Musk said 'manufacturing design improvements' are coming to the Model 3 - former Tesla engineers told us what that could mean

Tesla Motors

Ex-Tesla workers say the company faces challenges.

• In a letter to employees announcing layoffs, Tesla CEO Elon Musk also promised to have a $35,000 version of the company's new Model 3 car available for sale by May.
• Industry experts told Business Insider that cost down efforts are common in the auto industry, but can take up to a year to implement.
• Former Tesla engineers we spoke to said that Tesla lacks a process for manufacturing improvements, and that it can lead to confusion on the factory floor.

A mass layoff, the buildings of new factory in China, and plans to begin manufacturing the Model Y indicate a new phase at Tesla. And based on a recent letter to employees from CEO Elon Musk, the new Model 3 vehicle will not be left untouched as the company hopes to be able to sell a $35,000 version of the car by May.

Here's how Musk put it to employees as he announced layoffs earlier this month [emphasis ours]:

...we unfortunately have no choice but to reduce full-time employee headcount by approximately 7% (we grew by 30% last year, which is more than we can support) and retain only the most critical temps and contractors.

Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months.

Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 mile), standard interior Model 3 at $35k and still be a viable company. There isn't any other way."

Three former Tesla engineers who spoke with Business Insider on the condition of anonymity explained that this means scouring every piece of the Model 3 and its manufacturing process to find ways to significantly reduce costs. The changes could come from anywhere.

One former Tesla VP told us that it "likely means changing part design to buy the parts cheaper and make them quicker to install driving down labor at the factory."

And like all things at Tesla, the former employees said the company will want to do this at rapid speed.

Have a story to share about working for or interacting with Tesla? Contact Business Insider's Linette Lopez at llopez@businessinsider.com.

Cost downs

Carmakers are constantly looking for "cost downs" - ways to lower a car's cost in either product design or the manufacturing process - without sacrificing quality. This is especially important to moderately or lower-priced cars that generate thin profit margins. Part design changes can take 6-12 months to source and implement into the manufacturing process, especially if those changes require a new die (a tool used to cut or shape material) or a new mold for a part.

Back in November, according to reports, Musk told his staff that the cost to build the Model 3 is about $38,000. So thousands of dollars need to be shaved off the cost.

Sandy Munro, CEO of manufacturing consulting firm Munro & Associates, thinks Musk shouldn't have a problem making the changes he needs to make to the Model 3. In fact, Munro said his company sent Tesla over 200 ideas for how to improve the car after it examined the Model 3 back in July.

For one thing, Munro said, Tesla could make all of the batteries in the Model 3 a uniform size instead of using two different sized batteries. It could also use cheaper materials, replacing vegan leather with cloth or regular leather, and nylon with propylene.

"I think he's probably going to be able to take $12,000 out of it by doing this and that," Munro told Business Insider over the phone.

Of course, all of these things cost money, and they take time and focus.

"It's not like you snap your finger and it's done. It takes about a year to make things happen," Munro said. "Nothing's going to happen overnight, zero."

To Munro, ultimately whether or not the push to lower the cost of the Model 3 is a success or failure will come down to who Musk has working on redesigns and who he has working on making the factory more cost-effective. Surmountable or not, Munro still described this as a "sticky situation," and there are only a handful of people at Toyota, GM, or Ford he would hire to get out of a jam like this.

"None of those guys that I would bring in to help me if I was still working for Ford or something, absolutely none of them have been contacted," Munro said. "I don't know who he's hired."

Read more: Elon Musk ordered Tesla engineers to stop doing a critical brake test on Model 3s

Over-automation frustration

One engineer who left Tesla a few months ago told Business Insider that Musk's call to reduce Model 3 costs ASAP reminded him of last spring when over-automation at Tesla's plants had to be reversed, and the Model 3's manufacturing process had to be simplified.

It was all hands on deck. Everyone, no matter what their specialty had to join in the effort. The engineer joked that Musk would "make you responsible for fixing equipment even if your job is cleaning the bathrooms."

In other words, when there's an urgent situation at Tesla everyone has to stop what they're doing and join the mission. So it makes sense that - as CNBC reported and sources have told Business Insider - the company is pulling resources from the older S/X model cars and moving entire teams work on the Model 3.

Unfortunately, the engineers said, this does not necessarily mean that there are specific processes in place to identify, report, and fix each individual problem - or even specific teams designated to focus on specific issues. It could also mean hundreds of people could be working on the same problem without communicating, the ex-employees said.

A Tesla spokesperson told Business Insider that was not the case and that the company has detailed tracking processes to manage changes to its products, be they design or manufacturing updates.

But the ex-employees said that disorganization could have ripple effects.

One engineer who left in July 2018 who was tasked with resourcing parts in existing cars from their first day on the job. The process was difficult, he said, in part because some of the projects he was trying to improve lacked documentation explaining why they had been approved in the first place.

His manager explained that this was because the parts had been approved urgently, to get the parts or tools as fast as possible. This also meant Tesla went with the supplier who guaranteed the fastest shipment.

"They wanted the fastest parts, not the best parts," he said.

A Tesla spokesperson told Business Insider that it is always working to iterate its designs to maximize efficiencies and apply what it has learned in the manufacturing process so it can offer more affordable cars.

"This is as true with Model 3 as it is with every product we've ever made," the spokesperson said, pointing to rigorous quality and safety checks the cars go through before they're sold. "We designed our cars to the highest quality and safety standards and a change is only approved if it meets those standards."

The engineer who worked to de-automate Tesla's plant last spring told Business Insider that ultimately, the biggest obstacle to reducing the Model 3's cost will be Tesla's churn of employees. Institutional knowledge is very important when it comes to fixes like this, he said, and even in the short time the Model 3 has been in production, a lot of people who worked on it have left the company.

"I wish them luck on trying to reduce the cost," he told Business Insider. "But if the turnover remains high in production and they have to keep training new people... getting them up to speed is a lot of time. And it just keeps happening, people keep leaving."

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