Outsourcing : Tesla is Bucking the Trend

Debates over outsourcing are appearing with more frequency in the press. Companies have outsourced so many of their processes, through “Business Process Outsourcing”, that many now just sit as marketing companies. Examples include Apple, Google, Amazon, IBM, and many others, that produce very little, but have contract manufacturers such as Jabil, Flex, and others produce for them. Even automotive companies are now nothing more than assemblers, having the majority of their components built by tier 1 and tier 2 suppliers that must come together in assembly.

But there is one notable exception: Tesla. Their story is documented in an article in the Economist which discusses the radical approach being adopted by Tesla. As noted in the article, “Tesla has also rewritten the economics of making electric cars. It tackled high costs by stringing together hundreds of small, mass-produced laptop batteries. Tesla claims that its power-packs cost half what big carmakers pay their suppliers for custom-designed large-format batteries, and that its Gigafactory, a huge battery plant close to completion in the Nevada desert, will cut costs by another 30%.”

Tesla makes most of their parts inhouse. One reason is that they are seeking to innovate – and have “super chargers” that can charge a battery in 40 minutes. One of my students who worked with them last year, also developed one of the most sophisticated “should cost” models I’ve ever seen! This is testimony in my own mind to their ability to cut costs and understand the true insource-outsource tradeoffs that have to be made, that enables their frugal outcomes. He also noted that they have streamlined their procure to pay approach, which is much more streamlined than his former experience at a large Japanese automotive company, where 5 signatures were needed for a $30K purchase order. Tesla places greater trust in individuals, and as an intern he was able to get a purchase order for millions approved in 20 minutes….

Tesla isn’t just insourcing their production – they are also insourcing their sales channels. Tesla sells directly to the public through its website and in showrooms in shopping centers (of all places!) The retail market compared to the cost of maintaining showrooms is unsure at this point – but it is one that others like Apple have certainly factored into their calculations.

This is all to say that “insourcing” may be coming back. Other examples include Amazon, which is leasing 20 Boeing 767 jets for its delivery service, and reducing their contract volume with FedEx by purchasing their own fleet in selected major cities in the US. What’s next? Recall that Henry Ford used to own coal mines that was used to produce the steel for his cars….but that may be stretching it a bit…