How Elon Musk plans to ‘print money’ with a vertically integrated supply chain

Earlier this year, Elon Musk raised eyebrows when he confirmed plans to build a giant lithium plant on the Gulf coast of Texas.

“Isn’t this man rich enough?” people sighed in collective exasperation. “Now he wants to start mining lithium!?”

As it turns out, the $375 million plant isn’t part of a grand plan for Musk to transition into a mining tycoon. Rather, Musk claims the intended use of the factory is to refine lithium, not mine it. 

Tesla Inc. has been rather vocal about its goal to sell 20 million vehicles per year by the end of the decade. Given that the company sold roughly 1.3 million cars last year, they’ve got quite the road ahead of them (pun intended 🥁).

If Tesla is going to fend off challenger brands like China’s Nio and achieve their goal, they need to find a way to produce a lower-cost EV, while still maintaining strong profit margins.

This can only mean one thing: Slashing costs by taking greater control of their supply chain.

1. Why is Tesla buying a lithium plant?

By far the most expensive part of Tesla’s manufacturing process is producing rechargeable batteries. They require a very specific mix of raw minerals, with the most crucial piece being lithium.

However, record-high lithium costs (thanks, in part, to China’s supply chain monopoly) make this a major barrier for Tesla and other EV manufacturers.

Musk has spoken previously about how lithium refining — the process of extracting lithium from ore while removing contaminants and other unusable chemicals — is a ‘license to print money’, and that he believes there should be more investment into this area in North America.

Well, it seems like he’s now using his own financial cheat code, because that’s exactly what Tesla will be doing with this plant in Texas. They’ll be refining a type of lithium called lithium iron phosphate (LFP) to produce lower-cost, safer batteries for their next generation of EV vehicles.

In other words, Tesla is moving closer to a vertically-integrated supply chain.

2. What is a vertically-integrated supply chain?

Vertical integration is a strategy where a company takes ownership over one or more stages of the manufacturing and distribution processes in its supply chain. In doing so, they ‘integrate’ these processes into their own organization.

Traditionally companies own one ‘level’ in the value chain. Take a bicycle, for example. You might have one supplier that manufactures the wheels, another that does the brakes, and so forth. The issue with this is — you have very little control over all the moving parts involved in making and distributing your product.

Given geopolitical tensions with China, it’s not hard to imagine why a disruption to their battery production is a genuine threat to Tesla. Pre-globalization, vertically-integrated supply chains were the default. As China became the world’s workshop in the 90s, the common business advice became “do what you do best, and outsource the rest.”

But, there are many compelling reasons to turn back the clock and return to the old way of doing things. When done well, vertical integration can obviously save you money, which can in turn reduce downstream costs for customers. It can also make your manufacturing process more efficient, sustainable, and consistent.

Apple is well known for its vertically integrated supply chain (it’s perhaps one of the greatest factors in its success). For decades, they’ve had control over the most critical aspects of their production process — from their design and mineral supply to pricing and retail stores. They have a monopoly over their supply chain and it shows through their seamless customer experience.

It’s not just EV and tech giants who are employing this strategy, either. Vertically-integrated CPG (consumer-packaged goods) startups are attracting a lot of attention from investors, like The Ugly Company which farms its own fruits for ‘upcycling.’ 

We’ve also seen this with entertainment streaming companies — with some creating their own original content (Netflix), and others purchasing other Hollywood studios (Amazon Prime and MGM Grand), so they don’t have to rely on distributing other people’s content.

3. How is this relevant for designers? 

• Make sure you understand how (and where) your product is actually made. How much of the process does your organization actually own, and how vulnerable is it to supply chain issues such as material and labor shortages? From here, you may be able to make suggestions on how you can increase efficiencies and reduce costs with vertical integration (gold star for you!)

• Determine the most significant cost factors for your company. For electric cars, it's the battery pack. For smartphones, it's display technology. For streaming services, it's content licensing and production. Once you identify the primary cost driver, explore whether there are ways to alleviate that cost pressure through your design. Can your design reduce the dependence on the largest cost driver?