To say that the legacy automakers got blindsided by the electric vehicle boom is an understatement. After a decade of producing just enough EVs to satisfy government regulators, and insisting that customers didn’t want EVs (while largely avoiding advertising or marketing them), carmakers now have more orders than they can handle.
Above: Teslas parked in a row. Photo: Claudio Schwarz / Unsplash
Way, way more than most of them can handle, as anyone who’s shopped for an EV recently can tell you.
The surging demand is due to a number of factors—gas prices are up, and so is awareness of the climate emergency—but the main impetus is that the technology has gotten a lot better, and the price premium over legacy stinkers is (far too slowly, but surely) shrinking. Over the next couple of years, the new incentives in the Inflation Reduction Act, along with the boost to infrastructure investment in the Bipartisan Infrastructure Law, will turbocharge demand even further.
Some companies, such as Ford and GM, are rising to the challenge, rushing to increase production, reform their creaky corporate structures and dealership networks, and build new supply chains that prioritize local production of batteries and other components. Others continue to try to hold back the tide, pouring millions into anti-EV lobbying efforts—but even the industry’s most backward-looking brand, Toyota, is quietly building battery capacity and planning new models.
All this is good news, but what should have been done in an organized way over the last several years is now taking place in a mad scramble. The vibe in the auto industry at the moment is chaos, and it’s hurting the business. Customers are having to wait for months or in some cases, years, to get the cars they want, and automakers are leaving gobs of money on the table.
However, there’s one automaker that seems to be cruising smoothly down the highway, as the rest of the pack struggles. Tesla has also suffered from shortages of chips and other components (to say nothing of some self-inflicted PR disasters), but it continues to enjoy an absolutely dominant market share in most of its markets.
Furthermore, at a time when other brands are struggling to keep up with demand (some would-be buyers of the much-anticipated Hyundai Ioniq 5 have been told they’ll have to wait two years), Tesla recently announced that it has trimmed its famous order backlog, and wait times for some models have been reduced to mere weeks.
Golly, what’s their secret? Well, there’s never been any secret—we EV journalists have been writing articles, pieces, columns and posts about Tesla’s advantages over the legacy companies for some years now. However, the contrast between the two schools of automotive thought has come into sharp relief now that the Old Guard finds itself in “production-constrained” mode.
James Carter, a prolific poster of EV-related information on LinkedIn, recently fielded a question from an employee of one of the legacy OEMs: “Why is Tesla always able to expand, and doesn’t have the supply constraints that we do? I don’t get it.”
In response, Mr. Carter eloquently expressed some of the concepts that may seem rather obvious to Tesla’s Silicon Valley-oriented milieu, but that appear to remain “secrets” to those brought up in the traditional auto industry.
One thing that may have enabled Tesla to navigate the components shortages more dexterously is the comparative simplicity of its catalog. The company offers only four models, and lately, it’s mainly been pushing the two newer ones (Models 3 and Model Y). Each model generally comes in only three variants (RWD, LR, Performance) and offers only three major options (interior color, exterior color and wheels). This is a lean lineup compared to any of the other automakers, and as Carter notes, it “makes parts sourcing in tight supply situations much easier.”
Tesla is also much more vertically integrated than other auto OEMs. The company makes many parts itself, and is able to maintain tighter control of development and production. This was not always the case—the young Tesla relied heavily on outside suppliers and even another automaker (Lotus) to build the Roadster. But as the company grew, it found that suppliers couldn’t keep up with its fast pace of innovation in both vehicles and production processes, and it gradually brought more and more functions in-house.
This policy served Tesla well when the chip shortage reared its ugly head. Like every other automaker, Tesla wasn’t able to get the chips it had ordered in sufficient quantities. However, because of its unified computing architecture, and its tight control over its software, it was able to rewrite its software in order to take advantage of the chips that were available. “We have used alternative parts and programmed software to mitigate the challenges caused by these shortages,” the company said. The legacy automakers didn’t have that option, because their computing software and hardware was under the control of suppliers.
Vertical integration and a lean lineup are just a couple of the factors that enable Tesla to succeed. But the defining difference is that Tesla exists only to sell EVs. As Mr. Carter notes, it doesn’t have to maintain supply chains for two different types of powertrains. It has also been able to set much more aggressive production targets than any of the incumbents.
Most automakers wouldn’t bet big on EVs, because they didn’t want to divert resources from their existing (and until recently, extremely profitable) gas-guzzlers. They were (and some remain) skeptical that EVs would “catch on,” so they set comically timid production targets, and this is now coming back to bite them.
As the more forward-looking companies (Ford, GM, VW, Hyundai) understand, going electric isn’t just a matter of launching new cars—it’s going to require a complete restructuring of their companies (and yes, this is going to involve making some painful decisions). These companies have built vast empires over many decades, and in order to thrive in the electric future, they’re going to have to tear them down and rebuild them. Tesla, on the other hand (and hopefully, startups such as Lucid and Rivian) just needs to scale up what it already has.