How Is Tesla Solving Chip Shortage (and Other Supply Chain Issues) - 7investing 7investing
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How Is Tesla Solving Chip Shortage (and Other Supply Chain Issues)

The company has done a better job than the rest of the auto industry.

October 28, 2021

Many automakers have struggled to keep producing cars due to an inability to get needed materials. We’ve all heard about the microchip shortage, but it goes well beyond that. Supply lines have been strained across the entire industry (as well as across many other industries) and that has caused major production disruptions.

Tesla (NASDAQ: TSLA) hasn’t been immune to those problems but it seems to have largely been able to stay on schedule despite having problems getting all the materials it needs. In fact, the company has continued to set records when it comes to deliveries and, while it has had some slight delays, they have not impacted the bottom line.

Is Tesla more agile than its competitors? How has it been able to keep its production more or less on schedule when its rivals have struggled and, in some cases, even temporarily closed factories. Some of it comes from Tesla being a relatively small player. The company has steadily grown its market share but it’s still only producing about 1 million vehicles a year.

That’s not the full answer, however, as the company has done some things better than its rivals. Tesla has continued to operate like a startup and that’s a major advantage in a market where things aren’t behaving normally. Anirban Mahanti, who drives a Tesla, joined Dan Kline on the October 25 edition of “7investing Now” to look at how the company has adapted and what that say about the brand.

A full transcript follows the video.

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Dan Kline: Raw materials and chip shortages have been a problem. We’ve seen. Tesla’s acknowledged it’s been a problem, but they seem to be able to solve it. They seem to be able to shuffle things around whereas other manufacturers like but we’re closing factories for six weeks or we won’t be making the you know, the Volkswagen, whatever the Jetta for six months. Is Tesla just better at this because they’re they’re not using old line thinking.

Anirban Mahanti  15:08  I would say…I think yes is the answer, but I’ll caveat by saying that their volume is is lower than a Volkswagen right. So they’re not at that scale of making hundreds of millions or 10s of millions of vehicles. They’re making, you know, there are like a million run rate right now. So what Tesla’s doing is right now is agility. So basically saying, Okay, there’s a shortage for the airbag chip, which probably cost like $2. So it’s really low and chip. It’s not available, okay, can we go you know, an attack either whoever or Bosch whoever makes it is not available is not good. Try and use another one, can I change the form where multiple chips, integrate them together, and then just use them instead of, you know, multiple of these other chips.

So they’ve been doing a lot of agile thinking, they’ve been doing a lot of work with the supply chain. I think a lot of that stuff is agility, a lot of that stuff is also the lower volume. A lot of the stuff is also got to do with they being willing to pay more, because you know, a lot of the chips that they use probably are higher end compared to some of the chips that other cars use, just because of their design being more is relatively new compared to others. Yes, I think that’s played a big role. I think that – I personally think that this, I can’t believe that we will have a long term shortage of airbag chips, and this inner seatbelt sensor chips and stuff, stuff that we have always produced in very high quantity. And, you know, the whose price have been falling constantly for, you know, for several years, or decades. I just think those should resolve with respect to raw material. That’s, again, I think raw materials should also moderate.

Some of these things, they have a better position, though, because I think the raw material side is is an interesting one. Because they’re the only credible large scale EV maker, they’ve gone into these long term contracts, which have actually helped offset some of the, you know, absorb the price increases that are the other car companies would see if they need those batteries.

Now the battery prices go up. But you know, they you know, they have the suppliers absorbing some of that cost. Of course, in some cases, they have good, you know, sharing arrangement while you’ll absorb some and you’ll absorb some and things like that. But my My comment would be that this is not like actually, this is this setup is not a good setup for anybody trying to ramp their EV production today. This is a bad situation to be in, where things are not available. The raw material supply, you know, raw material cost is highly variable going up and down and it’s in the high side right now. So it’s a bad situation if you’re a Tesla competitor, without scale. And that will include many of the OEMs, which don’t have scale on the on the EV side have scaled on the on the Ice Age vehicle side. So yeah.

Dan Kline  17:55  So I have to say I love agile thinking. So you know, I spent a few years four years running a factory. And when I started doing that, I didn’t know anything about running a factory. So if a customer called me and they wanted some impossible quantity of goods, I always said yes. And then just figured it out. Because you know, it’s a lot better when you sell stuff. And like we did some of the Tesla things. Like we set up workstations in the in the parking lot. We you know, wheeled and dealed for raw materials and did the things you could do. And it was a really interesting lesson in sort of, you know, how do you manage things. And I was making very simple products compared to a Tesla.

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