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Vertical Integration: How Tesla's Elon Musk employs a long-lost approach from a bygone era in American business
Posted on December 08, 2016 by Matt Pressman
Of all places, on the other side of the world, the South China Morning Post* teaches us a valuable lesson about American business. The subject: Tesla Motors. To start, they provide a quick history lesson: "By the turn of the 20th century, Corporate America was characterised by... household names such as Standard Oil, DuPont, IBM, Ford, and General Electrics [which] were all vertically integrated. They regularly bought out upstream suppliers and acquired downstream distributors. Their activities were broad, touching all stages of production – from R&D to manufacturing and assembly... But by the 1980s, the system had been dismantled."
Above: Tesla Motors CEO Elon Musk (Image: Industry Week)
Why? In short: "global outsourcing. In the pursuit of higher return on investment, CEOs were dreaming about eliminating capital expenditure. Taking advantage of cheap labour in Asia, companies exited manufacturing en-masse in America... Gone were the days when Henry Ford still ran his rubber plantation, timberland, coal and iron ore mines to feed raw materials to his Michigan factory. Today, almost no one makes their components. Automakers rely on a worldwide array of foreign suppliers."
Above: Elon Musk discusses vertical integration and the lessons learned from Henry Ford (Youtube: ImagE Native)
Nowadays, automakers succumb to suppliers "across a great span of geographic regions while making sure thousands of moving parts perform to perfection." Ali Javidan, former head of vehicle prototyping and R&D at Tesla explains, “If Daimler wants to change the way a gauge looks, it has to contact a supplier half a world away and then wait for a series of approvals. It would take them a year to change the way the ‘P’ on the instrument panel looks.”
Above: Tesla Model S vehicles on the production line (Image: Auto Express)
In contrast, "Tesla has long realised breakthrough innovation demands the integration of multiple disciplines. Elon Musk saw depending on foreign suppliers as a weakness, not cost savings. At the Palo Alto headquarters, visitors would notice the dramatic use of vertical integration." Looking ahead, "Tesla [had] started developing its own battery chemistry with partners like Panasonic... [and] it is also building its Gigafactory which will allow it to produce batteries at a scale that exceeds the current capacity of today’s global supply chain, and drive down production cost to an unprecedented level."
Above: Elon Musk has said, "What we are doing at the Gigafactory is consolidating the production of the pack all the way from the raw materials, so there's literally ... rail cars of raw materials from the mines, and then out come completely finished battery packs" (Image: The ECO Report)
Musk is bringing the lessons of a bygone era, a golden age of American business, back to life, via vertical integration. "And just like that, the company [Tesla] has fused together electronics, software, and metal and batteries that traditional automakers are now struggling to match." It's fascinating that while so many American media outlets troll Elon Musk, instead the South China Morning Post* teaches its business executives that, "Tesla taught us important lessons about innovation. To stay on top of competition, we must ask ourselves... as a thought experiment, imagine Elon Musk were to enter your industry, what would he do differently from the others?"
*Source: South China Morning Post