Tesla's Vertical Integration Is Something Automakers Are Eager To Copy

Tesla's primarily in-house model reduces supply chain needs and dependence on hardware and software from other companies.

By: EVANNEX

Apr 20, 2022 at 7:59am ET

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Posted on EVANNEX on April 20, 2022, by Zachary Visconti

Automotive manufacturing has largely relied on suppliers in the past several decades, though the emergence of software-based electric vehicles has many global auto brands questioning the age-old model.

Tesla, a pioneering force in the shift, offers a vertically integrated product that is mostly manufactured in-house — reducing supply chain needs or dependence on hardware and software from other companies.

Above: A look at Tesla's production output (Source: Tesla)

As the auto industry shifts toward more in-house manufacturing in a vertically-integrated system like Tesla’s, major automakers are facing the need for radical change in how they’re doing things, as detailed by News18 in a recent report.

Tesla uses mostly proprietary technology that the automaker engineers, designs and manufactures itself. This model is far different from automakers such as Ford that simply bought components off the shelves of their suppliers in years past, in a model that Tesla CEO Elon Musk once called “catalog engineering.”

During a 2020 earnings call, Musk said, “We’re designing and building so much more of the car than other OEMs who will largely go to the traditional supply base and [execute] like I call it, catalog engineering."

The news comes just weeks after Ford officially separated its EV business from its internal combustion engine business despite dealership concerns about the move reported by CNBC. Ford made the move in hopes to generate Tesla-style stock capitalization, and to further streamline the supply and production of EVs.

Ford CEO Jim Farley emphasized the company’s need to move away from the “catalog engineering” model at a conference last month, saying “The most important thing is we vertically integrate.” Farley also added that Ford is now looking to have control over its supply chains “all the way back to the mines” where minerals for EV batteries are mined.

Similar shifts and strategies can be seen in companies like Volkswagen, General Motors and Mercedes-Benz, while most of them are still stuck purchasing electric motors from suppliers and, in some cases, struggling with software development.

Newer EV automaker Lucid Motors also features a more vertically integrated model, which company CEO Peter Rawlinson notes aids companies like Lucid and Tesla in the modern auto technology race.

In an interview, Rawlinson said, “Major players have realized electric vehicles are the future, but they have yet to widely recognize that they have to up their game in terms of motors, transmissions, battery technologies, inverters and electric powertrains." Rawlinson added, “The electric powertrain cannot be bought off the shelf at a world-class standard, it is not a commodity. This is a technology race and the market doesn’t see it yet."

Rawlinson, a previous vice president of vehicle engineering at Tesla, has managed Lucid’s manufacturing primarily in-house, in much the same way as Tesla did. The days of automakers outsourcing components and software manufacturing to save money on large-scale production could soon be outdated.