“If you’re trying to create a company. It’s like baking a cake. You have to have all the ingredients in the right proportion.” – Elon Musk
In the Fall of 2017, as Tesla prepares its ambitious rollout of the Model 3, the reality of mass market electric vehicles (EVs) seems closer than ever. To tackle climate change –and pollution—many countries (e.g., France, UK, India, Norway, China) have adopted bans on fossil fuel cars in the coming decades1. Although these policies changes are promising for EVs, the sudden rush for the metals used in lithium-based batteries is, paradoxically, threatening the viability of Tesla’s supply chain and its dream to deliver a mass market electric car. The sourcing and supply of Cobalt –a crucial component of Tesla’s current batteries—is a particular area of concern driven by two key unique factors:
- ~50% of the world’s cobalt production comes from the Democratic Republic of Congo (DCR), a country with huge supply chain risks– A recent report by Amnesty international concludes that the Cobalt rush has, and is expected to continue being a major driver of conflict, corruption, and child labor in DCR, with about 40,000 children laborers2. Tesla will, therefore, struggle to find ethically sourced Cobalt which creates a risk for a PR nightmare headline: ‘Is your $60k car built on the backs of children?’. Beyond that, political instability and warfare add further supply chain risk.
- Chinese companies currently control over 60% of the world’s Cobalt mines – in the past few years, Chinese companies have purchased control of around 60% of the world’s mines.3 China has also shown willingness to use its position in the market to ban access of competitors to necessary materials (e.g., ban on rare metal exports to Japan amid trade dispute). This creates added risks for Tesla’s supply chain and competitive position vs. Chinese car manufacturers.
Tesla has taken a number of actions to address these challenges. In the short term:
- Publicly adopting policy of responsible sourcing – Tesla’s first step to handle risk of conflict cobalt has been to publicly disclose its policy to investors through a specialized disclosure form.4
- Expanding due diligence of suppliers – its next step has been to build a small team within Supply Chain team has been tasked with due diligence of suppliers and their practices. This should limit risk of sourcing Cobalt or other materials from mining operations that don’t benefit armed groups or use child labor. 4
In the medium term:
- Encourage development of North American Cobalt – Tesla has repeatedly stated that it would prioritize North American supply chain of Cobalt and other materials in its production. This is a signal to the mining sector to encourage mining/ exploration operations. This has led many entrepreneurs to explore options to develop Cobalt (and lithium) mines in Canada and Nevada.5
- Invest in new battery technologies to reduce (or replace) Cobalt– Tesla inked a 5-year contract with reputed battery researcher Jeff Dahn to work on the next generation of batteries. Although details of the types of developments they’re working on is hard to get, it’s very probable that an effort is being made to get rid or reduce Cobalt usage. 6
In addition to their stated actions, I believe Tesla should also take the following actions (it’s unclear if they’re already working on any of these internally):
- Encourage development of market for cobalt recycling – Cobalt can, and should be, harvested as products (cars, phones) go out of use. Currently, about 15% of U.S. supply of cobalt comes from recycled scrap 7. Tesla should promote the development of recycled solutions through incentives, pricing agreements, or even technology investments that impact the availability of recycled cobalt
- Have ‘ready-to-go’ PR plan for when (and if) any conflict Cobalt (or other materials) are used in production. The reality is that the gap between demand and supply for Cobalt is set to grow so large that keeping a ‘clean/moral’ supply may be increasingly challenging and Tesla should prepare for the worst.
As I think about Tesla’s challenge, there’s a few questions which I’m unsure about and would appreciate your thoughts:
- How should Tesla think about the moral implications of its supply chain and how should these considerations influence its growth plans?
- How should Tesla engage with the Chinese and American governments? Should it seek support from the U.S. government to develop ‘American-friendly’ sources of materials?
- How can or should Tesla organize its supply chain to adapt to potential rapid changes in battery technology? How could it build flexibility and adaptability into its supply chain?
- What role could the recycling of components play in Tesla’s future sourcing of metals? How should Tesla promote ecosystem of recycling as a source of materials?
[Word count = 772]
- These countries want to ban gas and diesel cars – CNN http://money.cnn.com/2017/09/11/autos/countries-banning-diesel-gas-cars/index.html
- The Dark Side of Electric Cars: Exploitative labor practice – Amnesty International https://www.amnesty.org/en/latest/news/2017/09/the-dark-side-of-electric-cars-exploitative-labor-practices/
- Financial Times, Sanderson, H. (n.d.). China plays long game on cobalt and electric batteries. Retrieved November, 2017, from https://www.ft.com/content/054bbb3a-1e8b-11e6-a7bc-ee846770ec15
- Specialized Disclosure Form: Tesla Conflict Minerals Report. (2015, May). Retrieved from http://ir.tesla.com/secfiling.cfm?filingid=1193125-15-206829&cik=
- The Canadian Ghost Town That Tesla Is Bringing Back to Life Danielle Bochove – https://www.bloomberg.com/news/features/2017-10-31/the-canadian-ghost-town-that-tesla-is-bringing-back-to-life
- Elon Musk teases research on a big battery breakthrough Yoni Heisler – http://bgr.com/2017/08/04/elon-musk-tesla-battery-research-breakthrough/
- Cobalt Investing News, Recycling Cobalt – Sustainable and Affordable https://investingnews.com/daily/resource-investing/critical-metals-investing/cobalt-investing/recycling-cobalt-sustainable-and-affordable/