Case study: How Tesla changed the

auto industry
Published Feb. 20, 2018
By 
Kate Patrick MacriContributor

By Steve Jurvetson
 Moving parts: How the automotive industry is transforming

Tesla is experiencing growing pains, but has willingly invited more criticism than
other young companies because the automaker is brazen enough to pronounce
ambitious goals and, most boldly, insist that its vision of the future of the automotive
industry is the definitive one.

But Tesla is forcing the auto industry to rapidly change. Large, established
automakers now are making fully electric and hybrid electric cars. Automakers are
starting to explore and include artificial intelligence (AI) in their cars, and now major
automakers and U.S. Congressmen are discussing autonomous vehicles (AVs)  and
how best to innovate and regulate them.

Not only that, but Tesla's software design is state-of-the-art: the fact that Tesla can
update vehicle software over-the-air (OTA) as if it were Apple updating an iPhone is
unprecedented. As cars become more tech-savvy, Tesla is in the lead. But Tesla
struggles to meet deadlines and frequently delivers flawed vehicles, and profitability
remains elusive. Many use Tesla's failings to argue that the company shouldn't be
followed as an innovator or even as a true automaker.

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It turns out Tesla's story is far more complicated and nuanced than often portrayed,
but the roots of its challenges come down to the company's finances and supply
chain.

Tesla is forcing the auto industry to change rapidly

Tesla didn't invent the electric car (Scottish inventor Robert Anderson did, in 1832),
but it was Tesla who popularized, pioneered and promoted the electric car ever since
the company's founding in 2003. None of the major automotive manufacturers were
making electric cars until Tesla made it cool in 2008 with its bombastic
announcement of the first luxury electric car: the Tesla Roadster.

Since then, big automakers with lots of capital, solid supplier bases and seasoned
supply chains went to work in rapidly developing and churning out their own electric
cars, as consumers and governments pursue eco-friendly, low-emissions transit
options. The next electric car, released in 2010, was made by Mitsubishi Motors.

According to the Bureau of Transportation Statistics data, the number of hybrid EVs

sold in the U.S. didn't break 100,000 until 2005. The bureau doesn't have data on the
number of EVs sold until 2011, which was 9,750.

Since then, the EV market has exploded. By 2015, 71,044 EVs were sold in the U.S.,
and 384,404 hybrid EVs. Between January and September 2017, Tesla led the
pack by selling 73,227 EVs, followed by Chinese automaker BYD, selling 69,094.

Brian Loh, a partner at McKinsey&Company;, said innovation is at an "all-time high"

in the auto industry right now, which is significant because historically, the auto
industry is very slow to evolve.

"There's so much change happening that the automakers are trying to make sure
they’re as successful in the next era as they were in the past," Loh said.

The auto industry is not resistant to innovation and change, but does tend to adapt
slowly. Lately however, that's changed dramatically, and largely because of Tesla's
disruption in the market. Tesla has that "cool factor," something established
automakers do not have, and has created hype around Tesla's EVs that other brands
— like the Nissan Leaf, for example — do not get.

"The electronics innovation trend with the industry has been going on for a while, but
I think it’s accelerating," Loh said. "The mega trends we read about in the papers
every day of automotive driving, electrification, connectivity, shared mobility — these
are huge industry sharping trends and they are really having a big impact in the
industry at the OEM level and the supplier level, and it’s leading to a lot of big
investment."

Then there's the AV discussion. Tesla's Autopilot, which uses AI to drive a Tesla
vehicle for you with some minor assistance, has been the subject of hot debate, with
some consumers misusing the technology and crashing the cars while using
Autopilot. Other automakers are following Tesla's lead and looking to create semi-

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autonomous or fully AVs, and that has sparked contention in Washington as
lawmakers try to reconcile safety concerns with innovation-hungry automakers.

U.S. senators and industry leaders — including

automakers, manufacturers, 3PLs and supply chain leaders — now believe AVs are
the definitive future of the auto industry, largely because Tesla is driving the
conversation.

Tesla is one of the key drivers of innovation as the auto industry is forced to evolve,
but Tesla also shows how difficult it is to succeed in the auto industry at all, and how
there is still room for improvement within the hotly competitive, tight margin
business. In fact, Tesla is a good example of how critical stable supply chains are to
the success of an automotive company.

Tesla's supply chain is it's Achilles' Heel

Tesla doesn't meet deadlines. Tesla doesn't meet market expectations. Tesla delivers
cars riddled with defects.

