Musk Admits "Mistake" After Report Suppliers Flood Tesla With "Flawed or Damaged" Parts

In addition to being plagued by intensifying criticism of the company, it looks as though two other sets of "cut corners" are coming back to bite the company, leaving it dealing with an above average amount of defective parts and causing self proclaimed fans of the company to refer to their certified pre owned program as a "scam". 

On Friday afternoon, CNBC released an scathing report detailing that a large portion of parts supplied to Tesla to manufacture vehicles with has been substandard or defective. The article stated:

Tesla is struggling to manage and fix a significant volume of flawed or damaged parts from its suppliers, sending some to local machine shops for rework, according to several current and former Tesla engineers. The company said it also makes adjustments to the design of some parts after receiving them from suppliers.

It continues: 

All automakers have to deal with some amount of defective or damaged parts, both from their own factories and from suppliers. But, as previously reported, current and former employees say that Tesla experiences a higher rate of defects than industry norms. A significant number of flawed parts, and parts in need of design changes, also come from Tesla's suppliers, they said.

The reason for the large number of defective parts? Spending less time to vet suppliers, according to company employees. 

Current and former employees from the company's Fremont, Calif. and Sparks, Nevada factories blame Tesla for spending less time to vet suppliers than is typical in auto manufacturing. These people said the company failed to comprehensively test "variance specs" with some vendors before embarking on Model 3 production.

Ultimately, it's Tesla lack of experience and scramble to get a car to market that is leading to the pile up in defects, which will end up crushing the company's "quality control" reputation, as the following episode suggests:

Auto manufacturing expert Steve Finch, a former GM plant manager with about 40 years of industry experience, said automakers typically deal with some flawed parts from suppliers. Finch said that mass-market car companies normally will take a year or more to vet a prospective supplier. This is to ensure the supplier's factory follows ISO quality management standards and other processes that are on par with the automaker's own.

Former and current employees said Tesla took less time before signing on new suppliers. Tesla employees tasked with vetting suppliers were also not always experienced with ISO quality management standards, said these people.

The company predictably came out and said that this would not impact Model 3 production, but it's another brick in the wall of nasty headlines for the company that, so far over the last month, has dealt with Model 3 production delays, a public feud with the NTSB and growing pressure on the company and its CEO to generate cash.

Elon Musk also responded, and just hours after he assured investors overnight in a Tweet that the company would be cash flow positive for Q3 and Q4, the build up of negative press prompted the Tesla CEO to address the negative CNBC report, with a rare tweet in which he admitted he had made a mistake:

Yes, excessive automation at Tesla was a mistake. To be precise, my mistake. Humans are underrated.


Not only that - but Tesla is starting to give other indications that it is stretched very thin - and that this leads to cutting certified pre-owned vehicle corners. Yesterday, Electrek wrote an article detailing ugly new changes to the company's certified preowned checklist procedures, including the company no longer taking care of cosmetic details, which the article refers to as "refurbishing":

Now the company has updated its policy and some new cars coming on Tesla’s list of used vehicles have this ‘Not Refurbished’ warning that reads:

“This car has passed a 70-point mechanical inspection and will be cleaned before delivery. If you would like any additional work that is not covered under your warranty, we can help arrange service after delivery for an added cost.”

Tesla salespeople have been telling buyers that the automaker is still making sure that the vehicles are up to their standards for the warranty, but they are not fixing cosmetic issues anymore.

These changes come a time where the company is about to receive a massive inflow of vehicle inventory from three-year leases that started in 2015:

Tesla has changed its ‘certified pre-owned’ (used) vehicle policy this week to stop “refurbishing” its used cars just ahead of them receiving a big influx of vehicles as more 3-year leases are ending. The automaker had launched the program 3 years ago and it has been tuning it over the last two years.

Previously, certified preowned Tesla vehicles not only underwent a inspection to check the mechanics and operation of the vehicle, but they also underwent a cosmetic clean up. The cosmetic cleanup always seemed like an absolute necessity, especially given the fact that Tesla buyers are actually unable to view pictures of the certified preowned vehicles that they’re purchasing:

The cars with this new warning still don’t have real pictures of the actual vehicle, but instead only renderings of the vehicle’s configuration.

Tesla told Electrek that they are soon going to make it easier to request real pictures of listed vehicles.

The change comes as Tesla is getting more and more used vehicles, especially after 3-year leases from 2015 when Tesla started ramping up production significantly and also making strides with its leasing program.

On top of that, the company is still selling these vehicles at premium prices, which the Elecktrek article hilariously calls "value retention":

With the increased inventory and the lack of “refurbishing”, a decrease in price would be expected, but Tesla used vehicles have historically been very good at value retention.

