1

Group # 6

Prepared by:

Koontim Chau

William Chau

Alvaro Mendizabal

Yu Ting Wang

Liang You

1
"Tesla Motors, El Conocimiento Abierto Y Su Adiós a Las Patentes." Empresa Abierta. Accessed April 23, 2018.
http://blog.consultorartesano.com/2014/11/tesla-motors-el-conocimiento-abierto-y-su-adios-a-las-patentes.html.
Liang You

Background

Tesla Motors was established in 2003 and was incorporated by Elon Musk Eberhard

and Marc Tarpenning. It is headquartered in the heart of Silicon Valley in Palo Alto. It was

incorporated by Elon Musk Eberhard and Marc Tarpenning in 2003. 2 “Tesla”, the brand

name itself was derived from the genius Nikola Tesla (1856-1943), an electric engineer and

scientist.3 The firm was established with the commitment to develop only fully-electric

vehicles and mostly conduct business in North America, Asia and Europe. Elon Musk, the

billionaire CEO of the Tesla Motors, is one of the primary driving factors behind its success.

In 2006, Tesla Motors unveiled the ultra-sporty Tesla Roadster at the SF International

Auto Show. While, the model’s design was not unique, Tesla’s electric drivetrain technology

was revolutionary. It was the first vehicle to use lithium ion technology and was the first all-

electric vehicle to travel more than 200 miles on a single charge. Tesla proved that electric

engines can be extremely powerful and can provide acceleration well in excess of their

petrol-powered rivals. The base price of the car in USA was around $109,000 targeting the

premium segment and they delivered around 76000 vehicles worldwide in 2006.

Subsequently, Tesla delivered Model S in 2012, Model X in 2016 and Model 3 in 2017.4

Mission Statement

Founder–Elon Musk’s vision for Tesla is “to accelerate the advent of sustainable

transport by bringing compelling mass market electric cars to market”. 5 Although they want

to become an independent car maker and offer electric cars at affordable prices to the

2
Thompson, Aruthur, Margaret A. Peteraf, John E. Gamble, and A. J. Strickland III. 2016. Crafting & Executing Strategy The Quest For
Competitive Advantage. New York: McGrawHill Education.
3
Wikipedia. n.d. Tesla, Inc. Accessed 05 19, 2018. https://en.wikipedia.org/wiki/Tesla,_Inc.
4
Wikipedia. n.d. Tesla, Inc. Accessed 05 19, 2018. https://en.wikipedia.org/wiki/Tesla,_Inc.
5
Tesla. 2018. About Tesla. Accessed 05 19, 2018. https://www.tesla.com/about.

1
consumer but there were significant roadblocks to achieving this dream. However, Tesla

found the solution into these roadblocks by opening up its patent which shows the ingenuity

of the strategy of Tesla to change the entire game that they were playing and turn competitors

into collaborators and their major weakness into their major strengths.

In addition, the move also significantly lowered the barrier of entry of existing car

manufacturers to enter into the electric car industry and collectively develop the infrastructure

to support the electric car market. This effectively converted their major competitor i.e. the

gasoline car makers to Tesla in meeting their vision to make economic electric cars available

to the consumers. This also increased the number of suppliers for high efficiency batteries

and auto-components. Though Tesla’s moves came as a surprise, it was well appreciated by

most of its investors and resulted in other top car manufacturing companies showing interest

in making supercharging stations and developing batteries.6

Generic Strategy

Tesla is known mainly as the maker of fully electric vehicles. It also makes and sells

energy storage systems as well as installs, operates and maintains solar and energy storage

products. The brand has its own sales and service network that it has continued to grow

globally. Tesla has established a global network of vehicle stores, service centers and

Supercharger stations to increase the widespread adoption of its products. Two out of three

models that Tesla currently sells are fully electric but come for hefty prices. However, Model

3 is at a lower price that will be produced and sold in larger volumes. Tesla expects it to be an

affordable hit.

The main focus of Tesla is to help the world transition to sustainable energy though

the use of electric vehicles and other sustainable solutions. It is growing its network fast in

6
Tesla. 2018. About Tesla. Accessed 05 19, 2018. https://www.tesla.com/about.

2
North America, Asia and Europe. The generic competitive strategy that Tesla has used is

Broad differentiation. This generic strategy builds competitive advantage based on the

development of products that differentiate the company from other firms in the industry. Very

few brands sell fully electric vehicles and Tesla has further differentiated its brand by adding

luxury to its cars.

Their revolutionized the lithium ion batteries to hold more charge and in effect,

provide better mileage compared to conventional hybrid or plug-in based electric vehicles

gives them outstanding performance in terms of utility and luxury both. In fact, Tesla Inc.’s

products are competitive because they integrate advanced environmentally friendly

technology, considering that the vast majority of automobiles today use internal combustion

engines.7 In using this generic competitive strategy, the company broadly attracts all potential

customers, who are now increasingly interested in environmentally friendly products.

Currently Tesla Motor offers two models of EVs Model S and Model X. The first one

is an electric sedan while the second is a sports utility vehicle. Model S has a unique

combination of functionality, convenience, safety and styling to offer without compromising

performance and energy efficiency. Model X has a beautiful falcon wing door system that

completely matches the vehicles personality. Other elements like a 17-inch touch screen

driver interface add to the brand’s style quotient. Tesla has developed a third generation of

electric vehicles, Model 3 which has lower price in order to make stylish EVs available to a

larger segment of buyers. Apart from making these vehicles the brand also makes energy

storage products.8

7
Pratap, Abhijeet. 2017. Tesla Motors Generic and Intensive Strategies. 08 16. Accessed 05 19, 2018.
https://www.cheshnotes.com/2017/08/tesla-motors-generic-and-intensive-strategies/.
8
Tesla. 2018. About Tesla. Accessed 05 19, 2018. https://www.tesla.com

3
 Initially, Tesla used differentiation focus as its generic strategy for competitive

advantage. In applying the differentiation focus strategy, the company emphasized the

uniqueness of its products, but also focused mainly on early adopters in the high-end market

for electric vehicles. These early adopters are affluent customers who have a high tendency to

purchase newly introduced products. However, now that the company is already popular and

production costs are declining, Tesla’s generic competitive strategy has shifted to broad

differentiation. The declining production costs and increasing brand popularity enables the

company to broadly target customers in the automobile market. Overall, the brand has

differentiated itself from the crowd of vehicle brands by focusing only on sustainability

solutions whether in terms of vehicles or energy.9

The generic strategy of Tesla, Inc. requires suitable strategic objectives to ensure

competitive advantage. For example, one of the company’s strategic objectives is to increase

investment in research and development (R&D) to develop new products that satisfy market

demand for enhanced renewable energy solutions, such as batteries for various purposes.

