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Tesla Makes its Own Chips during Supply Shortage

Tesla can shrug off the chip shortage. The company makes its own chips, and they are better!

Much has been said about the chip shortage plaguing US manufacturers and its effect on car prices. However, this crisis has enabled Tesla to showcase its innovativeness and resilience to supply chain disruptions. As early as 2016, the company started developing a chip with a superior design. It is now reaping the benefits of its foresight and investments.

Video Spotlight: Elon Musk’s New Chip Will Transform how YOU Look at Electric Cars (September 15, 2021, Tesla Vision)

This post is based on the Forbes article, Tesla Flexes Innovative Muscle by Manufacturing Own Chips during Supply Crunch, by A. Cohen, September 22, 2021, and the YouTube video in the Spotlight. Image source: Shutterstock / Montypeter.

Discussion Questions:

1. What are the consequences of silicon wafer shortages for US manufacturers?

Guidance: The consequences of silicon wafer shortages have been both negative and positive. The negative consequences include late deliveries, bottlenecks, higher component prices, idle capacity, and lost sales. Fortunately, these problems have also highlighted the U.S.’ reliance on imports for critical sectors of the economy and the country’s defense. They also showed how ingenuity in the private sector produces solutions and superior alternatives.

2. Describe Tesla’s product innovation?

Guidance: Since 2016, Tesla has tried to decrease its reliance on imported computer chips. It decided to produce its own chips and pursued a superior material technology: Silicon Carbide (SIC). SICs have better thermal conductivity than traditional silicon wafers, which improves energy efficiency, a key to the company’s competitive advantage. The technology also uses materials that are more readily available (see video). Tesla is therefore less reliant on suppliers of critical components, less exposed to supply chain disruptions, and ahead of the competition.

3. For Tesla, what are the advantages and disadvantages of vertical integration?

Guidance: Vertical (in this case, backward) integration presents several advantages: 1) lower exposure to component shortages, 2) better control over design and quality, 3) more timely delivery, 4) lower cost of components, and 5) possibly better utilization of capacity. The primary disadvantage is the risk of not being as competitive as suppliers specializing in one product. However, in Tesla’s case, innovation has always been at the forefront of its operations, and its R&D department is especially strong. Furthermore, the high and steady demand for its cars justifies the company’s production of chips. Note: Tesla is also pursuing forward integration through direct sales to consumers. For example, Tesla recently bypassed state law in New Mexico by setting up a sales, service, and delivery center on Native American land.


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