Update: Tesla has responded to the facts below that it stopped a crucial safety test during "production hell" of the Model 3, confirming it did indeed not do the brake test, however justifying this by saying that every car is tested after production on a test track.
“Every car we build goes through rigorous quality checks and must meet exacting specifications, including brake tests. To be extremely clear, we drive *every* Model 3 on our test track to verify braking, torque, squeal and rattle. There are no exceptions.”
The response did not explain why the test was necessary in the first place. It certainly did not help the shares.
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One of the biggest mysteries to emerge from Tesla's mad dash scramble over the past week to hit its 5,000 Model 3 production quota in a week, was the question: what is a "factory gated" model and why are so many of the Model 3s produced by Musk not quite "production quality."
In addressing this question yesterday, Vertical Group's Gordon Johnson offered this explanation:
TSLA mentioned that it reached 5,031 Model 3 cars of “factory gated” production in the last week of June; while the company said it has used the “factory gated” terminology all along, we were not able to find this term in any SEC filings or public transcripts; however, looking to Linkedin, it seems “factory gated” may mean cars that require further testing and quality inspection upon leaving the factory floor (Exhibit 1) – this would mean these cars are likely not “full production vehicles” in the traditional sense of auto industry terminology;
Exhibit 1: Linkedin Review Suggests “Factory Gated” Produced Cars
May Require Further Inspection/Testing
The implication of the above is that in its rush to produce as many Model 3s as possible, Tesla was slashing quality control corners, and not producing fully QC-compliant units, which while perhaps permissible when producing less sophisticated goods, is clearly controversial to say the least when the product in question is a car that already has a spotty record of crashes and safety.
But while Johnson's speculation sounds accurate, is that really what happened?
Now, courtesy of Business Insider, we not only have confirmation but also evidence that Musk's quality control transgressions were especially acute: according to the report, which was based on internal Tesla documents provided to BI by what appears to be a whistleblower, "Musk appears to have asked engineers at his Fremont, California factory to remove a standard brake test, called the brake and roll test, from the tasks Model 3 cars must complete in order to move through production."
In order to maximize output and hit the company's weekly output quota, Musk went all out, eliminating what he considered non-critical "tests" to push out as many cars as possible:
The test was apparently shut down before 3 am on Tuesday, June 26, according to a person familiar with the matter. It's unclear why this particular test was halted.
And while Musk clearly thought the test was redundant, or at least of secondary importance, others disagree and according to one industry expert, the brake and roll test is a critical part of the car manufacturing process, taking place during its final stages.
The test ensures that the car's wheels are perfectly aligned, and it also checks the brakes and their function by taking the vehicle's engine up to a certain RPM and observing how they react on diagnostic machines.
To validate its reporting, BI notes the following screenshot of what the test looks like in Tesla's production system.
Here is the report's explanation of the screengrab above:
The far left column shows what step the car has reached in the manufacturing process and what tasks must be done there. In this step, the car undergoes a brake and roll test.
The two key columns here are the ones labeled "Critical" and "Blocking." According to an employee at the company, they show that it is apparently no longer necessary for the car to undergo this test before it leaves this step of the manufacturing process.
On the far right are all the descriptions of the tasks that should be performed at this station. However, since the criticality is off and the blocking is off, the car can leave the station whether those tasks are performed or not, the employee said.
It's not clear how many, if any, cars have left the station without this test being undertaken.
Quoting industry experts, BI then explains just why this test is of such significance in the production process:
Ron Harbour, a consultant at Oliver Wyman and the co-author and founder of "The Harbour Report," a worldwide guide to manufacturing, told Business Insider that after everything is installed in a car during the manufacturing process, a manufacturer would have to be very lucky if everything on a car was in alignment.
"If you just abandon that [the test] you could potentially have a lot of quality issues with your customers," he said. "Every plant does that ... it's part of finishing the build of the car."
Harbour told Business Insider he was unaware of any test that could adequately replace the brake and roll test on a manufacturing line.
When asked about this apparent "corner-cut" Tesla told Business Insider that every car goes through "rigorous quality checks" including brake tests. "To be extremely clear, we drive *every* Model 3 on our test track to verify braking, torque, squeal and rattle. There are no exceptions," Tesla spokesperson Dave Arnold said in a statement.
However, when pressed on whether or not Musk himself gave the order to remove the brake and roll test, Arnold said: "I don't have anything further beyond the statement."
Sounds like a tacit admission, which may come as very bad news for all those Model 3 buyers who are about to receive not only a Model 3 unit that was made not in sterile, high-tech conditions, but may have major drivability and comfort problems.
Business Insider also provided the needed internal color on what factory gating means:
The employee Business Insider spoke with said that the factory gate distinction is important. It means that the company likely reached its goal by finishing cars that had already been through the production line the previous week, but were held back for rework, and readying them for factory gating, the source said.
In other words, of the slightly more than 5,000 cars produced in that last, torrid week, Tesla rushed out production at any cost, even if it meant that countless units had to be QC-tested and checked, at the cost of numerous man hours.
It also means that had Tesla actually followed protocol, it would never have been able to hit its quota and would disappoint the market.
Business Insider's mole had one more troubling disclosure:
Tesla also announced that it made 28,578 Model 3s in the second quarter. However, BI has viewed internal documents that show that as of June 27 the company had planned to hit 36,020 Model 3s in the second quarter. Tesla declined to comment on this figure.
At that point the carmaker had made under 11,000 cars in the month of June and just under 26,000 cars in the 2nd quarter, putting it on track to fall below its plan of 36,020.
This means that even after building a tent and slashing quality-control "corners", Tesla was still unable to hit its internal bogey.
Needless to say, all of the above greatly dilutes Musk's triumphant message that he had managed to hit his production target. It also should be a concern to Tesla buyers: just what quality car are they getting from a company that was far more focused on pumping out a certain number of cars, than making sure it is not another patented Tesla burning deathtrap.
Worse, however, are growing accusations from various prominent Tesla skeptics, that Musk is now openly engaging in the same practices that led to the collapse of Theranos, warning that "this company is sounding more and more like Theranos every passing day. What other safety-related shortcuts are possibly occurring here?"
Perhaps the regulators should be tasked to answer that quesiton.
But the biggest problem for Musk is that, just like in the case of Theranos, there now appears to be a very motivated whistleblower within the organization alerting the media about the company's production flaws, operations transgressions, and - if the glove fits - outright lies.
Unless Musk is able to catch this leaker, or as he called him two weeks ago - saboteur, the Tesla story may have one more similarity with that of Theranos: the ending.
One wonders if this is why Tesla's chief engineer Doug Field finally quit yesterday...