Another strategic objective connected to Tesla’s generic competitive strategy is to strengthen

competitiveness by broadening its market reach to generate more sales and support brand

popularity. Tesla Motors’ source of competitive advantage comes from its ability to use an

existing technology in a more efficient way. They have differentiated themselves from their

competitors in the automotive industry by revolutionizing the lithium ion batteries to hold

more charge and in effect, provide better mileage compared to conventional hybrid or plug-in

based electric vehicles. The performance figures generated by Tesla’s batteries is unmatched

in the automotive industry. Besides the batteries, Tesla has developed a robust and unique

9
Rowland, Christine. 2018. Tesla, Inc.’s Generic Strategy & Intensive Growth Strategies (Analysis. 01 28. Accessed 05 19, 2018.
http://panmore.com/tesla-motors-inc-generic-strategy-intensive-growth-strategies-analysis

4
value chain ecosystem around its cars which provides better value and end-user experience to

customers.10

Innovative lithium batteries11

Tesla in meeting their vision to make economic electric cars available to the

consumers. This also increased the number of suppliers for high efficiency batteries and auto-

components. Though Tesla’s moves came as a surprise, it was well appreciated by most of its

investors and resulted in other top car manufacturing companies showing interest in making

supercharging stations and developing batteries. Competitors can imitate this technology, but

Tesla has a significant first mover advantage. A new model development for an established

automaker can take anywhere from 1 year (e.g. Toyota) to a decade (Mercedes & BMW)

besides having significant fixed costs investment.

Large Network of Supercharger Station12

Tesla’s electric vehicles require long charging durations for the batteries. A full

charge of a Tesla car from home plug takes around 12 hours but 40 minutes from a

Supercharger station. Still it is comparatively long to conventional fuel-based vehicles. The

downside is the low number of these stations in the US. Currently at 37 this doesn’t pose

much problem for existing owners but with increasing in EVs on the road, this might become

an issue. Tesla plans to increase the number of its service stations by 75% and Supercharger

stations by 200 globally this year. However, Tesla does not have to be the only one

developing the supercharger stations. Because of Tesla is opening up the patents, other

automakers will not only develop cars but will also have to develop the supporting
10
MoonisAhmed. n.d. Tesla's Competitive Strategy. Accessed 05 19, 2018. https://www.scribd.com/doc/249627022/Tesla-s-Competitive-
Strategy.
11
MoonisAhmed. n.d. Tesla's Competitive Strategy. Accessed 05 19, 2018. https://www.scribd.com/doc/249627022/Tesla-s-Competitive-
Strategy.
12
MoonisAhmed. n.d. Tesla's Competitive Strategy. Accessed 05 19, 2018. https://www.scribd.com/doc/249627022/Tesla-s-Competitive-
Strategy.

5
infrastructure. In the long run, this might substantially decrease Tesla’s investment costs.

Given the small size of the EV market, it doesn’t make sense for a rival competitor to make

proprietary charging stations as it could, in effect, kill the market.

Unique direct-to- customer selling model13

Tesla has played a differentiation game by focusing on providing a unique consumer

experience by selling directly to the end users without the middleman route of dealership.

Customers get to customize their car before purchasing online. Tesla runs over 50 stores

worldwide and because of full control over its operations, gets to maintain the same level of

customer service at these locations. Transferring ownership to dealers might put Tesla in a

disadvantage as it might not be able to control the service level. Maintaining a similar level of

customer experience is an intangible benefit which competitors cannot imitate easily.

Moreover, for the competitors, there are significant costs involved moving away from their

current model to imitate Tesla. However Tesla is facing legal troubles in their online selling

model from dealer associations in the states of New Jersey, Texas, Colorado and Arizona

with ongoing lawsuits in other states. It will be a challenge for Tesla to see how long they can

sustain this online model of selling to customers given the current challenge from dealers.

Development of lithium ion cells ‘Gigafactory’14

Tesla is gradually shifting its strategy from being a niche player to follow a rather

blue ocean strategy. After creating a unique product in Tesla cars, it is focusing on reducing

the costs of manufacturing thereby reducing the prices of its products and make the cars more

mass market. Another reason is that to recover its large fixed costs investment in

supercharger stations, it needs to boost sales, but sales have not been able to meet the demand

13
MoonisAhmed. n.d. Tesla's Competitive Strategy. Accessed 05 19, 2018. https://www.scribd.com/doc/249627022/Tesla-s-Competitive-
Strategy.
14
MoonisAhmed. n.d. Tesla's Competitive Strategy. Accessed 05 19, 2018. https://www.scribd.com/doc/249627022/Tesla-s-Competitive-
Strategy.

6
because of slow production of Li-ion cells. To mitigate this risk, Tesla launch a ‘Gigafactory’

in 2017 to minimize the crunch of supply-demand gap of Li-ion cells. Tesla aims to reduce

car manufacturing costs by up to 30% with development of more efficient batteries and in

large numbers. Proprietary designed batteries will help them bring their cars to the market

faster compared to automakers that rely on a third-party battery supplier. With the opening up

of the patents, while competitors will be focused on producing EV models of their own, Tesla

plans to setup up the factory to become a supplier of battery pack to these automakers when

the competitor models finally roll off the line. Moreover, as demand for more efficient

electric vehicles will go up, automakers will look towards going into joint ventures with

battery makers such as Tesla to secure raw material supply. Because of these measures, Tesla

will be in a strong position to be a market leader in Li-ion cells manufacturing and supply.

Reduced costs of manufacturing and reduced prices of cars will increase the competitive edge

of Tesla and make its cars a viable substitute for conventional oil-based cars.

