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HomeUncategorizedHow Tesla changed the production model of the auto industry

How Tesla changed the production model of the auto industry

After decades of assembling cars from multiple sources, automakers are now learning how to make and sell Tesla themselves, as de-globalization increases.

If you want to see how technology and de-globalization are changing the world economy, you can look at the car industry. Not only undergoing an epochal change, from internal combustion engines to electric cars, cars are now more and more like computers with wheels, relying heavily on processing power.

As the pandemic ravages supply chains, the auto industry is also seeing its biggest transformation in decades. Accordingly, instead of outsourcing most of the manufacturing process to focus on design, management and assembly; Now automakers are trying to control more of the value chain, from batteries to software to distribution channels. They want to turn electric vehicle parts into tech startups.

In both respects, controllability and entrepreneurial ability, the major automakers want to be like Tesla. Economist believes that Tesla’s production model is a breakthrough that will change the auto industry.

Tesla is aiming to do everything on its own. This is an idea both old and new. In fact, Musk borrows heavily from auto history. Henry Ford used to get raw materials (rubber for tires and steel for chassis) from plantations and smelters owned by his company. His River Rouge plant in Detroit also runs on coal from Ford’s mines.

Tesla model 3 shipped from the factory in shanghai, china in july 2020. Photo: reuters

Tesla Model 3 shipped from the factory in Shanghai, China in July 2020. Photo: Reuters

Similarly, Tesla has recently made deals with lithium and graphite miners. Last month, they signed a contract with Vale (Brazil) to buy nickel. Under the plan, Tesla will directly buy most of the lithium, more than half of cobalt and about a third of nickel from nine mining companies.

They will use them in their factories. The first facility started producing batteries on its own in 2017 in Nevada, in partnership with Panasonic. They also plan to produce more batteries themselves at the remaining three factories.

Tesla also gradually manufactures components in the powertrain itself. Dan Levy, director of Credit Suisse, said Tesla makes its own engines and many electronics, giving them better cost control. Although its ambition to buy a chip factory failed, Tesla still designed its own semiconductor products. Compared to other automakers, they also maintain a closer relationship with chip suppliers.

Tesla software engineers created a centralized computing architecture to run on those chips, ensuring smooth integration with the hardware. Musk even switched from a dealership model to opening his own store.

Other automaker leaders are looking to follow Musk’s model of self-sufficiency. According to UBS, integration only presents a strong competitive advantage in a structurally tight supply chain environment. That is no longer the case. Ford CEO Jim Farley recently stated, “The most important thing is that we integrate vertically. Henry Ford is right.”

This would reverse the decades-old trend that automakers focus solely on design, marketing, assembly and supply chain management. The car parts are mainly handled by a number of major suppliers such as Bosch, Continental and Denso.

Suppliers sell the same components to multiple firms in order to maintain low prices through mass production. This is supposed to free up capital for vehicle manufacturers, but slows down technological innovation. Carlos Tavares, CEO of Stellantis says his cars are 85% “assembled”. Mercedes-Benz also divides the added value of 70-30 with a large amount for suppliers.

Now, automakers are starting to rethink and want a ratio of only about 50-50 like Tesla. So they start with raw materials. In 2021, BMW invested $334 million in a lithium project in Argentina. Last year, Stellantis and Renault also signed a contract with Vulcan Energy Resources. GM has revealed its “million-dollar investment” in Controlled Thermal Resources is to proactively source lithium.

In March, a Chinese electric vehicle company announced an investment of nearly $500 million in a domestic lithium miner. They are said to have purchased six mines in Africa. Such transactions are usually private, but are increasing. Businesses think that is gradually becoming the norm.

Tesla’s battery supply chain learning efforts are accelerating. Automakers hope to reduce dependence on batteries supplied by China and South Korea, thereby bringing production closer to home to control costs and supply. Volkswagen began making its own batteries when it poured $2.1 billion into a factory in Germany and will build six more battery plants in Europe by 2030.

Plans to manufacture complete batteries themselves are still rare. Most companies prefer to cooperate with professional manufacturers. Ford and SK Innovations (Korea) will invest 7 billion USD and 4.4 billion USD respectively for 3 joint manufacturing companies in the US. GM invested $2.3 billion in a battery plant in Tennessee, in partnership with LG.

Sometimes, rival automakers even team up to share the cost of battery production. Stellantis, Mercedes and TotalEnergies will invest $7 billion in parts manufacturing plants in France and Germany. Volkswagen has a 20% stake, worth $1.4 billion, in Northvolt (Sweden).

Buying electric motors from suppliers is also out of favor. Hyundai and the alliance Renault – Nissan – Mitsubishi are almost autonomous in this part. BMW, Ford, GM, Mercedes-Benz and Volkswagen are also planning to make more engines in their own factories.

Last year, the fact that 7.7 million cars could not be shipped because of a lack of chips made the industry more closely linked with chip companies such as Qualcomm and Nvidia. Auto companies are also hiring chip specialists to help them customize specifications.

The same goes for software development for cars. Last month, Volkswagen President Herbert Diess declared that “developing own software is the biggest transformation the automotive industry has had to make”. Other industry leaders share this view.

In 2020, Volkswagen created a separate software segment, called cariad. Despite the troubles that arose with the software on the ID.3 hatchback back in 2019, the company still aims to develop most of the software itself in 15 years, up from about 10% today.

Mercedes and Toyota are also considering replacing software systems purchased from outside. Volkswagen plans to invest around 30 billion euros over the next five years. Stellantis wants to hire 4,500 software engineers between now and 2024. Several carmakers are opening R&D centers in Silicon Valley, Shanghai, Berlin and Bangalore to capitalize on tech talent.

In the sales phase, companies have long had no intention of abandoning the dealer system because it is convenient for maintenance services instead of struggling like Tesla has for a long time. However, many companies are now turning to direct car sales like Tesla. Direct selling can increase profits and create stronger relationships with customers, helping them to continue buying additional services and upgrades.

But if they want to catch up with Tesla, they have to “move at the pace of Silicon Valley,” Barclays commented. That meant they had to not only simplify their supplier network, but also restructure the company.

Volvo and Geely (China) have merged their businesses into one independent business. This allows the Swedish brand to accelerate to become an all-electric car company by 2030.

In March, Ford said it would create an electric vehicle division – the Ford Model e – and separate it from its traditional operations. Renault is also looking at doing the same to accelerate innovation.

All of this will entail huge upheaval for an industry that spans the globe, involving thousands of companies, millions of workers, and billions of dollars in intangible costs. Value chain innovation means spending a lot of time and money, even with the risk of failure. For suppliers, that means business going down. This is the reason the stock prices of some companies like Continental have slipped over the past few years.

For automakers, that will cause them more headaches. They will have to consider how best to deploy company resources and skills without triggering backlash from governments and unions for job losses.

Session An (According to The Economist)

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