"Elon Knew": New Lawsuit Alleges Musk Knowingly Lied About Model 3 Production

A new securities class action lawsuit filed in late March 2018, which names Elon Musk as a defendant, alleges that the Tesla CEO knew that the Model 3 was not going to be able to be produced as the rates he claimed - and that the company was not going to be able to meet production goals due to - get this - the production lines not even being assembled. The lawsuit alleges that this didn’t prevent Elon Musk from going out and telling the investing public otherwise, hence the allegation of securities fraud.

First, the allegation that Musk was told by his own employees that the Model 3 couldn't be mass produced by the end of 2017, which was the company's stated goal:

Then, after claiming in May 2017 that the company was "on track" to meet its mass production goal, it's alleged the company hadn't even finished building its production lines, clearly meaning it wasn't "on track". The lawsuit alleges that Musk knew the line was "way behind":

The suit alleges that the company was building Model 3's by hand at a "pilot shop" at the same time Tesla claimed to be on track for "mass production"; it also claims that it was "evident to anyone who visited the facility" - including Elon Musk - that the line wasn't built and that "construction workers were spending most of their shifts sitting around with nothing to do":

We also read in the lawsuit that Tesla’s Gigafactory, at the time in question, was allegedly capable of producing only one battery pack per day - and that the production of one battery pack took “two shifts” to complete.

The suit alleges that the company's former CFO, Jason Wheeler - who is one of more than 50 key executives and VPs to have left the company over the last half decade or so - told Elon Musk personally that they wouldn't be able to mass produce by the end of 2017. The entire lawsuit is available at this link and some of the most interesting content was first shared by critics of the company on Twitter.

The drumbeat of accountability for Elon Musk continues to pound louder and louder as each day progresses, with some analysts calling for the SEC to investigate him if the company doesn't meet its stated cash flow positive and "no capital raise" guidance for the back end of 2018.



Yesterday we detailed how the company is cutting corners with production and suppliers, as well as with its certified preowned vehicle program. Commentators continue to suggest that Elon musk should be held accountable by regulators if the company again raises capital this year or is not free cash flow positive by the second half of this year, two claims that Musk made this week in an angry outburst where he attacked the messenger (The Economist) for pointing out a Jefferies analysis.

Then, 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 alleged that:

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 was 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.

We also pointed out yesterday that 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.

Worst of all, 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 Elektrek 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.

Regardless, the air - and questions - of accountability continues to get thicker around Elon Musk and his band of merry brothers.

If the stock takes another dive next week, what is Mr. Musk going to come up with in order to keep a sense of being such trivial concerns as cash flow and profitability - and more importantly, how long will his lawyers let him keep talking?

Comments

takeaction Sat, 04/14/2018 - 20:57 Permalink

This guy plays a crazy game...would I buy one?...NOPE.

Buy a real car...

New Acura NSX for the wealthy...

and then any Honda or Toyota for normal people.  A car is a tool that needs to work.  A car is to not cause one grief...

I wrote a book a long time ago about car ownership..

the most important considerations in the purchase of a car should be

#1 Maintenance/Fuel cost

#2 Frequency of repairs / reliability

#3 Depreciation/Resale

Never buy NEW...always let somebody else take the Depreciation Dive...then buy it.

You should be able to buy a car...drive it for a couple years, then sell it for near the same price you originally paid.  I have rarely ever lost money on a car...

A Tesla does not meet the above criteria...especially when you consider the cost of battery pack replacement.

 

roddy6667 takeaction Sat, 04/14/2018 - 22:01 Permalink

Back when I sold Toyotas, we checked the assertion that cars lose half their value in two years. It's true. The wholesale/trade-in price drops 50% of new dealer price in 24 months. No dealer has ever paid more than wholesale price on a trade toward a new vehicle. They lie and say they do, but every dollar over wholesale is a dollar less they can take off sticker price. That's why there is a blank area under the field for the price "paid" for your trade-in. After the sale it is adjusted. Also, the depreciation charts used for leases shows a true drop in value of 50% in 24 months. If you are the type of person who "needs" a new car every 2 or 3 years and don't drive more than 12,000 miles a year, leasing is the cheapest way to go.

Later, I got access to the car auctions and never paid more than wholesale for a used vehicle. 

In reply to by takeaction

kbohip takeaction Sat, 04/14/2018 - 22:15 Permalink

You'll never buy a car, drive it for a couple of years and not lose money.  Never.  Even if somehow you manage to get someone to overpay for your used car, you'll have still sunk thousands into taxes and registration.  If you buy one every couple of years these costs go way up.

Other than that I agree with you.

In reply to by takeaction

gregga777 takeaction Sun, 04/15/2018 - 00:19 Permalink

A Tesla is powered them with thousand(s?)* of highly flammable Lithium-Ion batteries**, each a little larger than an alkaline AA-cell***. The complete battery pack occupies much of the underfloor area of the Tesla passenger compartment (see photos here*).  Because Li-ion batteries are very sensitive to charge/discharge factors they are apparently grouped by threes with individual charging, over-heating and over-current protection circuitry. 