Main Products

In 2006, Tesla Motors unveiled the ultra-sporty Tesla Roadster at the SF International

Auto Show. While, the model’s design was not unique, Tesla’s electric drivetrain technology

was revolutionary. It was the first vehicle to use lithium ion technology and was the first all-

electric vehicle to travel more than 200 miles on a single charge. Tesla proved that electric

engines can be extremely powerful and can provide acceleration well in excess of their

petrol-powered rivals. The base price of the car in USA was around $109,000 targeting the

premium segment and they delivered around 76000 vehicles worldwide in 2006. In 2012,

Tesla delivered Model S, the world's best-selling plug-in electric car in 2015 and 2016 where

global sales reached 200,000 unit milestone during the fourth quarter of 2017. Then in

September 2015, the company released its Model X, a crossover SUV that offers the safest,

quickest and most capable sport utility with a beautiful falcon wind door system. Lastly,
7
Model 3 was released in July 2017 where it is designed to attain the highest safety rating in

every category and the starting price is at $35000 before incentives. Overall, Tesla production

passed 300,000 vehicles as of February 2018.15

Target Market

In 2012, Model S sedan was launched that comes with options of a 60 or 85 kw

battery pack, allowing a mileage of 208 to 265 miles. It is priced between $70,000 and

$100,000 in the USA, targeting the premium segment.16 Tesla’s target market focuses on

people that want an upscale vehicle, that are environmentally responsible, desire a safe,

reliable, and easily handled vehicle, and that tend to have a high income to afford this

innovative, exciting, and environmentally responsible vehicle. However, their target market

has switched from high income consumers to the average consumer. In fact, Tesla’s newest

model, Model S, is focusing more on family as it can seat up to seven passengers safely and

comfortably and became one of the bestselling all electric cars in United States in 2016.

Model X, a vehicle in creation is another vehicle focused on a family market. A market

strategy Tesla Motor has used to attract more target customers is the method of incentives.

Incentives such as free charging at the Tesla charging stations and federal tax credits.17

Tesla established a marketing plan in 2015, detailing the current target individual as

“business executives and entrepreneurs who are city dwellers, tech-savvy and green-

friendly…wealthy, early adopters in the upper to middle class.” 18Their customers are mostly

those looking for a premium luxury car that are environmentally responsible, desire a safe,

reliable, and easily handled vehicle.

15
Wikipedia. n.d. Tesla, Inc. Accessed 05 19, 2018. https://en.wikipedia.org/wiki/Tesla,_Inc.
16
Wikipedia. n.d. Tesla, Inc. Accessed 05 19, 2018. https://en.wikipedia.org/wiki/Tesla,_Inc.
17
LeBeau, Phil. 2017. Tesla's newest target: Consumer Reports. 08 19. Accessed 05 19, 2018. https://www.cnbc.com/2017/10/19/teslas-
newest-target-consumer-reports.html.
18
Zucchi, Kristina. n.d. What Drives Consumer Demand for Tesla? Accessed 05 19, 2018. https://www.investopedia.com/articles/personal-
finance/021715/what-drives-consumer-demand-tesla.asp.

8
You Ting Wang

Important Problems

There are two most important problems in the case, and they are still debating for both

issues. First is the franchising issue. Tesla has operated more than 200 stores, galleries, and

showrooms around the world, and some are located in shopping malls. However, most sales

locations have only a few vehicles in stock. Therefore, most customers only are allow to

purchase vehicles through the Tesla website. The showrooms function is to introduce and

promote the company and its vehicles. The sales strategy from Tesla is direct sales to

customers and owning stores and service centers that is totally different from the standard

dealership model in the U.S. vehicle marketplace. All of the automakers use independently

owned dealerships except Tesla and that is the only manufacturer way Tesla sells cars

directly to customers. Nevertheless, Tesla began combining sales and service departments at

a single location in 2013 due to the Model S being the most popular cars of Tesla since 2012,

and it provides for high demand. The combination aimed to reduce cost-efficiency and

facilitated the expansion of retail footprint. Before 2015, Tesla has owned over 116 sales and

service locations including combination sales-service center around the world. However, it

has derived “The Tesla problem” for franchised dealers that had feared that automotive

manufacturers might integrate forward into selling and servicing the vehicles they produced.

In addition, there is a legislation in many states in the United States that direct manufacturer

auto sales that are prohibited by franchise laws requiring that new cars be sold only in

independent dealers, but Tesla is considered that selling vehicles by itself is properly

explained to customers the advantages of electric vehicles, and Tesla thinks the third-party

franchised dealerships could not handle sales because the firm has implemented the low

budget on marketing, using a referral program, and word of mouth to attract potential buyers.

Therefore, many auto dealership unions have started to file a lawsuit against Tesla company
9
because of its business model since 2013. For instance, Ohio dealers sued against Tesla, the

Ohio Bureau of Motor Vehicles, and the Ohio Department of Public Safety that violated Ohio

law in granting Tesla a license to sell its own cars and asking for an injunction to

immediately rescind Tesla’s license and prevent the Bureau of Motor Vehicles from issuing

additional licenses to Tesla for other new locations. In the result, a settlement was reached in

2014 that only allowed Tesla to own and operate a maximum of three sales galleries in Ohio

as long as it produced only all-electric cars and was not acquired by another company. For

other instance, the New Jersey Motor Vehicle Commission announced that it enforced

forbidding automotive manufacturers from selling cars directly to consumers by State law in

New Jersey, but Tesla already had two showrooms in New Jersey when the Commission was

holding a proposal into a law. Nevertheless, Tesla is insisted that was not violating state

franchising laws because it did not have any franchise.

The second most important problems in the case that is the consideration of safety

issue. Although Model S is the better selling in the Tesla line, the safety concerned in Model

S that is the big issue for consideration. Hybrid vehicles sales were obviously increased since

2013 and the all-time best month for sales of plug-in electric vehicles in the United States had

a volume of 11,073 units. Tesla had selected to use the 18650 form-factor lithium-ion cells in

the Model S battery pack due to the high demands for longer driving ranges than other

electric vehicles whose battery packs contained only low-energy-density cells. Therefore,

Tesla’s seriously concerned high accident rate because the battery pack is prone to catch fire

in a high-speed operation. The internal temperatures from the ignited cells cause other cells to

ignite that is difficult to extinguish and rapidly spread fire to other combustible parts of the

vehicle. In this case, there is an amplified some of battery fire incidents posted during 2013 to

2014 related with Model S vehicles. Three Model S vehicles fire accidents occurred in one

month in 2013 that resulted in fires in the battery pack due to high-speed collisions. One

10
accident caught fire because the car reported a problem and told the car owner to stop. A

video posted on YouTube showed that firemen had trouble completely extinguishing the fire

with water because the fire reignited underneath the vehicle after appearing to be

extinguished due to other parts of battery cells had exploded. In addition, the other one of

accident related Models S occurred in a garage on the campus of the University of California-

