The following are suggested questions to guide your Tesla case writeup:1. Given the importance of economies of scale in the auto manufacturing and technology industries, what is your long term forecast for Tesla?2. What is the value proposition for Tesla? Is it a car company or a technology company? Explain why.3. Document the value chain for Tesla. How does the company differentiate itself through its sourcing, manufacturing and delivery process?4. What can you glean from the financials of Tesla? Is the company in a strong or weak position?5. What are your recommendations for Tesla going forward? How should the company stabilize its business and guarantee its long-term growth?Case Parameters
Be sure to read the case completely
2-3 pages
12 pt. font, 1-inch margin, double spaced
No outside references needed for the case
Only use information on the company from what is presented in the case
Be sure to use concepts from the textbook and/or class slides
Do not look up and/or plagiarize case writeups online!!!
tesla.pdf
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W13610
TESLA MOTORS: BURNING UP THE ROAD TO DOMINATION OR
DOOM 1
Karam Putros wrote this case under the supervision of Professor Dante M. Pirouz solely to provide material for class discussion.
The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have
disguised certain names and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com.
Copyright © 2013, Richard Ivey School of Business Foundation
Version: 2014-04-16
It was November 2013 and Elon Musk and his innovative, premium electric car company, Tesla Motors
(Tesla), were beginning to enter a difficult period in the young company’s history. Recent stories in the
global press reported car fires in Tesla’s premier Model S sedan. 2 There were also reports that the
company was inflating its financials by booking revenue from sales of its zero-emission vehicle credits
granted to it by the State of California. Investors were becoming nervous.
The next year would be crucial. The company had the potential to become one of the best high-end global
car brands in the world. It could accelerate sales by continuing to generate big buzz about the
revolutionary battery cell technology used in its cars and citing the almost fanatical customer satisfaction
with them. But the company had to get the fundamentals right in order to build to a critical mass of sales
that would allow it to survive in the short term. The characteristically confident Musk was faced with
many issues that he had to resolve in order to survive the next 12 months. He needed to pick the most
important ones and get those resolved right away while creating a winning formula for production, pricing
and promotion of the Tesla car line before his investors started to bolt from the stock.
THE COMPANY
Founded in 2003 by Martin Eberhard and Marc Tarpenning, Tesla designed and manufactured high-end
electric vehicles. The California-based company was well-known for producing the first fully electric
sports car, the Tesla Roadster. Different from most car launches, Tesla decided to sell vehicles initially at
a premium price point, with the Roadster priced at $109,000. 3 This pricing tactic limited the size of the
target market and, of course, the number of units sold. This, coupled with the 2008 financial crisis in the
United States and the subsequent recession, seemed to backfire. Despite significant financial investment
from investors, the company failed to record profits in its first few years.
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Tesla Motors or any of its employees.
2
Tesla Model S – Official Walkthrough HD, www.youtube.com/watch?v=6HtlmNzqQdo, accessed December 9, 2013.
3
“Key Events In The History Of Tesla Motors,” Associated Press, June 21, 2012,
www.utsandiego.com/news/2012/jun/21/key-events-in-the-history-of-tesla-motors/, accessed December 4, 2013.
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In 2008, Tesla encountered a major change in its leadership — Elon Musk, co-founder of three companies
(most notably Paypal) was named chief executive officer (CEO). 4 Musk, a University of Pennsylvania
graduate, was an important financier. As the recipient of several honours, including Time Magazine’s Top
100 Influential People in 2010, 5 he was considered the kind of charismatic leader that could shake up the
company. This change of leadership, along with the slow recovery of the global economy, the increasing
demand for fuel-efficient cars and the increasing price of fuel, allowed Tesla to finally prosper in 2013.
TECHNOLOGY
The lithium ion battery pack was the signature of the Tesla design. Typically used in laptops, these
batteries could be charged at any outlet and stored three times more electricity than competitors’ batteries.
Every hour of charge would produce power for 100 kilometres of driving. Tesla set up supercharge
centres, usually at roadside outlets and cafes, in 34 locations in North America and six in Europe, where
half the battery could be charged in 20 minutes at no cost. In order to meet the hefty utility costs of these
free superchargers, Tesla incorporated solar-powered channels to run them — and these were built
conveniently by Musk’s other company, SolarCity. In the near future, the lithium ion batteries were
expected to fully charge within five minutes, about the same time it would take to fill up a gasoline tank.
