Tesla Motors – MGT 525

Tesla Motors – MGT 525 MGT 525 – Project Write Up – Tesla Motors Contents Company Background ................................................................................................................................................... 2 Company History .......................................................................................................................................................... 3 Electronic Vehicles (EV) Industry Analysis .................................................................................................................... 5 Network Effects from Charging Stations ...................................................................................................................... 8 Growth Strategy & Economies of Scale ...................................................................................................................... 11 Geographic Expansion and Sales Model ..................................................................................................................... 12 APPENDIX A ................................................................................................................................................................ 13 BIBLIOGRAPHY: ........................................................................................................................................................... 14 G r o u p m e m b e r s : Connor Cassis ; Shpetim Gula; Peter Laird BACKGROUND INFORMATION Company Background Tesla Motors, Inc. was founded in 2003 and is headquartered in Palo Alto, California1. Tesla designs, manufactures and markets electric cars, they also provide advanced electric vehicle powertrain components to other automakers (including: Toyota and Daimler). Tesla’s long-term aim is to be able to offer high-performance electrically powered vehicles at affordable prices. They market and sell their vehicles through Tesla stores and galleries, as well as over the Internet (direct selling distribution). The company operates a network of 80 stores and galleries in North America, Europe, and Asia (2014). Financial Performance: On June 29, 2010, Tesla Motors launched its initial public offering on NASDAQ, raising $226 million. Despite a drop of more than 20 percent in Tesla's stock price, following news of a third Model S fire, it was still the top performer on the Nasdaq 100 index in 20132, seeing its stock price quadruple. The company is now valued over $30 billion3 (GM is worth only twice as much). Year over year, Tesla Motors, Inc. has been able to grow revenues, from 2012 we saw revenues rise from: $413.3M USD to $2.0B USD. Most impressively, the company has been able to reduce the percentage of sales devoted to selling, general and administrative costs from 36.39% to 14.18%. This was a driver that led to an improvement in the bottom line from a loss of $396.2M USD to a smaller loss of $74.0M USD (See figure 1 in Appendix A). 2 Company History Earlier History Martin Eberhard and Marc Tarpenning incorporated Tesla Motors in July 2003, and it was Elon Musk who later led the Series A round of investment in February 2004, joining Tesla's Board of Directors as its Chairman. Early on, Musk's main goal was to commercialize electric vehicles, his strategy was to start with a premium sports car aimed at early adopters and then move as rapidly as possible into more mainstream vehicles, this was considered by many an effective strategy for building customer awareness and a strong corporate reputation. Musk has been very successful in pursuing this goal playing an active role within the company, as he oversaw their first vehicle’s product design at a detailed level: The Roadster: The Tesla Roadster, an all-electric sports car capable of acceleration from zero to 60 mph in less than four seconds, was going to be Tesla’s debut vehicle in 2008. Tesla later sold more than 2,400 Roadsters in 31 countries through to September 2012, and most of the remaining Tesla Roadsters were sold in Europe and Asia during the fourth quarter of 2012. The Roadster had a base price of $109,000 USD (2010). Model S: Tesla later expanded to the luxury sedan market. Model S, a zero emission and sustainable luxury sedan, was introduced as their second electronic vehicle in 2012. Global cumulative sales of the Model S passed the 25,000-unit mark in December 2013, with the U.S as the leading market with about 20,600 units sold4. Tesla’s Model S sedan targets mid-level customers, with a lower initial price of around $57,000 compared to the Roadster. The most basic Model S now costs $64,000 in America (after subsidies – March 2014). Tesla was the first automaker to market zero-emission sports cars in mass production (Mangram, 2012). Recent History The third model named Tesla model X is scheduled to enter the market in 2014. This new model is full-size crossover utility vehicle (CUV), first unveiled at Tesla’s design studios in Los Angeles on February 2012. Production was initially scheduled to start by the end of 2013, and later postponed several times in order for the company to achieve Model S production targets and to focus on international rollouts5. Market Entry Strategy: As is discussed elsewhere in this report, the barriers to entry for car makers are fairly high. Designing and manufacturing the first car require a large, knowledgeable employee base, an R&D center, a factory, and a sales & marketing team. Tesla’s market entry strategy was very effective, however. It enjoyed first mover advantage in the electric vehicle market, but that is not the only reason its entry was successful. It pursued a low fixed-cost entry strategy that existing car makers could not compete with. It essentially found a way to lower the barriers to entry in the car industry that other companies had not successfully managed: Its first car, the Roadster, used a chassis from the Lotus Elise. This allowed Tesla to use its relatively small amount of cash to focus on electric engine and battery R&D and 3 manufacturing, rather than on building its own chassis. It purchased chasses on a per- unit basis from Lotus, allowing Tesla to scale beyond its own production capabilities. At first, Tesla only sold cars online. This is the cheapest viable go-to-market route, and requires a relatively low fixed cost investment It purchased a factory at a distressed price from Toyota, rather than building one itself at a higher cost Its manufacturing facilities benefit from the most current automation techniques, saving money on labor Tesla’s variable cost structure is also lower, as they do not have large pension obligations or high union-negotiated wages and benefits Signaling and Reputation: Tesla has done an excellent job establishing a strong reputation with customers and sending a combination of different signals, via a mixture of soft and tough investments, to competitors. Purchasing a car requires a set of calculations on the part of the consumer that are different than many other products. First, a consumer must see that a car is in an efficient place on the cost-perceived quality frontier. Tesla, by being the only serious maker of mass-market electric luxury vehicles, it established an entirely new frontier within the car market. Second, a consumer must believe that the car company is likely to remain in business for at least the life of the warranty of the car, and ideally for the life of the car. A warranty is worthless if the company is in bankruptcy. A car becomes difficult to repair if the manufacturer stops making replacement parts. Consequently, signaling corporate permanence is very important to increasing the number of cars sold. Given that Tesla is a very young carmaker, it has taken several important steps to convince the consumer that it will remain in business. These steps also serve as important signals to Tesla’s competitors: Tesla’s initial public offering in June of 2010 raised $226M. This cash influx gave it a more comfortable financial position, a lower discount rate, and a higher likelihood of success. Its subsequent and significant jump in share price is a signal from the market that the company is a going concern. It is investing heavily in a nationwide supercharger infrastructure to show Tesla owners it will support them for the life of their vehicle. Tesla purchased a large factory in Fremont, California in 2010. This large investment was not easy to back out of, and it indicated that Tesla would increase the number of cars its manufactured and continue manufacturing cars far into the future. The company has said that it will only make electric vehicles. In doing so, it is signaling other car makers that it is not intending to compete in the petrol or diesel engine markets, which are where the vast majority of car sales occur. The combination of a large investment in a new factory, and its commitment to remain an electric vehicle producer effectively staved off large-scale competitive response from other auto makers during the early, fragile years as a car producer. 4 Electronic Vehicles (EV) Industry Analysis Defined: We defined Tesla’s industry based on their direct competition and close substitutes. Given Tesla’s long-term business view, we believe they operate directly in the ‘Electronic Vehicles’ (EV) industry; where they are leaders in the high-performance electric sports car market. However, Tesla also directly competes in the luxury car segment. Below is an application of Porters Five Forces model (with 6th force: Complementors) to this industry: Competitive Rivalry

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