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Tesla Motors Falls Short of 2016 Customer Delivery Target- Not for Lack of Effort

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This week, Tesla Motors announced that the innovative auto manufacturer reluctantly fell short in its 2016 operational milestone goal to deliver between 80,000 to 90,000 vehicles to customers during 2016.

The electric vehicle manufacturer delivered a reported 22,200 vehicles to worldwide customers during the December-ending quarter. When added to prior quarter deliveries, total year 2016 deliveries were approximately 76,230 vehicles, a shortfall amounting to just over 3700 vehicles to the 80,000 threshold.  tesla-interior_sized_450

Q4 vehicle deliveries were impacted by what Tesla described as short-term production challenges that began at the end of October and extended through early December. This delay was attributed to the transition to new autopilot hardware needing to be installed in vehicles.

In July, Israeli-based advanced technology camera supplier Mobileye elected to drop Tesla as a customer, and according to news reports, the cause was attributed to “disagreements about how the technology was deployed.” Earlier in May, a fatal crash involving a Model S operating on semiautonomous mode autopilot control had reportedly motivated the decision to drop Tesla at contract renewal time because this supplier wanted more control as to how its camera technology would be operationally deployed. Tesla has since indicated that its autopilot system will rely more on its radar sensors and advanced software to detect obstacles, rather than the forward-facing camera.

In its published update, Tesla indicated that teams were ultimately able to recover and fulfill its Q4 production goal, but the delay led to cars missing shipping cutoffs for Europe and Asia based customer deliveries. As manufacturing and supply chain teams know all too well, the best planning can often be impacted by unplanned events or disruptions, and the ability to recover quickly is what really matters. In addition to the 22,200 recorded deliveries in Q4, about 6450 vehicles were in various stages of transit to customers at the end of the quarter. These in-transit vehicles will be counted in the Q1-2017 revenue bucket.

As we have noted in prior Tesla focused commentaries, the company’s unique and self-perceived conservative customer fulfillment model is made-to-order and self-distribution driven, and calls for not recording full revenue until a car is manufactured and physically delivered into the hands of a customer with all ownership paperwork correctly transferred and acknowledged. For internationally focused deliveries, the fulfillment cycle is literally many weeks.

Readers could surmise that Tesla indeed had the capability to actually exceed its 2016 customer delivery goals of between 80,000 to 90,000 vehicles.  A total of 83, 922 vehicles were produced during the full year.

We believe Tesla should be lauded for consistently adhering to its conservative customer fulfillment policies of complete physical delivery, and for efforts to fulfill Q4 operational delivery milestones despite a noteworthy supply glitch involving a modified supply plan.

Perhaps in the future, customer delivery hurdles will be overcome by formally inviting the customers to Tesla manufacturing facilities to participate in a formal physical delivery transfer process that includes a maiden test driving experience on a test track. Who knows!

To get back to serious, CEO Elon Musk Tesla has committed to investors that the company would have the capability to produce upwards of 500,000 vehicles annually by the end of 2018. More than 300,000 people have put down deposits to reserve the newly announced Model 3, scheduled for 2018 delivery. That represents over a six-fold scaling from 2016 operational performance. If there is going to be a notion of how to improve required production and delivery scale in the months to come, it will likely center on more innovative and globally centric vehicle manufacturing and distribution processes.

Musk 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 ultimate product of engineering, and that you design a factory with similar principles as in designing an advanced computer with needs for many interlinking operational performance requirements. In November, the company acquired German consulting firm Grohmann Engineering to add specific manufacturing automation engineering expertise.

Much work remains, but then again, Tesla has always been a manufacturer that thinks and acts beyond industry convention.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Overt Signs of Trump’s Agenda for Confrontation on Global Sourcing and Trade Policy

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What is fast becoming a new norm for business risk is that of a direct public attack via a Twittertweet” from U.S. President Elect Donald Trump. Before formally taking office on January 20th, Mr. Trump has already attacked corporations such as United Technologies for presumably outsourcing U.S. jobs to Mexico. Other public confrontations have involved  Boeing and Northup Grumman for perceived excessive development costs related to new U.S. government aircraft.

Today, this Presidential social media campaign took on direct industry supply chain implications.

