After Clash, Musk Fires Head Of Key Tesla Subsidiary; Now It May Cost Him

Trouble is brewing in Elon Musk's paradise.

Recall that two weeks ago we brought attention to a little followed disruption in Tesla's infrastructure,  and a major potential setback for the on-time delivery of Tesla's Model 3, when I4U reported that Tesla is facing a potential strike at its new German subsidiary. Tesla acquired Grohmann, a specialized machine manufacturer, for about $150 million several months ago and now the German Trade Union IG Metall has warned that it is exploring a worker strike at Tesla Grohmann. A key Tesla supplier, the machines built at Tesla Grohmann are used to manufacture the Model 3. As a result, the Model 3 production start in July could face another imminent delay.

According to I4U, the 660 Tesla Grohmann employees are paid 25 to 30% less than the union rate. While Tesla, which says it seeks to maintain good relations with Grohmann workers including competitive wages, has offered to pay each employee €150 per month more that does not satisfy IG Metall. Tesla has also offered to increase compensation through a Tesla stock program, however that will be a tough sell as German workers are not used to this kind of compensation.

As a result, the trade union was exploring the possibility of a strike at Tesla Grohmann next week, IG Metall Trier speaker Patrick Georg told the German Welt am Sonntag newspaper, with the union stating that "we’re checking next week if a strike is possible."

While it is unclear if the strike at Grohmann has been given a green light, there appears to be quite a bit more to the story.

According to a Reuters report, the executive of the German subsidiary, Klaus Grohmann, was ousted last month after a clash with Elon Musk over the strategy of Grohmann's firm, which Tesla had acquired in November, a source familiar with the matter told Reuters. As we noted, the electric carmaker is counting on Grohmann Engineering's automation and engineering expertise to help it ramp up production to 500,000 cars per year by 2018.

At the time of the purchase, it described Klaus Grohmann and the company he founded as a "world leader in highly automated manufacturing" and said it planned to keep Grohmann on.

Grohmann wanted to stay, but the clash with Musk over how to treat existing clients resulted in his departure, the source said.

According to Reuters, Grohmann disagreed with Musk's demands to focus management attention on Tesla projects to the detriment of Grohmann Engineering's legacy clients, which included Tesla's direct German-based rivals Daimler and BMW. When reached by Reuters for comment, the former executive said "I definitely did not depart because I had lost interest in working," Grohmann said, without elaborating.

A Tesla spokesman, asked about Grohmann's departure, praised him for building an "incredible company" and said: "Part of Mr Grohmann's decision to work with Tesla was to prepare for his retirement and leave the company in capable hands for the future. Given the change in focus to Tesla projects, we mutually decided that it was the right time for the next generation of management to lead."

It appears that Tesla was ready for this contingency:

The management layer below Klaus Grohmann is continuing his work, they told Reuters. But they said parts of the workforce felt insecure about becoming so dependent on one client after the founder's departure.

Additionally, activating the hype maching Tesla is so well known for, last year the carmaker could not stop praising the recently terminated exec, saying that "under the continued leadership of Mr Grohmann, several critical elements of Tesla's automated manufacturing systems will be designed and produced in Pruem, to help make our factories the most advanced in the world.Our factories are so important that we believe they will ultimately deserve an order of magnitude more attention in engineering than what they produce. At very high production volumes, the factory becomes more of a product than the product itself," Tesla said at the time.

All that was long forgotten when Grohmann complained that Musk was trying to make his company a sole-source provider to Tesla, and nobody else.

Perhaps Musk was in his right: after all Tesla was the brand new owner of Grohmann, and as so can do whatever he wants. As Reuters adds, "Tesla started out as a client of Grohmann Engineering, a small unlisted company based in Pruem, that helped companies design highly automated factories. As pressure grew to increase production volumes at Tesla, Musk decided to buy Grohmann Engineering and make Pruem a base for Tesla Advanced Automation."

And, as an owner, Musk may also had the right to completely overhaul the company's business. However, a problem emerges: as well as BMW and Daimler, Grohmann counted the auto parts maker Bosch , chip maker Intel, and pharmaceutical firms Abbott Laboratories and Roche among its clients.

Which means that Musk's impulsive decision to convert Grohmann into a dedicated cog of the Tesla family will cost him:

Negotiations have started with some of the clients about how to compensate them for lack of resources devoted to their projects, one of the sources said.

It is unclear how much said compensation will be, but for the company that already burns through billions every year, what's a few hundred million more.

Which then, however, goes back to our story from two weeks ago: if Grohmann is indeed so critical for Tesla, how will the labor dispute be resolved? The German labor union IG Metall has demanded that Tesla's management formalize multi-year job guarantees and increase salaries as a way to provide assurance amid management turmoil. The alternative is a strike which could lead to further "unexpected" delays for the Model 3, and even more hyperbolic statements from Musk on his twitter account to deflect attention from increasingly growing problems in Tesla's paradise.