It is not that often that one reads about a key supplier that has elected to dismiss a major customer, let alone a customer that has high consumer and industry appeal. Thus the indication published by The Wall Street Journal today reporting that Mobileye, a key supplier of autopilot technology has elected to part ways with Tesla Motors.(Paid subscription required)
According to the report, the supplier will no longer provide its auto pilot computer chips after the current supply agreement ends because of disagreements about how the technology was deployed. The WSJ report points to the recent tragic accident involving a driver in Florida whose Tesla autopilot failed to recognize a turning tractor-trailer vehicle, causing a fatal crash. The supplier indicated to the publication that its current system was not designed to always detect vehicles cutting in-front, and that a new software release scheduled for 2018 would be able to do so. The report quotes Mobileye’s Chief Technology Officer indicating that in a partnership, the supplier needs to be there regarding all aspects on how the technology is being utilized.
According to the report, Israel based Mobileye is a current supplier to more than a dozen separate auto producers and that Tesla sales account for about one percent of its current revenues.
Tesla’s CEO Elon Musk indicated in an email to the WSJ that the split would not affect the company’s plan to develop more advanced versions of its Autopilot system and further indicated that the move was expected. Yesterday, the disclosure by Mobileye pushed its stock into a reported decline of 8 percent at the day’ close.
One could certainly speculate whether this announcement is either directly related to pending litigation or whether the partnership was straining for other reasons related to development timetables. However, it is noteworthy when a supplier takes the bold initiative to walk away from one of the most visible automotive industry companies on a global basis, one that is gearing-up to produce upwards of 500,000 electric powered vehicles in the coming few years.
As noted and observed in our prior and most recent Supply Chain Matters commentaries related to Tesla, it adds yet another challenge on the need to develop and nurture a supplier base that can provide continued leading-edge technology and volume requirements that can match Tesla’s timetables and aggressive product development and deployment needs.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.
Last week, Tesla founder and CEO Elon Musk penned a blog posting that essentially updated the master plan for the company that called for a broader product development thrust into hybrid trucks and buses. This places a far broader emphasis on the firm’s supply chain ramp-up challenges, one with the implication that Tesla will, by our view, have to seriously consider adding to existing final assembly production capacity beyond its current Fremont California facility.
The commentary itself not only provides an argument for why the electric car company must merge with SolarCity, but a further expansion of the master plan that includes:
- Create stunning solar roofs with seamlessly integrated battery storage
- Expand the electric vehicle product line to address all major segments
- Develop a self-driving capability that is 10X safer than manual via massive fleet learning
- Enable your car to make money for you when you aren’t using it
New product offerings were described as a new form of pick-up truck, and beyond the consumer vehicles market, an innovative heavy-duty trucks and high passenger density urban transport vehicle. Regarding the latter, Musk envisions a smaller footprint of urban busses with a transition from the role of individual bus driver to one of fleet manager. Both are noted as in the early stages of development at Tesla and should be available for unveiling next year, and will follow the availability of the more affordable Model 3 currently due in 2017.
Supply Chain Matters previously highlighted efforts of truck maker Nicola Motor Company in developing a Class 8, 2000 horsepower electric powered semi-tractor truck that will be named the Nicola One. This manufacturer has to-date booked 7000 reservations, each accompanied by a $1500 deposit, totaling more than $2.3 billion in cash to secure a reservation for this new vehicle, hence the sense of urgency for Tesla to enter such a market.
To state that the latest master plan is audacious or ambitious is an understatement. It places a far more concentrated focus on whether product development and the supply chain can rise to the challenge in such a short timeframe.
As noted, our last Supply Chain Matters commentary on Tesla concluded that the company remains challenged by supply chain ramp-up issues as it strives to meet aggressive short and long-term production and supply chain needs of existing announced vehicles. Musk has literally accelerated by two years, his goal to have the California final assembly facility output 500,000 vehicles per year. In his latest blog post, Musk once again re-iterated that this will be addressed as a function of engineering:
“What really matters to accelerate a sustainable future is being able to scale up production volume as quickly as possible. That is why Tesla engineering has transitioned to focus heavily on designing the machine that makes the machine — turning the factory itself into a product.”
The adding of commercial vehicles with more innovative hardware and software designs implies no choice but to accelerate capacity, strategic commodity and supply chain wide resources. Just today, The Wall Street Journal reports (Paid subscription required) that Tesla’s new $5 billion “gigafactory” near Sparks Nevada to produce the combined company’s battery component needs is currently one-sixth of its planned future footprint. Currently, 1000 construction workers are working two shifts per day, seven days per week to prepare for 2017 needs in the output of lithium-ion cells. Primary battery supplier Panasonic admits to the current challenges of finding qualified production workers, and with the addition of even more models of transport vehicles, the scale of the battery plant’s capability become crucial. But so does final assembly and distribution as well, in an area that is noted for rather expensive real estate and distribution space.
Thus, any experienced or even entry level supply chain and manufacturing professionals that enjoy an environment of fast-paced innovation and creativity in business process and physical supply chain processes best route your resumes to Tesla. We anticipate a razor-like focus that harnesses the fusion of engineering, product development and supply chain management into a kaleidoscope of expansion that will test current norms and thinking.
