Elon Musk’s Lofty Goals for Tesla Made This Supplier Recoil at Risk

(Bloomberg) -- A little more than two years ago, Elon Musk and other Tesla Inc. executives met with a Mexican auto-parts supplier to discuss an opportunity some companies would kill for.

For some time, Tesla had been evaluating Nemak SAB and, in the first half of 2016, the carmaker talked with the company possibly becoming a direct supplier of aluminum housing components for its Model 3 electric sedans. But Tesla’s projections, its prices and the pressure Musk had put on himself and his company to produce as many as 500,000 vehicles by 2018 unnerved the northern Mexico-based unit of the conglomerate Alfa SAB.

“We’re a company that’s always looking to grow, but we’re fairly conservative,” Nemak Chief Executive Officer Armando Tamez said Aug. 23 from his office in the border state of Nuevo Leon. “We saw a high-risk project.”

In retrospect, Tamez was right to have suspected that Musk’s forecasts were overly ambitious. While the Model 3 has no doubt been a headline-grabbing sensation, with thousands lining up to reserve their car starting back in March 2016, Tesla has come up well short of production projections. Bloomberg’s best guess places total output at fewer than 85,000 vehicles since the first Model 3s were built in July 2017. The company confirmed in July of this year that it had asked a handful of suppliers to give back some cash.

A Tesla spokesman said Nemak bid repeatedly to supply certain parts for the Model 3. But after a competitive procurement process involving several other companies, the carmaker selected another supplier that was better aligned with its needs.

iPhone-Like

Back in 2016, when the emergence of the Model 3 was being likened to the advent of the iPhone, missing out on the chance to be a Tier One supplier to the sedan could have been considered a major lost opportunity. And the jury is still out, even today. Signs have emerged recently that the youngest publicly held U.S. carmaker is making progress toward ramping up production.

Nemak’s stock is down more than 30 percent since the start of 2016, compared with an almost 50 percent surge for Constellium NV, a supplier of aluminum parts to Tesla. It’s hard to know, of course, if a Tesla deal would have helped the stock. Much of Nemak’s tumble is linked to concerns about U.S. President Donald Trump’s overhaul of Nafta.

Despite the trade battles, 2018 is turning out to be stronger than originally forecast, and Nemak is planning to boost its outlook for the year, Tamez said.

Rare Candor

Nemak is hardly the only automotive supplier to miss out a relationship with Tesla, which requires lots of patience -- volumes are low relative to more-established carmakers, and supply chains are still being forged. But it’s rare for an executive in the industry to speak frankly about the reservations he had to aggressively pursue a deal to supply a company that rivals General Motors Co. in market value.

At the time that Tesla was evaluating Nemak, Tamez was invited to California to see some prototypes, which he describes as nothing short of “extraordinary.”

But Tamez, 63, had already worked for both parent company Alfa and Nemak for more than 30 years when he met with Tesla officials -- he was named Nemak CEO three years prior -- and says he didn’t find Tesla’s production targets to be realistic.

With sales of $4.7 billion in 2017, Nemak specializes in aluminum car parts and says one out of every four cars sold worldwide has one of its components. Customers include Volkswagen AG’s Audi, BMW AG and Ford Motor Co.

The tricky part for Tesla, Tamez said, would be ramping up production “with the precision that other automakers have been doing it for years.”

UBS Group AG analysts made a similar assessment in a report published Aug. 23 that found fit-and-finish issues with the Model 3. UBS’s tear-down team -- experts whose job is to literally take apart a new car and examine it -- flagged quality concerns including inconsistent gaps throughout the car, missing bolts and uneven and misaligned spot welds.

‘Strong Force’

By pushing electric cars and eventually autonomous vehicles, Tesla is perhaps the best-known challenger to the traditional auto sector, and to companies like Nemak whose well-being have historically depended on the combustion engine. Electric cars use about a third fewer parts than gasoline-fueled vehicles. Some examples of components you won’t find in the Model 3 are spark plugs, pistons, camshafts, fuel pumps, injectors and catalytic converters.

Even so, the trend toward greener cars will bode well for Nemak, Tamez says. Since aluminum parts are lighter than steel and produce less emissions, Nemak sees business growing with the industry. It’s forecasting sales will climb by more than half to $7 billion by 2025.

“Musk has been a strong force of the electrification of cars, and technology is undoubtedly heading in that direction,” Tamez said. “I do wish him all the best; we just thought it was too high risk for Nemak.”

©2018 Bloomberg L.P.