Published Last Week

Tesla's Vertically Integrated Repair Network

Vertical integration is a critical and common trait amongst Musk-owned businesses. Today, over 70% of SpaceX’s parts are made internally. Tesla started with drivetrains and parts from Daimler and Lotus but now is now mainly vertically integrated from assembly to part manufacturing.

Musk has taken a similar approach in repairing its vehicles. Tesla directly owns ~90 repair shops and has certified ~900 third-party shops. There is no aftermarket for Tesla parts. Tooling and parts can only be purchased directly from Tesla. This prevents independent body shops from completing collision repairs. 

Vertically integrating into repair can have real value for OEMs. Tesla aims to drive down the cost of repairs and reduce waiting times. Controlling the network also underpins the repair quality and drives a tighter feedback loop between manufacturing and repair to reduce severity. 

But Tesla’s strategy doesn't seem to be driving too much of an advantage. Yet.

Tesla’s repairable severity, the cost of repairs when a collision isn’t a total loss, is higher than other EVs and ICE vehicles. 

Mitchell, US repairable severity
Mitchell, US repairable severity

Also, in June 2024, a U.S. District judge progressed a class action lawsuit against Tesla for the potential monopolization of its repair network and restraint of aftermarket parts. Vehicle owners claim this has led to extended waiting times and supranormal repair prices. Tesla is also the only OEM that doesn’t abide by the Right to Repair legislation that allows independent repair shops and vehicle owners to repair their cars. 

We’ve spent the last few months exploring the history of Tesla’s repair network, how it's differentiated relative to legacy OEMs, and the potential risks and competitive advantage from its vertically integrated strategy. 

In the nine months to September 2024, Tesla generated over $7.6bn and $500m in Services and Other revenue and gross profit, respectively. The majority of this line item is driven by Tesla Repair services. This learning journey curates our work on the history of Tesla Repair, the advantages of vertical integration, and potential implications if Tesla is required to abide by the Right to Repair Act next year.

GEICO vs Progressive: Competitive History and Outlook under Todd

At the 2019 Berkshire Hathaway AGM, a question was posed to Buffett about GEICO’s performance relative to Progressive. In the four years to 2019, Progressive and GEICO grew net earned premiums at 16% and 11% CAGR, respectively. In typical Munger fashion, he replied as follows:

“But Warren, in the nature of things, every once in a while, somebody’s a little better at something than we are’ - Charlie Munger, Berkshire AGM, 2019

Charlie may not be wrong here. In the last four years since Covid, and since Todd Combs took over GEICO in early 2020, Progressive and GEICO have grown earned premiums at 13% and 2.5% CAGR, respectively. In the last nine months, Progressive continues taking market share and has already added $6bn in premium from new customers YTD. 

This interview with a Former SVP at GEICO, who worked closely with its executive team, explores the competitive history and outlook of GEICO vs Progressive:

Progressive did something in 2016, ramping up their growth into the pandemic years. GEICO stopped marketing and focused on getting rate increases approved. Now that the rate increases are approved, profit has returned. There's an article I read this morning mentioning their marketing in Q3 was up 100% compared to Q3 last year. They spent about $160 million in Q3 last year, and this year it's around $320 million. Progressive, on the other hand, did not slow down. They've added 3.7 million customers through October this year. No insurance company has added 3.7 million policies in a year, at least not in my 38 years, and likely not in the past 50 to 70 years. By the end of the year, it will be over four million. If you multiply 3.7 million policies by an average of $1,500 in annual premium, Progressive is adding as many policies or as much premium growth as Travelers has countrywide. They're effectively adding the ninth biggest car insurance company this year. It's remarkable. - Former SVP at GEICO

Google Shopping vs European Price Comparison Lawsuit

This interview with a leader of a European price comparison site explores the history of Google’s SERP changes and the impact on SEO and SEM traffic. Ten years ago, Google was fined ~$3bn for changing its search engine algorithm and unfairly treating price comparison sites. 

Google has made recent SERP changes this year. For example, if I search “iphone 16” here in London, Google has added a new ‘Sponsored’ results box on the right hand side of the page. This box is similar to Google Shopping and it pushes organic results down the page. 