Although the safety of these batteries has been questioned, a gasoline tank has 10 times more combustion
energy.
The powertrain inside Tesla vehicles provided an edge in speed. It was relatively simple in design, only
containing one rotor that controlled the car’s movement. The powertrain in most other cars consisted of a
variety of parts, such as a spark or belch, in addition to a rotor, thus reducing potential acceleration.
Tesla’s simple powertrain could go from zero to 100 kilometres/hour in less than six seconds.
In order to reduce weight and increase performance, Tesla relied on carbon fibre for the Tesla Roadster
and aluminum for the Model S rather than the steel traditionally used by most automobile manufacturers.
These lightweight parts increased performance by requiring less power. In fact, crash tests demonstrated
that these lightweight materials, which were much stronger, performed better and had greater crash
absorption potential (especially the case in aluminum) than steel, contributing to the Model S’s
designation as the safest car of the year in 2013. 6
PRODUCTION
Tesla produced its vehicles at a Fremont, California plant formerly occupied by Toyota and General
Motors. In the 370-acre plant, 3,000 employees and 150 robots took about four days to manufacture each
of Tesla’s technologically advanced vehicles. The plant had the capacity to produce up to 500,000
vehicles annually, though in 2013 only about 20,000 were being produced. Tesla expected to produce up
to capacity within the next decade. Panasonic, its supplier for the lithium ion batteries used to power the
vehicles, although able to meet demand up to now, was not expected to keep up in the future. As a result,
4
Claire Cain Miller, “Tesla Motors Zaps Another C.E.O. and Lays Off Staff”, October 15, 2008,
www.green.blogs.nytimes.com/2008/10/15/tesla-motors-zaps-another-ceo-and-lays-off-staff/, accessed December 4, 2013.
5
Jon Favreau, “The 2010 Time 100: Elon Musk,” April 29, 2010,
http://content.time.com/time/specials/packages/article/0,28804,1984685_1984745_1985495,00.html, accessed December 4,
2013.
6
Jerry Hirsch, “Upstart Tesla Wins Top U.S. Safety Rating; What Will Competitors Do?,” Los Angeles Times, August 20,
2013, http://articles.latimes.com/2013/aug/20/autos/la-fi-hy-tesla-nhtsa-safety-rating-20130820, accessed December 4,
2013.
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Tesla recently considered buying a “giga plant,” which would be the largest lithium ion battery
production site in the world.
Tesla opened an assembly plant in August 2013 in Rotterdam, Netherlands to help meet increasing
demands for its vehicles in Europe.
SALES
Tesla had a radically different way of selling its vehicles, bucking the traditional method of selling
through dealerships and salespeople. Instead, Tesla used a factory-direct method of selling. Similar to
Apple Computers, Tesla used factory stores to sell directly to the end consumer. It opened factory-based
“galleries” in highly populated areas such as upscale shopping malls, where hundreds of people would
visit every day. In 2013, the company had 41 galleries in the United States and three in Canada.
It was not easy for Tesla to open and maintain these galleries. Franchising laws in the United States
prohibited manufacturers from selling directly to consumers. However, Tesla strategically targeted states
whose weak enforcement of franchise laws made them easy to circumvent. As a result, it was able to
bypass the dealership system of distribution successfully. As a result of this approach, not only did Tesla
avoid the extra fees, such as commissions, associated with selling its vehicles through dealerships, but the
consumer could purchase vehicles at a lower cost.
Despite this, Tesla still had limitations on how it could sell its cars in certain states. For example, Texas
had many restrictions on what the company could do: the state did not allow test drives or negotiations
over price at the Tesla showrooms. Moreover, Tesla’s factory-direct method sales approach angered many
franchise dealers across the United States, triggering numerous lawsuits.
Still, sales in North America increased at a significant rate, especially in Tesla’s home state of California,
where it surpassed Porsche, Jaguar, Volvo, Landover and Lincoln in sales in the luxury car market as of
September 2013. A total of 21,000 vehicles were expected to be sold globally that year. In the European
market, Tesla sales slowly started to gain momentum, particularly in Norway, where the country provides
electric car owners with benefits including free parking and tax benefits. Germany, which has a vast
automotive industry, was a slow market for Tesla whose vehicles do not drive fast enough for many
Germans, who are used to some of the highest highway speed limits in the world.
