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Shelby Lee Final Paper Social Psychology of Business Tesla Motors: Fueling the Transition to Electric Cars Tesla

Motors is an American electric car company that was founded in 2003 by business executives Martin Eberhard and Marc Tarppening. The inspiration for the name Tesla was derived from Nikola Teslas innovative legacy and the Tesla Roadster model even uses a motor that stemmed directly from his original 1882 design. Shortly after its inception, the company primarily became funded by eventual CEO Elon Musk, a serial entrepreneur and innovator who made a fortune as a result of his leadership in PayPal. Tesla provides societal value as a result of its measures to reduce the effects of oil scarcity and climate change through its production of electric vehicles and battery packs. Musk and Tesla posit that current hybrid vehicles are not an effective solution to critical environmental problems and the only answer to pollution concerns are zero emissions cars such as electrics. When buyers purchase a Tesla, they are not simply buying a product but buying into a company with an overarching purpose of helping to expedite the move from a hydrocarbon economy towards a solar electric economy. The US Energy Information Administration recently released its report entitled the International Energy Outlook 2013 (International Energy Agency). The report revealed insight into US complacency surrounding oil depletion, as there are extremely high expectations for future world oil production and the US is comparatively doing little to help. The EIA predicts that world oil production will hit 97 million barrels a day in 2020. In part due to our lax efforts regarding oil reduction, it is very unlikely that the world will be able to sustain such astronomical figures. This is one reason why Tesla owners are devoted and enthusiastic about the cars it is putting on the roads. Tesla customers understand that this is not simply a product but also buy into the belief that sustainable transport is important for the future of the world. Additionally, unlike a Toyota Prius or other hybrid vehicles that have tradeoffs in terms of perceived luxury

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and engine performance, Tesla is the first in its category to produce a car that is not only environmentally friendly but also fast and fun to drive. In the words of Consumer Reports, "The Tesla Model S takes everything you know about cars and stands it on its head. It's a very agile, super-quick electric luxury sedan (with a hatchback!) that seats seven and gets the equivalent of 84 mpg. Got your attention yet (Davies 2013)?" Teslas first model released was called the Roadster, the first highway-capable all-electric vehicle to be sold in the US in the modern era. The Tesla Roadster could accelerate from zero to 60 mph in under 4 seconds and had a top speed of 125 mph. It was designed to compete with the speeds of Ferraris and Porsches but had twice the energy efficiency of a Prius. However, it came with a hefty base price of $109,000. Tesla stopped taking orders for the model in 2011, however this car proved that the automaker was able to differentiate itself into a league of its own by producing an electric car with more bells and whistles (and speed, to boot) than any of its counterparts. The Model S was then announced in 2008 and the first units began rolling out in 2012. Unlike the Roadster, the Model S is a hybrid sports car-sedan. Finally, Teslas plans for the Model X, the companys first crossover utility vehicle, were unveiled in 2012 and deliveries should begin in 2014 with orders already being taken today (Valdes-Tapena 2012). Teslas Model S has been the companys most prolific and successful model thus far and has received impressive accolades from nearly all car enthusiasts in the industry, earning awards ranging from the 2013 Motor Trend Car of the Year to being listed as one of Time Magazines Best 25 Inventions of the Year. In late November, Consumer Reports announced that owners of the Tesla Model S gave it the highest owner-satisfaction score the magazine has seen in years: 99 out of 100. Furthermore, in August of 2013 the Model S received the highest safety rating by the NHTSA, which helps to combat one of the companys primary risks that has arisen as of late.

