In this Supply Chain Matters industry specific commentary, we focus in on the overall supply chain performance and implications related to electric auto maker Tesla’s Q2-2021 financial and operational performance. Increasingly, as other industry players move more towards electrically powered vehicles, there will likely be a need to alter the industry’s manufacturing and vehicle distribution strategies with consideration for leaner finished vehicles or make to order strategies.
Within global automotive supply chain circles, the recent announced Q2 financial performance by Tesla will likely provide a lot of industry conversation. The financial headlines reflected a record $1.1 billion in profitability amid upwards of $12 billion in quarterly revenues, exceeding analyst expectations.
This was also a new milestone for Tesla, being the first-time the electric auto maker has provided $1 billion in net income since the company’s founding. Margins reportedly widened to over 25 percent from 22 percent in the prior quarter.
The company was able to benefit from a surge in product demand with output exceeding more than 206,000 vehicles, more than double the rate experienced in the year ago period when the COVID-19 infection rate limited product demand and overall production levels. Output was accomplished in the midst of the ongoing global wide shortage of semiconductor devices that have affected the industry overall.
Supply Network Aspects
From a supply network lens, we extend applause to the automaker’s supply chain management and product design teams for their collaborative efforts in substituting alternative semiconductor chips and software as a workaround for chips the industry wide limited supply. That may be the advantage of a company with high-tech roots and agile design capabilities.
Founder and CEO Elon Musk indicated that the auto maker did experience some factory interruptions during the quarter but was able to locate substitute suppliers. He further indicated to investors that the ongoing chip shortages could impact Tesla’s efforts to continue to boost output: “For the rest of the year, our growth rate will be determined by the slowest part in our supply chain. Chip supply is fundamentally the governing factor on our output.”
Moving forward, Tesla maintains plans to boost output more than 50 percent in 2021. Executives cautioned that the output goal would depend on the state of production capacity brought about by model changeovers and overall supply chain stability. Analysts are anticipating output of upwards of 231,000 vehicles this quarter, primarily from the company’s Fremont California and Shanghai production facilities.
Two critical milestones later in the year will be the on-time opening of the Austin Texas and Berlin Germany production facilities. Regarding the latter, the company reported that European demand for the company’s electric vehicles is already exceeding available supply and as a result, the Shanghai facility is now serving as an export hub for certain in-demand vehicles. Both the German and Texas facilities are slated to support market demand for the next generation Model Y crossover vehicle.
New Product Introduction and Quality Perception Challenges
New product introduction and some quality perception challenges continue for Tesla.
The production start date for the company’s heavy duty semi-truck which was first announced in 2017 has again been delayed with initial deliveries now scheduled for 2022. The company attributed the added delay to supply chain issues along with available capacity to produce these vehicles.
CEO Musk indicated that the company’s plans for availability of the Cybertruck model pick-up truck are being affected by component shortages but declined on providing a revised market availability date. He told reporters that a semiconductor chip supply plan needs to be addressed in order to be able to scale to the production levels anticipated by existing demand.
As Supply Chain Matters indicated in a prior commentary, the electronic auto maker has embarked on a strategic battery supply strategy that involves multiple battery suppliers, moving away from its sole dependence on Panasonic. How these relationships evolve will be rather important for supporting the automaker’s regionally focused supply plans. One could also surmise that the importance of long-term supply agreements and active design collaboration will be key.
Multiple vehicle recalls with China due to announced quality and safety shortfalls identified by the country’s auto regulatory body threaten to fray an otherwise positive relationship with consumers. Reportedly, five various Chinese regulatory agencies are scrutinizing Tesla’s quality of vehicles produced at the Shanghai facility. In the U.S. there is also the ongoing incidents auto crashes reportedly involving the company’s Autopilot driver assistance functionality which safety regulators continue to investigate.
Ongoing senior executive departures are another question mark in terms of ongoing scalability global growth and auto delivery logistics along with anticipated financial performance milestones.
While Tesla’s supply chain and product management teams can be applauded for being key to the company’s recent financial performance, more challenges remain. With each passing quarter the scale and implications increase as the industry’s global supply networks compete for limited supply of in-demand electronics, not to mention adjacent electronics demand from continued robust sales of smartphones, computers and other electronics.
Ingenuity and tech-savviness will prove to be a key trait for Tesla in the months to come.
Regarding implications for the auto industry as a whole, we sense that there is new thinking already underway to rethink traditional make-to-stock supply chain strategies in consideration a more pull-based lean finished goods or make-to-order focused strategy for EV production.
The awareness of Tesla’s non-traditional strategy for bypassing dealers in favor of allowing customers to order vehicles directly online with direct delivery now have more meaning when multiple semiconductor devices or electronic components overlap with high-tech, consumer electronics and other industry supply networks.
That will be the new learning of 2021, a reality that more precise product demand planning and inventory management are table stakes for the new normal of supply chain management across global automotive industry supply networks.
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