Should Tesla Keep its Partnership with Panasonic?

Tesla is a company that has made a name for itself. Led by the famous CEO and co-founder Elon Musk, who also designed the American aerospace manufacturer SpaceX, Tesla has received public attention for what the companys future endeavors are. But what does Tesla actually specialize in? Tesla is a company that specializes in electric car manufacturing.

In 2018, Tesla announced plans to build a $5 billion manufacturing factory in Shanghai, China, in order to build about 500,000 electric vehicles every year by the 20222023 fiscal year. The plans for this factory are grandiose, in fact, it will be built on an 864,885 square-meter plot that, according to Musk, will be the size of Teslas Fremont factory and the current Reno, Nevada, Gigafactory1 combined. Due to the massive undertaking of this project and the ongoing Sino-American Trade War tariffs, this plan had to be discussed in great length with the local government in Shanghai. But, nonetheless, the project was approved.

Tesla and Panasonic

It is important to note that Tesla relies heavily on lithium batteries to power their vehicles. For all of their American cars, Tesla has partnered with the consumer electronics company, Panasonic, for the electric batteries in the cars. This relationship, established in 2013, has seen great strides in North America since both companies relocated to the Nevada Gigafactory1. This collaboration seemed to be symbiotic and well-received. However, since entering China, this collaboration has sailed into rough waters.

As a result, Tesla settled with the South Korean company, LG Chem, to be their battery supplier for the gigafactory in Shanghai. The South Korean mega-corporation focuses on technology and chemical production for the batteries. Since entering the Chinese market in 2017, LG Chem is a fairly new supplier of batteries in China and partnering with Tesla is turning out to be their Chinese cash cow.

The LG Chem battery-making factory for Tesla will be located about 200 miles away from Shanghai itself, which means there needs to be coordination between LG Chem and Tesla to get the correct auto parts to the right places. To add more salt to the wound of the TeslaPanasonic situation, Tesla also announced that they would partner with other localized entities in supplying other parts for cars, excluding Panasonic from these opportunities in China.

What are the reasons for this strained relationship that is pushing Tesla away from Panasonic and possibly seeking new collaborations in China? One reason came from Musk himself, who claimed that Panasonic has recently had a slow-down in production, particularly on a certain model of battery, the Model 3. Apparently, the battery cell production rate had slowed drastically, which in turn slowed the production of vehicles in Teslas Nevada Gigafactory1. Musk reported, in many interviews, that Panasonic had promised a much faster production rate, and this was a wrench in their relationship.

Another reason for Panasonic losing favor in the eyes of Tesla is due to the inside reports that Panasonic employees were ignoring crucial procedures while manufacturing Tesla products in the Nevada Gigafactory1. These actions normally went without notice and, if they were, did not attract punishment or negative repercussions.

Yet another reason is that the amount of waste material Panasonic is generating is quite alarming. According to reports, over half a million pieces of shrapnel and scrappage are tossed out each day. This waste is due to the procedures not being followed (as mentioned above), according to one employee. For a company that is collaborating with an electric car company whose overarching goal is to go green, Panasonic must understand Teslas core values as a company.

Due to these reasons, Tesla, in fact, halted future spending on Gigafactory1 in Reno, Nevada, where it actually saw stock prices go down. The investors and stockholders knew that this was not a positive outcome in regards to the strategic partnership of Panasonic and Tesla.

Resolution: Is There One?

Is there a way to mend the strained relationship between the two large companies? It is tough to say, but as was already noted, Tesla seems to be looking in another direction, since they are looking to other sources for lithium batteries in China.

Apart from the reasons mentioned previously, Tesla might be trying to curry favor with the Chinese government and local suppliers to boost name recognition and brand awareness in China. This new direction is largely due to the fact that the electric vehicle industry is booming right now, and China has a growing middle class, which in turn has a growing need for vehicles.

Case Discussion Questions

1. If you were Elon Musk, would you abandon Panasonic and look for other collaborative opportunities or find ways to work past differences?

2. What is the best way to structure these relationships with outside partners?