US Car Industry before Tesla:

General Motors, Ford, and Chrysler owned most of the market share in the US automaker sector ahead of 2008.
Although these businesses collectively enjoyed a substantial share of the market, they were experiencing growing
rivalry from international automakers, particularly from the likes of Mercedes, VW and BMW from Germany and
Toyota and Honda from Japan.

Early in the 21st century, the US automobile market was estimated to be worth $350 billion. The market was
expanding as more cars were being sold annually in the United States. However, the market share of US
automakers was shrinking. The market share held by US automakers in the US fell from 65% in 1990 to 51% in
2007 (Wilson, 2007). Due to their reputation for producing high-quality, fuel-efficient cars, foreign automakers
were gaining market share in the US. US carmakers struggled to keep up with their foreign competitors in terms
of innovation, as Japanese and German carmakers were investing heavily in research and development to produce
more fuel-efficient vehicles.

High labour expenses were another important concern for US automakers. The United Auto Workers union had
achieved generous contracts with the Big Three automakers, resulting in workers receiving substantial earnings
and benefits. This made it harder for US automakers to compete with lower-cost international automakers.

Financial performance: Before the 2008 financial crisis, US automakers were experiencing financial difficulties.
Both GM and Ford were losing money. Chrysler, which was also in financial trouble, was eventually sold to the
Italian automaker Fiat in 2009.

Furthermore, the 2008-2010 US automotive industry crisis was a time of severe economic downturn that resulted
in a considerable fall in automobile demand and, as a result, a sharp decline in the profits of major US automakers
like General Motors, Ford, and Chrysler. Rising oil prices, the subprime mortgage crisis, and an increase in interest
rates were some of the causes that led to the crisis. These conditions caused consumer spending to drop
significantly, which in turn decreased the market for automobiles. The US government eventually bailed out the
US auto sector because of the crisis, giving afflicting businesses financial support. Eventually two of the big three
carmakers Chrysler and General Motors filed bankruptcy in 2009 (Wikipedia, 2023).

TESLA – First successful new entrant since WWII:

The biggest challenge that any company faces entering the automotive market is the capital-intensive nature of
business, along with the need to achieve economies of scale as quickly as possible. Tesla's success can be
attributed mainly to addressing the same by adapting a cost-structure that was significantly lower than the
competition and focusing on economies of scale. They kept their manufacturing cost and capital investment at a
fairly lower value compared to the conventional automotive industry. In-house production and manufacturing
helped the company reduce costs and maintain quality control, while direct sales and services gave the company
a competitive advantage. Tesla's investment in manufacturing both vehicles and batteries helped the company
achieve economies of scale and reduce costs.

Furthermore, Tesla's success can be attributed to a combination of factors, including its strong brand reputation,
first-mover advantage, and direct sales and services. These factors allowed the company to differentiate itself
from traditional automakers and build a loyal customer base, despite facing many challenges along the way.
Tesla's focus on EV technology and engineering allowed the company to become a leader in the industry.

The right timing to enter the market also played an important role in Tesla’s success. Roadster was launched at a
time when customers were higher prices of gasoline has become a major pain point for the customers. Followed
by the Automotive crisis of 2008-2010 Tesla was fortunate to scale up its manufacturing cost investing only one
third of the usual plant acquisition cost.

Another significant win for Tesla was the market penetration strategy. Tesla started with the Roadster, which
helped create hype and change customer perception towards EV performance. Later, they moved to the Model S,
targeting customers with high buying power, and then to the Model 3, which is budget friendly. This also
enabled Tesla to position itself as a premium brand (likes of BMW contrary to VW, Toyota etc).
Car business value chain and profit pools:

When comparing Tesla to Ford/GMH in the value chain, there are some notable differences. Tesla’s vertical
integration enables the company to capture more from the value chain. Integrating in-house battery production
and injection moulding capabilities along with the exclusion of dealerships and service centres, is the key to
Tesla’s success. Tesla has a much stronger focus on the R&D and design/engineering stages, while Ford/GMH
have a stronger focus on the manufacturing and after-sales service stages. Tesla's in-house design and
engineering capabilities, as well as its focus on developing new and innovative features, have helped it gain a
competitive advantage. In contrast, Ford/GMH's expertise in manufacturing and after-sales service have
traditionally been their strengths. However, Tesla's recent investments in manufacturing, such as the
Gigafactories, suggest that it is looking to strengthen its position in this area as well.

