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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Comments (12)
  1. These are complicated decisions being made by very smart people with lots of business experience. Does what a blogger thinks really matter? No. This article is just masturbation.

  2. Obviously the editor doesn’t have idea what he’s talking about and how business works in the new decade, GM can hire hundreds or thousands and still they will produce a crappy car like Volt, companies like Tesla hire few people but smart.
    Quantity, strikes and bail out won’t help GM from going bankrupt.

  3. Bwahaha. James and Daud kill me--must be engineers? Voelcker is correct. Tesla and all the electric startups must be gobbled up by bigger competitors since the IPO market is dead in the US and will be for the next decade at least. SV venture funding now requires all manufacturing to be done in China, not like the good old days when the protos were built here, the plant scaled up, then production moved to Asia when the product was mid-cycle. Maybe that will change, now that the Chinese government is extorting EV technology from it's "partners". Silicon Valley makes sense for engineering phds, but most of the lowly manufacturing types were kicked out 10 years ago...this coming from a lowly manufacturing type.

  4. Tough call on either side. Tesla and its other SV siblings will most likely have to do some magic in order to remain in SV past the threshold where large-scale in-house manufacturing becomes necessary. Can they? What would that magic be? Robotics and automation come to mind, not least because we're talking about SV after all. Only if such magic 1) significantly magnifies worker productivity, and 2) the cost of relocating to a cheaper location is greater than simply remaining in SV and achieving incremental productivity gains. One might ask if that same automation would be even cheaper in, say Kentucky, but the labor pool there and its culture are very different from that in SV, yet another critical factor.
    I have to admit, R2Dad makes a harsh but realistic appraisal. It's going to be about ROI and cutting costs to the bone.

  5. SoCal is better. That's why Coda is in Santa Monica.

  6. This article is half right - its damn expensive in California (that's a deterrent more than regulations also see @Sleepingdog's comment) but if you're going to build a new technology you're going to need smartminds to do it and those are in the valley so that part of it is a fact. Maybe they won't manufacture in CA but design is a strong possibility.

  7. Obviously the editor is clueless about the SF bay area. San Francisco is not a part of Silicon Valley. It's near Silicon Valley, and no where near the Golden Gate Bridge. Also there are plenty of companies that took a while before they turned a profit. HP, Apple, Google and the others took several years to become strong. There were plenty of busts too. I believe Stanford's, VW's and BMW's (full/partial) self driving car will be sold in larger volumes than electric cars in 5-10 years. There's little infrastructure cost for a self driving car, but there is a significant infrastructure cost for an all electric vehicle. That infrastructure cost will be more likely a problem for electric vehicles than the location of the innovation.

  8. To @George "San Francisco is ... no where near the Golden Gate Bridge", I assure you, no one has stolen it from our fair city yet...
    Also, while wikipedia's definition and the historical name "Silicon Valley" did refer to Santa Clara county in the old days because of semiconductor companies, it is well understood nowadays to encompass all adjacent technology heavy cities such as Palo Alto, Mountain View, and yes, San Francisco as well as more than semiconductors.

  9. I agree with Yo Ma. In practice, SV extends from SF all the way around the bays and way out to Pleasanton and beyond. Some may even include parts of Marin county, or even Sebastopol where O'Reilly is, although that's really pushing it.

  10. With just a little research on their story, they would have noticed Bay Area companies designing batteries, high-current control electronics, and high-efficiency motors since the sixties (aerospace) and although Detroit is known for the rolling iron Californians make their cars handle, much faster, and then start racing them.

  11. And apps and software is precisely what Lockheed Space Systems do in the valley, right? ;)
    I am confident that when the smart guys at Tesla figure out the economics of the volume they bring to the market in a few years, manufacturing will shift to places that are more affordable. After all, very little of the hardware/goods made by Valley companies are actually made there. Or in the US for that matter.

  12. http://r.reuters.com/hyk92q is running a story on this debate...

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