Will Tesla build the autonomous ride-sharing network of the future?

Tesla Motors has been an auto industry leader when it comes to capturing value from its digital supply chain. Can it maintain this advantage as it ramps up production and moves forward to a vision of an autonomous future?

In the near-term, Tesla Motors plans to scale from a low-volume, high-end carmaker with negative cash flow into a profitable, high-volume carmaker producing vehicles at multiple price points. [1] In the long-term, Tesla envisions that its cars will be driven fully autonomously and operate on ridesharing networks.

The application of software throughout its supply chain–from car design and manufacturing all the way to post-car service–poses significant challenges and opportunities for Tesla as it attempts to meet these short-term and long-term goals.

Boosting production in the near term: supply chain shocks

Having sold 50,580 units in 2015, Tesla’s internal goal is to sell 500,000 units in 2022. [2] Some analysts are skeptical of this goal and of its ability to produce at the economies of scale that established OEMs are able to, given its history of being unable to meet stated production deadlines. [3] The firm largely builds its cars after the specific customer order has been placed, minimizing the amount of inventory they have on hand. [4] This practice has put Tesla at a substantial risk of production bottlenecks since it doesn’t maintain a high degree of safety stock.

In the near-term, Tesla seeks to address these production risks by vertically integrating its supply chain. The biggest cost component of electric vehicles are batteries (HBS case Tesla). Recognizing that international supply chain risks to its Asian-produced batteries could dramatically affect the profitability of its vehicles, Tesla built the Gigafactory 1 battery manufacturing plant in Nevada and expects the factory to lower battery costs by 30% over the next few years. [5]

It’s unclear what techniques Tesla is currently using to control for supply chain risk, but new tools can facilitate supply and demand planning with large, real-time data sets to help allocating inventory based on probabilistic distributions. New technology can also allow it to forecast projected demand to component manufacturers.

With software updates and its service team, the Tesla product supply chain extends past the purchase of the car. Because its cars operate on software, Tesla is able to deliver new functionality like temperature controls over the internet. Its service team is frequently able to diagnose and fix issues remotely. [6] By operating its own distribution and repair teams, the firm is able to capture the value that otherwise would be lost to third parties.

A fully autonomous ride-sharing future?

With its hardware strategy, Tesla’s betting on an autonomous-first future. The firm controls the refueling supply chain for electric vehicles by building internet-networked home power and electrification services through Powerwall, a battery product. This step is key to its vision of creating ridesharing networks of autonomous electric vehicles, and creates a substantial barrier to entry for other players hoping to enter that space. [7]

While no consumer-owned Tesla cars currently have fully autonomous driving capability, all of its new cars are shipped with all the hardware necessary for that capability–sensors, cameras, and onboard computer. [8] While the car is operating, the sensors collect data which then Tesla uses to improve its automatic crash prevention and limited autonomous driving features. [9] This proprietary data creates another powerful barrier to entry.

But the digital nature of Tesla’s products also gives rise to substantial threats. As its cars gain autonomous and ride-sharing capability, the firm will need more processing power and data storage in both the cloud and the car. Google and Amazon are capturing more and more of the cloud services market. As it requires increasingly more cloud storage, computational, and connectivity, Tesla needs to beware of its digital suppliers gaining pricing power. It’s uncertain how Tesla is working to address this risk.

Additionally, a wide consortium of automakers–Audi, Chrysler, Ford, Volkswagon, among many others–that have committed to using the open-source Google-maintained Android operating system in their cars. Tier one component manufacturers might all begin producing their products to be compatible with Android, and Google would then have a lot of indirect power in determining product development in the auto industry. Tesla has recognized this competitive threat, and open-sourced its patents in 2014. [10]

There are huge opportunities and challenges for Tesla on the horizon. How can Tesla dramatically ramp up production? Is there a way to maintain its high quality while outsourcing a greater portion of component manufacturing?

Lastly, how can Tesla broaden its small footprint in the Chinese luxury car market? With the Chinese mandate of a joint-venture, and significant cybersecurity and intellectual property concerns, how can Tesla win in China?

(733 words)

Sources

[1] Lynda M. Applegate and Arnold B. Peinado, “Tesla in 2015,” HBS No. 9-817-081 (Boston: Harvard Business School Publishing, 2017), p. 6

[2] Global Automotive & Transportation Research Team at Frost and Sullivan, “Tesla Motors’ Mobility Strategy–Executive Update,” April 2016, p. 8.

