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Focus: Sourcing/Procurement

Feature Article from Our Sourcing and Procurement Subject Area - See All

From SCDigest's On-Target e-Magazine

- April 8, 2014 -


Supply Chain News: Tesla Commits to Sourcing Materials Only from North America for New Battery Factory

 

Current Continental Suppliers of Graphite, Cobalt and More not Nearly Enough to Meet Giant Needs of New Plant, Experts Say; Tesla Targeting "Logistics Waste"

 

SDigest Editorial Staff 

 

Tesla, the maker of high end electric cars, is a rule-breaker and innovator in many ways in the automobile industry. It is on a mission, for example, to radically reduce the time it takes to get tooling made for its vehicles, among many other innovative supply chain practices.

The company is adding another notch to its rules-breaking belt, with news this week that it expects to use only  raw materials sourced from North America for its planned "Gigafactory," where the giant lithium-ion batteries that power its cars will be made. The location of the new plant has not even been determined yet, but sourcing decisions are already being made ahead of site location and construction.

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Will Tesla be able to execute its plans to source these minerals and metals wholly from North America? What will be the impact on the price of the materials once the giant battery factory is opened?

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The company believes it can source all the graphite, cobalt and other materials it needs without going outside the continent - but that plan takes a lot of faith, it turns out.

"It will enable us to establish a supply chain that is local and focused on minimizing environmental impact while significantly reducing battery cost," Liz Jarvis-Shean, a company spokesperson, told Bloomberg this week.

There are a number of drivers for the Tesla sourcing move. Graphite pollution, for example, is rising as a global issue. China's government, for instance, the world's largest graphite producer, has begun to shutter mines producing graphite, a major ingredient in lithium-ion batteries, over local air quality concerns. That even as demand for the material is soaring.

And of course, there are widespread corporate concerns about avoiding the use of industrial minerals from global trouble spots in parts of Africa, worried about both consistency of supply and being tagged as using so-called "conflict minerals" from the region. While neither cobalt nor graphite are considered conflict minerals, much of it does come from related war-torn regions.

Tesla "is a high-profile company that is entering an age of supply chain transparency," said Simon Moores, an analyst at Industrial Minerals Data in London.

The company says it sources most of its graphite now from Japan and Europe, and that much of that is synthetic, or manufactured rather than mined. In fact, Tesla says it prefers synthetic graphite over natural.

The announcement relative to North American-only sourcing is certainly not without risk. To pull it off, Tesla may need to turn to graphite mines in Canada that have yet to be built. The company may also require supplies of cobalt that exceed existing Canadian output and thus need to look at prospective suppliers in states such Minnesota and Idaho.

Whether in the end all this will save the company any money is not at all clear. Tesla says its plans will reduce "logistics waste" for many materials. Currently, graphite, cobalt and other commodities often travel thousands of miles from mines to processors and then on to manufacturers and consumers, miles that will be significantly reduced if Tesla can source what it requires from North America.

(Sourcing and Procurement Article Continues Below)

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The new Tesla factory is expected to produce 500,000 car batteries annually - a huge jump from current battery volumes. Each battery is something like the size of a piece of plywood, a few inches thick, and weighs about 1000 pounds. The material needs of such a factory are substantial - and may disrupt markets for those commodities. Currently, about half of the world's supply of cobalt comes from the tenuous country of the Congo. The Tesla factory, combined with existing demand growth for cobalt of 5% or so per year, is likely to lead to significant shortages if new supply sources are not developed, experts say.

The US hasn't had an active cobalt mine since 1971. But a company called Formation Metals is developing a new one currently in Idaho. However, the Vancouver-based company needs to raise $120 million to complete the project, and new mine start-ups are historically risky endeavors.

While lithium itself is mostly produced in South America and Australia, there are US sources that could be ramped up, industry analyst say.

A company called Rockwood Holdings makes brine-based lithium in Silver Peak, Nevada, and Rockwood and FMC Corp. both produce carbonate and hydroxide forms of the lithium at plants in North Carolina. Simbol Materials, a company out of Pleasanton, California, is also preparing to begin construction of its first commercial lithium plant.

Another player is Canada's Avalon Rare Metals, which has five projects under development in North America to produce lithium and other minerals.

In total, it is thought potential supply worldwide of lithium is sufficient to mostly keep up with rising demand.

Will Tesla be able to execute its plans to source these minerals and metals wholly from North America? What will be the impact on the price of the materials once the giant battery factory is opened? Those are questions that likely won't be answered for several years, but much of corporate America will be watching the former question especially very carefully.

What do you think of Tesla's mineral strategy? How risky is the move, for supply or cost? Let us know your thoughts at the Feedback button or section below.




Recent Feedback

I think this is a interesting move for Tesla. In the automobile industry, there are many components that have to be sourced from overseas and this process involves doing a TCO analysis to see if costs are saved. By sourcing minerals for batteries in North America, Tesla is able to mitigate risks including lead times, political risks, and environmental/sustainability risks. From a cost standpoint, Tesla saves on freight costs, logistics costs, port fees, distribution costs and reduced costs for factory visits. From a costs and risks standpoint, this sounds like a viable option but the presence of limited suppliers,  increased wage rate, limited capacity, and lack of economies of scale can be potential issues. I believe if Tesla can source effectively and efficiently from North American suppliers , they are setting a example of modern day supply chain transparency and strategy. Nowadays, it is important for enterprises to source materials for specific parts in a strategic way which aligns with their core capabilities. I'm very excited to see how this plays out.


Sameer Zaheer
Student
University of Texas at Austin
Apr, 14 2014

As a student stuyding supply chain management at UT Austin, this article is surely interesting. Tesla's decision to source all of its raw materials from North America; Tesla, in a way, is taking into account total cost of ownership. Although sourcing solely from North America might mean more costs than sourcing from elsewhere, such as South America, Asia, etc., by insourcing those materials, Tesla, in a big picture, is helping grow the US economy by building its "Gigafactory" in the US and therby creating jobs. Furthermore, one of the apparent advantages is to decrease lead time for those materials to arrive for manufacturing process, reducing logistics waste. Tesla's move, in conclusion, is interesting and strategic in building an efficient supply chain, as well as, minimizing its total cost of ownership.

 


Jeung Seung Lee
Feedback
UT Austin
Apr, 30 2014
 
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