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Tesla’s Ongoing Financial, Operational and Supply Chain Growing Pains

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If Supply Chain Matters readers have been following along our streams of blogs related to Tesla are probably aware that the global electric automaker has had its share of growth and supply chain scalability challenges. It’s the good news notions of groundbreaking technology and a cult following of loyal customers, fueling demands for vast scalability in supply, manufacturing, and global distribution of completed vehicles.

In addition to producing the increasingly attractive and rather expensive all-electric Model S and Model X sedans, the supply chain is now in the throes of preparing for the ramp-up of volume production of the less expensive, broader market appeal Model 3 sedan targeted at a sales price of $35,000.  The latter vehicle began pilot production in early February with plans to produce upwards of 5000 Model 3 vehicles weekly by the end of this year. That is an aggressive timetable from many supply chain perspectives.

To prepare for Model 3 volume production needs, both the existing “gigafactory” in Nevada that produces lithium-ion batteries, and Tesla’s existing production assembly site in Fremont California have undertaken square footage expansion. The Fremont facility itself will expand by up to 4.6 million square feet, adding upwards of 3100 additional jobs.

As noted in our prior blog commentary at the time of Tesla’s report of Q4 and 2016 financial reporting, the company has amassed upwards of $18 billion in debt with total cash on-hand amounting to $3.4 billion at fiscal year-end. That condition prompted Founder and CEO Elon Musk to call for an additional round of a combination of upwards of $1 billion in bond and equity financing to provide an added cushion for capital investments needed to ramp Model 3 production. As we pen this blog posting, a breaking news report indicates that China based Tencent Holdings has invested a reported $1.8 billion in Tesla, amounting to a 5 percent stake in the company. Tencent acquired its stake in a combination of the added stock offering by Tesla and shares purchased on the open market. While Tencent’s stake is reported to be passive, it does represent that Chinese company as the fifth largest shareholder of Tesla stock. Tencent own’s China’s largest social network, WeChat, and is recognized as the world’s largest electronic games publisher.

Regarding the ongoing scalability challenges of Tesla, the San Jose Mercury Times published an expose commentary in February indicating that long hours and reported unsafe working conditions was causing disgruntled workers to seek out potential external labor union assistance. The report indicates that during November and December, employees worked a minimum of 6-day workweeks to keep-up with production needs. At the same time, the high cost of living within Silicon Valley forces production workers to have a reported reliance on overtime to survive financially. The report further indicates that all Tesla employees were recently asked to sign a supplemental non-disclosure agreement indicating that all observations of work activities, schedules or production plans are confidential information.

As noted in our last Tesla focused commentary, the company still has a long way to go to meet its milestone of producing upwards of 500,000 vehicles across all model lines on an annual basis by 2018. There are many areas all along the supply chain that could prove to be weak links, not to mention the steep ramp-up needs for both the battery gigafactory and the Fremont facility.

The market stakes are high, along with the rewards. In the end, the supply chain, including product management and manufacturing will serve as the critical enablers to Tesla’s bold expansion plans.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


The Implications of Brexit Grow Near but So Far for Industry Supply Chains

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In a published Supply Chain Matters commentary in late June of last year, we explored our initial perspectives of the new term in geopolitical events, that of Brexit. By voting to exit the European Union, the British electorate set off a series of events that many continue to describe as unprecedented.  The most cited analogy remains- “unchartered waters and political events.” Such uncertainly not only surrounds the direct impact on the United Kingdom, but on the EU alliance itself if other select countries take a similar course.

On Monday, Britain’s ambassador to the European Union informed European Council President Donald Tusk that his country would trigger Article 50 of the Lisbon Treaty, the formal mechanism seeking withdrawal, on March 29, a week from today. That starts the clock in a rather complex, two-year window of negotiations between Britain and the 27 other EU member nations and the European Parliament leading to the actual exit. Tusk has asked EU leaders, minus the UK, to meet on April 29 to begin discussions relative to the guidelines for Britain’s exit. In a statement, Mr. Tusk indicated that the main priority for the upcoming negotiations is to create as much certainty and clarity as possible for all citizens, countries, and member states. Supply Chain Matters could certainly suggest adding clarity to industry supply chains to Mr. Tusk’s statement.

Business and broad media all point to the start of some of the most complex negotiations either side has undertaken, with many issues to resolve over the next two years. They include trade and tariff, border security and the movement of goods.

Since the announcement of the results of the referendum, the pound sterling has had a somewhat steady decline in relation to its value with the Euro and the U.S. Dollar. As a rather positive consequence has been increased attraction of British goods among domestic and global markets.  Broad supply chain activity, as reflected by the CIPS UK Manufacturing Index, reached a significantly high value of 56.1 at the end of December, with the report noting that rates of growth in production and new orders were among the best observed over the past two-and-one-half years. Since December, this index has moderated slightly to 55.9 in January, and 54.6 in February, both reflecting healthy activity. Thus, in the short-term, the UK has garnered supply chain economic benefit related to Brexit.