Last fall, Tesla missed Model 3 production goals in Q3 2017 due to supplier issues,
and ended up having to redesign a key part of the Model 3. What CEO Elon Musk
called "production bottlenecks" continued through Q4 2017, although by then Tesla
was no longer blaming suppliers, and told investors in February that the company
would produce 5,000 Model 3s a week by the end of Q2 2018.

Almost all of these problems can be attributed to lack of funding and the fact that
Tesla is still a small company, compared to the rest of the auto industry, and so
ramping up production for a new car is much harder for Tesla than it is for landed
companies like Ford or General Motors.

Tesla's supply chain is still in the development phase, and right now Tesla doesn't
have the capital and supplier relationships that other big automakers have.

"For better or worse, Tesla makes its own batteries, so it's heavily dependent on its
own sources," said Michelle Anderson, a partner with Boston Consulting Group. "If
that went down, batteries are heavily commoditized, so there wouldn’t be too much of
a hiccup, but there would be some down time."

Because Tesla's supply chain often relies on single source suppliers, one can quickly
fit the puzzle pieces together to see how and why Tesla has struggled. According to
a Tesla statement provided by CSIMarket, the electric car manufacturer does have
more supply chain volatility than other automakers.

"While we obtain components from multiple sources whenever possible, similar to

other automobile manufacturers, many of the components used in our vehicles are
purchased by us from a single source," the statement reads. "To date, we have not
qualified alternative sources for most of the single sourced components used in our
vehicles and we generally do not maintain long-term agreements with our suppliers.
While we believe that we may be able to establish alternate supply relationships and
can obtain or engineer replacement components for our single source components,

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we may be unable to do so in the short term or at all at prices or costs that are
favorable to us."

That's essentially the story of the company's struggle: Tesla tries to scale high and
fast, but gets bogged down by a faulty supply chain.

Tesla suffers from a lack of funding and a narrow supplier base

Supply chains are critical to an automaker's success, but the most critical part of the
automaker's supply chain is its relationship with suppliers — and that might be where
Tesla is weakest.

Loh told Supply Chain Dive that in general, the auto industry doesn't single source,
and described the average auto supply chain as being far more efficient and effective
than Tesla's.

"Typically an OEM will have a supplier panel or a collection of a few suppliers,

anywhere from 2-5 suppliers they source from for that commodity," Loh said.
"Oftentimes for a particular vehicle, they might be single sourced on that vehicle, like
one supplier would have all of a certain part for a Honda Accord or something like
that, but it’s extremely rare for a supplier to be single sourced across an entire
commodity for all their vehicles."

Then there's the funding problem. Tesla is technically still in the red — the company
isn't profitable yet, and many critics use that fact as their main reason for arguing
that Tesla isn't worth investment or even worth paying attention to.

But when it comes to suppliers, Tesla's lack of funding is a huge issue. For example,
Tesla is trying to ramp up production of the Model 3, necessitating a high volume of
parts and components from its suppliers. Because of that capital outlay, Tesla might
hold off on paying upfront costs for the parts and wait until the car starts selling
before paying suppliers.

"An OEM may get the best pricing if it uses all the capacity of a supplier," Anderson
said. "If an OEM only uses 20% of a supplier’s capacity, it’ll likely cost them more.
(The question is) are they willing to use that as a hedge?"

That compounds the problem; now Tesla has to produce and sell as many cars as
possible in order to pay suppliers and maintain strong supplier relationships. But
because Tesla is still learning how to mass produce electric cars — relatively speaking,
Tesla is still new to the auto industry — production problems still arise, making it
increasingly difficult to sell and deliver quality cars at an efficient rate.

"In some cases, a vehicle program might be really big and the OEM might say, I’m not
going to pay the supplier any upfront funding, you need to handle that cost yourself
because you’ll get a big volume down the road," Loh said. "The other extreme is low
volume with very little return (for the supplier) down the road, and the OEM might
need to pay for more of the engineering upfront."

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While that paints a bleak picture for any startup trying to break into the auto
industry, there's some silver lining: if you've got a solid vision and can sell that vision
— like Tesla — suppliers just might take a risk on you.

"If you have a combination of small budget and low volumes, then it’s trickier to get
enough interest from a supplier, especially if it’s an OEM with cutting edge
technology and known for leading the market," Loh said. "Even though the pure
economics of the program isn’t normal, a supplier might say, the technology might be
worth it."

Tesla delivers on its promises, just not always on time

For all of the problems Tesla is now experiencing with the Model 3, the company
already experienced with the Model S. At this point, most of the wrinkles in Model S
production have been ironed out. That may instill some hope in investors, but the fact
remains that Tesla still has inroads to make as a trusted automaker.

