1. Depict the Value Chain of the chosen company.
2. Analyze which activities are integrated vertically, which are outsourced and with which there are intermediate solutions (collaboration agreements, joint ventures, etc.).
Tesla manufactures the basic electric components of the car – the electric motor, the battery pack and the charger – but other parts come from suppliers spread across the U.S., Europe and Asia. Below is a list of some of the key suppliers for Tesla's manufacturing production, along with the components they supply:
- · AGC Automotive: windshields
- · Brembo: brakes
- · Fisher Dynamics: power seats
- · Inteva Products: instrument panel
- · Modine Manufacturing Co.: battery chiller
- · Sika: acoustic dampers
- · Stabilus: liftgate gas spring
- · ZF Lenksysteme: power steering mechanism[1]
Tesla tackled high costs by stringing together hundreds of small, mass-produced laptop batteries. Tesla claims that its power-packs cost half what big carmakers pay their suppliers for custom-designed large-format batteries, and that its Gigafactory, a huge battery plant close to completion in the Nevada desert, will cut costs by another 30%. Tesla makes most of their parts inhouse. Tesla isn’t just insourcing their production – they are also insourcing their sales channels. Tesla sells directly to the public through its website and in showrooms in shopping centers (of all places!) The retail market compared to the cost of maintaining showrooms is unsure at this point – but it is one that others like Apple have certainly factored into their calculations.[2]
Tesla and Panasonic: Related to the battery production, from their very initial years, Tesla started to collaborate with Panasonic to produce the highest energy density electric vehicle battery packs. Since then, the Tesla-Panasonic partnership has come a long way. In 2009, Panasonic signed an agreement to supply lithium-ion battery cells to Tesla Motors for its electric vehicles. Later, the Japanese company decided to invest 30 million dollars in Tesla. Both company started to collaborate in the development of a next generation of battery cells for electric vehicles, and Tesla chose Panasonic as its preferred lithium-ion battery cell supplier. the collaboration reached a new level when in 2016 Panasonic decided to invest up to 1.6 billion dollars in the Gigafactory project that Tesla initiated two years earlier.[3]
3. Perform a critical analysis of the solution currently chosen by the firm regarding at least one of the activities of the value chain. To do so, you will have to analyze, given the very nature of the activity and the firm, the costs that may arise from performing the activity in-house, and compare them with the costs of outsourcing it.
The price of an electric vehicle battery is determined by its capacity in kilowatt hours (kWh), which dictates its range and the power level of the motor that it supplies.
According to analysts at BloombergNEF, in 2015 the price of the battery of an electric car accounted for more than half (57%) of the vehicle’s production cost. But economies of scale related to the development of the electric vehicle market have led the price per kilowatt hour to plummet. In 2010, the average price per kilowatt hour was 1,037 euros whereas by 2018 it was less than 160 euros. [4]
Most sources estimate the current cost of an automotive lithium-ion battery pack at between $1,000 and $1,200 per kWh.[5]
Now that we have an approximation of which is the cost of these batteries in the market, we should analyze which are the costs of these batteries to Tesla on it manufacturing them.
The battery production is one of the activities of Tesla’s value chain. It is common sense that battery technology is expensive. Batteries to store and use electrical power are the most expensive single component of these cars, with the current cost of around $500 per kilowatt-hour. A Model S has around 60 kilowatt-hours of capacity, meaning that approximately $30,000, or 42.25%, of the sticker price is due to the battery packs. Since 2008, the cost of Tesla’s battery packs has risen by 50%, and their storage capacity has increased by more than 60%.[6]
If Tesla is able to increase its production, incremental cost per car should decline. The cost of a car has two components, fixed and variable. Variable costs include the battery, tires, engine, etc. These costs don’t usually decrease much (though they do decrease some) as a larger number of cars are produced. Fixed costs, like running a Gigafactory and developing software, decline on a per-car basis as Tesla increases its production. Assuming demand for Tesla’s cars continues to increase, the company’s gross margin (how much it makes per car) should increase, and thus it will reach profitability.[7]
The company’s pack-level costs reached $158.27 per kilowatt-hour in 2019, a decline of over $100 compared to 4 years ago. Tesla is the only automaker currently using cylindrical battery cells — the others use pouch or prismatic cells, which meant pack-level costs of over $200 per kWh in 2019.[8]
2012 2013
Cars Sold 2650 17650
Fixed Cost 231,976 273,978
Variable Cost 150,372 285,569
Total Cost 382,348 559,547
4. According to your analyses, is the solution actually chosen by the firm the most efficient one?
We can see that the average cost of the batteries in the market is between $1,000 and $1,200 per kWh. However, if we take a look to the information in the answer above, we can see that the batteries’ cost for Tesla is around $500 per kilowatt-hour. Therefore, it is better for Tesla to continue manufacturing its own batteries rather than buying them in the market.
5. Is there any vertically integrated activity in the firm for which you find that achieving market power (instead of becoming more efficient) is the reason behind the solution adopted in the firm?
Tesla vehicles master the art of transforming energy in a large variety of different conditions. Small and usually overlooked design masterpieces make the car a vehicle in which energy can flow like it does through a professional ballet dancer. It does so with the lowest losses and much more seamlessly than any other vehicle ever built. That is, in large part, because Tesla has vertically integrated so much of the design and production of the car, working obsessively to make each part of the overall system work ideally with other parts.
The irony of all the vertical integration examples given above, which give Tesla such an advantage in the industry, is that the true reason why Tesla is more vertically integrated than anybody is not because it wanted to make more profit, be more innovative, or simply be different, but because Tesla has been forced to do this. Many of the required parts, systems, and services Tesla needed, especially based on the company’s first principles approach to design and engineering, didn’t exist. So, the options would have been to train a supplier and fight against many odds to help them build what Tesla was looking for, or to do it internally. Both approaches have disadvantages and challenges, but given that a supplier would have needed to start from scratch and Tesla could not commit huge units of production, needed the parts fast, and needed flexibility from rapid testing and improvement, you can imagine why going the supplier route just didn’t make sense in many cases.[9]
Ok Patricia. You have plenty of good source of data. I would have expected that you had relied a little bit more on those that we called "relevant costs" that we dealt about in this chapter (costs of vertical integration, costs of outsourcing), to analyze which is the best solution.
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