>APPLE AND TESLA ARE DEMONSTRATING THAT THEY MASTER THE GLOBAL COMPONENTS SQUEEZE

November 2021
JEDI #Deep#Tech Episodiqu.es

by Frédéric Filloux

Rigor and anticipation for Apple, agility and speed of reaction for Tesla. These two companies are the opposite of the traditional automotive industry, which is paying a hard price for its old-fashioned methods.

Apple did not miss the expectations of investors for their fall quarter. This was not an easy task given the crisis affecting the global supply chain: record delivery times and above all a shortage of microprocessors. And yet, within a month of each other, Apple launched the 13th version of its iPhone, a new watch, and a new range of laptops, all equipped with processors designed in Cupertino and manufactured in Taiwan.

For now, Tesla is handling the situation pretty well too. However, its cars are equipped with hundreds of processors and about sixty computers, the most sophisticated of which, dedicated to the supposedly autonomous driving system, has a GPU/CPU power equivalent to 3000 MacBook Pros.

 

Certainly, both manufacturers had to take action. iPhone production has been cut by a few million units and the launch of the future model 14 could be affected.  In the last 12 months, Apple has shipped 238 million iPhones and posted record profits approaching $100 billion, with sales of $365 billion. And for the period of July to September, Apple's revenue was up 29% year-over-year.

Quite the opposite for the traditional automotive sector, which is suffering and has had to partially shut down some assembly lines in the United States and Europe, with partial unemployment, tens of thousands of incomplete vehicles that cannot be sold and production collapsing by 10% to 30%.

How do Apple and Tesla manage to contain the effects of such a shortage, which is expected to be deep and long-lasting? The answer lies in their unique industrial DNA. What they have in common is an ever-increasing vertical integration. Both design their processors with teams of over a thousand engineers each, who define the precise specifications.

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Tesla and Apple do not actually produce their components. This part is entrusted to specialized factories, called foundries or fabs, with which the two groups have established close relationships. These agreements are the result of close negotiations in exchange for long-term visibility, which is essential for these fabs, each of which costs between 2 and 6 billion dollars.

For the world's number one semiconductor manufacturer, Taiwan's TSMC, Apple is an essential customer that provides a quarter of its revenue. Hence a symbiotic relationship that has been built up over the last ten years. The two companies share an obsession with secrecy and the certainty that only aggressive R&D can guarantee long-term economic supremacy. TSMC is also far from the 35-hour work week: the company is one of the few in the world where R&D teams work around the clock. 

Generally speaking, Apple's top 200 suppliers (out of a total of 750) are subject to the same rule: total transparency on internal costs in exchange for a long-term relationship. This relationship can be questioned for two reasons: a drop in quality or insufficient protection of industrial secrets. For the rest, the follow-up is meticulous. For example, complex machine tools or certain critical materials will be ordered directly by Apple to prevent the subcontractor from taking its margin. Swarms of Apple's management controllers scrutinize the purchases, sometimes quibbling over a few cents. Monitoring this rigorous integration has been fundamental to Apple's supply chain performance.

None of this is true of traditional automakers and electronics manufacturers. In addition to opting for standard components as often as possible, they keep their suppliers in a relationship of absolute subservience.

So, as soon as the pandemic started, they abruptly cut off purchases of components, putting the fabs in a critical situation. For Volkswagen, General Motors, Stellantis, and for some electronics manufacturers, the important thing was to preserve their operating accounts, even if it meant putting a supplier in difficulty. A short-term vision that proved to be ruinous.

Instead, Apple and Tesla did not want to compromise the complex and delicate relationships with their chip suppliers and, as a result, did not reduce volumes.

There's more. Apple is known for its careful forecasting of product sales. For Tim Cook, himself a former Apple operations manager, inventory is the enemy. An iPhone inventory that is not rotating sees its value erode by 2% every week. The rotation is therefore reduced to a few days between the arrival of an item in a country and its sale. This implies a well-oiled machine, from ultra-fast customs clearance literally at the exit of Foxconn's factories in Shenzen, to the reservation of most of the air freight between China and the United States for a few critical weeks.

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Tesla relies more on agility. Are there important microprocessors missing? They’re keeping the ones that are intended for the car's essential functions, but removing those dedicated to ancillary tasks, such as the lumbar supports in the seats. If necessary, the engineers will rewrite the internal program of the chips so that they perform other functions than those initially planned. Not only does Tesla have the technical expertise to do this, but it also knows how to do it quickly; where it would take months and a committee at Renault or Ford, at Tesla, decisions are made in a few hours by a handful of engineers who have complete freedom to do so. It is not for nothing that at the last shareholders' meeting, Elon Musk said that Tesla was as much a software company as a car manufacturer.

 

Management schools analyzing the current crisis will remember the triptych that makes Apple and Tesla resilient: the ability to anticipate, the retention of critical know-how and an unparalleled agility to adapt to the unexpected.

Frédéric Filloux, Editor, JEDI Episodiqu.es
episodiques@jedi.foundation