The open question is course, the longer-term picture.

Entering the triggering of Article 50, British Prime Minister Theresa May has advocated for a “clean” break from the EU. She has threatened to walk away from negotiations if Britain did not get the trade deals it was seeking or if the EU tried to impose punitive measures.  She has further indicated that the UK could cut corporate taxes, loosen regulations, and could have a free trade deal with the EU that would include tariff-free access. British media including the Financial Times have interpreted such a stance as to indicate that Britain could transform itself into the low-tax Singapore of the west.  Such declarations appear to not set well with established EU countries.

Thus, a lot will transpire over the coming months and industry supply chain strategies will have find ways to navigate such a geopolitical environment. Most observers tend to believe that new trade agreements between both parties cannot be realistically negotiated and ratified by over 30 various parliaments in two years’ time. In fact, Mrs. May has indicated that the entire body of EU laws will be copied onto British statutes, and then over time modified by negotiation events and outcomes. The Economist noted in its editorials that it has recently taken nearly seven years to secure Canada’s free-trade deal with the EU.

As noted in our original commentary, two major industries dominating UK based manufacturing are automotive and the aerospace industry, the latter being focused primarily in commercial aircraft component manufacturing. Two of the most dominant stakeholder brands of autos are Volkswagen and Tata Motors, followed by Nissan and Toyota. According to Wikipedia, the aerospace industry within the U.K. is the second- or third-largest national aerospace industry in the world, depending upon the method of measurement. The industry employs around 113,000 people directly and around 276,000 indirectly and has an annual turnover of around £25 billion. Domestic companies with a large presence include BAE Systems (the world’s third-largest defense contractor), Britten-Norman, Cobham, GKN, Meggitt, QinetiQ, Rolls-Royce (the world’s second-largest aircraft engine maker), and Ultra Electronics. External companies with a major presence include Boeing, Bombardier, Airbus, Finmeccanica, General Electric, Lockheed Martin, Safran and Thales Group. As indicated in our 2017 predictions, the aerospace industry itself is believed to be reaching a 15-20 year inflection point, one that will be quite different from the past boom years of upwards of 10 year customer order backlogs.

No doubt, the invoking of Article 50 begins a period of discernable uncertainty among specific industry supply chains, related to access to key markets, financial goal performance, engineering, manufacturing, and overall talent capability.

A lot can and undoubtedly will occur, since in today’s clock speed of global business, two years can be a rather long-time, perhaps reflecting a new wave of geopolitical and technology change.

So goes this global environment of uncertainty, implications that seem near but yet so far.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


What’s Behind Intel’s Intent to Acquire Automotive Technology Provider Mobileye?

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In November of 2016, Supply Chain Matters called attention to the building trend of high profile technology and semiconductor firms beginning to position themselves in automotive supply chains mostly via market acquisitions. This week provided further evidence of this strategy with the headline that semiconductor giant Intel will acquire advanced vision and driver assistance technology provider Mobileye for an estimated $15.3 billion.

As noted in our prior commentary, the strategic stakes involve which company and which advanced technologies will ultimately control and benefit from the movement of more advanced technology being embedded into automobiles, trucks, and other vehicles. Last year, fabless semiconductor and cellular tech provider 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 was willing to pay a hefty sum, upwards of $39 billion, a 34 percent premium in existing NXP stock value, to gain entry into automotive technology value-chain needs. Samsung recently closed on its deal, the largest deal in the company’s history, on the acquisition of electronic components supplier Harmon International in an $8 billion all-cash deal. The deal again had the intent to gain deeper access to the automotive product value-chain, marrying Samsung’s technology based capabilities in mobile communications, electronic displays, memory chip and microprocessors with Harmon’s evolving capabilities to support connected vehicle and lifestyle audio product innovation.

In Intel’s case, the semiconductor and microprocessor provider was willing to pay a 34 percent premium over Mobileye’s closing share price at the time on the announcement. This Israeli-based technology firm, founded 20 years ago, at the Hebrew University of Jerusalem, develops the sensors and artificial intelligence that allow a vehicle’s on-board computer to know the context of where the vehicle is in relation to other vehicles and surroundings. Mobileye recently reported revenues of just over $358 million with net income of $108.4 million.

Our readers may recall that in July of last year, Mobileye elected to drop Tesla as a customer, and according to news reports at the time, 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. That decision impacted Tesla’s production cadence in Q4, requiring a huge spike of production in December to make customer delivery commitments.

