4 ms·

Vertical integration is one hell of an advantage. These mega companies that are contractors all the way down are like microservices - useful for some situation

Vertical integration is one hell of an advantage. These mega companies that are contractors all the way down are like microservices - useful for some situations but probably not yours.

ajmurmann 3y ago
Didn't we go through some phase where many companies were vertically integrating and then somehow that went out of fashion and everyone reversed that. I vaguely remember learning this in a business class, but no details.
- rsynnott 3y ago
  Unless you can do everything cheaper than the market cost, and better than what is on the market, forever, it’s going to become a problem at some point. (Hint: You cannot.)
- losteric 3y ago
  Yeah, like all the old American companies went through that process... Ford and GE come to mind. It's a good way to externalize some risks like labor and capital investment, and ramp faster by delegating some optimizations to natural contractor competition. There's a clear cost when it comes to all-up cost and velocity of innovation of tightly-integrated components.
- dylan604 3y ago
  With JIT style supply chain, didn't we recently learn the dangers of sending everything out to subcontractors?
  - deleted 3y ago
    [deleted]
  - admax88qqq 3y ago
    What are the dangers exactly? That a once in a century event can disrupt your supply chain? Is that actually a reasonable thing to try to guard against?
    - dylan604 3y ago
      Why do you think that a global pandemic is the only thing that can cause disruption? The ship stuck in the Suez canal was not pandemic related, and that kind of issue can happen at any time. What happens if the Suez or Panama canals are not functioning? Panama is already concerned about the water levels available. What about trade relations going to the extreme side and blocks all commerce with a major supplier? What if union dock workers all go on strike? Thinking that it can never happen again is just wearing blinders
      - admax88qqq 3y ago
        I'm not saying these events can't happen I'm saying they're rare enough that trying to prepare for them is wasteful. As you illustrated there's all sorts of things that can go wrong. Trying to anticipate them all is a fools errand. And if you spend the capital to try to protect against the rare supply chain disruption all your competitors will just roll the dice and save the money and odds are they will come out ahead.
- jandrese 3y ago
  What happened is big businesses wanted to get away from unions and pension obligations so they started outsourcing everything they could get away with. But this came with a loss of efficiency in the long run and ended up biting them in the butt.
- AnthonyMouse 3y ago
  > Didn't we go through some phase where many companies were vertically integrating and then somehow that went out of fashion and everyone reversed that. I vaguely remember learning this in a business class, but no details. The primary advantage to vertical integration is when you need something but the market for suppliers is broken somehow, e.g. there isn't enough competition and then the suppliers behave like Comcast or Qualcomm. In that case entering the market yourself can be an advantage if you have the resources to do it, because you can cut out the crummy suppliers. The risk of this is that you become the crummy supplier. The internal supplier has a captive customer because they're the same company, which means they're not exposed to competitive pressure. Corporate politics takes root, internal processes become wasteful and inefficient, but there is pressure to use the internal solution even if a third party offers something better. Internal systems become so integrated with each other that you can't switch to a competing supplier even when you should. One part of the company isn't allowed to improve their product in a way that cannibalizes the margins of another business unit, when non-vertically integrated competitors have no such constraints. Basically it works well in the early years but then the lumbering dinosaur goes extinct at the next meteor because it loses the ability to adapt. The secret is to enter the other market but then spin off the internal subdivision before the whole company becomes a festering bureaucracy. Or create an internal preference for the smallest suppliers in the other market to help them gain a foothold and increase their competitiveness, or provide them with startup capital or publish open source software that makes it easier for startups to enter that market etc. Commoditize Your Complement.
- blackoil 3y ago
  Intel is a recent example, where internal fabs were clear advantage till it wasn't then it became clear disadvantage. Ford at one time owned coal and iron mines.
  - jamiek88 3y ago
    Fun fact: ford used to sell bbq grills and bags of coal from their dealerships!
deleted 3y ago
[deleted]
userinanother 3y ago
It’s not vertical integration it’s that’s they have significantly less bureaucracy and overhead compared to legacy companies. That advantage won’t last forever but for 10-20 years it will propel them ahead
- schiffern 3y ago
  That, and vertical integration. Tesla also benefits from horizontal integration, sharing a common charger module between vehicle and Supercharger. This improves scale and cost.
- _ea1k 3y ago
  I'd say it is that, plus the fact that they built their charger designs at a time when they had to do them cheap. They had very little capital, and they knew that they couldn't sell cars without a charging network. So they put all their efforts into reusing as much as they could from their high volume cars to improve economies of scale. Noone else had the same incentives. That part is changing fast, though.