PARTNERSHIPS
Tesla slowly increased its partnerships with other top companies internationally. Recognizing that Tesla’s
electric vehicle design and technology were distinct, Toyota partnered with the company to produce the
RAV4 electric vehicle, which went on sale in the summer of 2013. Mercedes followed the same path and
was expected to release its first electric vehicle with the help of Tesla in early 2014. As previously
mentioned, Panasonic had long been a partner for Tesla, providing the company with lithium ion
batteries. To help consumers finance the costly vehicles, Tesla partnered with Wells Fargo and U.S. Bank
in 2013. Finally, AT&T provided the wireless service to enable buyers of Tesla’s premium vehicles to
link to the Internet in their cars.
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MARKETING STRATEGY
Using the factory-direct approach, Tesla attracted three groups of consumers. Eco-friendly consumers,
whose numbers were likely to grow in the future, were the main group that the company tried to attract.
Next were mid- to upper-class professionals looking for a premium car and then tech-savvy individuals.
Because electric vehicles were still fairly new in today’s market, Tesla trained product “specialists” to
educate consumers who came to the galleries about the benefits of electric vehicles in general. Unlike car
dealers, product specialists did not work on commission and thus were able to ensure a better experience
for the consumer as they did not have to pressure to make a sale.
Tesla’s in-house marketing team consisted of seven people, some of whom were in charge of the
company website. Unlike most auto companies, Tesla did not rely solely on traditional advertising to
promote its cars. Communication about the company’s products was disseminated through social media
such as Twitter and Facebook, although the company did produce a few ads.
Mostly the company relied on positive word of mouth and product technology announcements to drive its
sales. News about Tesla tended to go viral among various types of people including car lovers,
environmentalists, designers, techies and even investors. A 2013 article in Consumer Reports reported
that Tesla’s Model S was given an almost perfect rating score by both owners and the editors of the
magazine. 7 Ultimately, the distinctive factory galleries, which easily attracted customers with their
impressive designs, along with the raving word of mouth from owners, positive buzz among car
enthusiasts and high satisfaction and safety ratings, were the company’s best advertising.
FINANCING TESLA’S GROWTH
In the first few years of Musk’s leadership, the company made little progress financially. In 2010, the
same year the company made its initial public offering of $167 million, 8 it lost over $150 million, 9
approximately three times more than the previous year. However, since Tesla was a relatively new
business and the United States was still in the middle of a recession, time was needed to assess the true
state of the company. In 2011, Tesla both announced it would expand its car sales to Europe and Asia 10
and partnered with Toyota. In the following year, it released a more affordable second car model, the
Model S (priced at $50,000).
Exactly a decade after Tesla’s founding, 2013 proved to be a financially successful year. In the first
quarter, the company earned its highest ever profit of $11.2 million. 11 Moreover, the company’s new
Model S was named the safest car on the road, 12 and with oil prices becoming more expensive than ever,
7
“Tesla Gets Top Marks in Consumer Reports Satisfaction Survey,” Reuters, November 21, 2013,
www.reuters.com/article/2013/11/21/us-autos-tesla-satisfaction-idUSBRE9AK0J320131121, accessed December 7, 2013.
8
Jerry Hirsch, “Tesla Motors Plans $167-million Stock Option,” Los Angeles Times, June 16, 2010,
http://articles.latimes.com/2010/jun/16/business/la-fi-tesla-ipo-20100616, accessed December 4, 2013.
9
Tiffany Hsu, “Tesla Motors’ Loss Widens 177% In 2010,” Los Angeles Times, February 16, 2011,
http://articles.latimes.com/2011/feb/16/business/la-fi-tesla-earns-20110216, accessed December 4, 2013.
10
www.latimes.com/business/autos/la-fi-hy-tesla-stock-tops-100-20130528,0,1607302.story#axzz2jF6LGdRC, accessed
December 4, 2013.
11
Jerry Hirsch, “Tesla Motors’ Second-Quarter Operating Profit Sends Shares Soaring,” Los Angeles Times, August 7,
2013, http://articles.latimes.com/2013/aug/07/autos/la-fi-hy-tesla-second-quarter-proift-20130807, accessed December 4,
2013.