"Tesla is struggling to get to scale and get its model to pay off," Anderson said. "It’s a
tight margin business. We need innovation, but where tend to see the innovation
happening is in the traditional OEMs who have the supplier base to leverage."

What Tesla has proved is that it takes a tremendous amount of funding, grit and hard
work, star power and a strong vision in order to succeed in the auto industry and
launch a radical new product — especially if you're trying to do both those things at
the same time. The fact that Tesla is still around 15 years after its commencement is
impressive all by itself.

"On one hand, ramping up a car company from scratch is really hard," said Greg
Kefer, vice president of marketing at GT Nexus. "There’s a lot of basic tackling. An
assembly line that produces 10,000 cars a week? That’s really hard."

Tesla shows how crucial it is for an automaker — or any company, really — to have all
the kinks worked out of its supply chain before pursuing such big goals, like skipping
the prototype stage and rushing to produce 5,000 cars a week right away, which is
how Tesla approached the Model 3.

While Tesla can be seen as an inspiration to the industry, it also serves as an example
of what happens when you lack capital, sufficient cash flow and an unstable supply
chain. But if Tesla can keep investors hooked on its vision of a future filled with
electric cars, it may just be a matter of time before it becomes an industry bedrock.

"Once they work out the supply chain issues, watch out," Kefer said. "The big three
better be looking over their shoulder."

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 Tesla Supply Chain
Management, What Happened?


The Tesla inventory management system and Tesla’s supply chain strategy has gotten a lot
of attention. Some of it good and unfortunately some of it bad. The good comes from the
revolutionary vision that Elon Musk has for his company and the possibilities of what a full
on vertically integrated supply chain can look like, the bad comes from Tesla’s inability to
meet their own predictions and the delays in production that have been well publicized due to
the breakdown in their supply chain.
This boutique automotive company has come up with some innovative supply chain
solutions, but the question remains is it enough?

Marching to a Different Beat is it Worth It?

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Tesla’s vertical integration was born out of need. They were doing something no one else
was doing. Tesla has a fully operational plant in California and they also have some short-
term goals that are impressive. In a time when everything is being manufactured in Mexico or
China, Tesla plans on building a supply park adjacent to their plant so that they will be able
to manufacture all their parts on site.
They also built a giant battery factory in Nevada to meet their needs for batteries for their
cars. The need for batteries that are designed to Tesla’s specifications has become so critical
and so hard to find that they almost must build their own. One of the
key “bottlenecks” causing delays for manufacturing has been battery issues. Unfortunately,
the battery plant experienced some of their own woes which required some redesigns.
Tesla’s value chain also includes building charging stations across the country so that power
recharges are not an issue for their drivers. This promise has been somewhat slow to be
realized.
The logistics world has called Tesla’s motors supply chain revolutionary because of the
impressive strides they have been able to make but there have also been some big
disappointments in the last year which have some experts wondering if the revolutionary ideas
of Elon Musk and others, are applicable in real world time.
The Model 3 unveiled in 2016 had been promised to over 400,000 drivers around the world
that have paid $1000 up front to secure their vehicle, but production has been slow, as of the
4th  quarter of 2018 only 55,840 had been delivered.
The point is that at this juncture the company is struggling, consumers are mad, investors
are nervous, and the stock is falling rapidly and all the blame lies with the supply chain.

The Factory of the Future

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The vision of founder and CEO of Tesla is to build a vertically integrated supply chain that
is self-sufficient enough so that his “factory of the future” can grow and thrive and deliver on
all the promises. At one-point Tesla was constructing Model 3’s in a “tent” which really was
not a tent as reported by Elon Musk but instead a temporary structure erected next to the
Fremont CA plant that would focus solely on assembly of the Model 3.
While it is not the “alien dreadnought” factory that Elon predicted it might have been the
saving grace had it not been for all those pesky supply issues. Evidently the tent idea coupled
with the around the clock assembly was not enough to push Tesla to the finish line and deliver
the vehicles as promised.
Early on in 2017 CEO Musk promised that production would be ramped up to 5000 cars per
week. The average has fallen short by more than half even with 3 full assembly lines working
around the clock.