[3] Lynda M. Applegate and Arnold B. Peinado, “Tesla in 2015,” HBS No. 9-817-081 (Boston: Harvard Business School Publishing, 2017), p. 6

[4] Automotive Logistics, “Tesla’s supply chain set for a surge”, July-September 2016, p. 10-11.

[5] Automotive Logistics, “Tesla’s supply chain set for a surge”, July-September 2016, p. 10-11.

[6] Lynda M. Applegate and Arnold B. Peinado, “Tesla in 2015,” HBS No. 9-817-081 (Boston: Harvard Business School Publishing, 2017), p. 4

[7] Global Automotive & Transportation Research Team at Frost and Sullivan, “Tesla Motors’ Mobility Strategy–Executive Update,” April 2016, p. 6.

[8] Autopilot, from Tesla website, https://www.tesla.com/autopilot, accessed Nov 2017.

[9] Lynda M. Applegate and Arnold B. Peinado, “Tesla in 2015,” HBS No. 9-817-081 (Boston: Harvard Business School Publishing, 2017), p. 4

[10] Tesla Motors, “All our patent are belong to you,” https://www.tesla.com/blog/all-our-patent-are-belong-you, accessed Nov 2017.

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3 thoughts on “Will Tesla build the autonomous ride-sharing network of the future?

  1. A train is rolling uncontrollably towards five people unable to move away from the tracks. You are standing next to the tracks between the train and the people. You can pull a lever that diverts the train onto a different track, saving the life of the five people. However, there is another person on the alternate track, unable to move away. Will you pull the lever?

    Whether we like it or not: self-driving cars must be programmed to kill [1]. The famous “trolley problem” has originally been introduced as a purely theoretical thought experiment on ethical dilemmas in 1967. The emergence of autonomous vehicles has made this experiment much more real than originally intended [2]:
    * In cases of potential crash situations, what decision algorithms should autonomous vehicles follow?
    * Who is responsible for defining these rules?
    * Who is accountable for the outcomes?

    The essay underlines Tesla’s readiness to leverage its hardware for autonomous driving features. These features rely on Tesla’s propriety data that are portrayed as a barrier to entry for other industry players. In essence, industry players are now “competing” for more effective decision algorithms. While the desired outcome might be obvious in most situations, the answer to ethically loaded decisions touch on the values and fundamental belief systems of our society.

    Tesla’s management should therefore think beyond the competitive aspects of autonomous driving mentioned in the essay. Given its leadership position in the tech space, the management bears moral responsibility to stimulate a much-needed debate: Envisioning a future of fully autonomous vehicles, how do we as a society deal with these ethical dilemmas? What are the rules we can collectively justify to the best of our knowledge and beliefs? And how can we collectively define a fair decision making process that allows us to reach these conclusions? Welcome to the real word, Tesla. Pandora’s box has just been opened…

    _____
    [1] https://www.technologyreview.com/s/542626/why-self-driving-cars-must-be-programmed-to-kill/
    [2] https://www.theatlantic.com/technology/archive/2013/10/the-ethics-of-autonomous-cars/280360/

  2. Great write-up. I’m always interested in any Tesla headline. The way that Tesla has vertically integrated their supply chain to offer the suite of products at the prices they do is nothing short of amazing. From the Giga-Factory producing cost-efficient batteries to the Powerwall and highway charging stations providing multiple touch points for consumers to keep their cars charged, it is without a a doubt Tesla is the leader in electric vehicles.

    I’m confident that Tesla will remain the leader in this technology space as well. However, will Tesla be able to maintain their advantage when it comes to building the best autonomous driving system out there? Sure, Tesla has vehicles with more autonomous driving features than any company’s vehicles today, but what happens in 10 years if Google has a substantially superior product?

    I’m not so confident that Tesla will be able maintain the autonomous driving edge it has currently. If they do lose ground in this area to Google, Apple, or Uber, will Elon Musk be able to admit he’s lost and switch over to a competitor’s product on Tesla’s cars? If, in 10 years, Tesla has dominated the new car market, will these companies (Google, Apple, Uber), many of whom have partnered with traditional car manufacturers, allow their system on Tesla’s cars?

  3. Nice work!

    The essay appears to imply that the production bottleneck is appearing because of their practice of producing only after the customer order is placed. I’m not sure I agree there – I actually think this visibility of customer demand will actually help them plan their production process much better and should actually decrease the bottleneck.

    I wonder if Tesla’s issues of lacking scale is actually exacerbated by rather than alleviated by vertical integration. While Tesla might have the edge in building a superior autonomous vehicle, it is clear that the production process is yet to be re-engineered to achieve true scale. Tesla should be spending resources in optimizing this rather than vertically integrating into the battery plant in Nevada.

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