Who's in YOUR Supply Chain?

Tesla is now, by market cap, the second largest auto manufacturer (after Toyota).  Its market cap exceeds U.S. auto makers Ford, G.M., and Fiat/Chrysler -- combined.  This despite selling less than 400,000 vehicles in 2019, a figure that is more than the prior two years combined.  

Tesla has made its bet on the future of electric cars.  It didn't invent them.  It isn't the only auto manufacturer selling them.  But, as The Wall Street Journal recently said:

Investors increasingly see the future of the car as electric—even if most car buyers haven’t yet. And lately, those investors are placing bets on Tesla Inc. to bring about that future versus auto makers with deeper pockets and generations of experience.

 A recent analysis suggested a big reason why, and its findings should give those in healthcare some pause.  Tesla's advantage may come, in large part, from its supply chain.

Nikkei Business Publications did the analysis, a "teardown" of Tesla's Model 3, the cheapest car in Tesla's lineup.   The teardown found that Tesla's integrated central control unit -- aka, its "self driving computer" -- had capabilities that were six years ahead of the rest of the industry.  That's six years ahead of auto manufacturers with long histories, huge research departments, and millions of vehicles sold, not to mention sizeable investments in their own electric vehicles.

Nikkei quoted a "stunned" engineer from a Japanese rival who examined the computer: "We cannot do it."   

Tesla integrated central control unit.  Credit: Nikkei xTech

The engineer admitted that technological hurdles were not the reason for the gap, but, rather, the automakers' concern "that computers like Tesla's will render obsolete the parts supply chains they have cultivated over decades."

Tesla's computer required fewer electronic control units (ECUs) than other manufacturers.  If those manufacturers followed suit, it would drastically impact their suppliers of those units.  As Nikkei put it: 

So big automakers apparently feel obliged to continue using complicated webs of dozens of ECUs, while we only found a few in the Model 3. Put another way, the supply chains that have helped today's auto giants grow are now beginning to hamper their ability to innovate.

Tesla developed its integrated central control unit itself, and Nikkei found that to be part of a pattern: 

"Most parts inside the Model 3 do not bear the name of a supplier. Instead, many have the Tesla logo...This suggests the company maintains tight control over the development of almost all key technologies in the car."

And, of course, Tesla updates its software "over the air," giving existing models the advantages that traditional auto manufacturers might have required buyers to purchase a new vehicle to benefit from.  

In other words, no one knows.

Brian Johnson, a Barclay's analyst, has suggested that the market is acting as though Tesla will be the "sole winner" in the shift to electric vehicles (although he also has warned Tesla may be overvalued).  Another analyst, Adam Jonas of Morgan Stanley, wrote: "If Tesla proves to be profitable…we think this removes one of the biggest impediments for why legacy [auto makers] were hesitant to go ‘all in’ on EVs."  

Tesla didn't have existing vehicle models to build from.  It didn't have legacy technologies.  Nor did it have millions of vehicles, hundreds of thousands of employees, or scores of existing suppliers.  For better and for worse -- and Tesla's journey has encompassed both -- it started essentially from scratch, and bet big on its sole objective, rather than hedging its bets across numerous markets using varied technologies.

Last fall, Nathan Furr, a professor at INSEAD, called Tesla's strategy "brilliant."  He pointed out:

...a long research tradition underscores that when incumbents face a new technology architecture, they struggle to understand and adapt...

Although incumbents may imitate the new architecture, they have a hard time overcoming the way they have done things in the past and to match the superior performance of the new, purpose-built architecture...

It’s always the little things that get in the way – such as the fact that most vehicles built by other manufacturers have up to five separate software systems rather than a single integrated system like a Tesla, which gives a performance advantage.

Professor Furr believes Tesla is competing at a high risk, high reward, system level, not a product level:

The truth is that consumers don’t want products, they want solutions. Most car makers deliver products. But Tesla tries to deliver a complete experience: car, upgrades, charging, insurance – the whole bundle.

Meanwhile, of course, healthcare is the industry that still relies on the fax and CD long after most other industries have moved on, that views sharing data as anti-competitive, that finds disclosing prices (or quality results) too difficult, and that literally uses a still-in-use 200 year-old technology (the stethoscope) as its symbol. 

And yet...

In healthcare hospitals, doctors, and pharmaceutical companies account for essentially the same shares of spending that they've had for at least fifty years, old school vendors Epic and Cerner dominate the EHR market, and healthcare is patting itself on the back for efforts to "reinvent" primary care and to deliver "digital health." 

It's always the little things that get in the way... 

Healthcare is different, pundits claim.  Health care depends on the doctor-patient relationship, they preach.  Healthcare is maddeningly complex, full of visible and invisible middlemen, they complain.  Health care must "first, do no harm," making innovation both harder and for higher stakes, they warn. 

Maybe. 

But healthcare also seems to rely on doing more things to more people for more money, without necessarily ensuring that the results are worth it.  Lots of people are making money in healthcare, and they like it that way.  There is ongoing debate about what portion of our spending is unnecessary, how much of our care is ineffective at best and harmful at worst, or how many of us suffer or even die from medical errors.  But whatever the exact numbers, most people would agree that each is too high. 

Who in healthcare is six years ahead of the rest of the industry, in anything?  Who in healthcare is less concerned about disrupting its existing supply chains of healthcare professionals, facilities, and manufacturers, and more concerned about patients' experiences and outcomes?  Who is inventing and delivering "new, purpose-built architecture"? 

Tesla may be wrong.  We may never go fully to electric vehicles.  Self-driving vehicles may be a pipe dream.  Its build-it-here approach may blow up or might never prove profitable.  But, gosh, you have to love the chutzpah, and how it is moving the huge auto industry. 

Where's healthcare's Tesla?