Microchip crisis boosts repatriation of product development: Tesla leads the way

Illustration: Tesla

For over a year, manufacturing companies—especially the automotive industry—have been desperate for more microchips.

The coronavirus crisis has put pressure on global supply chains, and prices and delivery times have increased significantly. In the automotive industry, this has resulted in close to 10 million fewer cars produced in 2021 than planned.

However, there is one exception—Tesla’s electric cars. In 2021, more than 935,000 Teslas rolled out of factories in the US and China—a number that is close to double the one from the previous year.

But how can one car manufacturer, which is so dependent on microchips to control all parts of the car, increase its production during a period when others have to keep weekly factory shutdown days?

An important explanation is the level of vertical integration across all stages of the production processes.

“The coronavirus crisis has shown how vulnerable globalized supply chains are. It’s a bit of a slap in the face to principles like just-in-time and lean manufacturing, which have resulted in massive outsourcing in recent decades. Tesla has shown that when you repatriate more tasks and competencies, you eliminate a large amount of risks and vulnerabilities,” says Jean-Paul Skeete, lecturer in logistics and operations management at Cardiff Business School to Ingeniøren.

Two weeks of reprogramming

Specifically, Tesla has succeeded in reprogramming the cars’ software to adapt to the components available on the market and not necessarily the exact microchips for which they were originally designed. One of Tesla’s major competitors, Volkswagen, has even given the nod to Tesla’s ability to reprogram software that supports new microchips in just 2–3 weeks.

This is possible because Tesla has much more control over design, development, and production processes than its competitors.

“We're designing and building so much more of the car than other OEMs (original equipment manufacturers, ed.) who will largely go to the traditional supply base and like I call it, catalog engineering,” the CEO of Tesla Elon told Reuters.

Another factor is Tesla’s willingness to take risks and its ability to read the market. When the coronavirus spread in the spring of 2020, many car manufacturers cancelled large orders of microchips due to fear of a slowdown in car sales. However, that slowdown never happened, and in the meantime, the cancelled microchips were redirected to consumer electronics manufacturers. This left many car manufacturers with a huge shortage of microchips, which has led to temporary production stoppages at car factories around the world.

However, the satisfaction was short-lived—even for Elon Musk and Tesla, who the other day had to delay the launch date of their long-awaited pickup truck, Cybertruck. According to Reuters, Tesla has also completely removed USB ports, radar sensors, and certain Bluetooth microchips from some car models in order to keep up with the growing production requirements.

Europe picks up development

The diametric opposite to the vertical integration at Tesla is found in the German automotive industry, where widespread use of subcontractors has long been the standard both for software and hardware.

Outsourcing of both production and product development stems from the idea of lean and just-in-time production, which really gained traction in the 1990s with Toyota as the standard-bearer. This development accelerated further in the wake of the financial crisis in 2007. But the trend has been turned upside down since the coronavirus crisis.

It is not only Tesla that has figured out the benefits of taking back more tasks from subcontractors. Volkswagen and other major European car manufacturers are also making similar moves, and 22 battery factories are currently under construction across Europe, where investments in microchip and semiconductor technology are also growing.

This is happening with massive political backing from the European Commission, which has set aside billions in support to make Europe technologically independent from both Asia and the United States. In the US, Ford has also announced that it will now develop its own microchips together with Global Foundries.

For the most part, however, the repatriation is taking place only recently in the current microchip crisis and can therefore not yet be seen in the production data.

Problems in China threaten a normal 2022

Although the manufacture of microchips is slowly being scaled up, and the supply chains are being re-established, there is still a long wait before the delivery time of microchips and other electronic components reaches pre-coronavirus levels. On the one hand, it takes a long time to build up new manufacturing capacity, as the manufacture of semiconductors and microchips is extremely complex. At the same time, the spread of Omicron in China threatens to shake the supply chains again.

German export organization BGA warned this week of new disruptions to logistics and supply chains due to the situation in China.

“There is no risk of collapse, but a massive disruption of supply chains—at least temporarily,” said Dirk Jandura, president of BGA, according to the newspaper Funke.

Danish companies are in the same boat

Danish companies are on an equal footing with the rest of the world, fighting to procure components on time. A survey carried out in October by DI Digital, which represents the Danish electronics industry, showed that three out of four companies have problems obtaining the necessary microchips. Among other things, this has led Danfoss to make the same change as Tesla.

“But in more than a handful of cases, we have had to redesign a product in order to help customers who are waiting for products they have ordered. It may be engine control that needs to be modified, or perhaps controls in a cooling or hydraulic system,” Danfoss CEO Jesper V. Christensen told Børsen.

Illustration: DI Digital

He explains that it takes a lot of resources to switch from one chip to another.

“We are also learning to become even more lean. All wasted time must be eliminated in such a situation. But think of the people who suddenly have all their plans changed by such an urgent task—and of the production manager who—again—has to state that the production plans have to change. It requires a strong team, and we have that. But it’s better to have a longer planning horizon,” Jesper V. Christensen told Børsen.

Other companies like Demant and GN also say they have started redesigning some products in an attempt to address some of the supply challenges.