- Leaked documents in a court case between Tesla and a former employee indicate that the company was burning through hundreds of millions of dollars worth of scrap during its initial production of the Model 3 in 2018.
- But, according to emails and testimony from Tesla employees, a poor tracking system for parts and poor controls at the factory-made scrap difficult to monitor.
- Accounting experts told Business Insider that normally a company would take an inventory write-down, or provide some kind of explanation for this kind of expense. But scrap expenses do not appear in Tesla’s 2018 annual report.
- Tesla did not respond to multiple requests for comment on these documents.
- Visit Business Insider’s homepage for more stories.
In 2018 Musk was in a desperate race with himself, moving at breakneck speed to meet his own deadlines long past. Tesla, his electric car company, was building the Model 3 — a car that he had promised would cost $35,000 and change roads around the world. But there were challenges.
Musk had dreamed of a machine that built the machine, a factory devoid of human voices, an “alien dreadnought” that would prove the supremacy of machine over man. But as Musk quickly found out, manufacturing is the art of detail too delicate for robots, and Tesla had to hire humans and build a line outside Tesla’s Fremont factory that made Model 3s almost by hand. This miscalculation was eye-wateringly expensive, and it was not the only issue with production. There were fires, and issues in the paint shop and quizzical shareholders and company-wide layoffs. Musk himself described it as “production hell.”
But none of these stories of chaos at Tesla compare to what was revealed in court documents leaked from a lawsuit against a former Tesla employee, Martin Tripp, back in August. Tripp’s case was settled on Tuesday for $400,000, but court documents leaked during the case point to hundreds of millions in wasted materials unaccounted for on Tesla’s balance sheet. And that matter remains unresolved.
Read More:How much Tesla, Rivian, and Nikola pay their employees, from engineers to managers
These documents suggest the company was burning through raw materials with little control over where they went — into cars, to the dump, or to line someone else’s pockets. They also raise questions about hundreds of millions of dollars that seem to have vanished into the Nevada desert, talked about inside the factory, but unaccounted for on Tesla’s company balance sheet.
Accountants Business Insider spoke with said that all of this points to a culture of disorder and sloppiness at the company at best. At worst, the company failed to report eye-popping losses that it should have disclosed to investors.
Tesla did not respond to multiple requests for comment on this story.
Tesla sued Tripp in 2018 after he leaked documents that indicated that Model 3 production had generated $140 million worth of scrap in production from January to June of that year. Tesla alleged in the lawsuit that Tripp hacked the company’s system and breached his confidentiality agreement as an employee. It demanded Tripp pay $167 million in damages. Tripp countersued saying that he was a whistleblower, that Tesla’s production was indeed wasteful, and that Tesla unlawfully surveilled him.
In August, Tripp leaked a trove of thousands of confidential documents from the case online — things like emails, and depositions, and phone call transcripts. Tesla itself produced over 1,600 internal emails, and there were depositions of Tripp, Elon Musk, members of Tesla’s security team, press team, workers on Tesla’s Gigafactory floor, and more. Tripp also made videos explaining his predicament.
The leak of these documents was in violation of the court’s confidentiality order agreed to by all participants and an emergency hearing was called to settle the matter on August 14th. During the hearing, a judge ruled that Tripp’s lawyers could withdraw from representing him, that he would have to pay a $25,000 fine, and that Tripp would have to remove everything he put online related to the case. Finally, on November 30th, the parties reached a settlement. Tesla’s $167 million claim had been thrown out — as had Tripp’s countersuit — and Tripp would pay Tesla $400,000 in damages. Each party would pay its own attorney’s fees.
Business Insider reviewed the leaked documents after they had been posted online, and full disclosure this correspondent was mentioned in them. Back in 2018, Business Insider published information Tripp leaked in May of that year. Elon Musk came to baselessly believe that that leak was part of a conspiracy against the company. Tripp’s court document dump includes emails in which Musk advanced those conspiracy theories to friends and colleagues.