According to Mobileye, the company’s technology is installed in more than 15.7 million vehicles globally, and includes relationships with 21 automotive brands including General Motors, Honda, and Volkswagen AG.

In statements regarding the acquisition, Intel CEO Brain Krzanich indicated to investors; “You can think of the car as a server on wheels.” In an internal note to employees, regarding the acquisition, the CEO indicated: “The saying ‘what’s under the hood’ will increasingly refer to computing, not horsepower.”

Indeed, that is how tech companies now view automotive value-chains, providing intelligent transportation services with lots and lots of on-board technology and autonomous decision-making.

According to reports, after the completion of the acquisition, Mobileye’s development and operations will remain headquartered in Israel and led by the company’s co-founder, chairmen and CTO, Amon Shashua.

As noted in our prior November commentary, when a major new technology trend emerges, innovators can try to capitalize on the trend by creating and fostering a consumer product or service, or by creating the tools and technologies (the product supply and value-chain) that both enables and controls the intellectual property of the consumer product or service.  Like the California gold rush analogy, you can either make money in providing the service to multitudes of consumers or in supplying all the pick axes and supplies needed to mine for gold. This is the analogy now emerging among today’s global automotive supply chains and there continues to be big money and large technology stakes at-play.

Who knows what the names of key automotive suppliers and brands will be over the next five years. Your shiny new auto or SUV made have an “Intel Inside” emblem on its dashboard. An automobile, a truck or a municipal bus could morph to an on-call or on-demand transportation services business controlled by a lots of embedded dat and technology.

One thing is certain, the march of technology continues to impact all forms of traditional industries and their supply relationships.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Tesla Reports Q4 and 2016 Financial Performance with Most Eyes Affixed on the Model 3 Supply Chain

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Electric-automobile and solar power producer Tesla reported fourth quarter and full year 2016 results this week but it seemed that most eyes are focused on the ramp-up of the new Model 3 volume ramp-up production and supporting supply chain strategies. Tesla Flag 300x225 Tesla Reports Q4 and 2016 Financial Performance with Most Eyes Affixed on the Model 3 Supply Chain

On the financial front, the company reported mixed results. Q4 automotive revenues were reported down by 7 percent on a quarter on quarter basis while total year revenues increased 69 percent from the year-earlier period. Q4 gross margin in automotive nearly doubled from the year-earlier quarter while full year gross profit for automotive increased 74 percent.

Equity analysts remained concerned about Tesla’s current and anticipated cash-burn rate, particularly since the new Model 3’s ramp-up will require added capital spending. The Wall Street Journal today observed that total liabilities now stand at nearly $18 billion, compared with $7 billion a year ago. Total cash on-hand amounts to $3.4 billion with speculation that the company must raise additional capital. A further development is the pending departure in April of the firm’s current CFO Jason Wheeler who will be replaced by Deepak Ahuya, Tesla’s initial CFO for more than 7 years.

In this week’s letter to stockholders, Elon Musk, Chairman and CEO indicated that in the past quarter, combined net orders for the Model S and Model X increased 49 percent compared to the same period in 2015.  Vehicle production increased by 77 percent over the year-earlier period. I

In January, Tesla reported that it produced a total of 83,922 vehicles which was at the low-end of its mid-year forecast for producing between 80,000-90,000 vehicles in 2016. During the final quarter, the auto maker produced 24,882 vehicles, many of which were delayed until December because of a what have been described as short-term production challenges starting in late October and extending to early December. Like the rest of the auto industry, Tesla remains challenged by a gap of finished goods produced vs. vehicles actually delivered and signed for by customers. In the final quarter, the gap between vehicles produced and vehicles delivered was 2682 vehicles, which will be counted in the new fiscal year as revenue.

Yet, the company still has a long way to go to meet its milestone of producing upwards of 500,000 vehicles on an annual basis by 2018.

We previously alerted our readers to a published report that Tesla began pilot production of the new Model 3 vehicle earlier this month, to coincide with this week’s report to shareholders. In this week’s letter to shareholders, Musk declares that Model 3 product development, supply chain and manufacturing are on-track to support volume deliveries in the second-half of this year, while installation of manufacturing equipment is underway at both the Fremont California and the Nevada based Gigafactory. The company expects to invest somewhere between $2 billion and $2.5 billion in capital expenditures ahead of the start of Model 3 production and by our lens, there is little tolerance for missteps in engineering and process design.

Upwards of 400,000 paid deposit reservations are believed to have been made so that prospective Tesla customers can be assured of a Model 3 delivery slot. Tesla executives however refuse to cite any number related to Model 3 deposits.