Shelby Lee Final Paper Social Psychology of Business Tesla has clearly earned its place in society but the only factor that remains to be seen is if consumers in the mass market will fully adopt this transition to electric, which is at risk at the present time given the high prices that Tesla is currently charging for its vehicles. Despite the $60,000 base price that Tesla is currently charging for its Model S, the company eventually aims to produce a wide range of models, with particular attention being paid to affordably-priced family cars. Teslas business strategy has been to enter at the high end of the market, where customers are cognizant that they will have to pay a premium, and then drive down the market as fast as possible to increase unit volume and lower prices with each consecutive model. This is not unique to Tesla as manufacturers of televisions and computers used the exact same strategy in the past few decades. At one point, these products cost consumers tens of thousands of dollars, but once the mass market caught on and demand increased, suppliers soon followed and the prices dropped. However, Teslas pricing is not without benefits as the company has recently announced a new financing arrangement for its Model S line that guarantees the highest resale values of any luxury sedan brand (Tesla Motors 2012). Tesla is not only in the business of luxury electric cars but is now attempting to expand its reach by producing lithium-ion battery packs in the commercial and residential spheres. The battery packs have recently appeared in a limited amount of homes in California to store electricity produced by rooftop solar panels. Additionally, SolarCity, a company that installs solar panels in the Silicon Valley area, will start providing Tesla batteries for businesses that want to save money on their utility bills (Woody 2013). This could be extremely opportunistic of Tesla as a department store or mass retailer could charge up a Tesla battery pack with cheap energy produced by its SolarCity panels and then tap that power when demand and electricity

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rates peak. That would allow companies to minimize paying their local utility high demand charges for electricity when they need it most, resulting in great profits and new markets for Tesla. After 10 years in business, Teslas model finally reached profitability for the first time during the first quarter of 2013. However, in the fiscal year ending December 31, 2012, Tesla reported a total loss from operations of $394M. Total revenues were $413M while cost of revenues was $383M, resulting in a gross profit of $30M. However, total operating expenses were $424M, resulting in the aforementioned net loss. Tesla has two revenue streams consisting of automotive sales and development services. The highest revenues and costs were generated by automotive sales at $386M and $372M, respectively. The other revenue stream is development services, which resulted in total revenue of $28M and cost of $12M. Operating expenses consist of research and development costs of $274M and selling, general, and administrative costs of $150M (Tesla Motors 2012). Teslas net profit margin in 2012 was an abysmal -1% as a result of such high costs of production and expenses all being funneled right back into the companys development. Teslas generates most of its revenues from automotive sales, which include vehicle, options, and related sales in addition to powertrain component and related sales. The former produced $354M in revenue in 2012 while the latter produced $31M. Vehicle, options, and related sales include sales of the Model S and the Roadster and also take into account vehicle options, accessories, and destination charges, vehicle service, and sales of zero emission vehicle and greenhouse gas emission regulatory credits to other automotive manufacturers. For example, with regard to the more expensive Model S that has the biggest battery and longest driving range, Tesla can collect seven environmental credits from California's Air Resources Board. It can then

Shelby Lee Final Paper Social Psychology of Business sell those credits for an estimated $5,000 each to other automakers. Other automakers need those credits to meet state pollution regulations. Powertrain component and related sales represent the sales of electric vehicle powertrain components and systems such as the battery packs previously described and drive units, to other manufacturers. Teslas other revenue-generating division comes from development services. This segment represents arrangements where Tesla develops electric vehicle powertrain components and systems for other automobile manufacturers, including the design and development of battery packs, drive units and chargers to meet customers specifications. One example of this is Teslas co-opetition relationship with Daimler Mercedes-Benz. During the fourth quarter of 2011, Daimler requested that Tesla assist with the development of a full electric powertrain for a Daimler Mercedes- Benz B-Class electric vehicle. In 2012, it received two purchase orders from Daimler to begin development work and also entered into a separate development agreement under which Tesla would complete various milestones and deliver an array of prototype samples. During the year of 2012, Tesla earned in total $15.9 million in development services revenue related to the Mercedes-Benz B-Class EV program. These partnerships have been, and will continue to be, increasingly important to Teslas bottom line. The cost of revenues was extremely high for 2012 as this includes cost of automotive sales and costs related to development services. Cost of automotive sales includes direct parts, material and labor costs, manufacturing overhead, etc. while cost of development services includes engineering support and testing, direct parts, material and labor costs, etc. However, the most important cost is that of research and development. Teslas model has historically incurred net losses because of the companys research and development cycle of distributing nearly all of their free cash flow back into the company, as any new technology company should do. These