12
Jerry Hirsch, “Upstart Tesla Wins Top U.S. Safety Rating; What Will Competitors Do?,” Los Angeles Times, August 20,
2013, http://articles.latimes.com/2013/aug/20/autos/la-fi-hy-tesla-nhtsa-safety-rating-20130820, accessed December 4,
2013.
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Tesla’s shares 13 began to soar. Perhaps most impressively, in May 2013, Tesla repaid the government
loan of $465 million it had received in 2010, 14 nine years before the due date. The company was clearly
starting to show signs of financial stability.
At the end of August 2013, Tesla’s stock price was $170, and by September it reached $190, giving the
company a market capitalization of about $24 billion. Tesla was able to demonstrate this financial
strength despite the fact that it had shipped only about 20,000 Model S units by that time. However, by
the close of trading on November 28, 2013, the stock had fallen to $126.94. (The reasons for this are
explored in the following two sections.)
As a way of building sales, Tesla decided to start marketing and shipping cars to Europe. The time
required to transport the cars from California meant that the company’s fourth-quarter outlook could not
book these units as revenue until they were actually delivered. This made some analysts unhappy due to
lower short-term earnings.
Tesla continued to avoid expending any money on traditional advertising. They were able to sell every
unit they had in production, and there was still unmet demand in the marketplace.
Tesla was preparing production on a sport utility vehicle (SUV) version of the Model S to appeal to an
additional target segment and compete head-on with other high-end auto brands such as BMW’s X series;
the G, GLA, GLK and M series built by Mercedes; and Porsche’s Cayenne and new Macan series (the
latter to be launched in 2015). While the Model S was priced between $70,000 to more than $100,000
depending on the features added, the Model X crossover SUV was to be launched at the end of 2014 with
an unannounced price point higher than the Model S, given the expected demand.
In order to increase production velocity and avoid the uncertain supply of the battery packs, Tesla signed
a four-year production deal with Panasonic for 1.8 billion battery cells. This would allow Tesla to produce
250,000 cars. It was estimated that Tesla could produce and sell approximately 100,000 cars in the next
two to three years, according to Canada’s The Globe and Mail. 15
To meet the demand, Tesla was contemplating a production partnership with another battery supplier to
build a “giga factory,” which could produce enough battery cells to build hundreds of thousands of
vehicles. This would also allow Tesla to better control a large component of the variable cost in the
vehicle by closely managing the production of the most expensive equipment in the car — the battery. It
was estimated that based on estimated earnings in 2016, the current stock price was relatively cheap at
only 13 times earnings 16 Model S unit sales were 5,500 for the third quarter of 2013, but analysts were not
impressed: “Brian Johnson, an auto analyst at Barclays PLC, had expected 5,820 Model S sales. Dan
Galves of Deutsche Bank AG estimated the company would ship 5,850 cars in the quarter.” 17
Tesla planned to ship about 6,000 units in the fourth quarter of 2013. It reported a gross margin of 21 per
cent in the third quarter with the biggest share price increase of any carmaker. The company was also
13
“Does Tesla Deserve Its Rising Stock Price?” Fox Business News video, www.youtube.com/watch?v=MQLY36ED-hY,
accessed December 4, 2013.
14
Jerry Hirsch, “Tesla Motors Pays Off Department of Energy Advanced Technology Loan,” Los Angeles Times,
http://articles.latimes.com/2013/may/22/autos/la-fi-hy-tesla-pays-off-doe-loan-20130522, accessed December 4, 2013.
15
Chris Umiastowski, “Why My Money’s on Tesla, Despite the Stock’s Volatility,” Globe and Mail, November 28, 2013,
www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/growth-investing/why-my-moneys-ontesla/article15659893/, accessed December 4, 2013.
16
Ibid.
17
Bruno J. Navarro, “Tesla’s Run Just Beginning: Analyst,” CNBC.com, www.cnbc.com/id/100946446, August 7, 2013,
accessed December 9, 2013.
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preparing to ship to Asia by year end 2013 and estimated that over time up to two-thirds of its sales would
come from abroad.
Expenses continued to rise due to the aggressive roll-out strategy of company-owned store …
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