Seventeen months ago, business and social media was abuzz with electric automobile maker Tesla Motors’s audacious plans to build its own $5 billion electric battery “gigafactory within the United States, capable of supplying up to 500,000 electric vehicles per year. Plans indicated that the plant, would ultimately be able to produce batteries at 30 percent less cost, and when operational, would provide the capacity to be the single largest battery manufacturing volume plant in the world. To state the obvious, the strategy was a bold and savvy thrust involving vertical integration, given that of the entire value-chain and cost-of-goods sold (COGS) for an electric powered automobile, the batteries are indeed the highest portion of cost.
Since the February 2014 announcement, a far broader strategy has been unfolding, one that will extend beyond automotive supply chain needs. In September of last year, Tesla selected a site within the state of Nevada, just outside of Reno. Thus far, the steel structure and roof of the new factory have been completed. Tesla has partnered with Japan based Panasonic to assist in the setup of production processes within the new gigafactory. By autumn, Panasonic will dispatch hundreds of its employees to Nevada to assist in the plant internal design and setup.
In June, Tesla entered into a research partnership with a noted professor at Dalhousie University in Nova Scotia, known for his work in innovating lithium-ion batteries. The goal of this research partnership is to determine methods to incorporate more voltage as well as less cost of materials within batteries without eroding their longevity. According to a published report, Tesla is further investigating its own sourcing and processing of lithium, cobalt, graphite and nickel.
This week featured news indicating that Tesla has now increased its land holdings surrounding the new plant, purchasing an additional 2000 acres. The land purchases reportedly occurred during April and May with the majority of the land, according to Tesla, serving as a buffer zone in which solar arrays are to be constructed to provide internal power to the new factory.
According to a published report from The Wall Street Journal, battery cells will begin to roll-off production lines by the end of 2016, with plans for additional phased ramp-ups extending through the year 2020. Once more, up to 25 percent of the new plant’s capacity is expected to be allocated for production of static storage battery needs for homes, businesses and utilities. Tesla recently unveiled a new line of home storage batteries and the firm’s iconic founder, Elon Musk recently indicated that there has been positive interest from other industries in exploring potential battery supply agreements.
Tesla’s corporate culture of thinking big continues to extend across the supply chain and the new gigafactory will be the most significant testament to that boldness in supply chain vertical integration.
For added information regarding this new factory, readers can review Tesla’s conceptual design.
Report that Johnson Controls Seeking to Divest of Seating Business- Changed Automotive Supplier Dynamics
During 2008-2009, the U.S. automotive industry faced a significant crisis involving the largest OEM’s, and there were legitimate concerns that many key suppliers within the U.S. automotive supply chain would become collateral damage to a flawed industry business model that did tend toward shared rewards among suppliers.
A lot has changed and much learning has occurred since that crisis. Some OEM’s such as General Motors are now communicating intent to establish more strategic relationships with suppliers. Many key suppliers have moved toward reducing major exposure to automotive market cycles through industry supplier diversification.
Last week The Wall Street Journal reported that Johnson Controls, a key component and systems provider to the automotive industry was considering the sale of its automotive seats division. This news is significant because this division is the largest within Johnson Controls accounting for nearly 40 percent of total revenues, and over one billion in pre-tax profit.
Why therefore, is sale being considered?
According to the WSJ, the company wants to shrink its automotive interiors businesses and focus on other more strategic opportunities, even though executives had previously identified seating as a core business. The supplier’s CEO indicates that further investments in the seating business would take away from the goal for diversification among other industry sectors. In essence, senior leadership is acknowledging that it reached an important crossroads for its seating business. A cited quote indicates that Johnson Controls would do harm to continued growth of seating if it did not invest. Instead, the key supplier is opting to sell the business to a party willing to make the next leap in seating technology.
Further implied by the WSJ is that Johnson Controls shareholders expect higher value in the company’s stock. Supply Chain Matters as well as others have noted how activist investors have penetrated major industries demanding enhanced short-term shareholder value increased returns. Such investors are active among key automotive suppliers.
The implication is that years of contentious relationships among certain U.S. automotive OEM’s among suppliers has motivated certain key suppliers to seek reduced industry exposure via diversification. However, influences of activist or major shareholders for increased returns have opened up heightened M&A activity.
When the dust settles, the U.S. automotive supply chain ecosystem may well have a different or more powerful collection of strategic suppliers, either U.S. or foreign based.
As the idiom often reminds us: You reap what you sow.
