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Tesla Motors Operating Results Indicate Some Supply Chain Strains

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This week, Tesla Motors reported both fourth quarter and full 2014 financial operating results with indications of certain supply chain strains and perhaps growing pains.  Telsa Motors Model S

For the fourth quarter, the company’s loss widened to $108 million and reflected a shortfall in the delivery of 1400 vehicles along with described manufacturing inefficiencies related to the recently introduced Model S P85D as well as Autopilot functionality. Currency headwinds reflected by the current strong value of the U.S. dollar further weighted on earnings. The bulk of Tesla’s manufacturing supply chain is within the U.S.

Revenues in the quarter increased to nearly $957 million from $615 million recorded in the year earlier quarter.  The electric car company sold 9834 vehicles vs. 6892 in the year earlier quarter. Operating expenses nearly doubled.

During the fourth quarter, production increased to a record 11,627 vehicles, meeting its target to produce 35,000 vehicles in 2014. However, deliveries in the quarter amounted to 9834 vehicles. Tesla has adopted a rather industry-unique finished goods distribution model electing to take more end-customer orders directly online and delivering new cars direct to consumers, shunning the need for a vast dealer network. As a result, Tesla could not deliver 1400 vehicles because of challenges described as either customers being on-vacation, severe winter weather and termed shipping problems.  According to its 8K report, the 1400 vehicles have since been delivered in the current quarter, but weighed on revenues in Q4. Keep in mind that Tesla has invested in advanced technology to provide deeper visibility to overall delivery and customer fulfillment needs.

For the full year, Tesla recorded nearly $3.2 billion in revenues and an operating loss of $294 million, roughly three times the losses recorded for 2013. Inventories increased nearly $613 million. According to its SEC filing, about 55 percent of new Model S vehicles were delivered to North America customers while 30 percent were delivered in Europe and 15 percent were delivered to Asia Pacific customers. More vehicles were directed into Asia Pacific markets to support the initial year of deliveries for that region.

Looking toward 2015, Tesla faces a number of added supply chain challenges in order to support its global sales goal of 55,000 vehicles. A number of added investments in expanded manufacturing capacity are planned to increase production volume to 2000 vehicles per week by the end of 2015. Tesla entered 2015 with over 10,000 orders for its Model S and nearly 20,000 customer reservations for its new Model X, which is expected to begin customer deliveries in Q3 of this year. G&A expense growth is expected to be more modest with a particular emphasis on increased operational efficiency.

Added production capacity investments include a new state-of-the art automated casting and machining operation for various aluminum components and increased production volume investments to meet expected demand for All-Wheel Drive Dual Motor product demand. A new paint shop operation is further planned for combined painting of Model S and Model X models. Tesla additionally plans to further increase its sales and service resources in all existing markets including China.

One rather positive note is Tesla’s indication that steel fabrication is underway at the planned battery manufacturing Gigafactory near Reno Nevada.  That new facility, being constructed in partnership with major battery supplier Panasonic, is reported as on plan to begin equipment installation later in 2015 and battery production in 2016.

Thus while showing some supply chain strains at the end of 2014, even more challenges remain for Tesla’s supply chain in 2015. Tesla has often demonstrated the effective use of advanced technology applied to manufacturing and supply chain business processes, and 2015 will be no exception to that trend.

Bob Ferrari


U.S. Auto Exports Expand in 2014 and So Does Supply Chain Capabilities

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In late December of 2011, Supply Chain Matters raised awareness to Japan based automotive OEM’s, specifically Honda, with plans to shift a major portion of export production capability from North America instead of from Japan.  We have since updated readers on this strategy to include other automotive OEM’s. We did so because for our readers, it provides a valid example of a globally-balanced and flexible global manufacturing sourcing strategy along with proactive supply chain risk mitigation.

Last week, The Wall Street Journal featured a report on 2014 U.S. auto exports, one that confirms rather active evidence that North America auto production continues to be viewed for both domestic as well as global consumption.

The report indicates that U.S. auto exports in 2014 recoded a record for the third consecutive year. In 2014, approximately 2.1 million new cars and trucks were exported to other global regions, an 8 percent increase over that in 2013, according to the U.S. International Trade Association. According to the WSJ, about half of these exports are destined to Canada and Mexico with other countries of mention being China, Saudi Arabia and South Korea. Exported vehicles include brands such as BMW, Fiat-Chrysler, Daimler, Jeep, Ford, Honda, Nissan and Toyota. One cited example was the Jeep brand which shipped upwards of 316,000 of that maker’s Wrangler and Cherokee vehicles to export markets. A 50 percent increase from 2012 levels. BMW has plans to boost U.S. production of its X3 and other SUV line-up by 50 percent over the next two years.

The article further points out that while the U.S. dollar is currently strong, these exports efforts began when the dollar was weaker, and momentum has continued.

