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Additional News Related to Tesla’s Gigafactory

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There has been some additional news regarding the status of electric car manufacturer Tesla Motor’s rollout of its planned gigafactory to produce its own electric cells for use in both its automobiles as well as other rechargeable battery supply needs.

The Associated Press reports that Tesla has now received and sold about $20 million in transferable tax credits granted by the State of Nevada in conjunction with an overall $1.3 billion incentives package put in place to lure Tesla to selecting the northern Nevada site location. In its most recent progress report issued to the state, Tesla indicated that as of the first quarter of 2016, an average of 369 workers were employed at the plant thus far, while an average of 599 construction workers continue to work on plant construction and fit-out.

Tesla battery gigafactory

Source: Tesla Motors

Reports point out that Tesla continues with a strategic supply agreement with Japan based battery supplier Panasonic. This supply agreement reportedly calls for the production of 1.8 billion battery cells through 2017, to support the output needs for both the Model S and the Model X. As of Q1, Panasonic had over 50 employees working at the Nevada battery plant.

The battery plant is being designed to eventually support the production needs of upwards of 500,000 electric powered vehicles per year. The design goal is 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. The gigafactory is part of Elon Musk’s vision that batteries will not only be required in new automobiles, but in alternative energy applications as well. Hence, Tesla’s recent announcement of its intent to acquire SolarCity, the other component of this strategy, which includes supplying storage batteries to capture electricity captured by solar cells during the day, for use in other periods.

Meanwhile, a Bloomberg Businessweek published a report indicates that pressure to speed-up the original production ramp-up output of the gigafactory has taken on new significance because of the 330,000 preorders that have already been received for the new Model 3.

According to the report- “The accelerated schedule to supply the Model 3, the automaker’s first mass market car, doesn’t leave much time to create a complex supply chain that includes expanded mining and exploration operations.”

Further noted is that the Model 3 will feature a newer high-capacity battery with enhanced energy density to expand operating range.  To keep the base price of the Model 3 at its targeted $35,000 range, Tesla engineers are working on different compositions of metal content within the rechargeable batteries. Tesla has reportedly hired specialized metals experts to travel the world to seek out and work with metals suppliers.

In a Supply Chain Matters commentary published in September of 2015, we highlighted the bold supply chain vertical integration strategy that resulted in the concept of the gigafactory, destined to be one of the largest battery manufacturing plants in the world. We further noted the strategic importance of plant’s location in Nevada, close to available suppliers of lithium metal.

At Tesla’s annual stockholders meeting in May, Founder and CEO Elon Musk indicated that lithium metal will only account for two percent of the total materials in the firm’s electric cells. Rather than compete with high-tech and consumer electronics producers across Asia and Korea that consume 85 percent of current lithium supply, the strategy appears to be substituting other metal compounds instead. Similar to what we noted last year, the Bloomberg report indicates that strategic supply agreements for lithium have been signed with Bacanora Minerals and Pure Energy Minerals, each to explore and mine the metal within sources close to the new factory. However, a specialized metals research firm predicts a global deficit of lithium supply this year, turning to slight surplus in 2017 and 2018.

Musk reportedly indicated to stockholders that a bigger determinant for the Model 3 is the cost of nickel in the form that Tesla engineers require. That metal is being substituted for cobalt. Global-wide supplies of nickel have increased during the past two years resulting in a 50 percent decrease in prices.

As with many value-chain strategies related to a firm’s product supply chain, the ability to support both short and long-term customer demand need often rests with key strategic supply agreements. In the case of Tesla, that equates to the critical supply of not just battery cells, but the metals and compounds that go into the production of such cells.

A glance at Tesla’s recently filed Form SD, Specialized Disclosure Report with the U.S. Securities and Exchange Commission (SEC) related to adherence to avoidance of conflict materials can give one a sense of how important metals supply is for Tesla.  The Annex lists 41 different global suppliers of Tantalum, 51 suppliers of Tin and 35 suppliers of Tungsten. The scope is truly global in-nature.

Bob Ferrari

 


There’s a High Visibility Supply Chain That Can Also Move Supplier Fortunes

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Readers of this blog are well aware of the power and consequences of supplier visibility that is attributed to the Apple supply chain.  Knowledge of supplier contributions to Apple’s product value chains can literally make fortunes or cause significant financial harm, depending on the news or developments, whether real or rumored.

