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Electric vehicle (EV) start-up Tesla has disrupted the electronics supply chain, but not in the way the industry expected.
Disruption — as it pertains to high-tech — is usually seen as positive. “I think to make exponential steps forward you have to challenge what your peers tell you is possible,” said Lee Iken, director of electronics distributor TTI Inc.’s Transportation Business Unit for the Americas. “You have to stretch things — you just can’t incrementally make improvements.”

TTI’s Lee Iken, director, Transportation Business Unit for the Americas
TTI, like many distributors, supplies components to automotive subcontractors and to carmakers themselves. TTI’s Transportation Business Unit supports all TTI brands in the Americas, which provide design assistance as well as component fulfillment services to this massive industry.
However, Tesla’s inexperience with the electronics supply chain adds pressure to an already-strained market. Like many automakers, Tesla has been promising huge-volume orders of electronic components to secure low prices and high service from suppliers and distributors. So far, component sellers have little to show for their efforts.
“Tesla has been committing to a [Model 3] production volume for two years now and the pressure [to meet that goal] flows through Tesla’s subcontractors to component suppliers and distributors,” said Brian Dickerson, TTI director, sales and engineering, Americas. “Wire-harness suppliers that want to support Tesla can feel the pressure to hit that production volume, as can the distributors that support them.”
Normally, this would be a problem limited to Tesla’s component suppliers and distributors. But these are not normal times. Many electronics components — including connectors and items used in wire harnesses — are currently in short supply. During periods of allocation, suppliers and distributors move their biggest customers to the front of the supply line. Smaller manufacturers and sub-assemblers must scramble for products.
The automotive supply chain has historically moved at glacial speed. There’s stringent quality control and tolerance testing for components used in cars. Automotive electronics have always been mission-critical, so testing and certifying devices takes time. Tesla, by its own admission, wants to speed the manufacturing process up.
“In my experience, Tesla operates more like a computer company than an automotive company,” said Kirk Ulery, TTI regional sales engineer, Great Lakes region. “They are not locked in to long-term agreements so that they can change a component [in their design] very quickly. “
Tesla wants to accelerate sourcing
The automotive design chain is measured in years, not months; and the lifespan of a car even longer. Like the military and aerospace industries, carmakers get samples of state-of-the-art technologies, such as heads-ups displays, that can be used in automotive applications. Carmakers put these technologies through their paces before they are designed into an automotive system. Even then, it could take three to five years before a car model is ready to use the technology; and once that model is produced, its lifespan is measured in decades.
“That process is not appealing to businesses such as Tesla who are not only focused on the EV market but also want to redefine the entire supply chain,” said Iken.
Tesla’s failure to meet its Model 3 launch dates isn’t just due to manufacturing glitches, numerous sources said: Tesla has eschewed many of the processes and methods proven by Ford, GM and other “old guard” carmakers. On a piece-by-piece basis, Tesla’s subassemblies work. It’s when they are integrated that unexpected issues arise.
Tesla and the automotive industry has contributed to the component shortage that’s well into its second year. The electronics content in vehicles continue to rise thanks to new technologies and advanced functionality, particularly for safety systems. IC sales for automobiles and other vehicles are forecast to grow from $22.9 billion in 2016 to $42.9 billion in 2021, according to IC Insights. Moreover, many of these components — semiconductors, resistors, capacitors and sensors — are common to all electronics. Automakers are competing with consumer-product manufacturers in a market where “the with the biggest volume order” wins.

TTI’s Brian Dickerson, director, sales and engineering, Americas
Tesla has managed to secure a lot of these parts, largely based on its cache. “It’s sexy to be in the Tesla and Volt supply chain,” said Dickerson. “Suppliers take pride in being part of the Tesla supply chain. There’s a lot of positives attached to that. However, future demand [for the EV] industry is still an unknown and component manufacturers and system subcontractors are unsure of the ROI it will bring. However, the long-term upside is tremendous.”
Tesla faces common inventory problem
Because of repeated production delays, Tesla is sitting on a pile of inventory, electronics sources say. At the beginning of the week (7-23-2018), the Wall Street Journal reported that Tesla was looking for cash back on the products it returns. Tesla later said it was renegotiating pricing for existing contracts, a common practice in the supply chain.
Cash refunds, however, are nearly unheard-of.
“Tesla’s request is somewhat unusual in the electronics supply chain,” said Victor Meijers, senior vice president of the Electronic Component Industry Association. “Having worked for both an OEM and a couple of distributors, I would say it is very common to see contracts and purchase orders renegotiated when business conditions change. That is typically done on future shipments or sometimes on payment terms on items already received. But this is the first time I have heard of a customer asking for cash back from their suppliers. It is definitely a different approach.”
The electronics industry is rife with complex transactions that are largely based on credit. Distributors will normally buy components outright, but end-customers don’t want to store or manage inventory. OEMs or EMS providers frequently order devices on consignment and they don’t pay when an order is booked — they pay when the products are consumed. Even then, when leftover parts are returned to a supplier or distributor, credit may be issued toward the customer’s next purchase. This practices also applies to distributors when component prices drop: suppliers compensate for the price difference by issuing credit toward the distributors’ next purchase.

TTI’s Kirk Ulery, regional sales engineer, Great Lakes region
“I believe Tesla fully expected to meet their production numbers,” said Ulery. “But if there’s a delay and then production ramps up again, suppliers may be over inventoried. Tesla’s [supply chain practices] are still pretty new and are forcing the electronics community to adapt.”
Tesla did not respond to e-mail requests for comment.
It just might work
Tesla’s practices — quick-turn component substitutions, short-term contracts and fast-tracking new technologies — just might be the change the industry needs, Iken said. Established automakers are still pretty old school when it comes to the supply chain, but the electronics phenomenon extends well beyond vehicles. “You’re going to see autonomous cars, heavy trucks and taxi helicopters,” said Iken. “The EV OEMs and subcontractors will push the boundaries of both the manufacturing process and the supply chain. Traditional electrical components and steering wheels are going to be phased out. And there will be more innovation. We see innovative and “smart” electronic content going up and not just in sensors. All these things need power, power conditioning and power management.”
The customer and supplier partnerships that TTI has today and is building for tomorrow reflects this changing dynamic in the marketplace, he added. “TTI’s culture of investing in inventory has never been more valuable than now.”
Many distributors, over the years, have moved toward a just-in-time or lean inventory model. As a result, distributors are experiencing long lead times, which are then passed on to customers. TTI and Future Electronics Inc. are known for investing in inventory regardless of market shifts.
If Tesla’s Model 3 gamble pays off, experts said, the company could catapult into being a mass-market automaker while re-inventing the supply chain at the same time.
Check out these other stories in the Tesla Special Project:
Another’s struggle to deliver it
Long, Winding Road to a Tesla Model 3
We followed a new Tesla owner on the last mile of the journey to get his Tesla Model 3. Here’s how it played out.