How Tesla’s surging Q3 deliveries defied global chip shortage

Tesla has skidded into October with another record-beating quarter, reporting 241,300 deliveries for the third quarter of 2021, a number that has surprised pundits not only because it was well above predictions but also because it came in the midst of a global chip shortage.

The well documented chip shortage has been driving down sales of many carmakers, with Ford predicting a 50% drop in sales due to the shortage for the second quarter. (It did better than that but in July said it still did not expect sales to fully bounce back until the supply “normalised”. Its third-quarter earnings report is yet to be released).

Likewise, GM has laid the blame for a 33% drop in sales year-on-year in its third-quarter reporting squarely on “semiconductor supply chain disruptions and historically low inventories.”

Tesla’s latest figures more or less thumb the nose at America’s largest two carmakers. According to media reports, FactSet analysts forecast that Tesla would deliver roughly 227,000 vehicles in the quarter.

It beat that by more than 13,000 vehicles, and the question that many are asking is, how did Tesla do it? And what are the deeper implications for the market at large?

Tesla’s third-quarter sales were in part boosted by the release of the 2022 versions of the Model S and the Model X, which has been finally given a design refresh and is now ramping up production after its assembly line was shut down earlier in the year to make way for the new premium EVs.

Production has now jumped from just 2,340 Model S and X made in the second-quarter to 8,941 in the third.

And in both quarters, Tesla also made around 5,000-6,000 more Model 3 and Model Ys than it delivered. While some may be orders that are not delivered before the end of the quarter, the main point is Tesla is making more cars than it needs to.

Morgan Stanley, in a note to clients, suggested that Tesla’s vertical integration, along with its agile culture and youthful status, helped it overcome the chip shortage that hobbled the industry’s established companies.

It did this in much the same way that it dealt with ramp-up issues when it erected a massive tent to accommodate an extra assembly line in 2018.

“It’s not just a matter of swapping out a chip,” Musk has said. “You also have to rewrite the software. So it was an incredibly intense effort of planning new chips, writing new firmware, integrating it to the vehicle and testing it in order to maintain production.

Morgan Stanley credits Tesla’s sophistication and innovation and the ability to do this at speed. Having created its own AI chips to power its self-driving efforts, it is not only au fait with chip manufacturing but is also a competitor to its own suppliers.

“Tesla’s ability to further in-source technology keeps suppliers on their toes,” the analysts said.

And despite Tesla’s smaller scale compared to GM and Ford, suppliers are likely to see Tesla as a strategic customer, and therefore more likely to work towards reducing bottlenecks.

Countering this argument is the one that points out GM and Ford are making and selling far more vehicles than Tesla. GM’s Q3 drop in sales was not far below that of Tesla’s entire Q3 deliveries.

While this is true, as a relative newcomer Tesla is on a different path to the auto giants. It is at the beginning of an S-curve, and is already making nearly as much as Ford in gross profits with a fraction of the inventory.

And as analyst at disruptive investment firm Ark Invest Cathie Woods points out, electric cars require as much as five times the number of chips as ICE vehicles.

Her thread above on the issue delves deeper into the chip shortage issue, underlining the possibility that some companies are undertaking the silicon chip equivalent of hoarding toilet paper.

The Biden administration has gone so far as to threaten to implement wartime measures to force makers to reveal supply chain information, which would include chip inventories, she says.

According to Ark Invest, a loosening of supply could soon be on the horizon, and the implications for auto giants could be distasterous.

“By the time autos recover strongly, if@skorusARK’s analysis is correct, the sticker prices of #ElectricVehicles will be at or below those of like-for-like gas powered vehicles, suggesting that traditional auto companies will have to transform from ~95% gas to majority electric.”