Throughout 2014, Supply Chain Matters called attention to the automotive sector and the unprecedented levels of product recalls that continued to stress auto aftermarket service supply chains and supplier relationships to their limits. From a tactical lens, we observed that the colliding forces of regulatory, political, supplier management and capacity-restrained automotive replacement spare parts networks may well continue for many more months, and that appears to be exactly what continues to unfold. Once more, Supply Chain Matters predicted that when the dust settles, the automotive industry and its supply chain ecosystem partners need to take a hard look at lessons learned.
While automotive OEM’s and their associated brands have taken the bulk of the consumer and regulatory heat around product recalls, quality defects have more often resided within either OEM product designs or parts suppliers and their associated product design or manufacturing processes.
The most significant culprits for the continuous litany of product recalls has been the ignition switch defects involving multiple General Motors vehicles and the alleged defective airbag inflators produced by Japan based supplier Takata Corp for multiple OEM producers. After undergoing continuous ongoing scrutiny from U.S. regulators these past months, Takata refused to broaden the scope of the defective inflators recall beyond a select number of U.S. States with high humidity concerns because the supplier supposedly could not determine the exact cause of defects. That is up to now.
This week provides yet another, but far-reaching significant milestone, namely what is being described as the largest automotive recall in U.S. history, and involving the same potentially defective air bag inflators originating from Takata. Bowing to intense pressure and scrutiny from regulators, Takata has now, for the first time acknowledged that there are defects in its air bag inflators, yet root causes remain unanswered. This week’s announced product recall will be conducted by 11 different automakers and now doubles the number of vehicles subject to recall. Business media now reports the overall vehicle recall as involving nearly 34 million existing automobiles in the United States. Six deaths and upwards of 100 injuries have been linked to the defective airbag inflator problem thus far.
In announcing the current expanded recall, U.S. Transportation Secretary Anthony Foxx indicated: “It’s fair to say that this is probably the most complex consumer safety recall in U.S. history.” Depending on which math is being referenced, the scope of the overall recall amounts to roughly 14 percent of the total vehicles now operating on U.S. roads. Add to that the scope of the 2 million plus vehicles included in the GM product recalls, along with other product related recalls and the picture of a large number of existing vehicles awaiting repair attention becomes a dominant picture. Needless to state, the implications of the continued litany of product recalls involving the industry are far reaching, for both OEM’s, their suppliers, and their service networks.
Logistically, as we and others have noted in our prior commentaries, it will take months and perhaps years for dealer and service parts networks to complete repairs on all recalled vehicles. That will cause additional safety concerns and added frustration among consumers. There are concerns that previous air bag deflator repairs to vehicles may have been completed with defective parts requiring the need for yet another repair. As noted, the root-causes of the air bag deflator’s defects have yet to be determined by either Takata or a consortium of 10 automotive OEM’s. The shear volumes of cumulative open recalls are testing existing processes and supporting systems, perhaps to their breaking point. As we have pointed out, alternative suppliers have been recruited to augment supplies for both existing new production as well as repair parts needs.
From a political perspective, legislators and regulatory agencies continue to react to the concerns and frustrations of automotive consumers who wonder aloud if automakers really care about the quality of the vehicles they are producing as well as their attentiveness and timely response to vehicle safety. That leads to a continued sensitized regulatory and judicial perspective.
From a financial perspective, the bulk of the costs related to a litany of past product recalls have been on the shoulders of the OEM’s. However, some automakers such as GM, have managed to shield themselves from expensive lawsuits from prior legislative actions dating back to a previous bankruptcy filing. That will change with the current scope and visibility brought to bear of the latest Takata related recalls. In its reporting, The Wall Street Journal cites one estimate indicating that Takata alone could face recall-related charges in the range of $4-$5 billion, far outpacing an original estimate of $1.6 billion. Yesterday, Takata’s stock fell 10 percent on the Tokyo Exchange as its investors adsorbed the implications. On a broader perspective, the issue of which party bears the bulk of the financial liability for component quality will again be up for discussion.
To be candid and blunt, product quality perceptions have become an overall mess, and it could not come at a worse time. There was a feeling that automakers had come a long way in overall vehicle reliability but that perception belies the current picture of numerous vehicles now with open recalls. Once more, consumers clamor for the latest technology advances in vehicle safety, comfort and convenience including all notions of the connected car. Many of these innovations stem from component and sub-system suppliers within an industry that has a track record of mostly marginal supplier relationship building. In its recent annual supplier poll conducted by Planning Perspectives, for the 14th straight year, suppliers continued to rank Toyota and Honda as best customers. Noted is the diametrically opposite goals of an adversarial relationship where OEM’s often seek a supplier’s best technology at the lowest possible price. Compounding the problem are activist investors and private equity firms investing in various tiers of automotive supply chains clamoring for more short-term returns for shareholders.
