Tesla #4: Suppliers and Software

When Tesla started off, there were no battery manufacturers who had either the reliability or the volumes (quantity) needed for a niche electric car wannabe (like Tesla), let alone one with mass market ambitions (delusions?). The supply chain then was yet another challenge Tesla faced, writes Tim Higgins.

 

Early on, one of its lithium-ion battery suppliers, LG Chem, sent it a letter with a dire demand: Return our batteries. Why? There had been several high profile issues with lithium-ion batteries – one incident involved a fire on a cargo plane (a different manufacturer); another was Apple’s recall of 150,000 laptops (batteries by LG Chem). After those incidents, LG Chem’s legal department was worried that the any fire in a car would bring lawsuits on LG Chem as well.

 

Tesla’s assumption that it would create the market and therefore new battery suppliers would join in was proving to be wrong. The reason for the lack of interest was the same as LG Chem – the fear of lawsuits if the batteries caught fire in a car, maybe even burn the house in which it was parked. And who was to say Tesla would even succeed? Not worth the risk, reasoned the suppliers.

 

Eventually, after a lot of begging, pleading and dangling of the carrot (what if Tesla succeeded? Imagine the battery market it would create), Tesla was able to persuade Panasonic to become the battery supplier. Not only that, Elon Musk persuaded Panasonic to invest $30 million in Tesla. The supplier was investing in the company that they hoped would create the market…

 

Years later, when Tesla was getting closer to building electric cars in even greater numbers, they even built a “mule factory” to convince Panasonic to invest even more. At this stage, Panasonic and the other suppliers weren’t sure if Tesla was getting too ambitious. Tesla decided to start constructing the giant factory anyway – the mule factory. Bulldozers, earth movers, massive lights – it was all there at the site. Look, said Tesla, to its suppliers (including Panasonic), we’re going ahead. With or without you. If you don’t jump in, you will be replaced by other suppliers. Most of the suppliers, including Panasonic, joined in. The fear of missing out was too high.

 

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Elon Musk, remember, comes from a software/Internet background. Ergo, he wanted the car’s software to have the capability to control a lot more things than just the usual audio-video system.

 

The software capability would prove to be enormously useful to the company. Like the time they realized that the underside of the car was too low, which led to it getting scraped by debris on the road. In turn, since the batteries were at the bottom of the car, such scrapping could (and did) set off the odd car fire. The solution was obvious – raise the underside of the car. For any other car manufacturer, this would have led to a recall and costly changes in the manufacturing line. With Tesla, the solution came via the software – the underside could be raised by just updating the software. Much faster, and so much cheaper.

 

The Autopilot feature was another software capability – the car could drive itself. This one would prove to be a double-edged sword. While the feature made the car feel very sci-fi, any error could lead to disastrous consequences. Tesla went ahead with it, had its share of accidents, but the overall perception was positive.

 

So much software in the car even allowed Tesla to make previously unheard of things into pay-for-it options. Like the rate of acceleration of the car (if you want the 0 to 60 acceleration in lesser time, pay for it) became a paid option. Such options would add to Tesla’s profits eventually.