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consist of expenses related to pre-production of the Model S and vehicle testing as well as development of the Tesla Factory. Furthermore, Teslas new Model X incurred R&D expenses from development, design and engineering activities related to its production. Finally, selling, general and administrative expenses consisted primarily of personnel and facilities costs related to Tesla stores, marketing, sales, executive, finance, and human resources. Tesla sold most of its cars in person, over the phone or via the Internet until 2008 when they began opening stores across the world. Teslas financial model has been the subject of scrutiny and skepticism on the part of its critics because the automotive industry historically generates consistent revenue streams by achieving economies of scale. To stay afloat in the industry, this typically requires the production of hundreds of thousand cars to cover these aforementioned costs consistent with production expenses. However, Tesla is nowhere close to reaching these numbers anytime soon as it has yet to attempt a mass-market model and would most likely fail if attempted tomorrow. Tesla is only now seeing profits due to millions received from government environmental policies. In spite of the company never once producing a profit previously, Tesla filed for a $100 million IPO in early 2010 and became the first car company to go public since 1956 on June 29, 2010. The company had priced its IPO at $17 per share but opened at $19 per share, and closed at $23.89 per share, effectively becoming a Wall Street darling (Squatriglia 2013). Elon Musk has always maintained that his goal is to create a mass-market electric vehicle that could be as cheap as $20,000 in third-generation cars (Musk 2013). However, without the help from these pollution regulations constantly coming in, Tesla would be far from profiting on what remains a smallvolume, costly car.

Shelby Lee Final Paper Social Psychology of Business While Tesla exemplifies what appears to be an incredibly bright future in the electric car industry, the company is not immune to the risks that traditional automakers have been facing for years. Furthermore, since Tesla has revolutionized the industry and received significant publicity as a result, there is a spotlight placed on its every triumph and folly. News outlets are inundated with the latest headlines surrounding the companys evolution and missteps, forcing Elon Musk to feel the heat. In some cases, he has taken it upon himself to personally attempt to suppress any and all misconceptions about electric cars and has gone so far as to condemn journalists for sensationalizing the matter and falsifying the facts in order to achieve shock value. This leads into one of the biggest risks that the company faces today, and moving forward, which surrounds public perception and concerns over safety. Tesla has been plagued by safety concerns ever since the companys inception. In 2009, Tesla had to recall 345 of its Roadsters that were produced between March 2008 and April 2009 over concerns that the rear hub was "under-torqued" and could come loose (Yarow 2009). This had the possibility of resulting in the driver losing control of the car and ultimately the consequence could be a crash. The recall affected a significant portion of Tesla's Roadster sales, as there were only 400 Roadsters in total on the road at that time. Adding insult to injury, Teslas pockets took a further dent in that the company volunteered to fly technicians to Roadster owners homes if they lived outside of California, Chicago, Seattle or New York, ensuring that the company would continue to be perceived as the pinnacle of customer satisfaction. While this was obviously detrimental to Teslas sales and reputation for customer well-being, it may not compare to the current safety concern Tesla is now forced to correct and defend. In late October of this year, Teslas shares suffered a hit after there was a viral video released on the Internet displaying a Tesla Model S catching fire upon its collision with a

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metallic object. The damage was then compounded when a nearly identical second and third incident occurred just six weeks following the first. After a dramatic rise of about 500% in just 12 months, Tesla's stock fell about 30% in just one month. However, Elon Musk has been quick to cite current car statistics and emphasize that there is just one fire in every 6,333 Model S vehicles on the road, compared to one fire for every 1,350 gasoline cars (Musk 2013). As aforementioned, earlier this year, the Model S achieved the best safety rating of any car ever tested. Tesla does not have a safety problem (as of today) but instead the perception of the company is at risk. Musk is fighting hard to protect Tesla's brand image for this reason. He knows that in order to drive consumers to switch to electric cars and forgo their gas-powered ones, the public needs to be confident in the safety of the technology that Tesla is producing. A change in mindset such as this does not come easily and potential customers are understandably skeptical as to the future of the electric revolution. Tesla has thus become a target of intense suspicion and criticism, and detractors have been quick to cite the Tesla fires as a sign that electric vehicles are too novel, too peculiar and too hazardous to be allowed on our roads, which does everything but help Tesla in its quest for a more sustainable environment. An additional risk that the company faces moving forward is its ability to sustain and expand operations in the United States. Some states have enacted legislative measures that dictate that manufacturers cannot deliver a vehicle to a resident of their state except through a dealer licensed to do business in that state. Car dealership owners are fighting back against the threat of Tesla and are now insisting that this should apply to the company and it should be required to open a store in that state in order to sell vehicles to those residents. Tesla has attempted to circumvent this obstacle by opening its own galleries in some states, which are locations where potential customers can view the vehicle fleet. While this is not a full retail

