Tesla was created on July 1st,2003 by Martin Eberhard and Marc Tarpenning. At the time, the car industry was dominated by manufacturers of gasoline burning cars with production being mostly in China, the United States, Japan, Germany, India and South Korea. There about to 800 million vehicles in operation worldwide, consuming close to 1000 billion litres of gasoline and diesel fuel annually. Environmentalists were extremely critical of this use of fossil fuels and were advocating for the production of cars that would incorporate alternative fuel systems. The major concern was China’s potential of becoming the leading car producing country. Tesla began its quest to become a “disruptive force” in the seemingly stable market. Electric cars had been available as early as 1900, however, by 1935 they were no longer popular, having been replaced by internal-combustion engines. (Thompson, 2017)
A renewed interest in electric cars began in the 1960s and 70s. The 1970 Clean Air Act, the OPEC oil embargo of 1973, the 1976 Electric and Hybrid Vehicle Research Development and Demonstration Act, emissions regulations encouraged electric car production but production was limited. Traditional car companies had produced electric cars such as: General Motors with EV1 and the Toyota Prius. The Toyota Prius was a positive impetus to the growth of interest in fuel efficient automobiles and was available all over the world by 2000.This means that when Tesla began operations, there was government encouragement for electric car production, there were companies that had produced successful models, there was interest on the part of the public, but the door was open for serious competition to enter.
Considering Porter’s Five Forces, it is clear that at the time there was certainly the threat of a new entry. In terms of competition in the automobile industry, there was a limited number of competitors producing relatively equal products thus allowing a significant opportunity for a new entry into the marketplace. Existing companies are aggressive in innovation and promotion of their cars. Tesla at its entry into the market had plans to not only produce the cars but also to produce the battery systems used in them and thereby reduced the power of suppliers since the company would eventually become its own supplier. Tesla’s suppliers have a limited control in the eventual distribution and sale of its cars.
In the early days Tesla presented the cars to wealthy people who were interested in high performance cars but who were also interested in environmental concerns. (Chatterjee & Terez, 2018) This was a definite niche market and their successful use of the cars would provide opportunity for further marketing. There are low switching costs that reduce the barriers to purchase from Tesla. A company that could produce and successfully market such a vehicle would represent a serious threat to the existing manufacturers of standard cars.Tesla releases, the first electric vehicle that uses lithium-ion battery cells and is considered to be a luxury car in 2008. Its retail price was US$109,000. Roadster is capable of reaching 0-96 kilometres in three seconds. Tesla’s primary challenge is to assure its niche market the price is worth paying. They do so by targeting specific people, opening showrooms, and finally by partnering with large companies.
Consumers are used to buying luxury sport cars, which consume a lot of fuel, and so to overcome that difficulty, Tesla wanted to target this “rich” group by releasing a luxury car which is simultaneously environmentally friendly. Tesla looks at the customers’ wants, which helps them create a lifestyle. Roadster’s demand is remarkably high, but Tesla wanted to focus more on Model S, the more reasonably priced car. Furthermore, they stopped producing the Roadster. However, Tesla will relaunch the Roadster in 2020 because they prefer not only to target the middle class but the upper class as well. There are some criticisms of the Roadster that it is old-fashioned and too costly for the clients. Due to this, Tesla opened showrooms so customers can physically see the car.
Thereafter customers could go online and make their desired modifications before placing an order. By opening showrooms, Tesla created a direct-to-consumer procedure. Hence, customers can buy it online and have a direct contact with the manufacturer without needing intermediaries, overcoming the distribution challenge. In some states, it is forbidden to have manufacturer-to-consumer car sales, and consumers had to order their car online, have it shipped through intermediaries, fill in the registration process, and then be able to communicate with the company’s customer service, which is exceptionally costly and time-consuming.
Where Tesla created their own two-prong consumer distribution channel strategy to try and overcome this legal challenge. Tesla’s value based model utilizes its organization’s uniqueness and niche market to grasp out for its consumers. Tesla’s main customer segment are people who are “performance enthusiasts” and are keen on protecting the environment. Tesla has increased their value to the target audience by using eye catching gadgets and technology. Furthermore, their first design had special door handles, automatic doors, and incredibly high horsepower for an electrical car. That is to say, the company ensured that the car owners can monitor their own energy consumption and maximize their energy use.