It angered Musk that the information Business Insider published about Tesla’s scrap was so specific. At Tesla back in 2018, Tripp was part of a team that was tasked with finding, tracking, and figuring out what to do with parts that would likely have to be scrapped — if not scrapped, then reworked so that they could still be used.
Specifically, Tripp mostly worked with battery parts — battery modules and the cooling coils that wound around them, sometimes called “bandoliers.” The Gigafactory is shared with Panasonic, which makes the battery cells, and Tesla, which assembles the battery cells into packs that go into Tesla’s cars. Those packs, along with a few other key car parts made at the Gigafactory, are then sent to Tesla’s Fremont, California factory to be assembled into vehicles.
The leaked documents indicate that scrap at the factory was a major concern at the highest levels of the company — from CEO Elon Musk and CFO Deepak Ahuja down the chain of command. Millions of dollars worth of scrap was lost on the factory floor, meetings were called to address the issue, and witnesses claim that tens of millions worth of scrap was being generated from batteries each quarter.
Typically, companies would write down costs of this kind of scrap as part of inventory expenses — along with things like shrinkage (stealing) and obsolescence (a part ceasing to be useful for production), and inventory valuation adjustments, three accountants told Business Insider.
But the word “scrap” does not appear in Tesla’s 2018 annual report, and the $85.3 million inventory write down the company took for that year does not reflect the numbers being discussed in Tripp’s case.
The documents in the case reveal there was company-wide concern about waste from the factory, both from scrap and theft of materials.
On June 8th, 2018 Tripp sent a detailed email to his bosses (including Elon Musk) warning them that if the company didn’t do anything to control battery scrap as it ramped up production of Model 3s to 5,000 cars a week, the cost could total $200 million in the second half of the year alone.
That’s on top of what the company had already burned through. He laid out his calculations for the group, saying that battery scrap was — at that moment — hovering just under 7% and would likely make it to 10% as production ramped up. None of his colleagues challenged this notion.
In fact, Elon Musk shared Tripp’s concerns. He replied to the email saying: “Getting scrap from when cells leave Panasonic down to 1% needs to be a hardcore goal.”
The scrap calculations Tripp shared in the email lined up with sworn testimony from his superior too, a man named John Sheridan. Sheridan testified on December 5th, 2018 that Telsa’s battery scrap alone was totaling around $50 million per quarter, and that he’d worked with the finance department to calculate that number, according to the documents. Reducing scrap had become a company imperative in order to boost profitability. Musk had promised his investors fatter margins (so, alternatively lower costs) but tracking all the scrap proved to be a challenge.
Part of that difficulty was technical. Based on emails and testimony in these files, workers were having trouble keeping things straight inside of Tesla’s proprietary manufacturing operating system (MOS), a system that is used to track parts and operations in the manufacturing process.
The documents show that months into the manufacturing process engineers were still confused about how to log scrap into the system. An email chain after one April 26th, 2018 meeting called “Review Proper Scrap Process for Modules and Bandoliers,” revealed that workers were still trying to find all the different places scrap may have been logged in the system. Different workers had different methods. The email chain confirmed that Tesla needed to streamline the process, but scrap was piling up fast, which made it hard to consolidate.
As a result of this confusion, there were often disconnects between the scrap that was in the system, and what was being scrapped or reworked on the factory floor. On May 22nd, 2018 one production engineering manager, Michael Bowling, called a meeting to prepare a letter to Tesla’s then CFO Deepak Ahuja to address all the missing scrapped modules his team was tracking down for Q2. By July he was part of a team that was meeting about this issue regularly, according to the documents. The numbers in the system and the numbers on the factory floor simply weren’t matching up.
When workers found such a disconnect they would have to decide what to do about it, according to documents. Sometimes they would ask the finance department’s permission to put the new-found scrap in the system. An email dated July 23, 2018 shows that workers were still trying to locate $8.3 million in unreported scrap from Q2. This time they scheduled a meeting to speak with Ahuja about it directly.
The most important question surrounding these missing hundreds of millions is one of materiality, professor Thomas Selling, who teaches accounting at Southern Methodist University, told Business Insider.
