Tesla factories reportedly struggling with high scrap volume, and low vehicle production rate per employee

Key Points
  • Two new reports shine a light on waste and other woes within Tesla's major U.S. factories.
  • In 2017, Tesla employed around 10,000 at its Fremont, California factory-- producing just 10 vehicles per employee that year.
  • Tesla's Gigafactory reportedly sends 40 percent of raw materials and parts manufactured there to scrap or for rework.
Business magnate Elon Musk.
Ray Tamarra | GC Images | Getty Images

Two new reports suggest that all is not yet well in Tesla's major U.S. factories.

The fresh investigative reports describe: a high level of waste of raw materials and rework required on parts made at the Tesla Gigafactory in Sparks, Nevada; serious paint shop fires and a bloated workforce, allegedly twice the size of what's required to build its cars, in Fremont, California.

Business Insider reported that, based on internal documents it reviewed, Tesla was scrapping or reworking around 40 percent of the raw materials and parts built at its Gigafactory as recently as April, an unusually high rate compared to other automakers.

That number is in line with an earlier report from CNBC where Tesla employees estimated 40 percent of the parts received at or made in its Fremont factory also required rework or repairs.

Tesla said in an e-mail to CNBC today:

As is expected with any new manufacturing process, we had high scrap rates earlier in the Model 3 ramp. This is something we planned for and is a normal part of a production ramp. Indeed, we have always explained that Model 3 margins would increase after costs begin to fall from elevated scrap and other early ramp issues — and they have. Our scrap rate for batteries has decreased by almost 60% since January as we have improved our manufacturing processes. It's also important to remember the reason we scrap parts: because we want to ensure that only the highest-quality parts are used to create the best vehicles for our customers. This is a part of the reason why Tesla's customer-satisfaction scores for Model 3 vehicle quality and condition are at an all-time high of 93 percent.

In a separate investigation, a former Tesla employee told the Daily Beast that a paint shop fire there turned a paint sprayer there into a "flamethrower." The source told the Daily Beast: "Literally it's a torch f***ing flying around, the paint spraying, the paint's on fire, scorching the car," the employee said.

As previously reported, Telsa has experienced at least 4 paint shop fires since 2014 including one in 2016 and one this year in April that have burnt expensive robots and halted production for more than one shift.

Consumer reports reverses Tesla Model 3 opinion
Consumer reports reverses Tesla Model 3 opinion

The Daily Beast report also says that Tesla's Fremont plant had "more than 10,000 factory employees making about 100,000 cars last year," which equates to a production rate of just 10 vehicles per employee annually. The same factory churned out 26 vehicles per empoloyee at the low end and up to 74 vehicles per employee when it was operated as a joint venture between General Motors and Toyota, according to Automotive News.

Tesla CEO and chairman Elon Musk has said that he expects Tesla to turn a profit in both the third and fourth quarters this year, which many analysts and investors think would be extremely difficult if not impossible.

Tesla has struggled to ramp up production of the Model 3, its electric sedan which it designed to become a mass-market vehicle. In multiple reports, employees are saying that Tesla compromises safety, quality and efficiency in order to strive to hit the ambitious targets set by Musk.

These growing pains may not shake shareholders' confidence in Elon Musk or other current board members. The company is holding its annual shareholder meeting today at the Computer History Museum in Mountain View, Calif. today.

Morningstar's Dave Whiston said, "I'll be surprised if any of the votes go against management's wishes. If you don't like Tesla's governance or don't believe in Elon, then Tesla stock probably doesn't make sense to own."

One proposal shareholders will vote on urges them to appoint an independent chairman, rather than keeping Musk in both CEO and chairman roles. Another proposal urges shareholders to replace board members Antonio Gracias, Kimball Musk and James Murdoch with new independents.

The shareholders' meeting is being streamed online.

Read the full reports in the Daily Beast and in Business Insider.

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