Tesla’s Vertical Integration Unlocks Hidden Flexibility & Innovation — #CleanTechnica Field Trip
The 1990s and early 2000s saw companies around the world extending their supply chains into global markets in a way that the world had never seen before, or perhaps even imagined. The business models that emerged from the outsourcing movement were spread far and wide, with central organizations extending some semblance of control of their supply chains through quality spec sheets, service level agreements, and detailed supplier contracts.
Sourcing sub-assemblies, parts, and components from the lowest-cost supplier put global suppliers head to head, and over time, resulted in fewer and fewer suppliers as globally dominant companies emerged in each segment of the market. The automotive industry is an example of this outsourcing, with parts coming from all over the world to be bolted into “American-made” vehicles like the Chevrolet Bolt, which only sources 26% of its components from the US and Canada, with the bulk of the car (54%) coming from LG in Korea.
Tesla learned the hard way through the development of the Tesla Model X that sourcing 10,000 components from hundreds or thousands of globally distributed suppliers quickly turns into an exercise in herding cats. Stack on top of that the complexities of global shipments and logistics and you can already start to feel the grey hairs popping out by the minute.
To solve for this complex equation, Tesla began stacking suppliers. Instead of just one supplier for bolts, Tesla lined up two or three suppliers to dilute the risk and increase the chances of success. In April 2016, we said of the chaos that “unsatisfactory supplier capability validation, and the company’s lack of in-house manufacture ability for many of the parts in question” was to blame for the delayed ramp up of Model X production. Tesla learned its lesson and has the scars to show for it.
The Model X dragged the company over rocky roads and through fields of thorns. After coming out the other side to lick its wounds, Tesla had learned a valuable lesson about global supply chains, supplier validation, and perhaps most importantly, the value of not being afraid of just doing things yourself where it makes sense to do so.
Tesla is not building the same vehicles that others have built for the last 50 years in the automotive industry. This stems from the belief that each and every decision should be analyzed, verified, cross-checked, and continuously, rigorously scrutinized. This comes from a fundamental belief in “first principles” thinking that strives to start from the foundational principles that underpin their solutions, one at a time, from the ground up.
This thinking has led to a completely new type of vehicle, with seats, batteries, motors and windows that are are all different than the competition. Different does not equate to better, but in this case, it is this unique approach that sets Tesla apart, above the competition. Tesla’s desire to put the best seats in their vehicles led it to bring seat manufacturing in-house, taking full control over a critical piece of the vehicle experience into the hands of Tesla’s experts.
CleanTechnica toured Tesla’s seat factory in March and we were impressed that the seat factory, located just two and a half miles from Tesla’s Fremont factory, was brought online in a matter of months as one part of the solutions to the supplier issues Tesla experienced with the Model X.
Coming out of the challenging Model X production ramp, Tesla CEO Elon Musk said on the Q1 2016 earnings call in May 2016 that, “I think we’re actually going to increase the amount of vertical integration that we have. I think it’s very important for us to have the ability to produce almost any part on the car at will, because it alleviates risk with suppliers, where, going back to if 2% of suppliers aren’t ready, we can’t make the car. Having the ability internally to adapt and make that 2% of parts internally really massively reduces risks associated with the production ramp. That I think is a very important thing.”
Bringing seats in-house meant standing up a completely new factory in Tesla home state of California, where wages are significantly higher than in supplier countries. The offset to higher wages is lower transportation and logistics expenses, as Tesla no longer ships seats around the world.
Tesla currently employs a fleet of diesel semi trucks to move the seats the 2.5 miles to its Fremont factory, but talk of an underground tunnel from the seat factory to the main auto factory would allow for a direct line and an automated conveyor, slashing shipping costs even further. These types of optimizations simply are not possible when dealing with an outside supplier, and they support Tesla’s move towards pulling more and more of its critical manufacturing processes under a red, white, and grey Tesla roof.
The benefits at Tesla go far beyond just improving shipping costs, as bringing more of the company’s parts manufacturing in-house gives Tesla infinitely more flexibility in pushing improvements into its products than it would have purchasing them from a supplier. Tesla rather famously pushes 20+ improvements per week into its vehicles in a river of continuous improvement that allows the Silicon Valley company to not only improve the cost of its products, but also the efficiency, throughput, and quality of those products.
Establishing a culture of continuous improvement is very much in line with the wonderful world of software development, where the agile methodology provides a framework for requirement gathering, iterative development, functionality validation, testing, and deployment. The mindset at Tesla is the same, with everyone we spoke with at the factory commenting on just how much focus Tesla puts on continuous improvement in manufacturing. Vertical integration grants Tesla more control over more details of its manufacturing process and allows Tesla to respond much faster to potential improvements and at a lower cost.
Manufacturing flexibility, lower cost parts, and innovative products have allowed Tesla to push to the front of not just the electric vehicle revolution, but to additionally displace the competition in mid-sized luxury vehicles and even in all passenger vehicles in the entire state of California and several countries in Europe. A Tesla spokesperson told CleanTechnica that, “The number of labor hours needed to complete a vehicle has decreased 33% since early 2016. Of the 250,000 Tesla vehicles ever produced, more than half were built in the past 18 months. Whereas before, it took three shifts with considerable overtime to produce our target annual production of 100,000 Model S and X vehicles, now it can be done with only two shifts and minimal overtime.”
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