I used to think it was better to outsource things you are not good at, and instead focus on your key strengths — then why is Tesla trying to bring manufacturing in house when they could move much faster following Apple’s footsteps and outsourcing their manufacturing to China? After all, the Chinese manufacturers have decades more experience producing electronics and cars and could much more easy troubleshoot problems than we could.
Bringing things in house is what has enabled Tesla to get so far and be the leading electric vehicle company in the world — having no credible competition in the electric car market for 5+ years. Cutting out the middle man enables three things:
- Reduces client implementation complexity -> we can build more things!
- Lowers costs – we’re not paying someone who is incentivized to charge more
- To innovate – we can quickly iterate in-house
I’ve been reading the Master Switch: The Rise and Fall of Information Empires, and it’s fascinating to learn about companies who started with one core competency, and expanded moved things in house to gain a competitive edge. Radio Corporation of America (RCA) for example, originally started as a radio broadcasting company, but decided to start producing and selling radio sets so that they could control the frequencies that the radios could receive.
Are there industries then, that lend themselves more to vertical integration than those that don’t?
The answer is usually mixed. In the computer industry, for example, Microsoft is not vertically integrated but won most of the market share — Apple, on the other hand, is vertically integrated and won the lion’s share of not the market, but the profits.
Similarly, in the mobile phone industry, Google Android is not vertically integrated and has won the market (87% market share), while the Apple iPhone (12% market share)  has contributed to making Apple the most profitable company in the world .