Vertical integration is one hell of an advantage. These mega companies that are contractors all the way down are like microservices - useful for some situations but probably not yours.

ajmurmann 3y ago

Didn't we go through some phase where many companies were vertically integrating and then somehow that went out of fashion and everyone reversed that. I vaguely remember learning this in a business class, but no details.

rsynnott 3y ago
Unless you can do everything cheaper than the market cost, and better than what is on the market, forever, it’s going to become a problem at some point. (Hint: You cannot.)
losteric 3y ago
Yeah, like all the old American companies went through that process... Ford and GE come to mind. It's a good way to externalize some risks like labor and capital investment, and ramp faster by delegating some optimizations to natural contractor competition. There's a clear cost when it comes to all-up cost and velocity of innovation of tightly-integrated components.
dylan604 3y ago
With JIT style supply chain, didn't we recently learn the dangers of sending everything out to subcontractors?
- deleted 3y ago
  [deleted]
- admax88qqq 3y ago
  What are the dangers exactly? That a once in a century event can disrupt your supply chain? Is that actually a reasonable thing to try to guard against?
  - dylan604 3y ago
    Why do you think that a global pandemic is the only thing that can cause disruption? The ship stuck in the Suez canal was not pandemic related, and that kind of issue can happen at any time. What happens if the Suez or Panama canals are not functioning? Panama is already concerned about the water levels available. What about trade relations going to the extreme side and blocks all commerce with a major supplier? What if union dock workers all go on strike? Thinking that it can never happen again is just wearing blinders
    - admax88qqq 3y ago
      I'm not saying these events can't happen I'm saying they're rare enough that trying to prepare for them is wasteful. As you illustrated there's all sorts of things that can go wrong. Trying to anticipate them all is a fools errand. And if you spend the capital to try to protect against the rare supply chain disruption all your competitors will just roll the dice and save the money and odds are they will come out ahead.
jandrese 3y ago
What happened is big businesses wanted to get away from unions and pension obligations so they started outsourcing everything they could get away with. But this came with a loss of efficiency in the long run and ended up biting them in the butt.
AnthonyMouse 3y ago
> Didn't we go through some phase where many companies were vertically integrating and then somehow that went out of fashion and everyone reversed that. I vaguely remember learning this in a business class, but no details. The primary advantage to vertical integration is when you need something but the market for suppliers is broken somehow, e.g. there isn't enough competition and then the suppliers behave like Comcast or Qualcomm. In that case entering the market yourself can be an advantage if you have the resources to do it, because you can cut out the crummy suppliers. The risk of this is that you become the crummy supplier. The internal supplier has a captive customer because they're the same company, which means they're not exposed to competitive pressure. Corporate politics takes root, internal processes become wasteful and inefficient, but there is pressure to use the internal solution even if a third party offers something better. Internal systems become so integrated with each other that you can't switch to a competing supplier even when you should. One part of the company isn't allowed to improve their product in a way that cannibalizes the margins of another business unit, when non-vertically integrated competitors have no such constraints. Basically it works well in the early years but then the lumbering dinosaur goes extinct at the next meteor because it loses the ability to adapt. The secret is to enter the other market but then spin off the internal subdivision before the whole company becomes a festering bureaucracy. Or create an internal preference for the smallest suppliers in the other market to help them gain a foothold and increase their competitiveness, or provide them with startup capital or publish open source software that makes it easier for startups to enter that market etc. Commoditize Your Complement.
blackoil 3y ago
Intel is a recent example, where internal fabs were clear advantage till it wasn't then it became clear disadvantage. Ford at one time owned coal and iron mines.
- jamiek88 3y ago
  Fun fact: ford used to sell bbq grills and bags of coal from their dealerships!

deleted 3y ago

[deleted]

userinanother 3y ago

It’s not vertical integration it’s that’s they have significantly less bureaucracy and overhead compared to legacy companies. That advantage won’t last forever but for 10-20 years it will propel them ahead

schiffern 3y ago
That, and vertical integration. Tesla also benefits from horizontal integration, sharing a common charger module between vehicle and Supercharger. This improves scale and cost.
_ea1k 3y ago
I'd say it is that, plus the fact that they built their charger designs at a time when they had to do them cheap. They had very little capital, and they knew that they couldn't sell cars without a charging network. So they put all their efforts into reusing as much as they could from their high volume cars to improve economies of scale. Noone else had the same incentives. That part is changing fast, though.