In a series of Twitter postings, the President Elect took direct aim at General Motors regarding the Chevrolet Cruze model. Mr. Trump accused GM of importing this vehicle from Mexico to U.S. dealers without having to pay U.S. import duties. GM quickly responded that the bulk of the Cruze was produced in a plant in Lordstown, Ohio.

Trump’s other automotive industry target has been Ford Motor, who had previously announced plans last February to build and staff a new manufacturing facility in Mexico to produce smaller vehicles. An editorial at the time published by The Wall Street Journal reflected that Ford’s strategic sourcing moves were indicators of a strategy to offset the signing of a new labor agreement among its U.S. unionized work force, which raised direct labor costs to nearly $30 per hour in the coming years. Mexico’s direct labor rates were indicated as being one-fifth that of unionized workers in the U.S.

Today, Ford suddenly scrapped its plans to build the previously announced $1.6 billion small car factory in Mexico in favor of a modified plan that would share production among existing plants in the U.S. and Mexico. Ford’s CEO Mark Fields took to the business airwaves to declare a new meeting of the minds regarding the incoming POTUS to include a planned $700 million incremental investment in the Flat Rock Michigan assembly plant.

We call reader attention to a CNBC business network report which we believe provides far more insight as to what is really at-stake in this developing direct public confrontation of U.S. auto manufacturers. That insight involves the current automotive value-chain of parts and component sourcing.

The CNBC report notes that under the existing North America Free Trade Agreement (NAFTA) the parts components that make-up a finished automobile and truck are increasingly sourced in Mexico. In 2015 alone, 60 percent of the $5 billion in direct foreign investment associated with Mexico’s automotive industry sector was associated with parts and component manufacturing. As we have previously noted on this blog, Mexico’s direct labor costs averaging in some cases $2.50 per hour are a compelling attraction for parts producers, especially when various global OEM producers demand that a contiguous component supply chain be developed to support both Mexican and other North American production needs.

In 2014, we called Supply Chain Matters reader attention to the then prevalent trend that for the automotive industry, Mexico was fast becoming a North America production and global export production hub. We echoed that global automotive brands BMW, Honda, Kia, Mazda, Nissan, Volkswagen, Nissan, and others had announced strategic Mexican production sourcing decisions that amounted to billions of dollars of investment. This was beyond U.S. automotive branded companies, reflecting that Mexico would soon become an alternative global automotive manufacturing hub for smaller, lower-margin vehicle line-ups.

The CNBC report cites U.S. trade data for the first 10 months of 2016 indicating that “parts imports from Mexico totaled $89.6 billion, dwarfing the next biggest import nations, Canada with $54 billion and Japan, at $44 billion. While vehicles were the main imports from Canada and Japan, more than half- $46.8 billion of the automotive-related imports from Mexico- were vehicle parts in that 10-month period. U.S. government data show that car parts imports into the U.S. nearly doubled in the past five years.”

It would appear to this blog, that Mr. Trump has gathered advisors who appear very knowledgeable of automotive supply chain sourcing strategies particularly as it relates to current NAFTA agreements. The Trump campaign promises to thwart the exodus of U.S. jobs has obviously already begun, and the stakes are threatened import tariffs involving imported auto parts originating from Mexico and Canada. Thus far, it would appear that Ford has been willing to meet the incoming Administration halfway with new concessions. Perhaps, GM and others will follow in a meeting of minds or the Republican dominated Congress will act on Trump’s threatened NAFTA agenda.

With the first direct skirmishes involving public confrontation underway and other U.S. based industry supply chains should be prepared for an environment of changing assumptions related to the landed cost of component sourcing.

Where all of this give, and take ultimately lands is very much uncertain especially in the new tendencies toward direct confrontation.  The sheer facts of dramatically different direct labor costs among Mexico and the U.S. workers remains. Worker productivity and automation are the new variants in global sourcing coupled with threatened new import tariffs or open market retaliation.

Preparation and timely detailed knowledge of component sourcing and production costs coupled with backup contingency sourcing plans are fast becoming a required capability in this evolving new era of populism and anti-global trade.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


U.S. Auto Producers to Idle More January Production Amid Market Inventory Oversupply

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As we pen this Supply Chain Matters commentary in the week just after the Christmas holiday, many thoughts turn towards objectives in the year 2017. For the U.S. auto sector, those thoughts currently reflect on a situation of building oversupply of certain models.

