Monday, December 19, 2016

Elon Musk rediscovers vertical integration

The 1980s introduced the era of "greenmail" and other forms of financial piracy.  It wasn't just the resulting destruction of essential national wealth that was so disturbing, it was the bizarre rationalizations for why this destruction did not matter. Those of us who argued for example, the economic value of tight manufacturing integration, were hopelessly overmatched. We were up against the simple argument that it was better to move production from somewhere it cost $60 / hour to a location where labor could be had for $10 a day. Against that reality, we could only offer intangibles. Unfortunately, these "intangibles" included the values and practices that that allowed our great-grandparents to build in extremely hostile environments (like Minnesota—it was -22°F / -30°C yesterday morning) while turning them into warm and comfortable habitats with lighting, abundant food, transportation systems, educational institutes, medicine, and the other requirements of life.

The pioneers who ventured out onto this bleak landscape were not exactly building something from nothing. Around here, they started out with excellent soils, abundant water supplies, trees that yielded superb lumber, and a large supply of rocks—most especially limestone. Even so, there were no instructions on how to turn these resources into the farms and villages of settled life. The tools needed to build and the skills to operate them were especially scarce.  And yet, the resulting artifacts of civilization were figured out—in many cases with unusual sophistication. All of this happened so recently that the evidence that some mighty builders had roamed this land can still be found by anyone remotely interested.  My childhood and youth was spent marveling at these accomplishments—my favorite question seemed to be, "Now how do you suppose they built that?"

What fascinated me most was the realization that almost everything I could see and touch had been created by people who had no "qualifications" to build them. There were no schools or books that taught aeronautical engineering to the Wright brothers or Glenn Curtiss, no instructions to guide Ford into making automobiles or Firestone into tires. These folks were self-taught simply because there were no other teachers available. The greatest inventions of human history were brought to us by unqualified amateurs. Because this was so nearly miraculous, the practices and work habits that allowed the utterly "unqualified" to pull off feats that most observes still consider magic became extremely important. These were the factors of production that the financial pirates so happily destroyed in their get-rich-quick schemes of the 1980s.

The act of producing electric cars in a world designed to produce internal-combustion vehicles powered by liquid fossil fuels is similar to the acts of pioneering and invention practiced by the those early industrial giants. The most charming proof of this now comes from Elon Musk who has recently discovered the same virtues of vertical integration that Henry Ford so massively demonstrated when he built his famous River Rouge factory in Dearborn Michigan. It turns out that many of the old ideas still work.

Vertical Integration: How Tesla’s Elon Musk Employs A Long-Lost Approach From A Bygone Era In American Business

December 17th, 2016 by Matt Pressman
Originally published by Evannex

Of all places, on the other side of the world, the South China Morning Post* teaches us a valuable lesson about American business. The subject: Tesla Motors. To start, they provide a quick history lesson: “By the turn of the 20th century, Corporate America was characterised by… household names such as Standard Oil, DuPont, IBM, Ford, and General Electrics [which] were all vertically integrated. They regularly bought out upstream suppliers and acquired downstream distributors. Their activities were broad, touching all stages of production – from R&D to manufacturing and assembly… But by the 1980s, the system had been dismantled.”

Why? In short: “global outsourcing. In the pursuit of higher return on investment, CEOs were dreaming about eliminating capital expenditure. Taking advantage of cheap labour in Asia, companies exited manufacturing en-masse in America… Gone were the days when Henry Ford still ran his rubber plantation, timberland, coal and iron ore mines to feed raw materials to his Michigan factory. Today, almost no one makes their components. Automakers rely on a worldwide array of foreign suppliers.”

Nowadays, automakers succumb to suppliers “across a great span of geographic regions while making sure thousands of moving parts perform to perfection.” Ali Javidan, former head of vehicle prototyping and R&D at Tesla explains, “If Daimler wants to change the way a gauge looks, it has to contact a supplier half a world away and then wait for a series of approvals. It would take them a year to change the way the ‘P’ on the instrument panel looks.”

In contrast, “Tesla has long realised breakthrough innovation demands the integration of multiple disciplines. Elon Musk saw depending on foreign suppliers as a weakness, not cost savings. At the Palo Alto headquarters, visitors would notice the dramatic use of vertical integration.” Looking ahead, “Tesla [had] started developing its own battery chemistry with partners like Panasonic… [and] it is also building its Gigafactory which will allow it to produce batteries at a scale that exceeds the current capacity of today’s global supply chain, and drive down production cost to an unprecedented level.”

Elon Musk has said, “What we are doing at the Gigafactory is consolidating the production of the pack all the way from the raw materials, so there’s literally … rail cars of raw materials from the mines, and then out come completely finished battery packs”

Musk is bringing the lessons of a bygone era, a golden age of American business, back to life, via vertical integration. “And just like that, the company [Tesla] has fused together electronics, software, and metal and batteries that traditional automakers are now struggling to match.” It’s fascinating that while so many American media outlets troll Elon Musk, instead the South China Morning Post* teaches its business executives that, “Tesla taught us important lessons about innovation. To stay on top of competition, we must ask ourselves… as a thought experiment, imagine Elon Musk were to enter your industry, what would he do differently from the others?” more

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