From our lens, the global automotive industry, and in-particular U.S. based OEM’s need to have rock solid quality focused product design and more responsive early warning quality mechanisms as a top industry priority. Industry executives need to seriously look beyond any perceptions of the panacea of a current super sensitive regulatory environment that will run its course. The notions of an industry solely being driven by lower product margin goals and placing the bulk of that burden on suppliers has to change. Component, systems and overall vehicle reliability is not the purview of a marketing campaign but rather a systemic process that spans end-to-end product and aftermarket service centered supply chains. Component and systems quality must be a living fabric of supplier relationship management and suppliers need to be fairly compensated for assuring high standards in product design and process innovation, especially considering current product strategies leveraging common brand and/or vehicle model platforms. The stakes are even higher when considering that the electronic and software content of vehicles continues to rise implying more sophisticated reliability and systems focused hardware and software related engineering. In the analogy of carrot and stick agreements, the carrot is longer-term, more collaborative based product design and supply chain focused relationships and the stick is the shared responsibility and liability for warranty and/or product recall costs attributed to vehicle sub-systems such as vehicle safety.
Finally, you may have noticed that lately, not a day goes by without a barrage of targeted online or traditional media ads urging we as consumers to buy or lease that new car with latest technological features. From our lens, the industry will be better served by re-allocating existing marketing and sales budgets towards investments in more robust early-warning mechanisms related to component quality and to current overburdened and perhaps collapsing aftermarket service networks that are the first line of intelligence for quality and vehicle safety.
© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Supply Chain Matters has provided a series of ongoing commentaries involving fairly recent multiple industry aspects involving escalating pressures being placed on suppliers. Our commentaries have reflected on reports regarding global retailer Wal-Mart ‘s latest efforts of cost cutting and certain Consumer Product Goods producers being driven to bullying or extreme cost-cutting measures. Today, The Wall Street Journal provides a report indicating how one global automotive manufacturer is now trying to reverse course of previous supplier squeeze actions to foster needed collaboration.
This report, GM Wants Long-Term Parts Contracts (paid subscription or complimentary metered view) describes efforts by General Motor’s newest Chief Procurement Officer Steve Keifer to influence extended component parts supplier contracts that extend as much as a decade, in order to support two new vehicle product development programs and subsequent market volume output requirements. According to the WSJ report: “locking suppliers into longer-term contracts and looping into vehicle designs earlier in the process, the auto maker can expect suppliers to share more innovations and better processes that help save money.”
For some of our readers, that statement would appear to be forward-thinking but keep in-mind that the U.S. automotive industry has had a long history of supplier bullying that has been difficult to change for some manufacturers. While Keifer is described as a GM veteran, he only recently assumed the CPO role at the end of 2014, after serving an executive role at Tier one supplier Delphi Automotive. The report thus hints that this new CPO has brought more of a supplier sensitivity to his role.
That approach is apparently being influenced and supported by GM’s new CEO, Mary Barra, who herself has a manufacturing and product development leadership background. According to the WSJ, Barra has recently implemented a strategy “aimed at improving relationships with suppliers that believed the automaker was overly optimistic in its planning assumptions or too forceful in cost-cutting mandates.”
The report points to the ongoing technology-driven revolution occurring across the automotive industry, and the need to bring even more technology to market at a quicker competitive pace. However, the new CPO has the challenge of undoing decades of poor supplier relationships that curtailed deeper collaboration on areas of innovation. The spur such innovation, GM is reportedly open to consideration of new suppliers from regions such as the U.S. Silicon Valley or Israel.
On this blog we have pointed out the drawbacks of how a short-term business outcomes perspective driven to cost reduction mandates can permeate across the many levels of the value-chain. While such efforts may lead to short-term accolades and performance bonuses, they undermine efforts directed at longer-term needs for product, process and customer fulfillment innovation. Suppliers themselves need to have heightened sensitivities to the business pressures of key customers, and try to provide a helping hand perspective on short and longer term supplier relationship alternatives.