Just before the holiday, reports surfaced that all three U.S. auto domestic manufacturers have scheduled additional idle time at some factories in response to building finished goods inventories of some models of sedans and minivans. There is additional caution that light vehicle demand will cool in the coming year. ford-f150_450

General Motors indicated it would idle production at several factories in January accompanied by some additional job cuts. According to media reports, GM is expected to cut 3000 jobs in the first quarter due to slackening product demand and building inventories. According to a report by The Wall Street Journal, GM entered December with upwards of 870,000 vehicles on dealer lots, 26 percent more than the same period a year earlier.

Fiat Chrysler indicated plans to temporarily idle two Canadian plants, each responsible for producing the Pacifica model minivan, during the first week of January. According to WardsAuto.com, four brands of Chrysler vehicles had the equivalent of 92 days of supply and the end of November, 13 days higher than the year earlier period.

Likewise, Ford Motor plans to idle a Kansas City truck plant for a week in January to curb a reported rising of model F-150 pickup truck components and work vans inventories.

According to various auto dealerships providing background color to industry reports, the current industry challenge is reflected by continued high demand for pick-up trucks and large SUV’s, resulting in burgeoning inventories of standard and fuel efficient sedans.  This period of lowered gasoline prices has made the U.S. consumer somewhat hyped on acquiring the largest, most expensive vehicles, while gasoline prices remain low. Obviously, the days of $3-$4 per gallon fuel costs have taken a back seat in consumer memories, even as gasoline prices now begin to climb again.

Perhaps the good news is that U.S. auto producers are taking more timely proactive steps to manage the buildup of certain model inventories and to set realistic production schedules for the coming year.  The not so good news, however, is an industry that is content to keep promoting sales of the largest, most expensive vehicles to boost bottom-line margins, while defeating efforts to spur sales of more fuel efficient and environmentally friendly vehicles. The result may well be U.S. consumers with rather large, multi-year auto loans that could dampen overall industry demand for many future years to come.

One wonders if any lessons from prior years have been absorbed.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Volkswagen Reaches Additional U.S. Emissions Settlement with Another Painful Learning

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Supply Chain Matters provides a further reader update regarding the financial and other effects of the ongoing Volkswagen brand crisis concerning the diesel engine emissions alteration admission scandal that occurred over a year ago.

In late October, the global auto maker was granted final court approval to a $14.7 billion settlement with U.S. based consumers, dealers and government agencies specifically related to two-liter diesel engines that did not meet emissions standards. This week, in a U.S. Federal Court hearing, the global automaker agreed to pay an additional $1 billion to repurchase or fix upwards of 83,000 affected three-liter diesel powered vehicles.

The agreement calls for VW of offer a buyback program that covers 20,000 Audi, Porsche and VW branded vehicles while coming up with a plan to repair the remaining 63,000 vehicles to restore emission conformance. If VW cannot come up with a fix approved by U.S. regulators, the automaker would offer to buy back these vehicles as well. Further included in this added $1 billion settlement is a $225 million to be channeled toward environmental remediation efforts and $25 million to support the use of zero-emissions vehicles in California.

Everything told, the financial cost of ill-advised product design management decision is nearing $16 billion for the U.S. market. That does not count any other subsequent lawsuits that may come from U.S. vehicle owners who feel disgruntled by the existing settlements. Criminal investigations remain ongoing in both the U.S. and in Germany. There are additional logistics and handling costs that will stretch out over the coming months to manage the buyback and disposition of unsold and non-conforming vehicles.

As the New York Times reported in August, Volkswagen owners in the United States will receive an average $20,000 per car as compensation for the company’s diesel deception. VW owners in Europe, however, at most get a software update and a short length of plastic tubing to adjust emissions. That is because European laws shield corporations from class-action suits brought by unhappy consumers. A group of online legal start-ups has been working to change the status quo and has been supporting a campaign to recruit clients en masse and attempt to get around the usual restrictions for consumer lawsuits. If they are successful, the cost to Volkswagen will dwarf the company’s $16 billion settlement in the United States.