 

The Tesla Gigafactory may have developed some means of modularizing the battery pack into small packages making it amenable to some form of automated pick-and-place electronics manufacturing assembly line technology. They might have some form of fixture into which small groups of batteries are loaded, set atop some type of printed circuit board (PCB), wave soldered on the bottom side and then flipped over to be wave soldered on the top side. Then maybe they are hand assembled into completed battery packs. But, I expect that their touch labor, rework rates and scrap rates would be considerable. Perhaps that's why the Gigafactory takes two full shifts to produce a single Model 3 battery pack.

 

That is before pointing out that an automobile is a very high vibration and shock environment, has extreme temperature cycling, and susceptible to corrosion and contamination from all manner of moisture, water, sand, salt, dust, etc. The battery pack is apparently very wide and long but not very deep too to bottom. It will be very sensitive to vibration and vertical shock as well as the natural flexure of the chassis over rough road conditions. These factors will significantly shorten the life of the battery pack. 

 

*See photos of Li-ion batteries exposed in the Tesla's battery pack in which Apple engineer Walter Hwang lost his life: 

 

https://www.bizjournals.com/sanfrancisco/news/2018/03/29/tesla-autopilo…

https://www.bizjournals.com/sanfrancisco/news/2018/03/29/tesla-autopilo…

 

**21700 Lithium-ion battery; 21 mm diameter by 70 mm long; Announced by Samsung[54] and LG Chem in 2015 for electric bikes.[55] As of January 5, 2017 currently being produced at Tesla Gigafactory 1 for Tesla Model 3.[56]

 

***A AA-cell is 14.5 mm by 50.5 mm.

In reply to by takeaction

F1le Sat, 04/14/2018 - 21:00 Permalink

This guy is a 2018 Bernie Madoff ... Seems every 10 years new Bernie arrives. It was so obvious this company is a financial pyramid, and Elon can realize his visions based on others money ignoring the fact that the key business part is profitability. The time has come, market says CHECK. Let's see if the king is naked.

 

This bankruptcy joke ... It's not a joke, it's a psychological trick to laugh from inevitable things to buy some more trust for another month or two, thinking all problems will be gone.

Kidbuck Sat, 04/14/2018 - 21:02 Permalink

Good thing that rocketship taking those worthies to Mars won't need a more dependable guidance system than he puts in his cars and the QC on the rocket will be up to the Musk standards.

gregga777 Kidbuck Sun, 04/15/2018 - 00:48 Permalink

Rockets, especially heavy-lift rockets, require enormous quantities of oxidizer and fuel. The Saturn V first-stage had 5 F-1 rocket engines. They burned through 1,204,000 liters of liquid oxygen (LOX) and 770,000 liters of kerosene fuel in 165 seconds. That's about 1,460 liters of LOX and 933 liters of kerosene per engine per second. 

 

LOX has a density of 1.141 kilograms per liter. Kerosene has a density of about 0.8 kg/liter. So, each F-1 engine is burning through about 1,666 kg (~3,665 pounds) of LOX and 746 kg (~1,642 pounds) of kerosene per second! That's 2,412 kg (5,306 pounds) of LOX and fuel per engine per second. 

 

I seriously question if SpaceX has the enormously deep pockets required to adequately conduct developmental test and evaluation programs required to develop reliable, man-rated launch systems. NASA spent a fortune developing the Saturn first-stage F-1 engines, second- and third-stage J-2 engines and the Space Shuttle Main Engines (SSME). Descriptions of the SSME developmental test and evaluation program is available on the Internet and are a fascinating read and description of the enormous energies being harnessed in rocket engines especially in the LOX and LH2 turbo-machinery*. I just don't see how SpaceX could replicate the reliability of those kinds of engines required for heavy-lift vehicles. 

*One of the SSME turbo pumps develops 100 horsepower per pound of weight. In contrast, the 6.7 liter Diesel engine in my F-250 develops about 0.4 pounds per horsepower. That's obviously not an apples to apples comparison. But, it's a good data point for a strength of materials comparison. 

In reply to by Kidbuck

NVTRIC gregga777 Sun, 04/15/2018 - 01:03 Permalink

When I was a kid I lived in Simi Valley.  I will never forget being in grade school and Rocketdyne firing off that loud ass rocket up on top of Box Canyon.  So strange to hear the world ending and have everyone else acting normal and seemingly unaware thru the whole ordeal.

 

Later that day I found out it was just a rocket test.  They should tell little kids about that shit man.  Seriously.

In reply to by gregga777

gregga777 NVTRIC Sun, 04/15/2018 - 01:20 Permalink

I grew up living at ground zero, aka United States Air Force Strategic Air Command bases in the 1950's and 1960's. During B-52 engine tests they would run up all 8 jet turbines to full power up against the blast fences. The dishes in our cupboards would rattle from the subsonic vibration. After awhile I never noticed it anymore. 

In reply to by NVTRIC

PrivetHedge gregga777 Sun, 04/15/2018 - 06:47 Permalink

The F-1 turbopump was a huge beast of a machine and made a great crackling sound too.

