3 ms·

Gasprom, Dell and Tesla may be some examples of companies that have done will with vertical integration.

AnthonyMouse 5y ago
Tesla is kind of vertically integrated, but mostly because they were the first to make a popular electric car, so adequate supply chains for those components didn't previously exist. It remains to be seen whether it's still an advantage when most of the industry is making electric vehicles and competitive alternate suppliers for those components are common. Dell installs a Microsoft operating system on SSDs from the lowest bidder and puts them in a Foxconn motherboard with a CPU from AMD or Intel. Gasprom is a majority state-owned company in Russia. This can't really be an example of anything to do with a free market. The typical example is Apple, because they're currently very profitable. But they've been doing vertical integration for decades and their history is full of instances of almost going out of business. The previous "see how well vertical integration works" example was IBM.
- tyfon 5y ago
  Tesla also makes components like seats internally. A lot of companies just outsource that and lose out on the profits, it is one of the reasons tesla has such high margins.
  - AnthonyMouse 5y ago
    > Tesla also makes components like seats internally. For the same reason. Vehicle seat are, for better or for worse, typically model-specific. Before there was Tesla there was nobody making Tesla seats. Would anybody be surprised if they start outsourcing that soon, given that they now have enough volume to attract third party suppliers and seat manufacturing is certainly not their competitive edge? > A lot of companies just outsource that and lose out on the profits, it is one of the reasons tesla has such high margins. Vertical integration increasing margins is just an accounting trick. It costs $5 to make a widget, the widget maker sells it to the car maker for $6, the car maker sells it to the customer for $8. The non-vertical car company has a $2 unit margin, the vertical car company has a $3 unit margin. But to get it they take on all the risks and expenses of the widget maker. If making widgets is a commodity market then the $1/unit is going entirely to fixed overhead (otherwise someone would charge less and gain market share). Taking on the fixed overhead in exchange for the $1 is breakeven and increases systemic risk by reducing supply diversification. But on paper your margins increase by $1.
    - nebula8804 5y ago
      >For the same reason. Vehicle seat are, for better or for worse, typically model-specific. Before there was Tesla there was nobody making Tesla seats. Would anybody be surprised if they start outsourcing that soon, given that they now have enough volume to attract third party suppliers and seat manufacturing is certainly not their competitive edge? I doubt this will happen. Here is the reason they started making seats themselves as explained by the big cheese himself: https://youtu.be/YAtLTLiqNwg?t=357 https://youtu.be/YAtLTLiqNwg?t=357 Given what happened when they worked with supplier last time, I doubt they would want to give up the ability to innovate by going back to a supplier even if they are big. Furthermore, I think suppliers might not be chomping at the bit to work with Tesla anymore. When the Model 3 was being developed, that insanely large preorder volumes caused some suppliers to do whatever it took to get the order from Tesla because of FOMO. Some even stripped their margin to the bone in the hopes of establishing a long term relationship with Tesla. In the end Tesla did not deliver on the numbers they promised and this lower volume caused massive financial problems for some suppliers, especially the smaller guys. I think there were even some bankruptcies of smaller outfits. Given Tesla's reputation as difficult to work with, I don't fully think they will get preferential treatment compared to someone like Toyota or Honda (which I hear suppliers love to work with). FUN FACT: The largest Tesla skeptic subreddit /r/realTesla was started by someone who was supposedly a liaison between Tesla and the seat supplier during the Model X days. In fact he watched the whole Model X train wreck from start to finish and his banning from /r/teslamotors when he detailed all the disasters happening during Model X led to the creation of /r/Realtesla.
      - AnthonyMouse 5y ago
        > I doubt this will happen. Here is the reason they started making seats themselves as explained by the big cheese himself This is an explanation for why they designed their own seats, and basically amounts to "existing seats were uncomfortable." That makes sense when the status quo is junk, but now they've got a good seat, what does it matter who manufactures it? Are they expecting to do a lot of further seat innovating in the future? Does seat technology have a rapid rate of change? > Given Tesla's reputation as difficult to work with, I don't fully think they will get preferential treatment compared to someone like Toyota or Honda (which I hear suppliers love to work with). People care more about what you're doing right now than what you did when you were just starting out. Tomorrow's reputation is based more on today than it is on yesterday.

