For much of last year, established automakers such as General Motors and Ford Motor operated in a different reality than Tesla, the electric car company.
GM and Ford closed factory after factory — sometimes for months — due to a shortage of computer chips, leaving many dealerships empty and car prices skyrocketing. Still, Tesla posted record quarter-on-quarter sales, closing the year with nearly twice as many vehicles as in 2020, unhampered by an industry-wide crisis.
Tesla’s ability to conjure up critical components is more important than a year’s car sales. It suggests that the company, and possibly other fledgling electric car companies, could threaten the dominance of giants like Volkswagen and GM earlier and more forcefully than most industry executives and policymakers realize. That would contribute to efforts to reduce emissions that cause climate change by replacing more gasoline cars sooner. But it could hurt the millions of workers, thousands of suppliers and countless local and national governments who depend on traditional car production for jobs, business and tax revenues.
Tesla and its enigmatic CEO, Elon Musk, have said little about how the automaker fared in the rest of the auto industry. Now it becomes clear that the company simply had a superior mastery of technology and its own supply chain. Tesla seemed to predict demand better than companies that produce far more cars than it does. Other automakers were surprised by how quickly the auto market recovered from a precipitous decline at the start of the pandemic and simply didn’t order chips and parts fast enough.
When Tesla couldn’t get the chips it had counted on, it took the chips that were available and rewrote the software that ran them to meet its needs. Larger auto companies couldn’t do that because they relied on third-party vendors for much of their software and computer expertise. In many cases, automakers also relied on these suppliers to deal with chip manufacturers. When the crisis hit, car manufacturers lacked bargaining power.
Just a few years ago, analysts saw Mr. Musk’s insistence on letting Tesla do more things on its own as one of the main reasons the company struggled to increase production. Now his strategy seems justified.
Cars are becoming more and more digital, determined as much by their software as their engines and transmissions. It’s a reality that some old-line car companies are increasingly recognizing. Many, including Ford and Mercedes-Benz, have said in recent months that they hire engineers and programmers to design their own chips and write their own software.
“Silicon Valley natives never outsourced their software — they write their own code,” said Morris Cohen, a professor emeritus at the University of Pennsylvania’s Wharton School who specializes in manufacturing and logistics. “They rewritten the software so they could replace chips that were scarce with chips that were not scarce. The other car manufacturers couldn’t do that.”
“Tesla controlled his destiny,” added Professor Cohen.
Tesla sold 936,000 cars worldwide in 2021, an increase of 87 percent for the year. Ford, GM and Stellantis, the company formed from the merger of Fiat Chrysler and Peugeot, all sold fewer cars in 2021 than in 2020.
Measured by vehicles delivered worldwide, Tesla jumped ahead of Volvo and Subaru in 2021, and some analysts predicted it could sell two million cars this year as plants in Berlin and Austin, Texas, come online and a factory in Shanghai ramps up production. That would put Tesla in the same league as BMW and Mercedes – something that would have been thought possible only a few years ago.
Understand the supply chain crisis
GM and Ford, of course, sell a lot more cars and trucks. Both companies said last week that they sold about two million vehicles last year in the United States alone.
Tesla, which rarely answers questions from reporters, has not responded to a request for comment for this article. It has said little publicly how it managed to rise in a down market.
“We have used alternative parts and programmed software to mitigate the challenges caused by these shortages,” the company said in its third quarter earnings report.
The performance is a stark turn of events from 2018, when Tesla’s manufacturing and delivery problems made it a laughing stock in the industry. Many of the manufacturing flaws stemmed from Mr. Musk’s insistence that the company make many parts itself.
Other auto companies have realized they need to do some of what Mr. Musk and Tesla have been doing all along and are in the process of taking control of their onboard computer systems.
For example, Mercedes plans to use less specialized chips in future models and more standardized semiconductors, as well as write its own software, said Markus Schäfer, a member of the German automaker’s board of directors who oversees procurement.