However the F-1 engine was never any good, straight through injectors gave a very poor burn quality (note most of the fuel burning outside of the engine on the 1960's film reels and the soot on the photos of the injector plate), also the hopeless tubular cooling system meant high pumping pressures and thin walls unable to take adequate pressure, so all in all the F-1 was a bit of a dud that struggle to reach orbit.

I think skylab was it's only real achievement, it never had enough power to get anything near the moon, especially with stupid buggies strapped to the side of the non functional LM.

They did sound and look good though - things our hollywood government values most.

In reply to by gregga777

MarkGoldman gregga777 Sun, 04/15/2018 - 06:50 Permalink

Dude, get real...SpaceX has turned the entire global launch industry on it's fucking head. The best and brightest from elsewhere left to join them and have built what stands today: The only rocket company that matters. Short hops of BFS by the end of 2019, BFR by 2022. Falcon Heavy in the mean time. Anyone can say what they will about Tesla (I say, fucked company) but Space Exploration Technologies has Gwynne Shotwell calling the shots, and her credibility is unassailable. As for the Billions and Billions you think they require...you must work for ULA! FH cost less than 1/2 Billion. F9 cost several hundred Million. The entirety of the $$$ spent thus far by SpaceX is less than $10 Billion, for everything. F1, F9, FH, CRS, Dragon, GrassHopper, Raptor, BFS/BFR...had NASA been running that...they would have failed, but not before spending $200 Billion. ZH doesn't like Musk, whatever. And those SSMEs? from reusable to disposable...only NASA can go backwards like that, and with a perfectly straight face.

In reply to by gregga777

iampreparedru Sat, 04/14/2018 - 21:07 Permalink

Got my invite yesterday and put down my 2500 deposit. Sat in the model 3 in houston. It looks very nice  

But a tesla motors poster said he signed up the first day when elon announced 195k resevations. He also received his invite. Delivery in 4-6 wks. So about 30-40k cars delivered will be 200k into the resevation list. Have to admit that does not sound good. 

DontFollowMyAd… Sat, 04/14/2018 - 21:15 Permalink

ah yes, the ol' misleading forwarded statements trick finally coming home to roost on the muppets who've kept propping this stock up... wonder if the SEC will ever do their duty n start perp-walking the execs.

gregga777 DontFollowMyAd… Sun, 04/15/2018 - 00:52 Permalink

ah yes, the ol' misleading forwarded statements trick finally coming home to roost on the muppets who've kept propping this stock up... wonder if the SEC will ever do their duty n start perp-walking the execs.

That all depends on whether or not his bribes, ah, I mean campaign contributions to the political parasites are current. If not, I expect that the US SEC (US Swindler Enabling Commissars) will come down on him like an avalanche. 

In reply to by DontFollowMyAd…

CHoward Sat, 04/14/2018 - 21:20 Permalink

Personally...he should stick to something he's obviously very good at and that's rockets.  Get the fuck out of the car business, you're way in over your head and you're going to ruin a lot of good people. 

not dead yet CHoward Sat, 04/14/2018 - 21:36 Permalink

The Soviets and Americans spent boatloads of money developing the technology and the rockets. A supplier base was developed along with thousands of scientists, engineers, and others becoming experts in that arena. Thus Musk is building rockets with people, suppliers, and technology brought to you by the taxpayers. Just as his cars are built on others technology and supply base so are his rockets. He also uses taxpayer funded facilities to launch his rockets.

In reply to by CHoward

gregga777 not dead yet Sun, 04/15/2018 - 00:57 Permalink

Rockets, especially heavy-lift rockets, require enormous quantities of oxidizer and fuel. The Saturn V first-stage had 5 F-1 rocket engines. They burned through 1,204,000 liters of liquid oxygen (LOX) and 770,000 liters of kerosene fuel in 165 seconds. That's about 1,460 liters of LOX and 933 liters of kerosene per engine per second. 

 

LOX has a density of 1.141 kilograms per liter. Kerosene has a density of about 0.8 kg/liter. So, each F-1 engine is burning through about 1,666 kg (~3,665 pounds) of LOX and 746 kg (~1,642 pounds) of kerosene per second! That's 2,412 kg (5,306 pounds) of LOX and fuel per engine per second. 

 

I seriously question if SpaceX has the enormously deep pockets required to adequately conduct developmental test and evaluation programs required to develop reliable, man-rated launch systems. NASA spent a fortune developing the Saturn first-stage F-1 engines, second- and third-stage J-2 engines and the Space Shuttle Main Engines (SSME). Descriptions of the SSME developmental test and evaluation program is available on the Internet and are a fascinating read and description of the enormous energies being harnessed in rocket engines especially in the LOX and LH2 turbo-machinery*. I just don't see how SpaceX could replicate the reliability of those kinds of engines required for heavy-lift vehicles. 

*One of the SSME turbo pumps develops 100 horsepower per pound of weight. In contrast, the 6.7 liter Diesel engine in my F-250 develops about 0.4 pounds per horsepower. That's obviously not an apples to apples comparison. But, it's a good data point for a strength of materials comparison. 

In reply to by not dead yet