Tesla is kind of vertically integrated, but mostly because they were the first to make a popular electric car, so adequate supply chains for those components didn't previously exist. It remains to be seen whether it's still an advantage when most of the industry is making electric vehicles and competitive alternate suppliers for those components are common. Dell installs a Microsoft operating system on SSDs from the lowest bidder and puts them in a Foxconn motherboard with a CPU from AMD or Intel. Gasprom is a majority state-owned company in Russia. This can't really be an example of anything to do with a free market. The typical example is Apple, because they're currently very profitable. But they've been doing vertical integration for decades and their history is full of instances of almost going out of business. The previous "see how well vertical integration works" example was IBM.

tyfon 5y ago
Tesla also makes components like seats internally. A lot of companies just outsource that and lose out on the profits, it is one of the reasons tesla has such high margins.
- AnthonyMouse 5y ago
  > Tesla also makes components like seats internally. For the same reason. Vehicle seat are, for better or for worse, typically model-specific. Before there was Tesla there was nobody making Tesla seats. Would anybody be surprised if they start outsourcing that soon, given that they now have enough volume to attract third party suppliers and seat manufacturing is certainly not their competitive edge? > A lot of companies just outsource that and lose out on the profits, it is one of the reasons tesla has such high margins. Vertical integration increasing margins is just an accounting trick. It costs $5 to make a widget, the widget maker sells it to the car maker for $6, the car maker sells it to the customer for $8. The non-vertical car company has a $2 unit margin, the vertical car company has a $3 unit margin. But to get it they take on all the risks and expenses of the widget maker. If making widgets is a commodity market then the $1/unit is going entirely to fixed overhead (otherwise someone would charge less and gain market share). Taking on the fixed overhead in exchange for the $1 is breakeven and increases systemic risk by reducing supply diversification. But on paper your margins increase by $1.
  - nebula8804 5y ago
    >For the same reason. Vehicle seat are, for better or for worse, typically model-specific. Before there was Tesla there was nobody making Tesla seats. Would anybody be surprised if they start outsourcing that soon, given that they now have enough volume to attract third party suppliers and seat manufacturing is certainly not their competitive edge? I doubt this will happen. Here is the reason they started making seats themselves as explained by the big cheese himself: https://youtu.be/YAtLTLiqNwg?t=357 https://youtu.be/YAtLTLiqNwg?t=357 Given what happened when they worked with supplier last time, I doubt they would want to give up the ability to innovate by going back to a supplier even if they are big. Furthermore, I think suppliers might not be chomping at the bit to work with Tesla anymore. When the Model 3 was being developed, that insanely large preorder volumes caused some suppliers to do whatever it took to get the order from Tesla because of FOMO. Some even stripped their margin to the bone in the hopes of establishing a long term relationship with Tesla. In the end Tesla did not deliver on the numbers they promised and this lower volume caused massive financial problems for some suppliers, especially the smaller guys. I think there were even some bankruptcies of smaller outfits. Given Tesla's reputation as difficult to work with, I don't fully think they will get preferential treatment compared to someone like Toyota or Honda (which I hear suppliers love to work with). FUN FACT: The largest Tesla skeptic subreddit /r/realTesla was started by someone who was supposedly a liaison between Tesla and the seat supplier during the Model X days. In fact he watched the whole Model X train wreck from start to finish and his banning from /r/teslamotors when he detailed all the disasters happening during Model X led to the creation of /r/Realtesla.
    - AnthonyMouse 5y ago
      > I doubt this will happen. Here is the reason they started making seats themselves as explained by the big cheese himself This is an explanation for why they designed their own seats, and basically amounts to "existing seats were uncomfortable." That makes sense when the status quo is junk, but now they've got a good seat, what does it matter who manufactures it? Are they expecting to do a lot of further seat innovating in the future? Does seat technology have a rapid rate of change? > Given Tesla's reputation as difficult to work with, I don't fully think they will get preferential treatment compared to someone like Toyota or Honda (which I hear suppliers love to work with). People care more about what you're doing right now than what you did when you were just starting out. Tomorrow's reputation is based more on today than it is on yesterday.