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Tesla: Suppliers Are Holding Us Back

Posted By Jeff Moad, August 09, 2013 at 12:34 PM, in Category: The Adaptive Organization

How can a small, start-up manufacturer establish credibility with key suppliers so that the suppliers will buy into the manufacturer’s demand forecasts and ramp up production accordingly?

That was a challenged faced by electric car manufacturer Tesla Motors, and it is now constraining the company’s ability to meet rising customer demand for its cars, CEO Elon Musk told financial analysts this week on a conference call to discuss Tesla’s second-quarter financial results.

Musk said Tesla is having trouble pushing beyond its current 20,000-vehicle-per-year production rate because some of its suppliers aren’t prepared for higher volumes or are just unable to keep up. “While we have the ability to produce at the 40,000-unit level, all of our suppliers must have that ability to do so, and that’s what’s holding us back,” said Musk.

Musk estimated that 90% of Tesla’s suppliers have been able to ramp up to meet the company’s needs. Five percent are having some difficulty, while four percent are having a lot of difficulty, and one percent simply can’t respond. Tesla will have to look for new suppliers or insource production of some parts, a process the company expects to have completed within the next six months.

In Tesla’s early days, said Musk, some suppliers “didn’t give us much credit for our projections, so they didn’t gear up. Now they are scrambling to make up for it.”

Tesla’s early credibility with suppliers was further compromised, Musk said, by some market experts who publicly doubted Tesla’s forecast. Automotive market analyst firm IHS, for example, predicted that Tesla would only sell 3,000 of its Model S cars over its lifetime, Musk said. Instead, Tesla sold that number of Model S cars in the first quarter.

Tesla’s supply-constrained situation means that it is moderating its sales activities in North America and Asia Musk said.

But Tesla had better solve its supplier problems quickly. The company is currently ramping up Model S production and plans to introduce a model for the Asian market which is expected to grow demand by 40,000 units per year by late 2014. Ultimately the company is shooting for a production rate of 500,000 units per year, fueled by a “low cost” $35,000 electric vehicle that is now on the drawing board.

With Tesla’s sales and credibility growing, Musk says the company is now able attract more “A list” suppliers.

Whatever Tesla’s current supplier problems, Wall Street investors don’t seem too concerned. Tesla reported a second-quarter net profit of $26.3 million rather than the $18.9 million loss that analysts had projected. As a result, the company’s share price jumped 14% after earnings were announced. So far this year, Tesla stock is up 300%.

What’s your experience? How can small, young manufacturers quickly gain credibility from suppliers?

Written by Jeff Moad

Jeff Moad is Research Director and Executive Editor with the Manufacturing Leadership Community. He also directs the Manufacturing Leadership Awards Program. Follow our LinkedIn Groups: Manufacturing Leadership Council and Manufacturing Leadership Summit


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