If you search for iPhone 16, you'll see a new box on the right side. This is typically an organic box, where you go based on feedback you provide to Google with all your products, which then affects the ranking. This is sponsored. - Senior Executive at leading EMEA Price Comparison Site

Further down the page, Google has added a new box marketers call “SEO Shopping”. This is an SEO feed based on sales ranking. If you click one of the results, it breaks out into a sidenav showing the product details. It also compares products directly on the SERP which neutralises the value-add of product comparison sites.

If you scroll down, you'll see the iPhone 16 box. These are based on sales ranking. To be there, you need to provide feedback, not just that they are ranking you. You give them feedback, and based on the sales ranking, they place you there…it's an SEO feed. It's important to say feed because it's not based on an algorithm or crawl. It's based on the feed that you submit to Google Shopping. In theory, there should be a percentage reserved for price comparisons, but they are not respected. - Senior Executive at leading EMEA Price Comparison Site

However, as the screenshot above shows, Google is offering this iPhone 16 from Vodaphone but it says “By Google”. This is Google Shopping. Google is effectively pushing retailers to list products on Google Shopping so it ranks organically in these new boxes on the SERP. Pure SEO isn't as effective in this SERP structure. And Google is no effectively monetising more organic SEO traffic by forcing retailers into Google Shopping.

This interview goes into more detail on how Google SERP has evolved and the implications on product marketing and product comparison sites. 

Wayfair & Impact of Potential Tariffs - A Supplier’s Perspective

Wayfair states that one of its main differentiators is its CastleGate offering. This is a group of Wayfair-owned warehouses in which suppliers can forward-position goods they wish to sell on Wayfair.

The company states that items placed in CastleGate are delivered faster to customers and carry lower damage and return rates, supposedly a win-win situation for both Wayfair suppliers and customers. Despite this, CastleGate's penetration seems to have stagnated at ~20% of sales.

A year ago, we surveyed Wayfair suppliers to understand why they weren't placing more goods into the CastleGate network and realized amongst other things, that few completed an apple-to-apples comparison between CastleGate and other alternatives (i.e renting warehousing space, selling to brick retailer, and other competing solutions) to understand the benefits of CastleGate.

As goods from China are likely to be hit with additional tariffs under Trump, this interview with a Wayfair supplier sheds light on how they are adapting their supply chain to absorb the impact, how this may compare to 2018 tariffs, and how Wayfair's CastleGate solution could help.

"It's extremely challenging. We needed to find new suppliers in Vietnam. Additionally, a Chinese company we worked with moved to Vietnam to start operations there. A company which we worked with in China, established a plant in Vietnam to avoid tariffs. - a Wayfair Supplier

CellaVision: Sysmex Partnership, DC-1 Instrument & Reagents

Last week, we published an interview with a Beckman Coulter hematology veteran about CellaVision's blood analysis instruments. This interview with a former senior CellaVision executive shares details on the relationship with Sysmex. A key driver of CellaVision's organic growth is the opportunity to capture more reagents revenue.

It depends on the size of the laboratory, but I think it would range from 7,000 or 8,000 to probably 50,000 to 100,000. In terms of consumables, it's quite a bit. - Former CellaVision Senior Executive

CellaVision's business is currently reliant on new instrument sales, which are due to high penetration in large labs.

Our initial target was the large laboratories, starting with our first large system 15 years ago. It gained traction quickly. However, the large reference laboratories took a bit longer, as they tend to conduct studies and reviews before adopting new technology. Eventually, all major reference laboratories in the US began using it.- Former CellaVision Senior Executive

CellaVision bought reagents manufacturer RAL Diagnostics in 2019. However, its reliance on Sysmex for distribution has slowed the roll-out.

 For us, the rollout has been slower than I would have liked. I thought we could move faster and encourage Sysmex to prioritize our products for sale on their slide makers. However, Sysmex is a smart company with a long-term perspective. They plan their launches carefully to improve and innovate. The delay in the launch is partly due to their strategy. - Former CellaVision Senior Executive

Sysmex and CellaVision have renewed their strategic partnership until 2038. We will explore how Sysmex could approach the distribution of RAL Diagnostics reagents and what this means for CellaVision's future growth.