This whole affair raises an even more provocative learning regarding a product design management decision.  Consider what $16 billion in investment could have created in an alternative energy powered automobile, be that diesel, electric or hybrid in design.

Instead, difficult financial decisions are being made to offset these unplanned expenses, and thousands of VW focused employees may suffer the consequences in job losses. The damage to VW brand and perhaps customer loyalty, is even more troublesome. Now the global automaker must scramble to develop new models of more fuel-efficient vehicles to remain competitive in the industry.

As noted in our prior blog commentaries, a company noted for a somewhat tops-down management style, an engineering-driven culture and among one of the two top global producers continues to absorb some tough lessons because of this scandal. Further, the industry will adsorb some key learning regarding the need for balancing the pressures to introduce market-leading innovative products on a timely basis with organizational tendencies to cover-up potential hardware or software design flaws. This is quite an expensive lesson.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Ever Larger Bets in the Next Generation of Semiconductor Technology and the Key Dominance of Product Value Chains

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As many of our high tech and consumer electronics supply chain readers are aware, there has been a wave of consolidation occurring across semiconductor industry sectors.  The reasons are many. They include making bets on the next generation of chip technology that will drive specific industry applications such as artificial intelligence, autonomous driving and Internet of Things. Of late, acquisitions have also focused on the mitigating the rather expensive cost of investing in the next generation of chip technology as well as leveraging the influence and investment in semiconductor design and foundry capacity. This ongoing consolidation not only impacts high-tech product value chains, but other key industries as well.

A reminder of this implication of such trends has come from contract semiconductor chip fabrication producer Taiwan Semiconductor Manufacturing Company (TSMC). The “fab” chipmaker has recently announced plans to build a $15.7 billion new design and fabrication facility that would produce the world’s most advanced 5-nanometer and 3nm chips.

A recent published report from Nekkei Asia Review observes that Apple currently utilizes TSMC’s 16nm process technology for core processor chips utilized in the iPhone7. TSMC will begin producing 10nm processor chips in 2017, and with this new investment, could conceivably produce 3nm chips as early as 2022.

The report further observes that only premium tech players with deep pockets such as Apple, Huawei, Qualcomm, Media Tek and Nvidia can afford investments in these next generation chip technologies.  According to the Nekkei report, TSMC’s most dominant customers are Apple and Qualcomm, each accounting for 16 percent of the company’s revenue. In late October, Qualcomm announced its intent to acquire NXP Semiconductors, a major supplier of semiconductor chips and microprocessors that control more sophisticated automobile functions in power management, security access, media, and audio functions. Qualcomm is paying a hefty sum, upwards of $39 billion, to enter automotive technology value-chain needs. The announcement represented one of the largest semiconductor related acquisitions to-date. Industry speculation is that Qualcomm will turn to TSMC for 7nm chips which are scheduled for production sometime in 2018.

Further, more and more fabrication capacity is being consolidated around just a few “fab” owners. The report notes that TSMC current accounts for 55 percent share of global fabrication production needs, which by any standard points to growing market dominance. Other fabrication players that make-up the bulk of industry needs are Intel and Samsung, and to some extent Global Foundries which acquired the Former IBM microelectronics and semiconductor business unit.

Intel indicates it will begin producing 10nm chips in late 2017 while Samsung plans to introduce 7nm chips by the end of 2018.

Thus, the most critical link for high tech and consumer electronics supply chains is indeed semiconductor design and manufacturing capability, and forces are accelerating toward consolidation of the major players. More and more, the required investments in the next breakthrough in technology are becoming far more expensive and will require bigger and more deep pocketed players willing to make such bets.

The race is indeed about major control of not only the high-tech product value-chain, but increasingly key levers of automotive and equipment manufacturing value chains as well. Tesla Motors is already demonstrating the dominance of high technology components in the production and operation of electrically powered vehicles.

In today’s multi-industry environment of short-term focused investor value, not a lot of industries can tolerate a $16 billion bet on a new technology and production capability. Sharing the investment risk among fabless designers and fabrication producers is a practice increasingly being consolidated among key players.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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