Going forward, Mercedes will “make sure we have custom, standardized chips in the car,” Mr Schaefer said in an interview on Wednesday. “Not a thousand different chips.”
Mercedes will also design its own vehicle hardware, he said. Without mentioning Tesla, Mr. Schäfer added, “Probably there had been people down this road before.”
Doing more yourself also helps explain why Tesla avoided a battery shortage, which allowed limited companies like Ford and GM to sell many electric cars. In 2014, when most automakers were still doubting whether electric vehicles would ever pay off, Tesla broke ground on what it called a gigafactory outside Reno, Nev., to produce batteries with its partner, Panasonic. Now that factory ensures reliable delivery.
“It was a big risk,” said Ryan Melsert, a former Tesla executive involved in the construction of the Nevada plant. “But because they’ve made early decisions to get things in the house, they have a lot more control over their own destiny.”
As Professor Cohen of Wharton noted, in many ways Tesla’s approach is a throwback to the early days of the automobile, when Ford owned its own steel mills and rubber plantations. In past decades, conventional automotive wisdom has been that manufacturers should focus on design and final assembly and outsource the rest to suppliers. That strategy helped reduce the amount of money big players committed to factories, but left them vulnerable to supply chain turmoil.
How the supply chain crisis unfolded
The pandemic caused the problem. The highly complex and interconnected global supply chain is in turmoil. Much of the crisis has been traced to the Covid-19 outbreak, which led to an economic slowdown, mass layoffs and a production shutdown. This is what happened next:
It also helps that Tesla is a much smaller company than Volkswagen and Toyota, each of which produces more than 10 million vehicles in a good year. “For starters, it’s just a smaller supply chain,” says Mr. Melsert, who is now CEO of American Battery Technology Company, a recycling and mining company.
The Tesla lineup is also more modest and easier to deliver. The Model 3 sedan and Model Y SUV accounted for nearly all of the company’s 2021 sales. Tesla also offers fewer options than many of the traditional automakers, simplifying production.
“It’s a more streamlined approach,” said Phil Amsrud, a senior principal analyst specializing in automotive semiconductors at IHS Markit, a research firm. “They’re not trying to manage all these different configurations.”
Tesla software, which can be updated remotely, is considered the most advanced in the automotive industry. Still, the company’s cars are likely to use fewer chips, analysts said, as the company controls functions like battery cooling and autonomous driving from a smaller number of centralized on-board computers.
“Tesla has fewer boxes,” said Mr Amsrud. “The fewer components you need now, the better.”
Of course, Tesla could still run into trouble if it tries to match the growth it achieved in 2021 — it aims to increase sales by about 50 percent a year over the next few years. The company acknowledged in its third-quarter report that its creative maneuvers around supply chain chaos may not work as well as it increased production and required more chips and other parts.
The electric vehicle market is also becoming much more competitive as traditional automakers are reacting with models people want to buy rather than the small electric vehicles typically made to appease regulators. Ford said last week it would nearly double production of the Lightning, an electric version of its popular F-150 pickup, due to strong demand. The Tesla pickup will not go on sale for at least another year.
The outlook for traditional automakers is likely to improve this year as the shortages of semiconductors and other components diminish, and as manufacturers become better able to deal with them.
Tesla vehicles still suffer from quality issues. The company told regulators in December that it planned to recall more than 475,000 cars for two separate defects. One can cause the rear view camera to malfunction and the other can cause the hood to open unexpectedly. And federal regulators are investigating the safety of Tesla’s Autopilot system, which can accelerate, brake and steer a car on its own.
“Tesla will continue to grow,” said Stephen Beck, managing partner at CG42, a New York-based management consulting firm. “But they are facing more competition than ever, and the competition is getting stronger.”
However, the fundamental advantage of the car manufacturer, with which it survived the chip crisis, remains. Tesla builds nothing but electric vehicles and is unencumbered by habits and procedures that have been superseded by new technology. “Tesla started with a clean sheet of paper,” said Mr Amsrud.