“The question Tesla lawyers have to ask themselves is whether or not this is important historical information or information about a future trend that needs to be disclosed,” he said, adding later. “Seems to me like generating abnormal amounts of scrap would be material.”
You might expect this kind of information to reach investors in the management discussion and analysis section of a quarterly report, Selling explained. That’s where Tesla can explain how long costs would remain high and compare them to previous periods.
“If you think an investor would like to know this,” Selling said, “if you think some investors would make different investment decisions based on this information then it’s material.”
The scrap from Model 3 production was coming so fast and furious that scrap piled up around the factory more quickly than anyone could clear it, according to the documents. In emails, factory workers often worried about scrap piling up out of control. Sometimes the battery scrap caught fire, according to a security staffer who testified on May 29, 2019.
This staffer, named Sean Gouthro, said in his testimony that Tesla had little control over what was going on with its raw materials. He testified that because security was lax at the factory it was hard to track who — of the site’s 10,000 workers — was moving in and out and when. The result, he told the court, was a lot of theft.
Gouthro has since filed his own whistleblower suit against Tesla, claiming that shareholders should have been informed of the theft he witnessed — which totaled over $30 million in raw materials.
The court documents show that piles of parts got lost in the factory, or sat untracked with workers unsure if they were to be scrapped or reworked. This lack of tracking also extended to parts on the production line, but for different reasons.
If a part had any kind of imperfection going down the production line, it could cause the line to stop. To remedy that, Sheridan testified that workers would sometimes decide to turn off tracking for a specific part going down the line that had with some kind of issue that triggered Tesla’s system to stop production. That way, Sheridan said “if it [the part] failed, the system allowed it to move forward…” Production had to continue no matter what.
Tracking controls were so lax that in early February of 2018 a machine malfunctioned and punctured holes into dozens of battery modules going down the production line. When Business Insider reported the issue months later, Tesla said the modules had been scrapped — not reworked and put back onto the production line.
But in an email dated February 12th, 2018, shortly after the puncturing incident, a Tesla Quality Systems and Data Manager wrote: “Some [modules] will definitely be in vehicles. Otherwise, we will have to stop GA [General Assembly, a production line at Tesla’s Fremont, California factory] in order to contain…” [the damaged modules].
In other words — amidst all the confusion — those damaged battery cells did make it back into production. To accountants numbers tell a story. To the accountants who spoke with Business Insider, this confusion on the floor is visible on Tesla’s balance sheet.
“Every time I look at Tesla I see another sloppy, sloppy, sloppy,” Francine McKenna, a CPA, teacher and independent journalist who writes deep dives on accounting matters in her newsletter, The Dig, told Business Insider. The company’s numbers often change between reports and turnover in Tesla’s accounting department is high, she said. Tesla has three different chief financial officers since 2017.
And unless Tesla believed this scrap had some kind of future realizable value, it should likely expense it to the cost of goods sold, Professor Ed Ketz, who teaches accounting at Penn State University, told Business Insider.
Now, back in 2018 Tesla was trying to ramp up its recycling program, which may have recovered some value for this scrap. But emails indicate that the program was still getting off the ground in July of 2018. The company was able to sell some raw material from its to-be-scrapped parts, according to the documents, but the returns on that were not great. In one March 15, 2018 email Tesla recycled 30 pallets of rotors worth $209,520. Recovering the steel from those parts only returned $8,640 to the company.
Tesla is a car company where a few hundred million can make or break a quarter. The company is still unable to maintain profitability organically, without the use of regulatory credits from combustible engine automakers. In the second quarter alone it sold $428 million worth. In the first quarter of this year, it sold $354 million, a 64% increase from the year before. In the third quarter of this year, it sold $397 million in order to to make a profit of $331 million.
Without this cash, Tesla would’ve posted a loss each quarter. These few hundred million — which would be a hiccup to one of the big three automakers — are still the difference between the red and the black from Tesla. That’s true now, and it was definitely true in 2018.
If you want to talk about your experience working for Tesla, shoot me an email at llopez@businessinsider.com.
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