And it wouldn't be a Tesla story without the company contradicting itself and salespeople saying whatever they need to - despite these policy changes - to move vehicles out the door, as the Electrek author experienced himself:

Even though I couldn’t see real pictures of the car because there were only renderings online, a salesperson pushed me to order it anyway by telling me that they were going to fix any significant cosmetic imperfections as part of the refurbishing process.

It made a lot of sense to me so I confirmed the order, which at the time I was told can’t be canceled but if I refuse delivery, they will find me another car.

Now, if they only fix mechanical issues and not cosmetic ones, that becomes a problem.

The notion that one of the worlds “most innovative technology companies“ can’t show you a photo of a car you're buying before you buy it is insanity, even to the degree that some Tesla supporters are starting to take exception with the process, as detailed in a March 12 post by user on the Tesla Motors Club forum. This user who describes himself as someone who "loves Tesla", unleashed a firestorm of criticism towards the company and its certified preowned program when he took possession of his Tesla, stating:

Next day, in the sunlight, I had a better look at the car. and thats when I realized just how bad the car's condition is. 

- Headliner in TERRIBLE condition, Truly disgusting
- Steering wheel leather has what appears to be permanent damage. Maybe its just 
- Blemish / paint chip on the front of the hood
- Leather seats have dark streaks of what looks like oil / grease stains
- Dirt and gravel pretty much everywhere.
- The rear trunk center storage compartment (requires lifting the trunk floor) has dirt and gravel, some weird clothing item, and most revoltingly a dental hygiene tool (an interdental floss -- is it used?? I hate to even consider the thought) 
- Headliner is peeling and coming off in a couple of areas
- Center console has 2 deep gouges in it. 

Other issues:
- BT audio connectivity SUCKS ( i have had to do a soft reset a total of 9 times now in 5 weeks). 
- Wheels need alignment. The autopilot blue steering wheel looks funny at an 11 o'clock position when driving in a straight line. 

In addition, he posted photos of how dirty the vehicle was and some of the cosmetic issues.

He ended his rant saying he'll never do business with Tesla again and calling the car a "dirt pile":

I don't know what to think about the whole thing. But I will definitely never buy CPO from Tesla again, and quite frankly I am questioning whether I should ever buy another Tesla at all. 
For $70K I would have bought a very nice beamer, and would have received excellent customer service from a very reputable auto maker. 

I paid $70K for a car that, and lets all be honest with each other here, is severely lacking on the inside. But, we are all ok with it because it drives amazing, and we all buy into the company and its mission as a whole. For me though, this touchy feely crap only goes a certain distance. Once I started getting treated like dirt, and spent my commutes alongside a lot of dirt, reality set in that I've been conned. 

I would still love to be able to get my money back and give this dirt pile back.

You can read the entire horror story here

Even the Electrek article, despite trying to put a rosier tone on it, also ultimately wind up being critical of the company's program:

Tesla says that they will have pictures on request, but that sounds like a hassle to me. I get that they want buyers to reach out to them and create a connection with them, but people like to browse online for used cars and they want to see the real thing and not just renderings.

It sounds like Tesla wants to have a higher turnover for used cars just as higher volumes are expected to come in the next months and years.

This is an interesting surprise, given that Electrek is usually a source for all things bullish when it comes to Tesla.

This all comes on the back of news out this morning that Tesla "withdrawing" voluntarily from the recent NTSB investigation may not have been accurate, and rather, the company may have been removed from the investigation by the NTSB, a far cry from what the company has stated:

Late Wednesday, the electric-car maker released a statement implying it had withdrawn from the investigation on its own accord, while still providing technical assistance to government investigators.

"Tesla withdrew from the party agreement with the NTSB because it requires that we not release information about Autopilot to the public, a requirement which we believe fundamentally affects public safety negatively," the company said. "We believe in transparency, so an agreement that prevents public release of information for over a year is unacceptable."

However, an official with knowledge of the investigation speaking with Bloomberg News on the condition of anonymity contradicted Tesla’s original claims, saying it was the NTSB which removed Tesla from the investigation. The source said Tesla’s removal was conveyed to CEO Elon Musk in a "tense" conversation, and that a formal announcement is expected later Thursday.

So much of what has held up Tesla up as an investment and as a company that can do business is the continued assumption that they make a superior product and that the company story of eventually being able to turn profitable remains intact. The consequences of a broader narrative changing could be catastrophic. With regard to the CPO program changes, the first comment after the Elecktrek article sums it up:

Buying "new" cars sight unseen / no test drive is not a problem (I've done it 3 times). But, used Non-Refurbished No Pictures? No guarantees? At a premium? They're out of their mind. As a super Elon / Tesla fanboy - first time I have been disappointed.

Given that it appears that the sell side has given up on the company of late and that production problems were “worse than [Elon Musk] thought", as he stated yesterday, is it possible that a much larger sentiment shift could be in the wind for Elon Musk and Tesla?