Irvine on November 15, 2013. A fire broke out in the garage where a Tesla Model S was

plugged in and charging. The fire appeared to have originated at the wall connection where

the Tesla charging equipment was plugged in. Afterward, Tesla shortly updated the Model S

firmware to reduce charging current when power fluctuations were detected and replaced

wall adapters with a new unit containing a thermal fuse. However, Tesla considered that the

fire had nothing to do with the battery because it was a wall-socket problem with the car’s

charging cable. In November of 2013, based on the two fire incidents occurring on U.S.

public highways, the NHTSA opened a preliminary evaluation to determine if undercarriage

strikes presented an undue fire risk on the 2013 Tesla Model S. Consequently, the NHTSA

announced completely the investigation for the Model S design was making the electric car

prone to catch fire in March of 2014. The reason for the accidents was caused by the lithium-

ion batteries. The experts considered that the titanium underbody shield and aluminum

deflector plates, along with increased ground clearance, reduce the severity, frequency, and

the fire risk of underbody strikes. The Tesla firm also ensured to retroactively install the

shielding on existing cars to its lithium-ion batteries.

Solution from Issues

In regard to franchised controversy, franchised dealerships and Tesla are still debating

in some of the states in the United States. Despite many countries do not have regulation to

prohibit automakers direct sell cars to customers, the states’ laws are independently in the

United States. Some states had already banned Tesla direct sales to its customers through the
11
galleries and service centers, such as New Mexico, Alabama, South Carolina, and

Louisiana19. On the contrary, some states supported Tesla’s sales strategy, such as

Washington passed in 2014, New Hampshire passed in 2013, Wyoming passed in 2017, and

Indiana passed in 2017 because they considered that any company has the own decision on

the business model to distribute its products20. On the other hand, some states have opened

limited sales in the law to manufacturer sales since the franchised debate, such as New Jersey

lifted a ban in 2015 with restrictions, Maryland approved four store limit in 2015, and New

York banned direct sales in 2014 but except the existing Tesla stores which already had five

stores21. In fact, most bills whether passed or banned that are all made for the Tesla and

franchised controversy. However, Tesla stated the goal that is to increase the numbers and

variety of electric vehicles available to mainstream consumers by selling its own vehicles in

company-owned showrooms and online. Tesla attempts to not make a profit on servicing cars

to attract buyers. Therefore, Tesla is still pursuing and appealing these states which are

prohibited from manufacturers direct sales to its customers.

Regarding the consideration of safety issues, Tesla reviewed and investigated the

cause of the accidents in the shortest time to try settlements. Due to the higher qualities of the

battery pack to achieve longer driving ranges for electric vehicles, Tesla used 18650 form-

factor lithium-ion cells which are approximately 3X cells than other competitive vehicles.

Therefore, the risk of accident rate is also relatively higher. However, in the first incident

report of the Model S catching fire on October 1, 2013, the CEO Elon Musk only issued a

statement and explained that the result of the accident could have been even worse had a

19
Hu, C. and Marks, T. (2018). States banning Tesla sales stand to lose millions in tax revenue each year. [online] TESLARATI.com.
Available at: https://www.teslarati.com/states-banning-tesla-sales-lose-tax-revenue/ [Accessed 20 May 2018].
20
Farivar, C. (2018). Tesla pushes even more states to upend auto dealer-friendly laws. [online] Ars Technica. Available at:
https://arstechnica.com/tech-policy/2018/01/tesla-continues-to-press-ahead-for-direct-sales-in-nebraska-wisconsin/ [Accessed 20 May
2018].

21
Lambert, F. and Lambert, F. (2018). Tesla is currently fighting for the right to sell its cars directly in 8 states. [online] Electrek.
Available at: https://electrek.co/2018/02/14/tesla-pushing-right-to-sell-cars-directly-states/ [Accessed 20 May 2018].

12
conventional gasoline car encountered the same incident on the highway because most

gasoline cars do not have an armored underbody, leaving the fuel lines and tank vulnerable 22.

Although the firemen were difficult to extinguish and handle fire after other battery packs had

been reignited, Tesla thought that the Model S vehicles were still safe because the CEO Musk

indicated that a fire was five times more likely in a gasoline car than in a Tesla car, and the

car had alerted by onboard systems that warned the car owner stopped the vehicle and left to

avoid injury23. On the other hand, the NHTSA had initiated a preliminary evaluation to

determine if undercarriage strikes present an undue fire risk on the Tesla Model S vehicles

after another Model S had reported to catching fire on November 6, 2013, when it was being

driven on the highway24. Afterward, Tesla Motors announced to extend its current vehicle

warranty to cover fire damage and to apply a software update on Model S cars to increase the

ground clearance of the Model S when driving at highway speed. Moreover, on November

15, 2013, the third incident of Model S vehicles in the United State occurred in a garage on

the campus of the University of California-Irvine that a fire broke out at a wall socket where

a vehicle was plugged in for charging. After the investigation of the incident, Tesla updated

the Model S firmware to reduce charging current when power fluctuations were detected and

replaced wall adapters with a new unit containing a thermal fuse25. In the result, all Model S

cars manufactured after March 2014 that have the aluminum shield over the battery pack

22
Ibid
23
Russolillo, S. (2018). Musk Explains Why Tesla Model S Caught on Fire. [online] WSJ. Available at:
https://blogs.wsj.com/moneybeat/2013/10/04/elon-musk-explains-how-model-s-caught-on-fire/ [Accessed 20 May 2018].
24
Trop, B. (2018). After 3 Fires, Safety Agency Opens Inquiry Into Tesla Model S. [online] Nytimes.com. Available at:
https://www.nytimes.com/2013/11/20/business/us-safety-agency-opens-inquiry-into-tesla-fires.html?ref=automobiles&_r=0 [Accessed 20
May 2018].

25
Insideevs.com. (2018). Tesla Model S Software Update 5.8.4 Reduces Charging Current by 25% If Input Power Fluctuations Are
Detected. [online] Available at: https://insideevs.com/tesla-model-s-software-update-5-8-4-reduces-charging-current-by-25-if-input-power-
fluctuations-are-detected/ [Accessed 20 May 2018].

13
replaced with a new three-layer shield designed to protect the battery and charging circuitry

from being punctured even in very high-speed impacts26.