Reports that U.S. Volkswagen Dealers are Growing Restless Regarding the Ongoing Diesel Emissions Scandal Fixes
The ongoing brand crisis involving Volkswagen and specifically its customers and dealers over the diesel engine emissions alteration admission continues to take on new dimensions.
Last week, The Wall Street Journal reported that VW dealers across the U.S. are fuming regarding the receipt of specific guidance regarding the estimated 12,000 diesel powered autos that they are not allowed to sell. These unsold and currently prohibited stop-sale vehicles have been sitting in lots for over 10 months while VW and U.S. regulators traverse a legal process for determining next steps. According to this report, U.S. VW dealers are now sitting on approximately 107 days of finished goods inventory of which 12 percent represent currently non-saleable models.
Not wanting unsellable inventory to be clearly visible, many dealers have reverted to moving stop-sale inventory onto adjacent or off-site storage lots. While VW is currently compensating dealers for additional financing and needs for periodic servicing of this large amount of unsold and un-positioned inventory, dealers are not apparently making up the difference in new sales volume because of a lack of new saleable inventory. The long awaited family-sized sport-utility vehicle is not expected to be introduced in the U.S. until early 2017 while anew Alltrack small station wagon is due to be introduced in the next several months adding to dealer frustrations for more models to sell. Plans are very unclear as to whether the new family-sized SUV model will be offered with any diesel powered options as previously planned.
Last week, California regulators rejected a proposed VW fix for cars with the larger 3.0 liter diesel power plant. VW executives indicate that they have a fix related to the 2.0 liter diesel engines but regulators also need to approve this process as well.
In its report, the WSJ quotes one specific VW dealer executive as indicating that the scandal, compounded by the current glut of unsaleable inventory has soured his view of VW senior management. This executive further indicates that VW should take the unsold diesel vehicles back to Germany or some other location in the world where they can comply with emission standards.
On Friday, VW U.S. executives met with 150 Northeast U.S. dealers to review what was termed as a TDI Settlement Program, and pledged additional compensation to dealers. While the details of such restitution still are not known it was the first time that VW indicated that the dealers themselves will receive direct compensation.
A detailed timeline was reportedly outlined regarding the proposed buyback and repair program across the U.S., one that is expected to extend through the end of 2018. According to a subsequent report from the WSJ, a software fix would be made available for third-generation diesels by October, followed by a combination hardware and software fix for first-generation diesels beginning in January 2017, and a software update for second-generation diesel powered vehicles in February 2017. VW further indicated that it expects to have a hardware fix ready for third-generation diesels by October 2017.
This overall timeline, if approved by U.S. regulators will affect the nearly 500,000 existing diesel powered vehicles now on U.S. roads in addition to the unsold inventory of 12,000 vehicles. Thus, it is more than likely that U.S. VW dealer service teams will be very, very busy over the coming months and years. However, VW continues to decline media outlets regarding any specifics related to overall time lines or specific restitution for its dealers. The WSJ report also indicates that for consumers electing to sell their vehicles back to VW, a “third-party settlement specialist” would be inserted to act as an intermediary and direct communicator with dealers.
There is little doubt that U.S. VW dealers face a service management crisis, one that will tax both aftermarket and pre-sales service business segments.
As noted in previous commentaries, VW continues to experience painful lessons regarding its ongoing emissions scandal. A company noted for a somewhat tops-down management style and an engineering-driven culture and among one of the two top global producers will learn some tough lessons as a result of this scandal. The most important when all the dust settles, will be more sensitivity to customer, market and dealer network needs along with implications of being afoul to governmental emission standards.
Once again, all of these challenges in the months to come demand that VW executives move decision-making beyond the halls of Wolfsburg with more emphasis on major geographic based leadership such as VW U.S. The supply chain implications alone place a major emphasis on service management and responsiveness or risk even more erosion to the brand and to customer loyalty. VW needs to think more boldly and more creatively to address fixing the current challenges with non-conforming diesel powered vehicles including the need for augmented resources.
© Copyright 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.
In supply chain and procurement communities, there is somewhat of a known axiom that any lower-tiered component supplier, even smaller in scope, can cause a significant supply chain and production disruption. That lesson was reaffirmed in the 2011 devastating earthquakes and tsunami that struck Japan when automotive and high tech manufacturers discovered later in the aftermath that important component suppliers suffered major damage in production facilities.
This week, automotive supply chains have yet another reminder.
General Motors indicates that a contract dispute and bankruptcy filing from a key supplier could force it to close all North American assembly plants, potentially causing millions of dollars in losses per day. Clark-Cutler-McDermott Co. is a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America.
According to a published report from The Detroit News, the supplier stopped producing parts for GM after shifts on Friday and laid off its workforce. Clark-Cutler-McDermott previously had shut down business operations June 17 and laid off workers until GM was granted a temporary restraining order last month by a U.S. District judge in Detroit, forcing the supplier to temporarily resume production. That order expired Monday. According to a published report by The Wall Street Journal, GM has accused the supplier of using the bankruptcy process and its position as a critical parts supplier to protect personal interests rather than honor contracts.