Shelby Lee Final Paper Social Psychology of Business operation since there isnt inventory in stock for immediate purchase, it is possible that state regulators could insist that activities at these galleries constitute an unlicensed motor vehicle dealership and thereby violate applicable manufacturer-dealer laws. In addition, Teslas Internet sales model may be at risk because some states have requirements that service facilities must be available with respect to vehicles sold in the state, thereby limiting Teslas ability to sell vehicles in states online where it does not maintain service facilities in that state. Finally, the companys success is at risk because it faces fierce competition from traditional luxury automakers that are expanding into the electric car category. Mercedes-Benz and BMW are two brands synonymous with wealth and style that have also achieved the economies of scale and mass marketability that Tesla has yet to reach. BMW has just started production on its all-electric i3 model in their brand new factory in Germany. It plans to sell the i3 for $45,000 in the US, with expected sales of around 5,000 units in North America and an additional 35,000 units in Europe. Mercedes-Benz is also working on an electric version of its BClass vehicles in Europe (Tesla Motors 2012). Yet again, Mercedes is partnering up with Tesla for the venture. Tesla will provide its battery technology and electric drivetrain for the Mercedes car, which will be debuted next year as a low-price mass-market model. This is an ingenious strategy for Tesla to pursue in the future because profits will be mutually beneficial and the company can ensure that it isnt losing customers to its competitors. However, Tesla faces further risks in regard to the commercial car industry. Daimler AG plans to launch an all-electric vehicle in this segment and businesses may find suitable use for such vehicles as they seek to reduce operating costs across the European continent. Tesla currently has no plans to release a commercial version of its automobiles as of today and it is guaranteed to lose a portion of the market share once such ventures are launched.

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The aforementioned risk is conversely applicable to traditional automakers on the part of Tesla. Tesla is a serious disruptive innovator in the car industry. Tesla is not only a disruptive innovator in terms of the cars it produces but also with regard to the companys unique and intimidating business model. Tesla does not operate similarly to the traditional third-party dealerships that act as middlemen between car companies and consumers. Instead of buying a Tesla model from a dealership, customers can get it directly from Tesla either on the Internet or in a Tesla store. Adam Jonas, a leader of auto-industry research at Morgan-Stanley noted, "Theres been a seismic change. The auto industry hasnt seen anything this disruptive since the dawn of the Japanese manufacturers (Voelcker 2013). The Japanese manufacturers Jonas is referring to are Toyota and Nissan, two companies that stood in contrast to the traditional American ideals surrounding cars and production mechanisms. Toyota and Nissan (along with later arrival Honda) offered small, fuel-efficient cars that were more dependable and affordable than anything that domestic manufacturers were producing at the time. Automakers in Detroit stood firmly against this notion and ignored consumer interests, resulting in consistently decreased revenues that would haunt them for decades. Collectively, Toyota and Nissan went from selling fewer than 100,000 cars a year in the mid1960s to millions by the end of the 1980s (Voelcker 2013). Traditional automakers could see ghosts of their past come to life as Tesla continues to provide quality products with little to no tradeoff in appearance and performance. One of the most intriguing aspects of Teslas enigmatic rise has been the companys ability to grow in spite of failure. In 2008, Tesla was facing its greatest struggle and nearly collapsed as a result of the financial crisis. When faced with Tesla going under if the Model S could not be funded, Musk chose to bankrupt himself and sacrificed the millions he earned from