Alvaro Mendizabal

Financial Condition

Tesla’s financial situation has seen a lot of growth since 2013. At $11 billion in

revenue, there has been a significant improvement in sales, but not in net income. In fact,

Tesla has seen its biggest losses yet, but this is not necessarily a bad thing. One of Tesla’s

biggest issues, was its production time and delivery. This accruement of debt is directly

proportional to the newly established “gigafactories”, that will hopefully increase production

speed. While the short-term might see a similar downtrend, it’s expected that Tesla will be

able to bring down manufacturing costs with its new factories.27

Tesla’s stock price at the end of the case was at ~$150. By December of 2017, it had

more than doubled to ~$311. A lot of this can be attributed to long-term investors, but even

then, Tesla’s EPS has consistently been dropping. So why is their stock price rising so much?

People are betting on their growth potential. Tesla is a relatively new company, and they

26
Ivory, D. and Company, T. (2018). Federal Safety Agency Ends Its Investigation of Tesla Fires. [online] Nytimes.com. Available at:
https://www.nytimes.com/2014/03/29/business/safety-agency-ends-investigation-of-tesla-fires.html [Accessed 20 May 2018].

27
Tesla - Annual Report, ir.tesla.com/secfiling.cfm?filingid=1564590-18-2956&cik=1318605#TSLA-
10K_20171231_HTM_CONSOLIDATED_BALANCE_SHEETS

14
aren’t just taking on the automobile industry, they want to revolutionize clean energy in

general.

Total Revenue

At the end of the case, on December 31, 2013, Tesla’s total revenue was at $2.01

billion. By 2017, their total revenues had increased to $11.76 billion. From looking at the

chart, Tesla was making about $1 billion per year from 2013 to 2015. By 2016 it had a strong

surge and nearly doubled by 2017. Tesla had remarkable growth, and it seems like a strong

trend that just keeps increasing every year. We should expect total revenue to keep increasing

in the following years.

28

Net income

Tesla’s net income at the end of the case was at -$74 million, and improvement over

the last couple years. Although by 2015, they were down to -$889 million; a significant

increase. By December of 2017, it had more than doubled to -$1.96 billion. So, what can we

28
“TSLA Income Statement.” NASDAQ.com, Nasdaq, www.nasdaq.com/symbol/tsla/financials?query=income-statement.

15
expect in future years? Since a lot of this debt was due to heavy investment in factories and

overall infrastructure, we could potentially see a reversal into the profits. From the graph

above, we can also see that there was an improvement from 2015 to 2016, so it isn’t like to

debt is just continuously adding up every year.

Earnings per share:

Tesla’s earnings per share(EPS) in 2013 were at -$.062. The following years

continued this downward trend even further. By December of 2017, their EPS was down to -

$11.83. This isn’t that surprising since their net income has also dropped throughout the

years. From the graph below, we can see that in 2016, there was an improvement from -$8.52

to -$4.68 in 2017, but it quickly dropped by December. A lot of Tesla’s financials seem very

volatile, with sharp increases and decreases, but this should be expected in new companies.

The EPS is a tool mainly used by investors to see whether a company is making money or

not, but for Tesla, it isn’t exactly useful. We can conclude this from observing their common

stockprice.

29

Common Stock Price:

29
Tesla (TSLA) EPS & PE Ratio History.” MacroTrends, www.macrotrends.net/stocks/charts/TSLA/pe-ratio/tesla-inc-pe-ratio-history

16
 At the end of the case, the Tesla stock was sitting at ~$150. The stock price saw an

upward trend - reaching up to $280, where it saw a resistance twice before eventually

dropping in the beginning of 2016, where it dropped down to $151, obviously marking a

support at that price which was previously seen in 2013. From there we see a bullish increase

to their overall highest price at $383 in June of 2017. From then until December 2017, we see

fluctuations in the $300 range.

30

Financial Status

From a numbers perspective, Tesla is worse off financially. They have accrued a lot

of debt, and while their sales have increased, their total revenue has gone down. Down to -

$1.9 billion in 2017 from -$74 million in 2013. This number has consistently been dropping

since 2013. While our research was only for a four year period, we can see from the stock

price graph that Tesla’s stock has been dropping since 2017, down to almost $284. This can

be due to Tesla’s worsening financials. It seems like investors aren’t very sure anymore, and

30
TSLA Interactive Chart | Tesla, Inc. Stock.” Yahoo! Finance, Yahoo!, 22 May 2018, finance.yahoo.com/quote/TSLA/chart?

17
this is reflected in the one positive they had, which was their stock price. With lowering stock

prices, increasing net loss, and debt, Tesla’s financials seem worse off.

Tesla’s financials are highly dependant on their investor’s speculation. From a

beginning, Tesla had an extremely optimistic growth target. Tesla wanted to revolutionize the

automobile industry, and it even expanded into the solar power industry. But its performance

over the years has shown little optimism. With increasing costs, and further need for

investment, it’s still all speculation for investors, and there’s little to show for what’s been

invested so far.

Koontim Chau

Distribution Strategy

Tesla sold its vehicles directly to buyers and also provided them with after-sale

service through a network of company-owned sales galleries and service centers. Tesla

believed that integrating forward into the business of traditional automobile dealers and

operating the company’s own retail sales and service network had three important

advantages. The first advantages is the ability to create and control Tesla’s own version of a

compelling customer buying experience, one that was differentiated from the buying

experience customers had with sales and service location of franchised automobile dealers.

Having customers deal directly with Tesla-employed sales and service personnel enabled

Tesla to engage and inform potential customers about electric vehicles in general and the

advantages of owning a Tesla in particular and build a more personal relationship with

customers and, hopefully, instill a lasting and favorable impression of Tesla Motors, its

mission, and the caliber and performance of its vehicle. The second advantage is the ability to

achieve greater operating economies in performing sales and service activities. Tesla believed

that a company-operated sales and service network offered substantial opportunities to better

18
control inventory costs of both vehicles and replacement parts, manage warranty service and

pricing, maintain and strengthen the Tesla brand, and obtain rapid customer feedback. The

third advantage is Tesla has the opportunity to capture the sales and service revenues of

traditional automobile dealerships. When Tesla buyers purchased a vehicle at a Tesla-owned

sales gallery, Tesla captured the full retail sales price, roughly ten percent greater than the

whole price realized by vehicle manufacturers that relied upon their franchised dealers to

provide needed maintenance and repairs.

