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OM in the News: Elon Musk and Vertical Integration at Tesla

June 30, 2016

teslaTesla’s move to vertical integration (see Chapter 11) reminds us of Henry Ford’s approach in the 1920s. Ford’s massive Rouge complex in Michigan made most of the components, including engines, glass, and steel, used in its assembly plants and was supplied by Ford-owned iron mines and limestone quarries. Ford even owned and operated a rubber plantation in Brazil.

To secure the huge number of cells it needs and drive down the cost, Tesla is collapsing the supply chain and bringing battery-cell production in-house,” writes Businessweek (June 27-July 3, 2016). Musk’s vision now includes Tesla buying SolarCity, so his passionate customers can get rooftop solar panels, electricity storage units, electric cars, and charging units from Tesla.

Musk needs unprecedented quantities of the metals (ie., nickel, cobalt, lithium, aluminum) used to make lithium ion batteries to reach an ambitious goal: producing 500,000 electric vehicles a year by 2018. That’s no small task. When the factory was announced in 2014, Tesla said it would produce more lithium ion batteries annually by 2020 than were produced worldwide in 2013. 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.

It also pits Tesla against consumer-electronics companies, which use the batteries in everything from mobile phones to laptops, and carmakers in China, where the government wants 5 million electric and other new-energy models on the road by 2020.  Tesla knows that it’s going to have to source the raw materials themselves, and they are competing with China. (Tesla’s Model S sedan, which starts at $66,000, contains more than 7,000 battery cells).

Classroom discussion questions:

  1. Provide other examples of vertical integration (see Figure 11.2).
  2. What is the difference between backward and forward integration? How does this relate to Tesla?
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