The Franklin Massachusetts-based supplier filed for Chapter 11 bankruptcy last week, and is seeking to sell its business assets because of what it calls unprofitable contracts with GM that have led it to lose $12 million since 2013. Further indicated was that the loss rate of loss had recently accelerated to more than $30,000 a day. The company, which also filed bankruptcy for its subsidiary CCM Automotive Lafayette LLC, says in court records that more than 80 percent of its revenue comes from GM. That is a significant risk for any supplier, especially a smaller one in the nature of a global automotive producer.
A report indicates that GM loaned the supplier millions of dollars to continue operating and also increased prices paid for parts. GM, in court filings, said it told the supplier it would completely fund the sale of the business to another entity.
A U.S. Bankruptcy Court hearing is scheduled to discuss several requests from the supplier and GM. The judge may rule on motions from the supplier to reject GM contracts, give it the authority to pay wages and benefits and obligations, use of collateral cash or GM’s motions that would require the company to deliver inventory to GM and turn over GM tools and equipment or honor its contracts with GM.
Obviously this is a situation that no procurement and supply chain operations team looks forward to and obviously has a lot of GM teams scrambling in back-up contingency planning. The subsequent weeks will be critical in producing back-up supply plans.
Supply Chain Matters recently highlighted a WSJ report of a different focus by GM’s procurement teams, one that allowed 400 U.S. and Canada based component suppliers for GM vehicles being produced in Brazil and Mexico to be able to periodically renegotiate their supply contracts. These suppliers are currently challenged with the effects of a volatile foreign currency environment causing rising material and labor costs. This development was newsworthy because among long time automotive industry watchers, GM developed somewhat of a past reputation as a strict negotiator with what the WSJ describes as “ironclad” contracts with suppliers. Unfortunately, this latest news, coupled what eventually transpires regarding this one supplier, will either add or distract from previous perceptions regarding GM as a customer.
Tesla Motors Reports Q2 Production and Operational Results- The Critical Ramp-up of the Supply Chain
Tesla Motors remains challenged by supply chain ramp-up issues as it strives to meet aggressive short and long-term production and supply chain needs.
On Sunday, Tesla announced that the electric auto maker had produced 18,345 vehicles during Q2, a volume increase of 20 percent from Q1. However, in classic “hockey stick” fashion, 5150 completed vehicles were still in-transit to customers at the end of Q2 because production completion was skewed toward the latter part of the quarter. That in-transit number represented double the number reported in Q1 (2615 in-transit), a reflection of Tesla’s unique challenge of supporting a direct to consumer distribution model that adds direct to customer delivery acknowledgement to actual revenue recognition.
The auto maker acknowledged that almost half of the quarter’s Q2 final production occurred in the final four weeks of the quarter which is an obvious sign of component supply and other production challenges. The goal set by Tesla management in Q1 was to produce 20,000 total vehicles in Q2.
Tesla reaffirmed that it is on-track to deliver 80,000 – 90,000 new vehicles in 2016 which implies that production volumes in Q2 and Q3 must continue to ramp-up to deliver 50,000 total vehicles. To that end, Tesla indicated that it excited Q2 at a production rate of 2000 vehicles per week, with milestones of 2200 vehicles per week in Q3 and 2400 per week by Q4. Thus there is little tolerance for any future supply chain disruptions.
As noted in previous Supply Chain Matters commentaries and in the company’s statements to shareholders and customers, Tesla has elected to accelerate plans to ramp annual production volumes to 500,000 vehicles annually by 2018, two years earlier than previously planned. At the recent annual meeting of shareholders, Founder and CEO Elon Musk indicated that Tesla will “completely re-think the factory process.” Musk repeatedly raised the notions of “physics-first principles” and made the point that his team now realizes that where the greatest potential lies is in designing and building the factory. To that end, he disclosed that he now no longer has a Tesla office, instead spending the bulk of his time residing on the production floor and observing. He has challenged Tesla engineering teams to the principles of “you build the machines that build the machine.” In other words, the context is in thinking that the factory is the product, and that you design a factory with similar principles as in designing an advanced computer with many interlinking operating needs.
Further acknowledged was that the Model X design was overcomplicated, perhaps too much to accommodate production volume needs. Going forward with the development of the new Model 3, he indicated that a tighter integration loop among product design and manufacturing would be fostered.
Going forward, Tesla has to have a laser focus on supply chain and production execution. Invariably, the company will become distracted by other needs requiring management attention such as product issues or the ongoing autonomous auto-pilot software caused accident that has caught the attention of U.S. regulators.
Traditional auto manufacturers attain a supply chain ramp-up focus via a permeating culture of just-in-time continuous production and total elimination of production waste. Culturally, that can be a tall order for most innovative high technology companies whose emphasis is on innovative and breakthrough product design while leaving the production details to contract manufacturers.
Tesla however continues to push the envelope of traditional thinking. Over the coming months and years, we all get to observe the results.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters© blog. All rights reserved.