Strategic Partnerships

Going into 2014, Tesla had entered into long term-term strategic partnerships with

Panasonic Corp., Daimler AG, and Toyota Motor Corp.31 31Panasonic investing in the Tesla’s

Sparks, Nevada plant and providing the of battery pack for Model 3 which started producing

them on December 2016, in addition they hired many engineers and factory worker on plant

and created about 30,000 additional jobs in the surrounded area of plat. The collaboration

established between Tesla and Panasonic is striving to revolutionize the automobile industry

by having an air filtration system, bioweapon defense, self-driving hardware, touch screen

system, and low cost vehicle that will bring a product like no other in the industry.

Tesla and Panasonic has proven a positive well planned project that started on 2010

by setting an understanding and sharing among team members their stakeholders goals and

make sure everyone is committed to it. They have been able to tied their mission with the

planning of the project by making a transition to a sustainable energy As Tesla highlights

“Tesla’s mission is to accelerate the world’s transition to sustainable energy. To achieve that

goal, we must produce electric vehicles in sufficient volume to force change in the

31 "A Deep Dive Into Tesla Business Strategy." Feedough. July 26, 2017. Accessed May 22, 2018.
https://www.feedough.com/tesla-business-strategy-and-business-model/.

19
automobile industry.”32 As we can see, Panasonic and Tesla have a very understanding on

their goal and their strategy is giving results by not having delivery delays. They have had

history on working on other project which has giving them the advantage to successfully

work together and execute effectively. Now its proven by Panasonic successfully delivering

its manufactured battery to fulfill Model 3 orders which has allowed them to not have

scheduling delays and not affect their critical path which will avoid expenses.

Marketing Strategy

In 2014, Tesla’s principal marketing goals and functions were to generate demand for

the company’s vehicles and drive sales leads to personnel in Tesla’s showrooms and sales

galleries, build long-term brand awareness and manage the company’s image and reputation,

manage the existing customer base to create brand loyalty and generate customer referrals

and obtain feedback from the owners 32of Tesla vehicles and make sure their experiences and

suggestions for improvement were communicated to Tesla personnel engaged in designing,

developing, and/or improving the company’s current and future vehicles.

Product Line Strategy

Tesla’s production strategy is focused on moving towards vertical integration for

quality control. Tesla’s factories are located in California, the Netherlands, Nevada, and plans

for a German facility are underway. Tesla’s main product line is electric vehicles. Tesla has

quietly integrated more products into their offerings that solidifies the company’s goal to

accelerate the world’s transition to renewable energy. Tesla’s mission seems to parallel

saving the world, a mission almost everyone can get behind.

Manufacturing Strategy

32 A Deep Dive Into Tesla Business Strategy." Feedough. July 26, 2017. Accessed May 22, 2018.
https://www.feedough.com/tesla-business-strategy-and-business-model/.

20
 Tesla contracted with Lotus Cars., to produce Tesla Roadster ‘’gliders’’ at a Lotus

factory in Hethel, England. The Tesla gliders were then shipped to a Tesla facility in Menlo

Park, California, where the battery pack, introduction motors, and other powertrain

components were installed as part of the final assembly process. The production of Roadster

gliders ceases in January, 2012. Tesla’s beginning showed incredibly slow deliverables from

the new car company. As the company has worked out the bugs, Tesla wisely invested in

mass manufacturing in the United States and Europe. Tesla manufactures their vehicles in

Fremont, California, shipping in hundreds of parts for the vehicle, while keeping assembly at

the facility. Tesla’s refusal to let the company’s deliverables be anything but stunning often

delays production. The company delivered just over 50,000 vehicles in 2015.33 Tesla’s

production capabilities are set to increase ten times in the next two years. Expanding further

on production, Tesla broke ground in 2013 on a “gigafactory” in Nevada that will produce

more lithium-ion batteries than all other producers worldwide. Partnering with Panasonic on

the factory, the facility will be powered 100% by solar energy. Tesla also manufactures in the

Netherlands and is starting work in Germany to build another gigafactory after a recent

acquisition of German company Gromann Engineering. Plans for the German facility include

building both batteries and vehicles. Tesla’s aggressive acquisitions are directed at decreasing

the costs of high quality batteries and vertical integration. Tesla’s gigafactories will produce

more high quality batteries than anyone in the world33, giving the company an incredible

opportunity to lower costs, as well as share this technology with other companies to develop

strategic partnerships.

Product Failures

33Boudette, Neal E. "Tesla Model 3 Goes Upscale, and Base-Price Buyers Must Wait." The New York Times. May 22, 2018.
Accessed May 22, 2018. https://www.nytimes.com/2018/05/21/business/tesla-elon-musk.html.

21
 Tesla recalls about 123,000 early Model S vehicles in 2018, having found that the

power steering bolts in some were displaying “excessive corrosion.”34 The issue can make the

car more difficult to steer at low speeds and to parallel park, and it should "not materially

affect control at high speed." This isn’t the first time Tesla has issued a recall, but it’s their

biggest recall to date. It recalled around 53,000 Model S and Model X vehicles in April of

2017 due to parking brakes that could potentially get stuck in the “on” position; a few months

later, it recalled 11,000 Model X because of a faulty cable in the second-row seating.35

Moreover, within the space of five weeks in October-November 2013, three Model S vehicles

(two in the United States and one in Mexico) were involved in traffic accidents that resulted

in fires in the battery pack.36 All three fires occurred after high speed collisions, and none

resulted in serious injuries or deaths. When 3 Tesla’s Model S cars caught fire after having

accident, public and media showed the real concern about Model S’s safety, result in 20%

drop in Tesla’s stock price and decreased in Model S sales, Elon Musk response is to posted a

blog at Tesla’s website that clear 3 things with public and customers37. First, Musk assured

customers there is nothing wrong with the batter34y pack and Tesla’s electric car, specifically

Model S is even safer than traditional gasoline cars in term of accident and fire. He showed

the clear evidence “Since the Model S went into production last year, there have been more

than a quarter million gasoline car fires in the United States alone, resulting in over 400

deaths and approximately 1,200 serious injuries.”37 .Elon Musk also announced that Tesla

had rolled out an over-the-air updates to the air suspension, which is a solution to reduce

danger for underbody of the car. Second, Musk requested that the National Highway Traffic

Safety Administration conduct a full investigation as soon as possible into the fire incidents.

