A goal for Supply Chain Matters has continually been to assist multi-industry supply chain management teams in overall awareness and learning related to business process and decision-making improvements, supplier management and successful implementation of advanced technology.
We have focused on all of these themes since this blog’s inception, but one persistent theme that constantly presents itself is the fostering of win-win strategic supplier relationships, or lack thereof.
In our ongoing stream of blog commentaries related to electric auto maker Tesla Motors, we have highlighted continual challenges related to aggressive over-promising of volume production targets, less than efficient management of supply management needs, and of-late, a high level of mid and senior management turnover. Our most recent update focused on Tesla’s Q3 operational performance and once again, disappointment among Wall Street interests.
A consistent theme that permeates this multi-year set of events has been the often described brash and micro-management persona of CEO Elon Musk, who has often established aggressive financial and operational goals without fostering a culture of bottoms-up consensus input and contingency planning.
At the height of intense efforts to scale-up production output of the mass-market targeted Model 3 sedan, we called reader attention to a report indicating that plans to scale-up the crucial battery production “Gigafactory” had been suddenly scaled back. Original plans had called for expanding the battery production facility’s capacity by 50 percent by 2020, however, financial concerns from strategic battery technology supplier Panasonic reportedly forced a re-think of that strategy. The Asia based report further indicated that Panasonic intended to also suspend a planned investment in Tesla’s planned new battery production facility in Shanghai supporting China Model 3 production needs for the china and Asia markets.
This week, The Wall Street Journal featured an in-depth report, Tesla Rattles Panasonic. (Paid subscription or complimentary metered view) Upon reading of this report, we believe it may well be the basis of future business case study learning, thus our highlighting for our readership.
Our Cliff Notes summary of this in-depth report reflects a series of developments and decisions stemming back to 2008, that have now led to both companies pointing fingers at one another regarding the current and future management of volume battery production.
Noted is that Musk continues to push his strategic battery supplier to reduce component prices in order to meet Tesla profitability objectives, while Panasonic’s costs for supporting Tesla’s production needs are reported as consistently in the red.
Panasonic’s CEO continues to try to justify the strategic partnership potential of Tesla, while the company’s stock price has fallen nearly in half this year. There is a tone of a behind the scenes breakdown in the overall relationship, while the public persona seems to be one of “shared vision.” According to this report, from the beginning there were lingering concerns by Panasonic whose Japanese management culture stemmed from full operational responsibility of battery cell production supported by a bottoms-up, team-based consensus management culture.
Under the Gigafatory arrangement, Tesla has full operational responsibility for operations with Panasonic being the equivalent of an in-house supplier to Tesla’s aggressive production schedules, without an apparent collaborative consensus voice. The report describes Tesla managers at the battery production facility being described as living in fear of Musk’s micro-management tendencies resulting in even small efficiency changes having to get written approval from Tesla’s management team, defeating autonomous work group process innovation efforts.
As is often typical, the relationship has been held together by key executives each tasked with relationship management among both companies, They managed to maintain collaborative perspectives, but that eroded with Tesla’s recent high number of executive turnover and the mandatory retirement of Panasonic’s relationship manager to Tesla.
The low point apparently occurred in April when Tesla CEO Musk took to Twitter to blast Panasonic for constraining Model 3 production. Musk’s appearance last year at a news conference apparently smoking marijuana was an added blow to cultural tensions and trust building.
The current environment is described as “CEO to CEO personal communication” among Panasonic CEO Kazuhiro Tsuga and Tesla CEO Elon Musk. Reportedly, Mr. Tusga indicated that: “Panasonic wants to be paid more for its batteries as soon as Tesla is securely profitable, according to a person familiar with the matter.” It seems that Mr., Musk remains adamant for immediate price cuts, and both CEO’s remain head to head in negotiations no doubt with face saving needs.
Supply Chain Matters Reader Takeaway Perspectives
Too often, we observe similar developments where key strategic supplier relationships become strained because of intense pressures to deliver one or both of the partner’s financial performance goals, especially profitability.
Today’s short-term focus on business results often tends to conflict with needs for win-win relationships involving strategic suppliers. This is especially evident when activist investors or private equity interests are present. This blog has previously highlighted the activist investor handbook which views strategic or tactical supply agreements as a prime source for wringing out cost savings and improving product margins. Such a focus implies extended supplier payment practices as well as one-way, win-lose relationships which invariably lead to soured outcomes.
Consider hedge fund manager Eddie Lambert’s now soured relationship with former suppliers of Sears Holdings, after the retail chain has trans versed through multiple store closings and reorganization. Consider the 3G Capital formula for supplier management and its subsequent soured relationship with key suppliers to AB In-Bev and Kraft Heinz. In the case of the former, at one point, supplier payments stretched to 176 days, and with the latter, a subsequent SEC investigation and fine related to procurement payment practices.
According to the WSJ takeaway narrative: “The relationship that led Panasonic to invest billions in a shared Gigafactory battery plant in the Nevada desert has exposed a culture clash between the conservative, century-old Japanese conglomerate and the 16-year-old Silicon Valley upstart.” This is a similar narrative when aggressive, overly optimistic goal setting is added to the backdrop.
No doubt, our readers may have mixed viewpoints regarding such concepts and developments. They likely represent cultural differences in viewpoints and in management theory. International business culture differences are unmistakable and always evident, especially in the notions of long-term relationships.
Our view remains that long-term success is always built on two-way, win-win relationships with give and take, and respect for either partner’s business culture. An I win-you lose relationship helps lawyers to stay gainfully engaged and your supply chain to be in constant risk of disruption.
When times are good, such strategies can and do yield benefits. When times are challenged, such as the last global recession, they often led to massive supply disruptions and inherent added mutual sacrifice from both partners. Toyota often provides lifelines to key suppliers, when needed. Win-win fosters opportunities for joint-collaboration on product and process innovation which ultimately lead to increased revenues and profits. It represents the best in business practices and successful outcomes, no different than treating each and every employee with respect and appreciation of effort.
What’s your viewpoint?
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