There is also the option of a website to track electricity transfer back to the grid and see how the car owners directly benefit the environment from the solar-powered re-charging stations. Tesla’s customers are also handled with quintessential care after the delivery of their car, from exquisite car service, to valets, and even extending the warranty on the car battery. Making their own cars and name worth a lot more. In addition, Tesla wants to have a rapid cash flow in order to position themselves in a better and sturdier market. The expansion of Tesla would mean that they shall move to the mass market production of regularly priced cars, unlike the Roadster Model.
Therefore, when exploiting the mass production market, they would differ from their competition as the regular consumers would base their assumption on the Roadster and its positive. Although the Roadster was successful, they faced several challenges with supplies. Since Tesla’s technology is different, their suppliers are different, thus, the entire organization is different. Unlike any typical car manufacturer, they have to use a different supply chain strategy. They must apply the three-pong supply chain strategy; having a supplier for standard parts, proprietary parts, and one for the battery. Tesla has done so by partnering with Daimler and Toyota, with a trade-off. However, some parts were supplied directly from Toyota. Having Daimler on the board for Tesla definitely helped in supplies.
Nevertheless, this was harder to do in other necessary parts of the vehicle like the lithium battery which is manufactured in the Far East. The distance causes delays in production which causes delays in delivery, hence, questions start to arise from consumers. In order to overcome this issue, Tesla pays highly priced airfreight, when necessary, to avoid the delay and speed up the process. Peter Carlsson who is the supply chain vice president, summarized their delay in two words “Buffer up”; which means higher costs.
In essence Tesla will not be making as much profit as they desired in order to move to the mass production market. They later did come up with a common digital platform for all the suppliers to meet face to face: and named it “the manufacturing hotel”. Tesla’s entrance to the market achieved uniqueness, customer satisfaction, and meeting customer expectations. In addition, they disrupted the supply chain not just the market. They were able to get what they want, how they want by using trade-offs, different strategies, and even building a new digital platform. However, this was successful and effective on the small output scale where they have only one manufacturing destination. In order to apply this to regularly priced vehicles in a mass production market, several obstructions will arise.
A brief SWOT analysis further explains how Tesla entered the market.
Looking at its financial statements and situation, it seems as though this company is one that can hit bankruptcy at any given time. Exhibit 5 from the case shows that there has never been a positive free cash flow since 2012. The operating cash flow minus the capital expenditures is always negative, meaning that Tesla does not have any cash after including their capital expenditures. Exhibit 6 shows us that since 2010, there has been a net loss. EBIT has never been positive therefore, after accounting for interest and tax, it is only logical that Tesla will be producing a net loss rather than a net profit. By combining the exhibits with balance sheets and the exhibit 3 which is consolidated statement of operations, one can identify that there is a negative return on equity and a negative return on assets.
Calculating the current ratio, one can see that the current ratio is below 1. This shows that Tesla’s liabilities exceed their assets which means that Tesla has plenty of outstanding payments however, because they are expecting a lot of revenue from their future projects, they should be able to cover this short-term debt, avoiding bankruptcy. The high debt to equity ratio tells us that Tesla has been using borrowed money in order to finance their debts and grow as a company. This could downturn if the return they receive from projects where the borrowed money was invested is minimal, as Tesla will not be able to cover the debt.
The stock price for Tesla is surging more than ever whilst the company has only been reporting net losses. Markets are based on expectations and perceptions of people. One reason Tesla’s share price is increasing steadily could be due to the fact that people expect Tesla to make a greater loss than they actually do. Since they have been at a loss for years. (For example: people expect them to lose 50% but they end up losing 20% so the stock price increases) Along with this, people look at the future of Tesla.
Elon Musk always promises his fan base new things. He has been promising to introduce a “cheaper” Tesla model which is now being introduced. He has also promised to begin diversifying their product line by adding semi-trucks. Tesla has been on “hiring binge” where they have increased their number of employees at a rate faster than they are increasing revenue. The need to hire goes alongside additional investments and promises made by Elon Musk. This excess amount of hiring contributes to the constant loss that Tesla is making year on year.Elon Musk has created a lifestyle with Tesla, which has a huge fan base who will always purchase Tesla products. People have faith in Elon Musk and his leadership capabilities.