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Shelby Lee Final Paper Social Psychology of Business his success with PayPal rather than watch it die. He wisely reinvested his last $35 million into the company and in a 2010 court filing, Musk admitted he was broke: "About four months ago, I ran out of cash (Hessman 2013)." The filing revealed that he had been living off of personal loans from friends since October 2009. Bankruptcy would have been considered an easier out than what Musk chose to do. He threw everything he had into this (at that time) pipedream of keeping Tesla alive. Musk exemplifies the traits of a visionary and transformational leader who has a real purpose other than money and believes wholeheartedly in the ideals of his company. If his previously detailed rescue of Tesla from the depths of destruction is not evidence enough of this fact, it is most certainly proven by the way he approaches his role as a leader. Musk once said, "For me it was never about money, but solving problems for the future of humanity (Musk 2013). Elon Musk could have easily given up and thrown in the towel on Tesla after he himself nearly went bankrupt despite generating a respectable and lucrative legacy from his prior ventures. Most people, even great leaders, probably would have done so and at the very least wouldnt have faulted him for it. However, Musk flew in the face of adversity and proved his detractors wrong. Musk, conceivably more so than anyone in the industry today, maintains a clear vision for what real modern technology is capable of and what kind of future it needs to create. He reportedly puts in a 100-hour workweek, and this number is not all that farfetched given the lofty plans he has for the future of humanity, whether it be electric cars, the Hyperloop transportation system, or SpaceX (Hessman 2013). Perhaps even more impressive, he has accomplished all of this at the young age of 42, and he is only getting started. In Malcolm Gladwells novel entitled the Tipping Point, he defines the so-called tipping point phenomenon as "the moment of critical mass, the threshold, the boiling point" for products,

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ideas, messages, and behaviors (Gladwell 2002). One of his critical theories surrounds the law of the few, which is summed up by three key social influencers. First are the mavens, who collect and share information, not as a means of persuasion, but education. Next are the connectors, the people in a community who know large numbers of people and who are in the habit of making introductions. Finally, there are the salesmen, who find an idea, cause or product they believe in and spread the word, determined to convince everyone else of its worth. Tesla owners are extremely loyal early adopters who do a fantastic job at spreading the word about their Tesla purchases. My dad owns a Tesla Model S and he exemplifies all three of the above categories. He consistently raves about the car to anyone who will listen. However, he is far from the only Tesla owner who feels passionate about their model and hopes to spread the word. This devotion is derived from the stickiness of Teslas message. Malcolm Gladwell further emphasizes in The Tipping Point that The specific quality that a message needs to be successful is the quality of stickiness (Gladwell 2002). This relates to Teslas commitment to creating a better and more sustainable future for the world, one car and battery pack at a time. Teslas message is incredibly sticky and has the ability to create tangible changes in the world. The company exhibits an enormous degree of social responsibility with respect to educating about and attempting to solve our very real problem of the limited fuel source of petroleum. Despite Teslas volatile financial history, the future of the company is optimistic as long as public perception of electric vehicles remains positive and Tesla is able to achieve mass marketability in an industry that necessitates it in order to achieve success.

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Shelby Lee Final Paper Social Psychology of Business Works Cited Davies, Alex. "Consumer Reports: The Tesla Model S Is The Best Car We've Ever Seen." Businessinsider.com. Business Insider, 05 May 2013. Web. 04 Dec. 2013. Gladwell, Malcom. The Tipping Point: How Little Things Can Make a Big Difference. Boston: Back Bay Books, 2002. Print. Hessman, Travis. "The World According to Elon Musk." Industryweek.com. IW, 07 Oct. 2013. Web. 11 Dec. 2013. International Energy Agency. World Energy Outlook. International Energy Agency. International Energy Agency, 2013, Web. 21 June 2013. Musk, Elon. "The Mission of Tesla." Teslamotors.com. Tesla, 18 Nov. 2013. Web. 11 Dec. 2013. Squatriglia, Chuck. "Tesla IPO Raises $226.1M, Stock Surges 41 Percent." Wired.com. Conde Nast Digital, 29 June 2010. Web. 09 Dec. 2013. Tesla Motors, Inc. (2013). Form 10-K Annual Report 2012. Retrieved from http://ir.teslamotors.com/secfiling.cfm?filingID=1193125-13-96241&CIK=1318605 Valdes-Dapena, Peter. "Tesla Racks up $40M worth of Model X Orders." CNNMoney. Cable News Network, 15 Feb. 2012. Web. 07 Dec. 2013. Voelcker, John. "Tesla: As Disruptive To U.S. Car Market As Toyota, Nissan Were?"Greencarreports.com. Green Car Reports, 27 Aug. 2013. Web. 10 Dec. 2013. Woody, Todd. "How Tesla Batteries Are Powering an Energy Revolution."Theatlantic.com. The Atlantic, 05 Dec. 2013. Web. 10 Dec. 2013. Yarow, Jay. "Tesla Recalls More Than 75% Of Its Roadsters." Businessinsider.com. Business Insider, 28 May 2009. Web. 11 Dec. 2013.

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