34Bullis, Kevin. "Tesla Could Finally Make Electric Vehicles Practical." MIT Technology Review. January 08, 2014. Accessed
May 22, 2018. https://www.technologyreview.com/s/516961/how-tesla-is-driving-electric-car-innovation/.
35 Ibid
36 Gans, Joshua. "Why Elon Musk's New Strategy Makes Sense." Harvard Business Review. March 07, 2018. Accessed May
22, 2018. https://hbr.org/2016/07/why-elon-musks-new-strategy-makes-sense.
37 Miller-Wilson, Kate. "Automobile Industry Impact on US Economy." LoveToKnow. Accessed May 22, 2018.
https://cars.lovetoknow.com/Automobile_Industry_Impact_on_US_Economy.

22
Third, Musk amended the warranty policy to assure customers about the low risk of fire in

Tesla’s cars by cover any damage due to fire, even if due to driver error. The new policy is an

effective way to eliminate customers’ concern about the accidents. When the battery

charging caught fire in one of Tesla’s car owner, Elon Musk and Tesla respond immediately

by proving the problem was not come from the battery pack or the charging cable itself. In

fact, the problem “was on the wall side”. Moreover, Tesla redesigned the new charging cable

and give it to customers for free. Tesla reactions are fast and effective, which result in no

decrease in customer’s confidence. Furthermore, Tesla made an improvement for Model S

cars by adding titanium shielding, which prevent any possible battery fires that could be

result by running over objects.

William Chau

Driving Forces

Some may wonder where Tesla can go now as a company now that they have really

built a name for themselves as the leader of electric vehicles. Tesla’s competitors have a long

way to go until they can obtain and perfect the level of technological advancement in an

electric car, just like Tesla has done in the past few years. As for driving forces for Tesla and

all the other car companies in the same industry, there are many that they can face now and in

the future. The first driving force Tesla and other car manufacturers could face now and in

the future is aggressive competition. Ever since Tesla has been gaining significant success in

the electric car industry, other manufacturers have been trying to get on board the electric car

industry that consumers are slowly moving over to. Popular car companies from Honda,

Toyota, and BMW have released electric cars to compete with Tesla, as well as newer car

manufacturers that have less of a reputation like Fisker, and Rimac have jumper aboard also

to compete and make a name for themselves in the electric car industry. Car manufacturers

have always had to deal with aggressive competition with each other, and the only way to
23
compete against every other manufacturer is by creating innovation that consumers are

interested in, a great design that will catch consumers eyes, and keeping value relevant while

maintaining competitive advantage, just as Tesla for example has been doing over the years

with their models.

A second driving force that Tesla and all car companies could face now and in the

future is a changing economy. The worlds economy is a versatile market that is always

changing in front of our eyes. A changing economy is a driving force because the automotive

industry is integrally linked to the financial well being of a country. For example, in 2006

was a great year for the car industry and the United States produced almost 11.3 million

vehicles.38 In 2008 at t35he height of the recession, production dropped to 8.7 million

automobiles which was a 23% drop in 2 years.39 The economy has a big impact on how a car

manufacture run their business and how they plan their strategic moves and advances to

create net income and a successful release of a car model. As the economy gets better, Tesla

would see a significant increase in sales due to their product innovation and value to

consumers, but if the economy gets worse, Tesla will take a big hit due to their cars being

highly priced for a lot of consumers.

Another driving force for Tesla and other car manufacturers could face now and in the

future is technological change and product innovation. As we move towards the future, car

manufacturers are continuing to push the envelope when it come to innovation and

technological advances. Tesla was the product innovator of self-driving cars being the first

manufacture to work out most of the kinks in the self-driving feature and update it on each

and every one of their cars over an over-the-air update. Other companies including Honda,

and Toyota and others followed directly behind releasing their versions of autopilot due to the

huge interest in consumers when it came to technological advancement and innovation. Other

38 Tabuchi, Hiroko. "Calling Car Pollution Standards 'Too High,' E.P.A. Sets Up Fight With California." The New York Times.
April 02, 2018. Accessed May 22, 2018. https://www.nytimes.com/2018/04/02/climate/trump-auto-emissions-rules.html
39 Ibid

24
innovations in the car industry include blind spot monitoring, lane departure, self-parking

cars, auto collision detectors, and much more. Technological change and product innovation

is a huge driving force for Tesla and other car manufacturers because there will always be

innovation as time goes on and these advances attract consumers to buy their product.

Lastly, government regulation is a driving force that Tesla and other car

manufacturers could face now and, in the future, because regulations are always changing as

cars are getting more advanced and our earth is getting older. Emissions are becoming a big

part of the car industry and governments are starting to tax on gas guzzling cars and give

incentives on low emissions vehicles like hybrids and electric cars. Every year car

manufacturers must meet a new regulation for emissions as the EPA is trying to get every

new car and truck to be able to drive 54.5 miles per a gallon of fuel by 2025. 40 These

government regulations are making car manufacturers invest more into electric vehicle

research and development and will be a driving force for car manufacturers to be more

competitive in the 36electric car industry against Tesla. All in all, Tesla must continue to push

the envelope when it comes to innovation and technological advances and that will keep them

from sinking as aggressive competition from other car manufacturers are coming for them

now and in the future.

Key Success Factors

There are many key success factors that Tesla and other car companies in the industry

must follow to succeed. The first key success factor as I mentioned before is innovation when

it comes to their vehicles. Consumers are choosing cars that are packed with technology and

that is where the car industry is moving towards. Autopilot and self-driving vehicles is the

biggest product innovation of the decade and as we move towards the future, more and more

car manufacturers are going to be adopting this technological advancement. Other technology

40 Gans, Joshua. "Why Elon Musk's New Strategy Makes Sense." Harvard Business Review. March 07, 2018. Accessed May
22, 2018. https://hbr.org/2016/07/why-elon-musks-new-strategy-makes-sense.

25
like safety equipment including backup cameras, lane assist, heads up displays and much

more are becoming standard on cars and consumers are wanting that technology in the new

cars they purchase. So, a key success factor to succeed in todays car market and also in the

future is to always think outside of the box and create technological advancements just as

Tesla is doing in all of their cars. Tesla is doing it right in that department because they

continue to pack their cars with technology and safety equipment, which gave them the

highest ever rating out of every car manufacturer in 2014 with the Tesla Model S.