It now appears there is a new contender on the scene, that being Tesla’s supply chain.

This week, the Wall Street Journal highlighted evidence to this effect.

Recent rumors were that battery manufacturing firm Samsung SDI, a component-making division of diversified electronics manufacturer Samsung, was in-line for a new procurement contract for lithium-ion batteries to power the newly announced Tesla Model 3 vehicle. Keep in-mind that Tesla partnered with Panasonic to build the giant battery manufacturing gigafactory located in Nevada. That partnership required Panasonic to pony-up a considerable financial sum to help in building this new facility as well as incorporating advanced manufacturing processes.

Tesla founder and CEO Elon Musk took to Twitter to clarify that Tesla was indeed working exclusively with Panasonic on the Model 3 electrical power needs, and that news articles claiming otherwise were incorrect. According to the WSJ, that one tweet caused Samsung SDI market capitalization to drop by $580 million while the market cap for Panasonic jumped $800 million in the same day.

The report notes: For investors chasing buzz, the electric-car maker has increasingly been a driving force among shares of automobile-component suppliers in Asia, akin to what Apple news does to electronic-parts makers.”

The article further noted:”Tesla moves stocks, even if the news is hard to confirm.”

Two other examples were provided to reinforce this trend. Hankook Tire shares shot-up in May on news that it could become a Tesla supplier.  Similar news sent shares of battery producer LG Chem soaring last October. Taiwan based Hota Industrial Manufacturing; sole supplier of gearboxes saw it shares driven down in April amid rumors that Tesla was seeking a second supply source.

Thus, Tesla has obviously become another high-visibility global supply chain, one where supplier fortunes move on the slightest news, and one that will increasingly be subject to attempts to gain all forms of insider information.

There is of-course, another twist to this new high visibility supply chain. That is that automotive supply chains will increasingly shift toward more high technology components and software composition in the overall supply chain.  Then, there are the continually rumors that Apple maybe working on developing its own branded electric car.

So goes the new era of elite supply chains, those few innovative players that literally move financial markets on the basis of being the recognized market disruptor, where supplier contracts, news or supply chain hiccups determine financial fortunes.

Bob Ferrari


Tesla Founder Elon Musk Addresses Plan to Revolutionize Factories

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Our last Supply Chain Matters commentary concerning electric automotive manufacturer Tesla highlighted a candid admission of the importance of design for supply chain practices, as well as a new dilemma relative to the need to more dramatically scale its supply chain and manufacturing cadence.  Tesla Model X SUV

Earlier this week, in an address at Tesla’s annual meeting of shareholders, founder and CEO Elon Musk further addressed these challenges including a plan to revolutionize factories. Hearing the passion of Musk and his executive team, we believe that there may be some substance to these efforts, worthy of ongoing monitoring.

In addition to reiterating the fascinating history of Tesla, Musk shared with shareholders various lessons learned along the way. Among them was an admission that the Model X design was over complicated, perhaps too much to accommodate initial production volume needs. “We have great ideas, The smart move would have been to table those for version 2 or version 3.”

He reiterated that going forward, particularly with the new Model 3 design, Tesla teams will have a tighter integration loop among product design and manufacturing.

In his address, Musk indicated Tesla will “completely re-think the factory process.

The last time similar words were communicated was when Tesla developed the strategy to source all of its supply requirements for lithium ion batteries from a massive production facility or “gigafactory” to be located in the United States. The long-term core mission for Tesla has been to build very high performance vehicles that could be affordable for consumers. The core component of an electric vehicle is its batteries. As Musk explained the situation, it was a revelation that the company’s needs for such higher performance batteries would exceed current existing global capacity, so why not build it in the U.S. The other revelation was that most existing battery manufacturing techniques stemmed from consumer electronics companies with different design principles. This, Musk challenged his internal and external supplier teams to literally re-invent the way batteries can be produced including the adoption of more vertically integrated value-chain principles.

On July 29, a grand party is scheduled to celebrate the culmination of such vision in the operational opening of this gigafactory located in northern Nevada.

When addressing the future, 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 further 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 indicated to shareholders that his team now realizes that in re-thinking the challenge for the ability to support output volumes of 500,000 or more vehicles per year the same principles, “you build the machines that build the machine” apply. 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.