This view comes from an investors point of view with the thought of feeling by believing in the product in order to invest in the stock. The potential for the new products and the consumer demand show more reliability than the financial statements do. This is similar to the Amazon case. Amazon did not report positive net income until 2015, however, regardless, people remained invested and in September 2018, Amazon briefly reached a value of $1 trillion. (Davies & Rushe, “Amazon becomes world’s second company to be valued at $1tn”, 2018) People around the world who do not constitute to the Tesla fan base are starting to realize that the future of the world is no longer gasoline, human-driven cars but electric, software driven cars. Due to the understanding of this new future lifestyle, the stock price of Tesla has exceeded that of their competitors who have been producing a net profit year on year.
The biggest investments Tesla has made are the Gigafactory and the acquisition of SolarCity. These investments are $5 billion and $2.6 billion respectively.Gigafactory was built to produce batteries in order to reduce costs across the value chain. In 2014, Elon Musk announced Gigafactory will be able to produce 500,000 batteries by 2020. Later in 2016, he revised this target and concluded it will produce 500,000 by 2018 and 1,000,000 by 2020. Elon Musk realized this was a stretch, therefore, he rectified his statement by saying they will make 750,000 batteries per year till 2020. The latest figures reveal that Tesla has been producing around 3,000 per week. It is necessary for them to make about 9,500 per week to achieve 500,000 per year, so it seems impossible for Tesla to reach Elon Musks statement of 750,000Battery prices have been reduced from 1000$/kWh in 2010 to 200$/kWh in 2016 (McKinsey&Company, “Electrifying insights: How automakers can drive electrified vehicle sales and profitability”, January 2017).
At that moment Tesla said battery price was below 190$/kWh and Elon Musk has said its current price is around 100$/kWh in the 2018 Tesla Shareholder Meeting. This huge decrease justifies the investment Tesla made in Gigafactory. The main reason behind this decrease is because Tesla has control over the whole process of fabrication. This allows Tesla to control costs in every step, except for lithium, whose price is changeable like any other commodity.
Even if Tesla is the biggest automotive company in terms of value cap, it´s so small in terms of production. Tesla sold 103,000 cars in 2017 vs Toyota or Volkswagen which sold over 10,000,000 cars in the same year. If Tesla wants to compete with these firms it would need to build the same kind of factory. Furthermore, they would need to significantly reduce the number of employees. SolarCity was bought in 2016, its business consists of installing solar panels and batteries (powerwall and powerpack).
SolarCity was the biggest U.S residential solar company. It was founded by Lyndon and Peter Rive, Elon Musk´s cousins. This purchase represents a big change in Tesla as they want to diversify their business from solely car production to including solar panels and home and industrial batteries. This is reflected in the name change of the company from Tesla motors to Tesla Inc. Tesla was founded with the aim of accelerating the transition from fossil fuel cars to electric cars. Electric cars produce pollution when the cars use electricity to charge their batteries. Therefore, Tesla had to provide electricity to their customers in their famous “superchargers” through clean energy. Electricity needed at Gigafactory had to be produced by renewables resources too. Only by doing so Tesla keeps its image of changing the world to clean energy.
Strong efforts have been set out in order to convince consumers that electric cars are both economically and conveniently good investments. Elon Musk is a powerful force for Tesla, being both “tenacious and resilient” and his position at the head of the company has gone a long way in helping the company attain success.
Tesla should take advantage of the following to attain future success:
- Continue respecting the Vision Statement of the company which states, “To ‘create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles’”.
- The strengths of brand equity and an environmentally good product should be maintained.
- Product quality should be improved as there has been complaints about the fit and finish of the Model S. In order to compete with traditional car companies who, perfect their overall product.
- Increasing upper level staffing requirements to include renewable energy experience and expertise would remarkably help Tesla to exploit the energy market. It’s important to note that Tesla should not increase their number of staff, rather replace. In other words, aligning their hiring binge with their revenue.
- Tesla should overall decrease their expenses. Partnering with a shipping company – including land, air, or sea transportation.
This will significantly decrease unnecessary expenses. Alongside, with a dedicated team from to handle production delays or emergencies. In order to remain the preferred stock for investors, customers’ need to trust Tesla even more. In the coming era, this can only happen through their commitment to Elon Musk’s promises alongside the company’s results.