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Tesla Is Vertically Integrating Case Solution

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As of now, the company is likely to announce its plans to build the Tesla Gega Factory in New Mexico as this location is considered ideal by much global equity research analyst. The construction activity is likely to take place in six to eight months. The factory is designed to build in such a way that it could generate 30 gigawatts of production capacity per year. The idea is to make the factory largest facility of its kind. Moreover, the factory could also produce hybrid battery pack that can increase the driving range on model S Car by 10 to 20%.

Following questions are answered in this case study solution

  1. How did Tesla’s management justify the decision behind the vertical acquisition or divestiture? 

  2. Do you agree or disagree? Apply basic concepts in your analysis as well as any additional factors that you can use to support your position. 

  3. What has been the outcome to date?

Case Analysis for Tesla Is Vertically Integrating

1. How did Tesla’s management justify the decision behind the vertical acquisition or divestiture?

The company is wrestling with a decision to integrate vertically through which it will be constructing a battery manufacturing factory of electronic cars for the mass market. The idea is to leverage the forecasted demand for the cars to reduce the cost of the batteries quickly and to make the supply chain process more efficient. To justify the decision regarding the vertical integration, Tesla’s management have to emphasize on the benefits of the integration process which will be the byproduct of the process.

First of all, as part of the plan, the company will build a large-scale factory which will produce the batteries in house rather than outsourcing it from an external supplier. Manufacturing the batteries in large quantities will allow the management to spread the fixed cost of the factory over a number of units. Thus, per unit cost of the battery will be minimized. It means that the company will be in a position to achieve the economies of scale.

The company can start a research and development department in the factory. This will allow the company to come up with the new, innovative and creative ideas which can make the production process more efficient. The whole logistics management will be much easier now as the inbound logistics will be part of the company and the supply chain would be less complex and easier to manage. Most of the waste activities would be eliminated which were initially compiling the cost as the logistics management services were outsourced.

The collaboration between the new factory staff, the car production unit, will allow the management to offer more state of the art product as there would be less confusion among the two supply chain points. The qualities of the batteries would be increasing as the constant innovation process will be at a place and combine all the production process into one place. The overheads will also be controlled and the kilowatt-hour price of batteries would be down by 30 percent. This is a significant reduction in cost and provides management with a solid justification for the integration process.

2. Do you agree or disagree? Apply basic concepts in your analysis as well as any additional factors that you can use to support your position. 

The company’s decision to build its infrastructure for the batteries which it will be using for its automotive is a sensible decision. As the company has goal of producing the compelling and electric car in approximately three years. This step will allow the company to expedite the process while focusing on the innovation and eliminating the wasteful activities. The solar power industry is also becoming more demanding, and the dynamics needs of this industry require constant innovation; Tesla Giga Factory can be a millstone in this regards. The industry requires massive packs of stationary batteries. This opens up a whole new source of revenue for Tesla. It seems like a win-win position for both the parties, where one party can fulfil its dynamic needs, and the other can get access to new sources of earnings.

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