Outsourcing Analysis of Tesla’s Supply Chain Management

LITERATURE REVIEW

For any complicated mechanical product, outsourcing is considered a necessity because it is hard for
any company to control all the resources and technology to produce its final products from scratch
or it is simply cheaper to let suppliers make certain parts instead of self-producing(Johnsen et al.,
2017). There are three major theoretical approaches to this subject.

First of them is transaction cost economics(TCE) theory. TCE theory which built upon two basic
assumptions (1. Business actors are rational but not omniscient. 2 Business actors are profit driven.) claims that transaction cost of outsourcing with high uncertainty will diminish the profitability. Thus, it emphasises on control mechanism over trust and suggest that companies
should focus on their boundaries instead of the interrelationships with other firms. To evaluate the
viability of the outsourcing strategy of a company, three factors will need to be checked, asset
specificity, uncertainty, and frequency of transactions. TCE framework consider an outsourcing event as valuable to a company if these factors are low(Williamson,1981).


The second theory is resource-based view (RBV). The RBV provides a strength-weakness framework
for company to analysis their strategy. The theory suggests that outsource should only be used in
areas which pose no strategical importance to the company so that the firm can focus on areas
which can provide competitive advantages (Barney, 2000). Extended resource-based view(ERBV) is a
development from RBV framework. It addresses the original theory with some supplements. ERBV
suggests that strategic advantages can also be achieved via inter-firm relationship(Mathew, 2003).
This indicate that collaborations between companies can achieve success beyond their own
boundaries.

At last, interaction approach is another theory which is close to ERBV. It states that companies are
interconnected via resource ties and should put more attention on their positions in the supply chain
groups rather than their own boundary(Håkansson, 1987).

ABOUT TESLA
Tesla is a leading company in electric vehicles manufacture and buttery cells. It was founded in 2003
by Martin Eberhard and Marc Tarpenning. Later in 2004, famous entrepreneur Elon Musk provided
30 million dollars of venture capital to the company and joined in as chairman of the company since
then(Gregersen,E. ,2020). The company had a total of 24578 million dollars of revenue and
contributed to 18% of global EV sales in 2019(Statista, 2019). Considering that the company
introduced their first product in 2008, the market share it has today is a magnificent achievement.
Some study believe that it was due to its fast product update and continuous effort to improve
existing products(Lyyra A ,2018).

Like most modern car manufacturer, Tesla outsources majority of its car parts to different suppliers
around the world. The core intellectual property of Tesla includes their electric
powertrain(equivalent to the engine of a car) and software(Tesla,2019).

A typical tesla powertrain consists of battery pack, power electronics, motor, gearbox, and control
software. Among them, battery consists the highest cost. Tesla does not produce battery,
or more specifically, battery cells. In Tesla factory, battery cells from Panasonic, a long term partner
are assembled into battery module. After that, battery module will be put together to form a battery
pack. Tesla and Panasonic have a joint venture together in battery business which shares
risk and revenue. However, their relationship is not perfect. With the unpredictable profitability of
Tesla, Panasonic are already planning to quit certain areas of the business such as solar cells and
modules in order to avoid loss(Korosec, 2020). Managers from Panasonic also complained about the
management style of Elon Musk(The independent, 2018).

In 2019 annual report, Tesla claims that they are dependent on single-source suppliers for many
parts of their products. They acknowledge that the risk of supplies being cut due to any reason
which could lead to production interruption (Tesla, 2019).

ANALYSIS

The outsourcing strategy of Tesla is viable under TCE framework. First, the outsourcing of parts of
the car is a common practise in car manufactory business. Nowadays, most car manufactures only
make engines and frames of their cars(How Products are Made, ND). The car parts industry chain are mature and under perfect competition. Thus, the uncertainty is minimized. At the same time, even if the company invests the outsourcing cost to establish new production lines for the parts, it is
unlikely they can receive greater outcome compare to use outsourcing. Asset specificity of the
outsourcing remains low.


From RBV’s perspective, Tesla’s success has a deep relationship with focusing on strength and
avoiding weakness. Comparing to other traditional brands such as BMW and Toyota, Tesla as a
newcomer lacks experience in hardware manufacture. This is why for most mechanical parts Tesla
uses outsourcing as a solution, not only for cost saving, but also for making up lack of experience.

Its relationship with Panasonic, however, is questionable. Since the ‘engine’ of a Tesla car – the
powertrain is its core intellectual property. The production of the essential part of its core
competitive advantage is outside the boundary of the company. After the acquisition of SolarCity,
the ability of self-producing battery become more and more crucial to the company. The suggestion
for the future plan of the company is to acquire experienced battery manufacturer or to self-develop
battery technology.


On the other hand, ERBV or interaction approach would argue that it is unnecessary to self-produce
battery because by managing inter-firm relationship, it is possible to maintain strategic advantages
while cooperate with others on core business. The core problem of Tesla on this matter is that with
Elon Musk’s management style, maintaining mutual respect between company cultures is a hard
thing for the company to do.

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