Sunday May 28, 2023

Beating The Global Chip Shortage– The Tesla way

Beating The Global Chip Shortage– The Tesla way

The automobile manufacturing industry is undergoing a dramatic change in managing their supply chain needs. The impact of the global pandemic and the growing shift of consumer demand to electric vehicles are added complexities to an already competitive global market. The modern day car maker is also supposed to integrate latest technologies such as voice enabled sun-roof, LED head lamps with light intensity sensors and automatic driving mode for enhanced control and safety. Moreover, such features seen in modern cars can only be possible because of sophisticated silicon chips which are also used in computers and electronics. As the modern car gets smarter so does the demand for these chips.

As a result, the global automobile industry has suffered great losses due to the chip shortages and subsequent order cancellations. There are only a few chipmakers and suppliers around the world which possesses the expertise for chip manufacturing. Chip making also is expensive and also challenging to manufacture at scale.

At the onset of Pandemic, major auto companies around the world instructed chips manufactures to defer shipments because they believed that lockdowns might cripple demand. As the global demand for cars picked up, there were not enough chips going around in the market to meet the auto manufactures demand.  The chip manufacturers had already rerouted their supplies to other industries like computers and electronics.

Another major factor contributing to the chip shortage in the global auto industry is that chip manufacturers earn fewer profits from supplying to the auto industry. Chip manufacturers therefore prefer supplying to industries other than automobiles, making chips a prized commodity for global car manufacturers.

Tesla on the other hand wasn’t too perturbed by this global shortage. In the recently published sales report, Tesla delivered 936,000 cars in 2021 which is double the number of cars sold in 2020. As a result, the tesla stock rose by 14% against all market expectations.

Tesla, an electric car manufacturer needs silicon chips like any other car manufacturer. Last year Tesla was also hit by chip shortages due to which they had to stop production for a while for their newest car, the Cybertruck. Market analysts have suggested that because of a cult like following of Tesla, its customer base and loyalty is similar to apple customers, therefore a bad economy will not hamper demand.

This is the main reason why the Tesla leadership didn’t tell chip manufacturers to hold off shipments. Tesla was convinced demand for their cars would remain robust despite the pandemic.

Model 3 sedan, the company’s most successful and high selling model uses a consolidated single chip setup for features like speakers and gesture recognition. In other cars, such features require multiple chip setups. Tesla has positioned itself more as a technology company than a car manufacturer and prefers producing everything in-house. Even when they need to source chips from elsewhere they directly source it from manufacturers without letting third parties getting involved. As a result, Tesla has a better working relationship with these chip makers as even the chip makers believe that Tesla is a strategic customer and one for the future.

Lastly, Tesla engineers quickly rewrote all its software during the pandemic so that they could integrate chips from alternate manufacturers as well. Customers of the $ 70,000 model Y reported that they received their cars from Tesla on time and were informed two weeks before the car delivery by email that due to the global chip shortages certain minor features like additional USB ports cannot be guaranteed. Tesla customers due to their loyalty were not perturbed by such developments further adding to Tesla’s global brand equity.

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