An Analysis of the Problems

Supply chain failure is the problem. What is

Elon Musk doing about it? He is moving his company toward complete self-sufficiency, but
many critics agree that what he needs to do to overcome the problems is to collaborate with a
firm like Magna that has experience in mass production of automotive parts. Albeit Magna
may not have the knowledge base to manage electric car production but with some input and a
lot of support from the team at Tesla the issues of lack of knowledge could be overcome.
Another issue that Tesla might want to consider is to get someone on board that is a supply
and logistics whiz. This is a big operation not because of the scale of production but
because Tesla cars have over 10,000 parts in each one!
Another mistake Tesla is making is the “blame game”. It is never a good idea to blame the
supply chain for your woes, yes there have been delays because of suppliers but and it is a big
but, consumers do not want to hear that the providers that you choose cannot meet your
demand.
Frankly, knowing when to ask for help is critical in any manufacturing. There are plenty
of contractors out there that can deliver exactly what Tesla needs to ramp up production, but
Musk just refuses to adjust his vision.

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What are the Benefits of Vertically Integrated Supply Chain?
We do not need to continue to harp on Tesla’s short comings. The fact is there are some key
values to Tesla’s vertical integration model that can benefit any business. We could stay
with the positives and look at how did vertical integration allow a business to reduce costs?
Tesla deployed a plan that without a doubt, operations and supply chain management for the
21st century and for all intents and purposes, it is a cost saving strategy that will allow
growth.
Considerations that are key to the success of this type of integrated supply chain strategy
include:
 Cost
 Control
With vertical integration of the supply chain it is possible to reduce the costs of
transportation through out the chain, but that relies heavily on proximity and the geographical
location. Musk has the vision of building a compound where every step of the supply chain is
managed in close proximity, the problem is that his cars need 10,000 parts to function. In
another setting where there is not the need for 10,000 parts for production that integration
could be simplified.
Costs for transportation of supplies and parts is not the only savings that can be realized.
There are time savings and labor savings as well that can be realized with a vertical
integration of the supply chain.  Of course, it can also improve your competitive advantage.
For example, if there is a scarce resource that is firmly allocated to your supply chain that
your competitors cannot get, you win.
Control is also a huge benefit. You can easily improve supply chain efficiency with this
model, have access to downstream distribution channels that you may not have any other way
and more. There are many attractive potential benefits, but there are also some disadvantages
as well.

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The Downside to Vertical Supply Chain Integration
Tesla’s problems are a tale of caution when it comes to this model. There are some serious
potential risks with this model that can include:

 Increased costs
 A decrease in flexibility of product design
 Balancing issues
This model can ramp up costs due to a lack of competition. When suppliers compete for your
business it drives costs down, when you have a single select supplier, costs can get out of
control. There may be additional bureaucratic costs as well.
Flexibility can be constrained as well. Changing designs or changing models can be difficult
if it will take a lot of new development.

Balancing upstream and downstream supply and demands can get difficult.

Who Can it Work For?

Clearly it is not working for Tesla but there are some businesses that would thrive under this
model. Any business that:
 Experiences obstacles to contract formulation or monitoring of contracts can find that
this model of supply chain would work for them
 Have large production quantities can benefit from this model because of the scale
 Are strategically like the activities in the vertical chain
This model can work for a wide range of manufacturers with the right set of circumstances. It
may eventually work for Tesla.

Who Should Avoid It?

There are some businesses that are just not well-suited to take advantage of this model
including:

 When the quantity that is needed from the supplier is not on enough scale
 The product is widely available
 The competencies are very different between the activities
 The vertically adjacent activities are in different industries
This useful model can be integrated but all the above must be considered before decisions are
made.

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The Outcome
Tesla is still a startup and of course there will be struggles and a huge learning curve. After
all Elon Musk is a visionary not a logistics and supply expert. One of the things that will help
to propel this company forward is to sign on a true logistics expert that is experienced in
automotive manufacturing.
Yes, the Tesla cars are something that have never been done before, but building cars is still
building cars and to do that well, there has to be a strong supply chain and a proven method.
A few tweaks to the supply chain management, and Tesla may become the factory of the
future and be able to muscle in on some of the big guys in automotive manufacturing

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1) Could you map TESLA supply chain ? You can use external information to this case.
2) What kind a solution company have in case of production capacity issue ?
3) Which 4.0 tools TESLA could use to improve communication and forecast information with their
subcontractor ? how can they balance better upstream and downstream supply and demands ?
4) What is the opposite of vertical integration ? What are the main advantages ?
5) Why since COVID 19 crisis some company start to go more and more for vertical integration ?
6) What is ramp up production phases ? Why is important to secure it ? What kinf of operation
company does usually do secure it ?
7) What is for you the main reason of vertical supply chain choice by TESLA ?
8) Could you explain why TESLA GIGAFACTORY is one of the most advanced one in term of
industry 4.0 working method ?
9) What are the main challenge of Supply Chain 4.0 in the future ?

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