To that end, Tesla is now calling on existing product design engineers who constantly labor to achieve vehicle performance enhancements, to now turn their attention and efforts into building far more efficient production capability. Musk himself indicated that he is very confident that improvements in a factor 10x can be achieved in these ongoing efforts. Then again, having already amassed 400,000 pre-orders for the newly announced Model 3, there is somewhat a sense of urgency for the need to fulfill these orders in a timely manner.

We at Supply Chain Matters continue to admire the supply chain and manufacturing thinking that exists at Tesla.  This is a company that literally challenged the notions that one could source owned internal manufacturing directly in Silicon Valley. As noted, they challenged existing notions of lithium ion battery design and high volume manufacturing. Similarly, the company challenged the industry norm of established dealer networks and instead has a direct sales and service relationship with its customers.

Tesla is always challenging established thinking and now, has expressed a renewed belief that the supply chain does indeed matter. We expect even more supply chain innovation from this innovation driven organization and would not at all be surprised that during the next five years, Tesla will be cited as one of the top five supply chains.

Readers can view the more than two hour address to shareholders by visiting this Tesla Investors web link.

Bob Ferrari

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


Highlights of Supply Chain Matters Interview with Jabil

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Supply Chain Matters recently had the opportunity to speak with contract manufacturing services (CMS) firm Jabil’s, specifically Vice President of Supply Chain Solutions and Global Logistics, Fred Hartung.  If readers had any perceptions that certain CMS firms were laggards in advanced technology adoption, our interview led to quite the contrary perception.

Jabil has been featured in supply chain industry headlines these past two weeks. At the recent Gartner SCM Executive Conference, Jabil’s intelligent supply chain capabilities in real-time visualization and advanced analytics resulted in receiving an award as a “Supply Chaininnovator.” Hewlett Packard unveiled what it termed as the first production-ready commercial 3D printing system and Jabil participated in the press conference. At last week’s SAP Sapphire customer conference, SAP and UPS announced a partnership for services related to an on-demand 3D printing network which involves this CMS as well.

Hartung oversees multiple roles including responsibility for advanced supply chain technology, digital supply chain, advanced planning and trade compliance. He additionally heads a team overseeing Jabil’s supply chain global network.

Our discussion touched on a number of business and technology areas.

Regarding the current CMS industry landscape, Hartung described changing global transportation costs, foreign exchange rate volatility and changes in the “value density” of products as all dynamic industry forces.

More manufacturing focused OEM’s now see themselves as incorporating more and more software and technology as major parts of product design and functionality features and that impact spills over to contract manufacturers. OEM customers were further described as increasingly practicing near-shoring manufacturing sourcing practices aligned to major geographic product demand regions with Mexico and Vietnam really taking off along with resurgence towards manufacturing in Malaysia. Hartung indicated Jabil’s belief that 3-D printing will make a big difference in localized manufacturing tied to customer fulfillment. OEM’s are still experimenting with incorporating 3D printing concepts into product strategy and Jabil is assisting by maintaining various labs across Silicon Valley.

We discussed what is often described as the number one multi-industry supply chain decision-support challenge, that being gaining and enabling end-to-end planning and customer fulfillment visibility. Hartung described this challenge in the context of “actionable visibility”, a focus on the most pertinent information supporting business processes along with “in-control” digitized streaming information flow that is anchored in analytics-driven decision-making capabilities. Another Jabil consideration in its use of advanced analytics is directed at managing and mitigating supply chain risk. Nine separate categories of risk are continually tracked ranging from low to higher supply chain disruption and risk factors.

In the area of addressing Internet of Things, machine learning and cognitive computing opportunities, Hartung acknowledged that information security has got to be an area to be taken very seriously, and prominent in the early design process. Jabil views IoT as an enabler of new business models for customers and for Jabil, and here again, leveraging analytics, either prescriptive or predictive, is the important area of concentration. Responding to the question of whether customers ready for these types of initiatives, Hartung indicated that while Jabil is way ahead on the learning curve, customers indicate that they want to hear more.

Besides incorporating advanced supply chain technology and multi-tenancy practices across Jabil’s own extended supply chain, the CMS is increasingly being called upon to assist OEM customers themselves in deployment of such technologies across their extended supply chains as-well.  This has been a new area of technology services for some CMS providers.

