Tesla’s Prices Increase Due to Supply Chain Pressure
In May, Tesla’s Model 3 and Model Y prices increased, marking the fifth incremental price jump for its electric cars in the span of three months. When Twitter account @Ryanth3nerd called out Tesla on Twitter for raising prices despite removing lumbar features, Musk tweeted back: ‘Prices increasing due to major supply chain price pressure industry-wide. Raw materials especially’.
During an April conference call, Musk said that Tesla had faced ‘some of the most difficult supply chain challenges’, referencing semiconductor chip shortages.
Microchip Demand Outstrips Market Supply
In 2020, many automakers were forced to stop production on product lines until chip supply caught up. Intel, one of the largest semiconductor manufacturers, recently announced that it could take several years for the industry to catch up. Tesla, however, took rapid steps to mitigate supply chain chip shortages. The company uses chips for various automotive control systems as well as a specially-designed chip for its self-driving cars—and realised that it couldn’t stand by and watch as the market failed to keep up.
In February, Tesla halted Model 3 production at a California car assembly plant due to supply-chain backlogs. And Tesla isn’t the only car manufacturer suffering from the global chip shortage. Bloomberg reported in January that the automotive industry could lose up to US$61bn in revenue. After all, microchips make up a significant portion of a car’s manufacturing costs: according to Deloitte, computer chips add up to 40% of a car’s cost.
Tesla’s vehicles and market power indicates a trend for other automotive companies who rely on semiconductors for navigation, collision detection, and bluetooth capabilities.
What Caused the Microchip Shortage?
When COVID-19 hit, stay-at-home mandates drove a rapid increase in consumer electronics. As a result, microchip manufacturers adjusted their supply lines to better serve the digital market, which was generating higher profits than the automotive industry.
As automakers re-opened their factories, however, they didn’t count on the reduced supply of chips. Microchip factories weren’t able to ‘flip the switch’ back to car chips quickly enough, which led to backlogs and order cancellations. Ford, General Motors (GM), Honda, and Volkswagen had to cancel shifts and close down certain operations. GM, for example, noted that the chip shortage could cost them $US2bn in profits. The shortage will likely last until July, if not several years.
Musk Hints at Potential Solutions
In a recent Q1 earnings call, Musk compared Tesla’s current chip shortages to World War 2 logistics. Yet the company announced that it had avoided the worst of the consequences by pivoting to microcontrollers and seeking out chips from multiple suppliers.
Automotive suppliers facing production backlogs might do well to take a similar approach, building a resilient, diverse network of suppliers to produce chips and mitigate logistics disruptions. As Electrek summed up: ‘Tesla is taking the advantages of its startup mentality to move quickly and stay nimble’.
Overall, the company still reported a profitable quarter, despite complaints from customers about the recent price hikes. As Zach Kirkhorn, Tesla’s CFO, said: ‘We continue to work through the instability of the global supply chain, particularly around semi-conductors and port capacities’.
During the first quarter of 2021, the company sold 184,800 vehicles, gaining traction in Chinese markets. If Tesla continues to develop agile microchip procurement processes, therefore, they look set to lead the market in recovering from the microchip shortage.
Biden establishes Supply Chain Disruptions Task Force
The US government is to establish a new body with the express purpose of addressing imbalances and other supply chain concerns highlighted in a review of the sector, ordered by President Joe Biden shortly after his inauguration.
The Supply Chain Disruptions Task Force will “focus on areas where a mismatch between supply and demand has been evident,” the White House said. The division will be headed up by the Secretaries of Commerce, Transportation, and Agriculture, and will focus on housing construction, transportation, agriculture and food, and semiconductors - a drastic shortage of which has hit some of the US economy’s biggest industries in consumer technology and vehicle manufacturing.
“The Task Force will bring the full capacity of the federal government to address near-term supply/demand mismatches. It will convene stakeholders to diagnose problems and surface solutions - large and small, public or private - that could help alleviate bottlenecks and supply constraints,” the White House said.
In late February, President Biden ordered a 100 day review of the supply chain across the key areas of medicine, raw materials and agriculture, the findings of which were released this week. While the COVID-19 health crisis had a deleterious effect on the nation’s supply chain, the published assessment of findings says the root cause runs much deeper. The review concludes that “decades of underinvestment”, alongside public policy choices that favour quarterly results and short-term solutions, have left the system “fragile”.
In response, the administration aims to address four key issues head on, strengthening its position in health and medicine, sustainable and alternative energy, critical mineral mining and processing, and computer chips.
Support domestic production of critical medicines
- A syndicate of public and private entities will jointly work towards manufacturing and onshoring of essential medical suppliers, beginning with a list of 50-100 “critical drugs” defined by the Food and Drug Administration.
- The consortium will be led by the Department of Health and Human Services, which will commit an initial $60m towards the development of a “novel platform technologies to increase domestic manufacturing capacity for API”.
- The aim is to increase domestic production and reduce the reliance upon global supply chains, particularly with regards to medications in short supply.
Secure an end-to-end domestic supply chain for advanced batteries
- The Department of Energy will publish a ‘National Blueprint for Lithium Batteries’, beginning a 10 year plan to "develop a domestic lithium battery supply chain that combats the climate crisis by creating good-paying clean energy jobs across America”.
- The effort will leverage billions in funding “to finance key strategic areas of development and fill deficits in the domestic supply chain capacity”.
Invest in sustainable domestic and international production and processing of critical minerals
- An interdepartmental group will be established by the Department of Interior to identify sites where critical minerals can be produced and processed within US borders. It will collaborate with businesses, states, tribal nations and stockholders to “expand sustainable, responsible critical minerals production and processing in the United States”.
- The group will also identify where regulations may need to be updated to ensure new mining and processing “meets strong standards”.
Partner with industry, allies, and partners to address semiconductor shortages
- The Department of Commerce will increase its partnership with industry to support further investment in R&D and production of semiconductor chips. The White House says its aim will be to “facilitate information flow between semiconductor producers and suppliers and end-users”, improving transparency and data sharing.
- Enhanced relationships with foreign allies, including Japan and South Korea will also be strengthened with the express proposed of increasing chip output, promoting further investment in the sector and “to promote fair semiconductor chip allocations”.