As we originally observed, the implication in these shifting manufacturing export trends is that U.S. automotive supply chains now cater to the product-unique needs and product demand strategies of certain export markets and there lies the importance of global product platform development strategies.  There is the added need to dynamically plan and respond to constantly changing and different geographic market scenarios. The U.S. automotive supply chain ecosystem therefore benefits and has the continued potential to be globally competitive in margins and consumer fulfillment. The U.S. automotive supply chain further serves as a backup strategy to any major supply chain disruption that might occur in another region.

Whether the growing export trend continues in 2015 is obviously dependent on shifting and highly changing currency trends.  However, the strategy and capabilities invested upwards of five years ago appear to be paying off.

Bob Ferrari


General Motors Discloses Cost of Product Recalls

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Last year, in what was billed by business and general media as the worst U.S. product safety crisis in recent memory, a series of large scale product recalls among multiple General Motors brands involving upwards of 2.6 million vehicles brought this company to crisis footing as it attempted to restore consumer confidence and establish a new footing for growth.

The defective ignition switch recalls involving thousands of vehicles triggered consequent increased regulatory and business media scrutiny. An additional response among GM’s product teams was to subsequently review all potentially harmful vehicle safety and parts quality issues and err on the side of caution with even more product recalls involving multiple parts issues.

In conjunction with its earnings reporting in October 2014, CEO Mary Barra assembled the company’s top 300 executives to declare that that the company must do what it takes to be the “world’s most valued automotive company”.  That included a renewed more passionate emphasis on quality as well as reliance on an expected crop of planned new models expected to come to market, many of which were shepherded under the leadership of Barra when she previously led new product development. The goal is to have 47 percent of global sales to be fueled by these new models by 2019. Supply Chain Matters has also called reader attention to GM’s goal to further focus on the broader supply chain’s contribution to its renewed business goals.

This week, GM reported what is reported as better than expected financial results for the December-ending fourth quarter. While revenues slipped slightly, GM posted a noteworthy 91 percent increase in profit compared with the year prior quarter.

The full-year results also provided quantification of the costs of product recalls. GM reported $2.8 billion in costs associated with product recalls including the ignition-switch related recalls.  According to reports, GM will likely pay $9000 in profit-sharing to its upwards of 48,000 U.S. hourly employees, somewhat more than actual North American operating results to compensate for the impact of the product recalls.

Thus, at the conclusion of GM’s fiscal year, there is quantification of the specific financial costs of a previous corporate culture that eluded accountability and fostered functional fiefdoms. In what appears to be an increasing global trend, GM is considering appeasing its stockholders with plowing some profits in stock buy-back or increased dividend actions.

Moving forward in the new fiscal year, GM has to strengthen its supplier relationships and foster a climate of joint innovation and accountability for quality. We trust that such efforts would include more financial consideration toward stronger supplier relationships and an increased emphasis on joint quality management monitoring and remediation practices.

Billions of dollars expended in product recalls is better invested in addressing the root causes of either product design or supplier quality practices.

Bob Ferrari


Mercedes Benz USA Selects AM General as its First Contract Manufacturing Services Provider

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An interesting news release came across our Supply Chain Matters news feed last week, one that perhaps demonstrates the broad capabilities of certain contract manufacturers within the automotive and truck sector.

Mercedes Benz’s U.S. entity and AM General LLC jointly announced that because of the increasing demand for the Mercedes Benz R-Class luxury vehicle, and the subsequent need for increased capacity, that the luxury sports utility vehicle would now be moved from the Mercedes U.S, Tuscaloosa Alabama facility and instead be manufactured at AM General’s commercial assembly plant in Mishawaka Indiana. Under this multi-year agreement, AM General becomes Mercedes first and only contract manufacturing operator within the United States. The R-Class vehicles manufactured and assembled by AM General are expected to roll-off its assembly lines this summer.

According to its web site, AM General designs, engineers, manufactures supplies and supports specialized vehicles for commercial and military customers. The manufacturer claims more than six decades of experience meeting the changing needs of the defense and automotive industries with a legacy of product innovation. In addition to its manufacturing capabilities, the company further provides support in service parts and integrated logistics as well as supply chain management.

AM General’s business units include three wholly owned subsidiaries, diesel engine manufacturer General Engine Products, automatic transmission manufacturer General Transmission Products, and Mobility Ventures which is the prime recipient of the contract manufacturing agreement. However, this manufacturer would best be known by U.S. and other military veterans as the original designer and manufacturer of the famous HMMWV (Humvee®) troop transport vehicle.

AM General’s Mobility Ventures produces the iconic HUMMER® H1 and H2 branded vehicles, along with specialized wheelchair accessible vehicles for public and private transportation. As a result of the new partnership with Mercedes Benz USA, the manufacturer further announced the hiring of two new senior executives, a new business unit President and an executive vice-president engineering, sales, distribution and dealer support.