As a key supply chain partner in many more multi-industry settings, a contract manufacturer must be knowledgeable of the business process and enabling technology competences that make a difference in meeting both customer and internal business and supply chain outcomes. This is an industry that moves in lock-step with its customers, and is constantly challenged with narrow margins to work with.

As a recognized supply chain industry analyst, this author has had the opportunity to view a number of Jabil industry presentations over past years as well as to speak with the firm’s executives. This CMS has consistently demonstrated a willingness to leverage and collaborate with customers on advanced technology use cases across its supply chain management processes.  After my recent interview, I am further impressed with the firm’s understanding and practice of leveraging areas where technology enablement can indeed be a facilitator of a more adaptive and resilient supply chain.

Bob Ferrari

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


A Counter Trend- Strong Galaxy S7 Sales Lift Samsung

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In an earlier Supply Chain Matters posting, we noted that this week, Apple provided a huge thud across Silicon Valley and global equity markets. The globe’s richest and most profitable company delivered a huge financial disappointment resulting in the first quarterly sales drop in 13 years. Executives pointed to macroeconomic headwinds and a far more competitive and challenging smartphone market. Yesterday, the Dow Jones Industrial Average suffered its biggest drop since February, fueled by the recent financial performance news from Apple, along with sharp declines provided by IBM and Cisco Systems.

However, this is a global world of industry competition and it is important to reflect on other players and other product, market, pricing and supply chain trends in similar industries and markets.

This week Samsung Electronics reported what was billed as the fastest profit growth in its core mobile business in nearly three years, attributed to strong initial sales for its Samsung Galaxy S7 model smartphones. Overall revenue rose 5.7 percent. The company’s mobile business operating profit for the March ending quarter rose 42 percent from the year-earlier period, noted as the largest year-over-year improvement in mobile profits since the second quarter of 2014.

Business media reports cite analyst’s estimates that Samsung shipped 10-12 million units of the new Galaxy S7 series phones in the past quarter. Keep in mind that Samsung elected to push-up the scheduled launch of this new S7 models to Q1, which may have led to the improvement in financial performance. Once more, Samsung’s guidance to investors reflected a continued optimistic sales growth forecast for S7 devices in the current operating quarter. In its reporting, global business network broadcaster CNBC quoted market research firm TrendForce as forecasting that S7 unit shipments will reach 52 million by year-end, surpassing a previous record of 47 million for the Galaxy S4 model. While that number does not equate to iPhone sales in a single quarter, keep in mind that Samsung offers abroad variety of other smartphone models in various competitive price ranges. One estimate indicates over 79 million total Samsung produced smartphones sold in Q1.

Thus, while the overall global smartphone market may be shrinking or turning toward a replacement cycle, there are pockets of provider growth. Among the current rankings of top five global producers of smartphones, besides Samsung and Apple, three are China based, offering price competitive models, especially for larger China and Asia based markets.

Operating margins for Samsung are noted to have risen to 14.1 percent from 10.6 percent from a year ago amid a streamlining of product line offerings and reductions in manufacturing costs.  Keep that number in perspective and recall that Apple’s current operating margin was noted as close to 28 percent in its most recent quarter, twice that of Samsung.  That may be an indicator of price performance and sensitivity reflected in today’s global smartphone markets. It also counters Apple’s claim of macroeconomic headwinds in current regions, since Samsung competes in similar geographies.

Readers should recall that Samsung is both a competitor as well as a major supplier to Apple in the form of proprietary processor chips as well as general memory chips produced by Samsung’s semiconductor operations. In the latest quarter, this chip business recorded its first year-over-year decline in more than three years, due to what was termed as a supply glut and cooling demand for processor and memory chips.

We have previously noted the importance of Samsung’s vertical supply chain integration strategy reflected by its chips business as both an internal and external industry supplier. From an advanced technology perspective, Samsung gains the benefit for first mover advantage in leveraging the most advanced chip based technologies. From a broader key strategic industry component supplier perspective, the risk is that when supply chain dominants such as Apple financially sneeze, the implication flows down to the component supplier, even large key suppliers. These reverberations will likely continue over the coming months.

Thus there are different sides to any coin and it is important for high tech and consumer electronics supply chain S&OP teams to focus on the core sales, pricing and product trends reflected in the overall market, not just certain players. Another key takeaway is the ongoing critical importance of responsive and timely product design and new product introduction.

Bob Ferrari

 

 


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