Tesla learns how to be a German automaker
The story of Tesla's rush to produce the Model 3 mass-market car has a subplot that shows how much the U.S. company's ambitions depend on German expertise -- and explains why German automakers are confident they can match or exceed anything Tesla throws at them.
During the company's recent earnings call, CEO Elon Musk said the Model 3 production lines will be "be roughly comparable with the best high-volume vehicle production lines in the world." Getting there appears to depend on Tesla Grohmann Automation, a medium-sized automated production line builder in Pruem, a small town in the state of Rheinland-Palatinate in Germany. Tesla acquired the firm, then called Grohmann Engineering, last year, paying $150 million in cash.
This was only Tesla's third-ever acquisition. Musk's firm had used Grohmann as a supplier; it has many others in Germany, because there's no way to make a luxury car without German inputs. ThyssenKrupp supplies steering columns and shock absorbers; steering systems come from Bosch; Infineon provides chips and sensors; Peiker, owned by Valeo, makes mobile connectivity possible; S1nn (a German company owned by Harman) makes sound systems; Recaro (a German subsidiary of Adient) produces seats. The list goes on: coatings, some plastics and car-painting technology are acquired from BASF, high-voltage wiring from Coroplast. KUKA makes robots engaged in Tesla assembly; Schuler builds presses to make Tesla body elements; Manz robots are used in battery production.
Grohmann, however, was important enough to buy outright because Tesla apparently wanted exclusivity. The firm had contracts with major German automakers, including BMW, Volkswagen and Daimler. This year, it transpired that Tesla wanted the company to concentrate on the Model 3 launch, even to the detriment of those relationships. The German firm's founder and then-chief executive, Klaus Grohmann, who was named in Tesla's acquisition press release as an important asset, reportedly didn't like the idea and was forced to resign last month. "Given the change in focus to Tesla projects, we mutually decided it was time for the next generation of management to lead," Tesla said, explaining the change.
Workers in Pruem weren't happy, either. Working for just one client didn't sound like a secure situation to them; suddenly, they remembered that their pay was up to 30 percent below the level negotiated for its members by the IG Metall labor union. They threatened to unionize and explore a strike. That action appears to have been averted for now after Tesla raised wages and offered workers stock compensation, repeating Musk's prediction that his company would one day be worth more than Apple. Now, Tesla is trying to sort out Grohmann's contractual obligations to the German car manufacturers, which are pressing for compliance.
This is more than yet another American company's clash with European business culture, which rejects cut-throat competition and centers on keeping all stakeholders happy. Tesla has muscled in on an ecosystem that sustains the German automotive leadership. Its suppliers also work for the three local giants -- VW, BMW, Daimler -- and, while competing energetically, for market share, they've all been able to coexist and help Germany build its famous -- or infamous, according to some -- trade surplus. There's nothing for Tesla to disrupt here except established business relationships: It needs German technology to make its cars, especially at scale, which is the small company's biggest challenge.
Given Musk's reputation as a visionary, German automakers' plans to ramp up electric vehicle production may sound like desperate attempts to catch up to Tesla.
But Volkswagen brand chief Herbert Diess's boast this week -- "Anything Tesla can do, we can surpass" -- isn't just bluster. The German companies know where Tesla sources its parts and technology and who makes the "machines that build the machines." They work with the same suppliers and use the same state-of-the-art parts and production solutions. They could pretty much make Teslas themselves -- but instead, they'll let Musk's company lose money as it blazes the trail.
Meanwhile, they will work at setting up production at scale for the time when electric cars make up more than the current 1 percent of the market. That's what Diess means when he talks about his company's "leapfrogging cost advantages."
"The entire electric fleet is to be profitable from the very beginning," Diess said. For public companies whose market capitalization depends on operational health and the ability to pay dividends, that's an important consideration.
VW -- incidentally, valued at about $80 billion by the markets compared with Tesla's $50 billion -- cannot suddenly adopt Tesla's business model and start selling a narrative and sporadic displays or tech brilliance instead of millions of cars. The German automakers are constrained by investors' perception of them as traditional manufacturing rather than technology companies. But they and their ecosystem are extremely technologically advanced. In a few years' time, instead of watching Tesla "disrupt" and "innovate" while the rest of the industry ostensibly hangs back, we may see Musk's company -- if it is successful at scaling production -- as part of this ecosystem, a new species that's learning to survive next to the indigenous ones.