How did Tesla Overcome the Semiconductor Crisis?

The global semiconductor shortage has created an economic turmoil. The automobiles and electronics industries were the worst hit and incurred significant losses, as semiconductors are an integral raw material in these domains. Furthermore, the shift in demand to computers and IT has emphasized the need for these smart chips. However, automobile giant Tesla has managed to successfully maneuver through this crisis and outperform rivals.

Introduction

The ongoing pandemic has been indiscriminate in terms of its detrimental impact across industries worldwide. Some of the industries that were heavily dependent on semiconductors and were affected by their reduced supply were automotive and consumer electronics. Demand for semiconductors outpaced supply, leading to a corresponding increase in the prices of the smart chips. Amid this chaos, however, Tesla was able to sustain production and has had a profitable period.

Global Semiconductor Market Scenario

As the pandemic disrupted the regular way of life, many organizations worldwide had to quickly transition to the work-from-home operating model. To ensure smooth operations via robust IT infrastructure and computing systems, demand for semiconductors skyrocketed. This compelled chip makers to redirect their supplies to the computer, IT Infrastructure, and electronics industries.

When demand for automobiles started to pick up, following the relaxation of lockdown rules in several countries, there was a dearth of smart chips, and automobile manufacturers were caught off guard. However, one company stood the test of time and managed to outperform peers even during the crisis, i.e., Tesla.

What Did Tesla Do Right?

Like any other automobile manufacturing firm, Tesla was affected by recent developments in the semiconductor market. The company was forced to shut one of its plants in the San Francisco Bay Area and also had to delay the rollout of the much anticipated Cybertruck. However, it was the only automobile manufacturer (as of January 2, 2022) reported to have delivered nearly 936,000 cars in 2021, which is approximately 100% more cars compared to 2020. This figure defied all estimates by experts and its stocks jumped 14%.

How did Tesla manage to achieve this coup? The firm has positioned itself as a forward-thinking automobile company driven by cutting-edge technology. Its popular car variant – the Model 3 Sedan (soon to be available in India) – is equipped with features such as a 360-degree view, ultrasonic sensors to prevent collisions and provide parking assistance, and the very popular autopilot mode. Researchers state the model uses a consolidated chip setup to control functions such as speakers and gesture recognition, unlike other cars that require separate, dedicated chips.

Tesla prefers to have most of its processes carried out in-house and outsources semiconductor directly from manufacturers, without involving any third parties. Hence, the company has established a strong relationship with the chip suppliers. They believe Tesla would eventually be the future of automobiles, which gives it a strategic competitive advantage over peers.

The engineering team at Tesla has efficiently modified and rescripted the codes and software to incorporate the scope of working with alternative manufacturers, without compromising on the core deliverables and features.

Conclusion

Tesla has created a fan following by providing top-tier customer experience, thus earning strong brand loyalty. (IHT Markit gave Tesla the following awards in its 2020 Automotive Loyalty Awards: Asian Market Loyalty to Make, Highest Conquest Percentage.) Its clientele includes Elon Musk fans for whom cars are a status symbol, similar to the behavior Apple loyalists exhibit. Therefore, certain changes in the economy do not influence the buying decisions of these customers to a large degree. It was indeed one of the reasons Tesla was confident about its sales and product demand, and consequently, did not ask the chip makers to halt or suspend their supplies, in spite of the onset of and uncertainties caused by the pandemic.

The key takeaway from this case is that Tesla has very strategically positioned itself as a serious contender for the vehicle of the future and has become self-sufficient in many of its operational procedures. As a result, the company was able to make a mark in this space, despite fluctuations and swings in the economy overall. Tesla has been a pioneer in the automobile sector, with many car manufacturing giants (such as BMW, Volkswagen, Ford, and Mercedes), following suit to stay relevant in the future mobility domain. By offering a mix of technology and automotive engineering proficiency, Tesla has even attracted customers that were not very keen on cars to the world of mobility.