Tesla's problems with battery production at the company's Gigafactory in Sparks, Nevada, are worse than the company has acknowledged and could cause further delays and quality issues for the new Model 3, according to a number of current and former Tesla employees. These problems include Tesla needing to make some of the batteries by hand and borrowing scores of employees from one of its suppliers to help with this manual assembly, said these people.
Tesla's future as a mass-market carmaker hinges on automated production of the Model 3, which more than 400,000 people have already reserved, paying $1,000 refundable fees to do so.
The company has already delayed production, citing problems at the Gigafactory. On Nov. 1, 2017, CEO Elon Musk assured investors in an earnings call that Tesla was making strides to correct its manufacturing issues and get the Model 3 out.
But more than a month later, in mid-December, Tesla was still making its Model 3 batteries partly by hand, according to current engineers and ex-Tesla employees who worked at the Gigafactory in recent months. They say Tesla had to "borrow" scores of employees from Panasonic, which is a partner in the Gigafactory and supplies lithium-ion battery cells, to help with this manual assembly.
Tesla is still not close to mass producing batteries for the basic $35,000 model of this electric sedan, sources say. These people requested anonymity as they are not authorized by the company to talk to the press.
A Tesla spokesperson told CNBC: "Until we reach full production, by definition some elements of the production process will be more manual. This is something Elon and [CTO] JB [Straubel] discussed extensively on our Q3 earnings call, and it has no impact on the quality or safety of the batteries we're producing."
Meanwhile, bears are growing more skeptical by the day. Stanphyl Capital's Mark B. Spiegel, who has a significant short position in the company, told CNBC: "While I've no doubt that Tesla will eventually work out its Model 3 production problems, the base model will cost Tesla at least mid-$40,000s to build. The company will never deliver more than a token few for less than the current $49,000 lowest-cost offering. Sales will hugely disappoint relative to expectations of over 400,000 a year. And even at those higher prices Tesla will never come anywhere close to its promised [profitability]."
Tesla has a history of setting and missing ambitious targets.
It reportedly aimed to ship its Model X gullwing vehicles to the masses in 2014, but couldn't do so until 2016.
Last year, Musk promised to deliver 1,600 Model 3s in the third quarter, but only delivered 220 of them. In a shareholders' update in August, he said the company should be producing 5,000 Model 3s per week by the end of 2017. In November, he lowered expectations, saying Tesla will be able to crank out 2,500 premium Model 3s per week by the end of March, ramping up to 5,000 per week by June.
According to shareholder updates, the company delivered fewer than 2,000 Model 3s through the end of 2017, and only the more expensive long-range ones. No $35,000 basic models have shipped as of mid-January.
Issues at the Gigafactory could hamper Tesla's ability to hit even its reined-in goals, say sources. Delays would hurt employee morale, test the patience of customers, and help electric vehicle competitors like Chevy, Nissan and China's BYD.
But some Tesla investors view production issues as minor in the grand scheme. A note from senior research analyst Ben Kallo at R.W. Baird said, "We continue to believe Tesla will be able to ramp Model 3 production, think demand could accelerate with positive reviews from early customers, and believe the Model 3 total addressable market could be larger than expected." Baird reiterated its outperform rating in the note.
Some former Tesla engineers agreed, saying manufacturing and quality issues should be kept in perspective. "Manufacturing is always hard. There are questions of tolerance and risk, what meets quality criteria and so on," one said. "It takes time to figure it out."
What does it take to make a Model 3 battery? Each battery pack contains four modules. And each module contains seven bandoliers, or cooling tubes with a row of lithium-ion cells glued to each side. Those cells have to be precisely aligned.
Manual assembly works for some parts of battery production, like bolting down and gluing the "clamshells," or outer structures that hold a battery pack together.
But bandoliers are tough to put together by hand. Cells can be pushed a bit too high or low, or otherwise drop out of alignment, as they're squeezed against the glue on a cooling tube and packed into modules.
A current Gigafactory engineer recalled that in December, factory workers were manually "slapping bandoliers together as fast as they possibly could," generating a lot of scrap in the process.
Once the machines in the factory were able to crank out bandoliers as fast or faster than the manual laborers, Tesla began sending Panasonic workers back to their employer, sources said.
Today, Tesla is winding down manual assembly as much as possible at the Gigafactory, a hopeful sign.
But one engineer who works there cautioned that the automated lines still can't run at full capacity. "There's no redundancy, so when one thing goes wrong, everything shuts down. And what's really concerning are the quality issues."
Many of the company's quality control workers are relatively inexperienced, make sloppy calculations and don't know when they're looking at flaws, according to several current and former employees. They said many quality inspectors were temp-to-hire workers with no automotive experience who Tesla hired via a staffing agency.
Tesla acknowledged the relative inexperience of some employees, but said new hires involved in battery production receive "extensive training, including safety training."
Two current engineers told CNBC that they are concerned some of the batteries being shipped do not have the minimum gap required between lithium-ion cells. These engineers warned that this "touching cells" flaw could cause batteries to short out or, in worse cases, catch fire.
These engineers said they raised the issue internally, but their concerns were shrugged off by managers.
A Tesla spokesperson dismissed these comments as "false claims," and strenuously denied the company is shipping hazardous batteries.
"The implication that Tesla would ever deliver a car with a hazardous battery is absolutely inaccurate, contrary to all evidence, and detached from reality," the spokesperson wrote in an email to CNBC.
The spokesperson also explained:
"Every battery in a Tesla vehicle has thousands of cells, the vast majority of which are at the same voltage potential as neighboring cells. Hypothetically, even if two cells of the same voltage potential were touching, there would be absolutely zero impact, safety or otherwise – it would be as if two neutral pieces of metal touched.
"Despite this fact, all Model 3 battery modules' cell positions are measured twice in manufacturing to verify process control and quality of outgoing parts. Conversely, if at any point in the production process cells are touching at different voltage potentials, they cannot be electrically interconnected. Over the course of the production process, we conduct three different tests to ensure the right number of cells are electrically connected in Model 3 modules."
The two engineers also said that Tesla doesn't do the same kind of "stress tests" of its Model 3 batteries which would be expected of other electronics or carmakers. Such tests could help Tesla figure out if touching cells (or any other flaws) are present in its fully assembled batteries, or if flaws develop or worsen with real-world use.
Tesla countered that it tests batteries in many other ways, "including shock and vibration, and high temperature and humidity testing, as well as thermal cycling endurance testing throughout design and via sampling in production." The company says this testing "is designed to prevent touching cells from being installed in any of our vehicles."