Elon Musk may single handedly revive a business practice that’s gone out of style (TSLA, SCTY)

elon muskBack to the future.Kevork Djansezian/Getty Images

Tesla and SolarCity are pitching their combined value — “synergies,” if you must — ahead of vote by shareholders in a few weeks.

Taking a car company and combining it with a solar company might not make a lot of sense at first glance (I don’t think it makes any sense at all), but Tesla CEO Elon Musk is doubling down on a business idea that he’s been amping up with Tesla.

It’s called “vertical integration,” and it’s something that many modern manufacturing businesses have spent decades running away from.

This is from Tesla’s most recent blog:

Tesla and SolarCity have a tremendous opportunity to create a vertically integrated sustainable energy company offering end-to-end clean energy products. Leveraging the core competencies of each company, consumers can look forward to deploying and consuming energy in an efficient and sustainable way, with SolarCity’s existing solar power systems and ultimately with a solar roof, a Powerwall 2 that maximizes the benefits of the combined system, and a Model S, Model X or Model 3, all while lowering costs and minimizing dependence on fossil fuels and the utility grid.

Vertical integration is old hat for Tesla; Musk and his team co-exist fitfully with their supply chain, as design- and production glitches with the Model X SUV have shown. At one point, the automaker got so frustrated with a seat supplier that it brought the design and manufacturing in-house.

Lean is not the answer

Major automakers have done whatever they can to move away from this. For 30 years, “lean” or “just in time” manufacturing has been their goal; the Japanese carmakers pioneered it and the rest of the industry followed. Components now show up at assembly plants worldwide just as they’re needed, lowing inventory costs and enabling manufacturers to rapidly adjust to market shifts.

Musk doesn’t want to play that way, and in the process he’s become the world’s most prominent advocate for vertical integration, and old-school idea that’s appealing if you’re a visionary CEO who wants to influence numerous aspects of his products.

It’s worth noting that Tesla isn’t acquiring SolarCity to have a solar business — rather, Musk sees Tesla and SolarCity as an ecosystem, selling electric cars that run on power captured by solar panels and stored in home battery packs.

If you’ve paid any attention to manufacturing since the 1970s, you’d conclude that this is a ruinous idea. And Musk isn’t an idiot — he has some ambitious plans to re-invent vertical integration. But for the time being, if you want to know why Tesla has struggled to build as many vehicles as it has promised (the shortfall this year could be 10,000), look no farther than the boss’ preoccupation with going in exactly the opposite direction of almost every other car company on Earth.

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Most Popular

To Top