Despite the many disruptions of the recent past, predominantly with the global semiconductor chip shortage, Tesla has been able to maintain an impressive rate of production and delivery much to the surprise of other large automakers such as General Motors and Volkswagen Group. At the centre of this resilience has been the company’s ability to be innovative and reject the established methods of vehicle manufacturing in favour of vertical integration and in-house design and development. In this article, we take a closer look at how in-house design is key to Tesla’s advantage.
In the fourth quarter of 2021, Tesla delivered a record 308,600 vehicles, and announced that deliveries in 2021 were up 87% on 2020 levels.
These results come at a time the ‘legacy’ vehicle manufacturers of the world are struggling to cope with pandemic-induced semiconductor shortages, making Tesla’s record sales figures all the more admirable.
Tesla’s unique business model involves in-house design of components which allows for agility in making tweaks to parts to mitigate the effect of supply chain issues. Tesla builds cars by developing software on unique hardware, much in the way Apple develops the iPhone or Microsoft leverages Intel chips and Dell PCs. Tesla designs more hardware and writes more software than many rivals, which rely on auto suppliers. Chief Executive Elon Musk has called the company “absurdly vertically integrated compared to other auto companies.”
This level of self-sufficiency proved invaluable when the semiconductor chip shortage struck. When the majority of large manufacturers scaled back production in response to the pandemic, chip allocation was directed towards the electronic device manufacturers that needed them to meet sudden spikes in demand. When demand for new cars unexpectedly bounced back, the automakers were unable to acquire the semiconductors they needed. This exposed the shortcomings of the complex systems of supply that legacy manufacturers relied on. Tesla, on the other hand, was not constrained to the same extent by bottlenecked suppliers given their vertically integrated structure. Musk said Tesla was also able to substitute alternative chips for some that were in short supply. According to VW Group CEO Herbert Diess, Tesla can spend just 2-3 weeks rewriting software and then switch to a new chip.
“We’re designing and building so much more of the car than other OEMs (original equipment manufacturers) who will largely go to the traditional supply base and like I call it, catalog engineering. So it is not very adventurous” – Elon Musk
In-house design of parts and components doesn’t only provide protection against supply chain disruptions, it’s the basis of Tesla’s ability to build vehicles that are far more sophisticated than the offerings from the legacy manufacturers. Tesla vehicles, described as ‘computers on wheels’, are able to have their software functionality remotely updated every few weeks since Tesla has complete control over the software engineering. This is in sharp contrast to the traditional auto industry model where the product is the same for as long as you drive it.
Another advantage to Tesla’s in-house design arrangement is the quickened pace of innovation it accommodates. Whilst capital expenditure costs for factories, production equipment, recruiting and maintaining in-house technical design talent are high, the investment has led to rapid product design cycle times. Additionally, the end product typically yields better performance and reliability compared to products built with horizontal integration. For example Tesla’s battery systems have improved at astonishing pace and they are consistently producing batteries with longer ranges at lower costs than other automakers that have entered the electronic vehicle market.
Keeping production lines running through a tumultuous period for the world’s car manufacturers is a testament to Tesla’s unique business model. The company is at the forefront of the electric vehicle market and will likely hold this position in the foreseeable future with it’s unrivalled pace of innovation and self-sufficient anatomy.