In the case of this week’s WSJ report concerning General Motors, a changed senior management perspective, driven by both the realities of long-term industry competitiveness through innovation, and a leadership grounding in the importance of suppliers for contributing to such innovation has helped to initiate a changing perspective. That will help in overall change management.
We trust there will be more of the above positive actions rather than the others we have highlighted of-late.
Today, The Wall Street Journal reported that Volvo Car Corporation, owned by China based Geely Holding Group plans to invest $500 million in the construction of a new vehicle production and assembly facility in the United States.
According to this report, Volvo is making this investment to become closer to its prime North American market, take advantage of attractive labor rates and protect against currency fluctuations. Volvo has had a presence in the U.S. market since 1957 but has struggled in recent years to establish market-share growth. The plant will reportedly build vehicles utilizing a new “SPA” platform that serves the basis of several new models including the Volvo XC90 SUV.
The report further indicates that the auto maker is considering sourcing its new facility in a handful of U.S. states and will make a final site decision in about a month. Volvo had considered a new plant investment in Mexico but opted instead for a U.S. site.
What is even more interesting is that Volvo’s CEO indicates that the new factory could eventually serve as an avenue for its parent, Geely to distribute cars in the United States.
We are often reminded that one of the most common traits of industry disruptors is that they think differently. They challenge the notions of industry norms, current practices and business processes or the leveraged use of technology in product and service delivery.
Over the coming weeks, Supply Chain Matters will feature a series commentaries focused on industry disruptors and their implications to existing customer fulfillment.
Fast becoming one of the icons of disruptive thinking approaches is Elon Musk with his current ventures in the automotive and space exploration and aerospace sectors. The two companies he leads, Tesla Motors and Space Exploration Technologies have each challenged legacy industry practices.
Supply Chain Matters has featured a number of prior commentaries specifically focused on Tesla and how this automotive producer has challenged existing norms in is driving re- thinking in supply chain vertical integration, advanced manufacturing practices, service and distribution strategy. Tesla’s fundamental approach is that an automobile serves as a transportation device that is primarily powered by computer intelligence and the user experience. There is little need for intermediaries or after-market providers.
This week, Tesla has invigorated both social and business media on the news of its latest series of software upgrades planned for the Tesla Model S. At a recent automotive industry conference, Musk declared that it will soon become illegal for humans to take the wheel once the technology of self-driving cars have proven themselves. If you sit in a Tesla vehicle, it’s visually striking that the huge 17 inch LCD screen takes-up more driver attention than a traditional automobile dashboard. It was designed as such.
Last October, IHS reported on its initial analysis of a teardown of the components of the Tesla Model S with the headline: Is it a Car or an iPad? The article is impressive and worth a read.
What is extraordinarily impressive is that Tesla’s software upgrades are delivered wirelessly to individual owned consumer vehicles in the truest form of cloud delivery. There is no need for the traditional automotive industry dealer visit. Musk views such upgrades in the same context as updating a laptop computer or a smartphone. He further categories autonomous driving as a “solved-problem”. Last year, Tesla began equipping its Model S with on-board cameras and sensors to be powered by a sophisticated system termed “autopilot”.
Over the coming weeks and months planned upgrades will include functionality that completely puts the driver at-ease regarding the existing range of the car’s battery power. The software analyzes the current driving route, road conditions, topography and location of available battery charging stations. If the car is going to exceed the range and distance to the nearest charging station, a real-time warning is issued along with GPS coordinates to the charging facility. According to Musk, “it makes it almost impossible to run out unless you do it intentionally.”
In an upcoming release 7.0, a new user interface will provide the ability of the car to operate with complete autonomy on highways when the driver lets go of the steering wheel.
In the context of the consumer experience, like Apple, Tesla delivers on design elegance and the interactive user experience. The car you may have purchased one or two years ago, has newer functionality and user experience features delivered by the cloud than when you purchased that vehicle.
For the remainder of automotive related industry, a disruptor such as Tesla will elicit more accelerated innovation in applied technology and the driver experience. Suppliers are already working on more sophisticated processors, sensors, embedded systems and driving aides.
Is it any wonder that when news broke that Apple was working on its own secret development of an electric vehicle, that social media lit-up like fireworks and the automotive industry shuttered.
In today’s industries, change is constant and the termed clock speeds of product innovation are indeed accelerating. Supply chain teams will invariably be either on-board facilitators or unfortunate obstacles to these changes.
Note: This author is not a current owner of a Tesla automobile nor a stockholder, rather an observer and enthusiast of automobiles.