everywhere are grinning slyly as they shock their passengers with the thrill of a 0-to-60 sprint in under 2.8 seconds.
Is building your own product always the right answer? Certainly not. If you’re building a product that leverages commodity items and will not change significantly, then it doesn’t make sense to build yourself. Yet if you’re building a product that contains unique intellectual property or has a high change velocity, it can be the best choice.
A layered capacity strategy is often the right approach. Start by building the product with your own small manufacturing operation, ideally in the same building as your engineers, designers, and product teams. Use this pilot line to learn quickly, iterate, and develop an understanding of what it takes to build your product. As you then scale beyond this initial capacity, layer on outside contract manufacturing capacity.
This strategy has several advantages. First, you gain the knowledge to keep the contract manufacturers honest. Need to make a small change to the product? Test it on your internal pilot line and then deploy it to your contract manufacturer. This short-circuits arguments over how much additional labor is needed because you already have direct experience with the incremental costs. Second, this initial line becomes your platform for developing the next-generation product and building samples. With a layered capacity approach, you enjoy the benefits of fast cycles of learning while also leveraging the more efficient supply chain of larger contract manufacturers.
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Why am I so passionate about this? Early in my career, I was a participant in the offshoring of US manufacturing. We built factories that were pushing the state of the art in several areas of technology—yet all of it was outside of the US. Because of this trend, American industry lost some of the fundamental knowledge that comes from building your own products.
For too long now, a fear of building new hardware companies has gripped enterprises and entrepreneurs. To solve many important problems, you need to touch the physical world. Disease, energy, infrastructure, mobility, and other complex challenges require multidisciplinary solutions that include hardware. We need bold founders to tackle these important problems. The time has come for us to build things again—and recapture the knowledge and competitive advantage it creates for our businesses and communities.
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