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Scrapped raw materials have cost Tesla $150M this year: report

by Drew Johnson

Tesla is reportedly burning through cash trying to build the Model 3 in volume.

Tesla CEO Elon Musk has publicly stated that the Model 3 sedan has landed his company in "production hell," but a new report has revealed just how far the electric sedan has plunged the company into manufacturing chaos.

According to internal documents obtained by Business Insider, Tesla is operating under the assumption that up to 40 percent of the raw materials used to make batteries and driving units at the company's Nevada Gigafactory will end up either as scrap or will require repurposing to be used in other vehicle components. As a result, it's estimated that Tesla has spent nearly $150 million on scrap this year alone.

Tesla disputes that it's blown through $150 million this year on scrap material.

"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," Tesla told Business Insider in a statement. "Our scrap rate for batteries has decreased by almost 60 percent 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."

However, a Tesla insider paints a different picture. The unnamed Tesla employee told Business Insider that defective parts are common at the Gigafactory and are often piled on the factory floor. Moreover, the employee claims that some defective parts are being installed in production Model 3 vehicles. One example given was battery modules that were punctured by a malfunctioning robot. More than 1,000 units were compromised, and the employee says some of those were fixed with adhesive rather than scrapped.

Tesla denies that claim, but Business Insider reviewed an internal log that showed some of those units were indeed installed in customer vehicles.

Scrap costs have become so exorbitant at the Gigafactory plant that Tesla often quantifies them in internal documents by comparing them to other eye-watering figures. For example, scrap costs from the first five months of the year were compared to how many Model 3s it would have purchased — 103.42 cars.

In order to speed up production of the Model 3, Tesla is also reportedly skipping some key steps during the manufacturing process. For example, the company has stopped putting tracking systems on certain parts because it slowed the production line. That could cause a major problem down the road — without any way to identify the production origins of a certain part, it could complicate any potential safety recalls.

Tesla is desperately rushing to build 5,000 units of the Model 3 per week in order to make the company profitable. So far in its history, Tesla has never turned an annual profit.