Musk previously informed shareholders of plans to begin Model 3 volume production by July of this year but cautioned that the company could miss that date if suppliers do not meet deadlines. In this latest letter to shareholders, there is a statement indicating that all Model 3-related sourcing is on plan to support the start of production in July.

During the Q&A phase of management’s briefing to equity analysts regarding the latest financial results, there were multiple questions related to further background for the Model 3 ramp-up. Musk re-iterated that the goal for the Model 3 is to have production rates of 5000 per week by the end of this calendar year and that current supplier parts orders begin to ramp to increased volume cadence from July through September. He reiterated that the auto maker has refocused most of Tesla’s engineering, including design engineering into designing the factory. “I think in the future, the factory will be a more important product than the car itself.” Also stated: “I’ve said this before, but our goal is to be the best manufacturer on Earth. This is our real goal. I don’t know if we will succeed, but I think we’re making good progress in that direction.”

Responding to a question on the difference in the Model 3’s design, executives indicated that the amount of complexities in the overall design and vehicle complexities to assemble the newer, lower priced but higher volume model have been dramatically reduced, while the amount of operations that involve more judgment from production operators have been dramatically reduced, or almost eliminated. The Model 3 was described as designed for manufacturability.

A further acknowledgement was learning from the previous Model X production ramp-up where complex design changes hampered ramp-up, bottleneck and cost efficiency milestones, which we have pointed out in prior blog postings related to Tesla.

Another difference noted by Musk is that in earlier models, it was rather difficult to recruit established automotive tier-one suppliers for long-term supply contracts because Tesla was viewed as a start-up with financial risks. For the Model 3, component and subsystem supply contracts have been established with some tier-one suppliers and there is now renewed confidence in supplier capabilities to meet design, quality, and volume commitments.

Supply Chain Matters has previously praised Tesla’s vision, innovative thinking and its can-do perspectives concerning supply chain and distribution. Many eyes are now focused on Tesla’s next critical milestone, that being the ability to operate as a high volume, disciplined manufacturer of industry-leading and technology-laden innovate automobiles.  As many of our readers are well aware, Tesla is now embarking on a full-blown supply chain segmentation strategy, one that differentiates capabilities of full-featured, higher-priced vehicles from that of the high-volume, lower-priced Model 3.

The year 2017 will be the crucial test.

Bob Ferrari

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


Report Indicating Tesla Model 3 Pilot Build About to Begin

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After Founder and CEO Elon Musk declared last May an intent to revolutionize Tesla Motors production activities to coincide with the availability of the new dramatically lower cost Model 3, a report now indicates that the electric auto maker is planning to start pilot production this month at its Fremont California production facility.

The Reuters report syndicated by global business network CNBC, cites sources as indicating that Tesla has informed suppliers that test build of the new Model 3 sedans will initiate on February 20.  While the sources did not know of how many sedans were planned for this initial pilot build, it would likely be a small number to test the new assembly and test needs.

The February date happens to precede by two days, Tesla’s scheduled shareholders meeting. Speculation is that the initiation of test build would provide added optics for reservation customers as well as shareholders.

Upwards of 375,000 paid deposit reservations have been already made by prospective Tesla customers. Musk previously informed shareholders of plans to begin Model 3 volume production by July of this year but cautioned that the company could miss that date if suppliers do not meet deadlines.

According to the report, sources indicate that the Model 3 timeline is indeed considered to be extremely aggressive, especially since engineers are still making last-minute design changes to the vehicle. This has been a common pattern for Tesla, one in the mold of Apple under the leadership of Steve Jobs, where last-minute design changes drove suppliers and contract manufacturers crazy in periods of critical production volume ramp-up.  Tesla suffered some effects of this process with the prior Model X, whose revolutionary gull-wing doors and seating designs had to be re-visited because of volume production yield challenges.

At last year’s 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.  He 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 over complicated, perhaps too much to accommodate production volume needs. Going forward with the development of the new Model 3, Musk indicated that a tighter integration loop among product design and manufacturing would be fostered.

This latest report raises the question of whether Musk can fulfill his promise for producing 500,000 cars annual by 2018. That currently represents 4-5 times 2016 production levels, which missed their annual goal as well.

From our lens, the other open question is whether Tesla’s unique new vehicle distribution and customer delivery model can also ramp-up to such levels. Increasingly, at the close of each quarter, Tesla reports thousands of vehicles still in-transit to awaiting customers.

Readers may well have their own views but it would seem to this blog that Tesla’s better efforts should be directed at taking the time to get all production and distribution processes highly synchronized in high volume dimensions across the entire supply chain. Rather than communicate whether suppliers can meet deadlines, communicate the readiness of the entire supply chain machine to meet production and distribution milestones.

The optics can come later.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


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