Elon’s missing ingredient: the human and political challenges of Tesla’s supply of Cobalt
In the Fall of 2017, as Tesla prepares its ambitious rollout of the Model 3, the reality of mass market electric vehicles (EVs) seems closer than ever. To tackle climate change –and pollution—many countries (e.g., France, UK, India, Norway, China) have adopted bans on fossil fuel cars in the coming decades1. Although these policies changes are promising for EVs, the sudden rush for the metals used in lithium-based batteries is, paradoxically, threatening the viability of Tesla’s supply chain and its dream to deliver a mass market EV car. The sourcing and supply of Cobalt –a crucial component of Tesla’s batteries—is a particular area of concern and could stop Elon's dream in its track.
“If you’re trying to create a company. It’s like baking a cake. You have to have all the ingredients in the right proportion.” – Elon Musk
In the Fall of 2017, as Tesla prepares its ambitious rollout of the Model 3, the reality of mass market electric vehicles (EVs) seems closer than ever. To tackle climate change –and pollution—many countries (e.g., France, UK, India, Norway, China) have adopted bans on fossil fuel cars in the coming decades1. Although these policies changes are promising for EVs, the sudden rush for the metals used in lithium-based batteries is, paradoxically, threatening the viability of Tesla’s supply chain and its dream to deliver a mass market electric car. The sourcing and supply of Cobalt –a crucial component of Tesla’s current batteries—is a particular area of concern driven by two key unique factors:
- ~50% of the world’s cobalt production comes from the Democratic Republic of Congo (DCR), a country with huge supply chain risks– A recent report by Amnesty international concludes that the Cobalt rush has, and is expected to continue being a major driver of conflict, corruption, and child labor in DCR, with about 40,000 children laborers2. Tesla will, therefore, struggle to find ethically sourced Cobalt which creates a risk for a PR nightmare headline: ‘Is your $60k car built on the backs of children?’. Beyond that, political instability and warfare add further supply chain risk.
- Chinese companies currently control over 60% of the world’s Cobalt mines – in the past few years, Chinese companies have purchased control of around 60% of the world’s mines.3 China has also shown willingness to use its position in the market to ban access of competitors to necessary materials (e.g., ban on rare metal exports to Japan amid trade dispute). This creates added risks for Tesla’s supply chain and competitive position vs. Chinese car manufacturers.
Tesla has taken a number of actions to address these challenges. In the short term:
- Publicly adopting policy of responsible sourcing – Tesla’s first step to handle risk of conflict cobalt has been to publicly disclose its policy to investors through a specialized disclosure form.4
- Expanding due diligence of suppliers – its next step has been to build a small team within Supply Chain team has been tasked with due diligence of suppliers and their practices. This should limit risk of sourcing Cobalt or other materials from mining operations that don’t benefit armed groups or use child labor. 4
In the medium term:
- Encourage development of North American Cobalt – Tesla has repeatedly stated that it would prioritize North American supply chain of Cobalt and other materials in its production. This is a signal to the mining sector to encourage mining/ exploration operations. This has led many entrepreneurs to explore options to develop Cobalt (and lithium) mines in Canada and Nevada.5
- Invest in new battery technologies to reduce (or replace) Cobalt– Tesla inked a 5-year contract with reputed battery researcher Jeff Dahn to work on the next generation of batteries. Although details of the types of developments they’re working on is hard to get, it’s very probable that an effort is being made to get rid or reduce Cobalt usage. 6
In addition to their stated actions, I believe Tesla should also take the following actions (it’s unclear if they’re already working on any of these internally):
- Encourage development of market for cobalt recycling – Cobalt can, and should be, harvested as products (cars, phones) go out of use. Currently, about 15% of U.S. supply of cobalt comes from recycled scrap 7. Tesla should promote the development of recycled solutions through incentives, pricing agreements, or even technology investments that impact the availability of recycled cobalt
- Have ‘ready-to-go’ PR plan for when (and if) any conflict Cobalt (or other materials) are used in production. The reality is that the gap between demand and supply for Cobalt is set to grow so large that keeping a ‘clean/moral’ supply may be increasingly challenging and Tesla should prepare for the worst.
As I think about Tesla’s challenge, there’s a few questions which I’m unsure about and would appreciate your thoughts:
- How should Tesla think about the moral implications of its supply chain and how should these considerations influence its growth plans?
- How should Tesla engage with the Chinese and American governments? Should it seek support from the U.S. government to develop ‘American-friendly’ sources of materials?
- How can or should Tesla organize its supply chain to adapt to potential rapid changes in battery technology? How could it build flexibility and adaptability into its supply chain?
- What role could the recycling of components play in Tesla’s future sourcing of metals? How should Tesla promote ecosystem of recycling as a source of materials?