AM General Hummer H1

 

 

 

Humvee

 

 

 

 

 

 

Mercedes R-Class SUV

 

 

 

The multi-purpose manufacturer claims more than six decades of experience meeting the changing needs of the defense and automotive industries with a legacy of product innovation. In addition to its manufacturing capabilities, the company additionally features specialized support in service parts and integrated logistics as well as supply chain management.

We at Supply Chain Matters could not help but think about the contrasts related to this announcement.  Picture the Humvee or H1, (pictured above) the embodiment of rugged, tough and explosive-proof, being produced in the same facility as a luxury SUV with all the driver and passenger creature comforts.  That is quite a contrast.

Then again, it could provide a testimonial to the notions that product design integration and contract manufacturing services can co-exist among various purpose-built vehicles.

 


Alarms for Data and Information Security for Internet of Things Initiatives

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Prediction Four of our Supply Chain Matters 2014 Predictions for Industry and Global Supply Chains predicts that the current momentum surrounding Internet of Things (IoT) could be side railed if vendors do not step-up and address certain challenges.  Such challenges include sensitivity to data security and information privacy.

This week, the Financial Times provided a specific B2C focused example of the meaning of data security challenges. The article, BMW sounds the alarm over tech companies seeking connected car data (paid subscription or metered complimentary view) indicates that indeed technology companies and advertisers are putting pressure on carmakers to share the data collected by more connected cars. German automaker BMW has sounded the alarm over such demands emanating from Silicon Valley tech companies and advertising interests and is reportedly indicating a firm “no thank you” to such demands.

We say, thank you, BMW.

The German luxury automaker indicated to FT that “it had a firewall in place to protect crucial data about the internal running of the car. But any transmission of data raises concerns about who might access that information- and what they might do with it” Apparently, BMW is not alone among automakers in taking such a stance.

Of course, the more significant benefits of connected machines communicating their operating status or needs for servicing or replacement parts is thwarted by these other more questionable or controversial approaches to mine data for other purposes.

This week, this author had the opportunity to speak with Mark O’Neill, Vice President of Innovation at B2B integration technology provider Axway. We talked about IoT’s current honeymoon period and the various issues of data and information security. We discussed parallels to prior RFID, item bar code, point-of-sale and other data collection initiatives that raised similar concerns about data security and data use.  The notions of the value of such data tended to take on added revenue considerations and spawned the growth of information brokers.

O’Neill articulated that the biggest challenge being raised for IoT among various B2C and B2B environments is exactly, who owns all of this potential data? Information integration and broker providers are caught in the middle of such dynamics and currently work with customers to insure data is protected, encrypted or reside within architectures that provide adequate protections.

According to O’Neill, initiatives and subsequent benefits of IoT initiatives will prove more successful when established industry best practices addressing information security and privacy are brought forward to IoT business initiatives.

In the coming weeks and months, we will feature more commentaries concerning IoT benefits along with the challenges that may affect current interest and momentum.

Stay tuned.

Bob Ferrari


Recall Fallout: Investments in Automotive Parts Traceability and Service Supply Chains

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Prediction Ten of our 2015 Predictions for Industry and Global Supply Chains declares that service focused supply chains will garner increased attention and new investment interest. We noted two prime motivations, protecting the brand especially in the light of continuing massive amounts of product recall activity as well as taking advantage of the new opportunities brought forward with connected devices.

This week, in conjunction with the annual North American International Auto Show being held in Detroit, The Wall Street Journal featured an article, Massive Recalls Force Part Makers to Track Defects (Paid subscription of free metered view). The article observes that auto parts makers such as air bag inflator supplier Daicel are investing millions of dollars to improve tracing and lot identifiers of component parts. There are mentions of parts suppliers Aisin Selkl, and Jtekt Corp. significantly investing in parts traceability. Observed is while automotive OEM’s and their associated brands take the bulk of the consumer and regulatory heat around product recalls, quality defects more often reside within parts suppliers. OEM’s are now influencing parts suppliers to amp-up quality measures including easier means to identify production lots and trace parts history. The CEO of NHK Spring, who is also the chairmen of Japan Auto Parts Industries Association is quoted: “Now that supplier names are being mentioned widely, the range of responsibilities that we face is expanding. Not only do we need to face auto makers but also consumers.”  In other words, brand risk has taken on new dimensions in the lower tier of automotive supply chains.

It struck us that such efforts focused on supply practices need to be further complimented by increased capabilities by OEM’s to analyze such quality tracking and tracing data at a far more timely pace.  Providing more prescriptive tagging to such data is  a further consideration.

The takeaway is that indeed, service supply chains are indeed ripe for investment, but require coordinated efforts to leverage input, output and prescriptive information insights that insure more timely identification and response to parts quality or design defects.

Bob Ferrari


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