Why Silicon Valley Won't Be Detroit For Green Carmakers Page 2

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Tesla Motors, Palo Alto, California

Tesla Motors, Palo Alto, California

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When even Stanford University has to build hundreds of housing units to attract everyone from young professors to assistant athletic coaches, startups face huge challenges in luring talented workers from other areas.

But what of Tesla?

Ah, but isn’t Tesla Motors the prototype for this fabled new auto industry in the Valley? Funded by Silicon Valley venture capital, the company is now headquartered in the foothills just above Stanford University, in an old Hewlett-Packard building no less.

Nonetheless, Tesla still has to play by the same rules as the rest of the auto industry. If it truly intends to grow into an independent global automaker—a goal most analysts think is close to impossible—it faces the same high costs.

The company developed its groundbreaking Roadster smartly, by adapting and reusing large portions of an existing car—the Lotus Elise sports car—and outsourcing much of that work to Lotus itself, along with the manufacturing (in the U.K.).

Tesla confined itself to designing, testing, and assembling the Roadster’s battery pack and some other electronic components. They’ve recently brought more of that work in-house in their new facility.

More volume means in-house assembly

But total Roadster production over three or four model years will number in the low thousands, a level at which outsourcing makes economic sense. According to auto manufacturing guru James Harbour, outsourcing only makes sense to volumes of 15,000 to 25,000 cars per year. After that, it’s simply cheaper to set up your own factory.

That’s why Tesla acquired a factory in Fremont, California, from Toyota earlier this year. The Japanese company had inherited the plant after GM pulled out of the New United Motor Manufacturing Inc. partnership that had jointly operated the plant, most recently building Toyota Corollas and Pontiac Vibes. It was also the last surviving auto manufacturing plant in the state.

Tesla says it will build and sell 50,000 Model S luxury sports sedans a year, as well as building battery packs and adapting vehicles for other makers. Its powertrain is currently used in the Smart Electric Drive and the Mercedes-Benz A-Class E-Cell, and Toyota is paying it $60 million to provide powertrains for an electric version of its RAV4 crossover.

Brand survives, factory moves?

If Tesla survives as a company, its headquarters and even manufacturing may stay put. Most analysts feel a more likely scenario is that the brand is acquired by another carmaker, in which case, manufacturing will likely migrate elsewhere.

Maybe not right away, but almost certainly when Tesla wants to build a $15,000 or $20,000 electric car that will sell in the hundreds of thousands of units. Around 2020, say?

Tesla’s headquarters might remain in the Valley. That’s a major part of its brand image, and most automakers have outposts there to keep current on innovations in microelectronics, telematics, and social media. But we’d be shocked if the Fremont factory is still building cars 20 years hence.

2011 Chevrolet Volt

2011 Chevrolet Volt

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Fisker, Ford, and GM

It’s worth comparing Tesla to Fisker Automotive, another venture-funded startup. Fisker says it will build up to 15,000 of its first car, the 2011 Karma plug-in hybrid sports sedan. That’s the right number for outsourcing; indeed, the Karma will be assembled in Finland by Valmet.

For its planned second car, Fisker too is taking over a former GM plant. But this one is in Delaware, a far cheaper location. More importantly, Tesla and Fisker are still tiny startups.

So is Coda, which plans to open a vehicle assembly plant for what it says will be up to 14,000 electric cars a year in Benicia, on the northeast corner of San Francisco Bay.

Plus ca change…

General Motors and Ford are now hiring hundreds of engineers to work on hybrid, plug-in hybrid, and electric vehicles, like the 2011 Chevrolet Volt and the 2012 Ford Focus Electric.

And they’re not doing it in Silicon Valley. They’re doing it in Michigan, just where they always have: the GM Technical Center in Warren, and the Ford headquarters complex in Dearborn.

Sure, their designers and engineers visit Silicon Valley to do deals with startups in areas like apps that will connect their cars to the world of always-on information. But then they take the apps back home to where cars are built.

In other words, we suspect that the new, clean, green auto industry in the U.S. will be pretty much where the old, dirty, gas-guzzling one was.

That would be … Detroit.

Plus ca change, plus c’est la meme chose.


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