A second key success factor that Tesla and other car companies in the industry must

follow to succeed is a great design. Tesla has great designers obtained from other car

manufacturers and created a very sleek and sporty design that many people enjoy. When

compared to other electric vehicles like the BMW i3 or the Honda Clarity, Tesla wins in

design for every category. Like the BMW and Honda electric vehicles, those manufacturers

are aiming more towards a futuristic boxy look while Tesla is aiming more towards a sporty

and sleek design that consumers can only get from buying an expensive sports car. Design is

a huge part of success in the car industry and a good-looking car will always win over

consumers over a not so pleasing design.

37
Another key success factor needed for Tesla and all other car manufacturers to

succeed is durability and reliability. A reason why people choose certain manufacturers like

Honda, and Toyota is due to known reliability and durability. As stated earlier, Tesla has had

problems with their products. Tesla had to recall 123,000 Model S’ in 2018 due to a

mechanical error, and 53,000 another time in 2017 due to parking brake failures. 41 Every car

manufacture has their problems, but Tesla has had many problems which can be intimidating

to consumers who would like to buy a vehicle. If Tesla and other car manufacturers want to

succeed in the car industry, durability and reliability must be a top factor when producing

41 A Deep Dive Into Tesla Business Strategy." Feedough. July 26, 2017. Accessed May 22, 2018.
https://www.feedough.com/tesla-business-strategy-and-business-model/.

26
their vehicles and all kinks must be worked out before it gets to the customers hands. All in

all, being innovative, having a great design, and being durable are 3 of the many key success

factors Tesla and all other car manufacturers need to be successful. Tesla is said to be ahead

of its time and has many success factors that other car manufacturers do not have yet, and this

is why Tesla is causing a stir in the car industry.

Turnaround Strategy

Although Tesla has shown great growth in sales and total revenues, we were torn

whether Tesla needs a turnaround strategy. At first, we thought a turnaround strategy was not

needed because gross profit has increased, total revenues has increased, and sales have been

doing very great for the company. At a second glance, we thought a turnaround strategy was

needed because we realized that net income was decreasing due to a lot of research and

development and heavy investments in factories and other developments in helping Tesla out,

such as Gigafactory’s. There was a lot of debt being created due to all these investments.

Tesla is also worse off financially due to accruing a lot of debt over the past four years.

Tesla’s stock has also been dropping due to fear from investors on the debt created by heavy

investing and the Model 3 not being what everyone expected it to be. The model 3 is not of

great quality like everyone expected it to be and it cost more than people expected it to be

also. After heavy consideration, we do not believe a turnaround strategy is needed for the

company because although there is a lot of debt being created, the investments are being

invested into sectors that will help the company in the future and help develop their product

to be more advanced and innovative. Tesla has a lot of tricks up their sleeves and debt created

and a decrease in net income should not be worried about because Tesla is a big believer of

innovation and research and development, and that is what comes with thinking outside of the

box.

Strategic Moves

27
 Tesla has really made a name for themselves in the car industry over these past years.

Tesla’s strategy is to build a minimum viable product to test the market while making a name

for their brand. Their strategy was clear, to release a vehicle in each sector like the sports car

sector, the sedan sector, the SUV sector, and the affordable sedan sector. The tesla roadster

was their first product which sold well and helped fund their next model, the Model S. The

roadster was their sports car to get their name out there on the market to show innovation in

the electric car industry. Next Tesla used the money from the roadster and entered the luxury

sedan market with the Model S. The model S was their best seller and was the model that
38
made Tesla a household name. The model S received awards left and right and was even

named the safest car with the best crash test rating ever received for any car. After the model

S, the Model X was released to enter the SUV market, and after the Model X was released,

the cost friendly Model 3 was introduced and released to cater to the less wealthy market.

The model 3 had an MSRP of $35,000, but with options, everyone’s car came out to be

almost or over $50,000 for a decently optioned model 3 that compared to other car

manufacturers.43 A strategic move I recommend Tesla to do is use the money from all those

models they released and release an even cheaper model for the average consumer. Most

consumers were excited for the $35,000 Tesla Model 3 but were not expecting all of the extra

charges to make the car around $50,000, something that most consumers cannot afford. This

made a lot of people who put deposits on the Model 3 to cancel their allocation due to the

price. I believe if Tesla kept the price after everything to around $35,000 off the showroom

floor, a lot of consumers will buy a Tesla. Tesla’s are not the cheapest car out there and other

manufacturers like Honda and Fiat are creating electric cars for cheaper than Tesla is selling

them for, and that is a big problem. Honda and Fiat are attracting those consumers that want

42 Ibid
43 Gans, Joshua. "Why Elon Musk's New Strategy Makes Sense." Harvard Business Review. March 07, 2018. Accessed May
22, 2018. https://hbr.org/2016/07/why-elon-musks-new-strategy-makes-sense.

28
electric vehicles for a low price and I believe a strategic move for Tesla is to create an even

cheaper car, so they can enter the compact and economy car sector with a new model.

Another strategic move for Tesla that I recommend is creating more access to

charging stations and supercharging stations. Since Tesla has entered the SUV market, the

luxury market, the sports car market, and the affordable car market, there are a lot more

Tesla’s going to be on the road, and people are replacing their gas-powered cars with electric

vehicles. By adding more charging stations and supercharging stations that charge a full

battery in 30 minutes, more people will switch over to electric vehicles like Tesla and use

them more for traveling farther. By having more access to these stations, there will not need

to be a line to charge electric cars and people’s time won’t be wasted by waiting to charge

their vehicles. Also, time is of the essence and a strategic move would also to create a

charging station that would charge faster than their current supercharging stations. If a full

charge at a current supercharging station is 30 minutes, there could be product innovation to

create an even faster charge, so people will be on their way quicker, especially if they are

driving long distances to travel somewhere. More charging stations and faster charging

stations will convince people to switch over to electric vehicles and will have a significant

increase in Tesla’s sales. Longer range batteries are also available when ordering your car

from Tesla but choosing bigger batteries for your car as an option results in thousands of

dollars in upgrades, which not everyone has money to spend on, especially in the affordable

market when it comes to the Tesla Model 3. So, having cheaper battery options that have

extended ranges, so people can drive farther off of a charge will be a great strategic move for

Tesla as innovation and technological advances are discovered as time goes by. All in all,

Tesla is doing great in the market currently and there is no sign of stopping. Tesla is an

innovator is today’s time and continues to push the envelope when it comes to electric cars

and the car industry.

29