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- These countries want to ban gas and diesel cars – CNN http://money.cnn.com/2017/09/11/autos/countries-banning-diesel-gas-cars/index.html
- The Dark Side of Electric Cars: Exploitative labor practice – Amnesty International https://www.amnesty.org/en/latest/news/2017/09/the-dark-side-of-electric-cars-exploitative-labor-practices/
- Financial Times, Sanderson, H. (n.d.). China plays long game on cobalt and electric batteries. Retrieved November, 2017, from https://www.ft.com/content/054bbb3a-1e8b-11e6-a7bc-ee846770ec15
- Specialized Disclosure Form: Tesla Conflict Minerals Report. (2015, May). Retrieved from http://ir.tesla.com/secfiling.cfm?filingid=1193125-15-206829&cik=
- The Canadian Ghost Town That Tesla Is Bringing Back to Life Danielle Bochove – https://www.bloomberg.com/news/features/2017-10-31/the-canadian-ghost-town-that-tesla-is-bringing-back-to-life
- Elon Musk teases research on a big battery breakthrough Yoni Heisler – http://bgr.com/2017/08/04/elon-musk-tesla-battery-research-breakthrough/
- Cobalt Investing News, Recycling Cobalt – Sustainable and Affordable https://investingnews.com/daily/resource-investing/critical-metals-investing/cobalt-investing/recycling-cobalt-sustainable-and-affordable/
Student comments on Elon’s missing ingredient: the human and political challenges of Tesla’s supply of Cobalt
Re: Question 4, I wonder whether Apple can provide a model. I know Apple has dealt with the same supply chains issues and has struggled to really track its Cobalt sourcing, but with its new phone leasing model, Apple can better maintain control over its physical assets, which presumably could help them recycle. Perhaps by adopting a similar model, Tesla could investigate ways to recycle cobalt.
Very clear view on a topic that is becoming more and more risky !
I think that as long as Tesla doesn’t encourage competition among battery manufacturers, they have little influence. Indeed, currently only a few manufacturers have the capacity to produce so large amouts of batteries (1). So Tesla has little leverage on them as they are on an oligopoly.
Thanks to a more competitive scheme, Tesla would be able to switch suppliers as soon as one of them is discovered as guilty of non moral practicies.
Currently, Tesla is betting everything with Panasonic (2), and I think this is a very risky strategy that can backfire as soon as Tesla loose control over Panasonic.
Great article. Interesting and well-structured. Specially liked the (quite difficult) open questions at the end. In my opinion, moral implications should be an important issue for Tesla. To me, it seems cynical to talk about creating an “environment-friendly” car while exploring child and subhuman labor. Moreover, I like the idea of recycling but am wondering why Tesla did not (apparently) pursue this strategy more in depth; possible because of the recycling costs and / or quality? Seeking support in governments seems like an inevitable idea. However, when building these partnerships, I would also try to focus on negotiating some type of subsidise to produce recycled Cobalt (more) cost-efficiently.
This is a fascinating topic; while I am decidedly beneath HBS standards when it comes to geo-political awareness and knowledge, I would say that relying on a consistent supply of cobalt from China to fuel what should become one of the most profitable and inevitable industries globally is a non-starter. While it is incredibly important for Tesla to “demo” and “kickstart” the electrical transportation revolution, particularly in the US, I think they need to be fully prepared to become more independent from such high-risk regions. I agree with the author the importance of having a fully defined conflict strategy as it relates to the DRC; one possible route of action for Tesla is to use its heft to work directly with DRC government representatives and regulators. While this sounds naive and will prove incredibly challenging due to the relative political instability in the country, the fact remains that as the transportation industry shifts Tesla will be able to provide an incredible value proposition to ensure a steady, ethically sourced supply of cobalt.
Having lived in a town next to Cobalt Ontario, and having worked on mine planning for one of the world’s largest copper/cobalt mines, Tenke Fungurume in the DRC, while a student at the University of Arizona, I have a bit of perspective on this.
I think that there is extraordinary value in providing supply chain diversification and clarity. Freeport-McMoRan and its joint venture partners have a cobalt refinery in Finland, which provides an integrated cobalt supply chain with a strong commitment to sustainability and social responsibility. Although the mine has been sold to a China Molybdenum Co, the company can still source Cobalt from clearly delineated sources – although it cannot supply anywhere near the full mrket. I wonder to what extent can Freeport or another producer charge a market premium for its transparent cobalt output?
I also wonder to what extent the U.S. government can subsidize cobalt mines. If the price of cobalt goes back down as Congolese expansions come online, to what extent should the US government continue to prop up an outside source? Could we rely on market forces and a transparency premium to render these less-economic cobalt mine projects and expansions economic?