Tesla cost-structure compared to competition:

Tesla has a cost advantage compared to its competitors because of its focus on vertical integration and advanced
manufacturing technologies. This has allowed it to reduce labour costs and increase efficiency compared to
traditional automakers. Furthermore, Tesla offer limited customization to the customers which also significantly
reduces costs. Additionally, Tesla has a relatively small model line-up and produces cars in smaller volumes,
which can lead to higher costs per unit. However, Tesla is investing in large-scale manufacturing facilities like
the Gigafactory, which is expected to help it achieve greater economies of scale over time. The comparison is
shown in the table below:

Tesla Incumbents (IC Engine Vehicles)

Reduced costs of design & development, raw
materials (parts) and manufacturing pertaining to
drive train
Innovative design approach & minimalistic styling
(touchscreen control panel)
Very limited customization and options
In-House Injection Moulding
Significantly higher cost due to complex system of
IC engine (Engine, Transmission, Colling system,
Injection System, Fuel storage etc)
Higher cost for complex dashboard design and all the
buttons and knobs.
Lots of customizations in terms of trims, features,
performance, capabilities, from body colour, seat
fabric to dashboard colours and wheels
Outsourcing of body parts such as dashboards,
bumpers, mirrors, doorhandles etc

Tesla
Cost savings from higher levels of plant automation
and better manufacturing processes
In-house battery production (Battery cost
$115/KWh)
Economies of scale (Market leader in EV sales &
manufacturing)
In-House Injection Moulding
EV startups
Higher manufacturing costs
Outsourced batteries (Cost $137/KWh)
Lower number of sales
Outsourcing of body parts such as dashboards,
bumpers, mirrors, doorhandles etc
Tesla VS incumbent car makers:
SWOT Analysis:

Strengths Weaknesses
a) Better cost structure a) Limited production capacity
b) Vertical Integration b) Higher price of the products
c) Higher & increasing contribution margins c) Dependence on government incentives for
because of a) & b) (Refer to Appendix A) making products affordable.
d) First mover advantage in EV market & d) Limited Product Range and customizations
Strong brand reputation e) Still new in the market (lack of loyal
e) Innovative technology consumer base)
f) Higher customer satisfaction
g) Product differentiation in terms of
performance, safety and cost-saving fuel and
maintenance.
h) Investments in mass production of both
vehicles and batteries
i) Superior technology in terms of self-driving
capabilities and software

Opportunities Threats
a) Growing demand for EVs a) Competition: Legacy carmakers are entering
b) Gaining economies of scale further and making huge investments in the EV
spreading costs segment
c) Expansion into new markets such as b) Toyota’s huge investments and plan to
developing countries. launch solid-state batteries EVs
d) Autonomous Vehicles and Robotaxis
e) Partnership opportunities with
manufacturers of batteries and motors to
enhance capacity.

Tesla's financial performance compared to BMW (Appendix A) is outstanding. BMW's automotive contribution
margin is shrinking, while Tesla's is increasing with the growth in sales and decreasing SGA and total operating
expense. More information is needed to further break down the contribution margins for energy and services sector
to understand fluctuations. Tesla needs to speed up the recent improvement in the services sector, which is going
to get better with the economies of scale.

Tesla VS EV new entrants:

Tesla has several competitive advantages over new EV entrants:

1. Brand reputation: Tesla is a well-established and recognised brand in the EV market, with a strong
reputation for innovation, quality, and performance.

2. Advanced technology: Tesla has been at the forefront of EV technology and has invested heavily in
battery technology, autonomous driving, and other cutting-edge technologies.

3. Economies of scale: Tesla has a significant advantage in terms of economies of scale, due to its large
production volumes, which allows it to achieve lower costs per unit and offer more competitive pricing.

4. Production efficiency: Tesla has a highly efficient production process and is known for its advanced
manufacturing techniques, which enable it to produce vehicles more quickly and at lower cost.

5. Battery supply chain: Tesla has established a robust and vertically integrated battery supply chain,
including its own Gigafactory, which gives it a significant advantage in terms of cost and supply chain
management.
 6. Supercharger network: Tesla has an extensive network of supercharger stations, which enables its
customers to travel long distances and recharge their vehicles quickly and conveniently.

7. Brand loyalty: Tesla has very high customer satisfaction ratings, and such customers are passionate about
the brand and its products. This gives Tesla an advantage in terms of customer retention and word-of-
mouth marketing.

Tesla – Building a sustainable competitive advantage:

To build a sustainable competitive advantage, Tesla needs to increase its market share to compete with both legacy
carmakers and new entrants. A higher volume of sales will help Tesla to achieve economies of scale, further
expand its production capacity, and further improve its cost structure. Tesla can consider the following strategies
building on its current strengths:

1. Continue to innovate: Tesla's current competitive advantage is based on its ability to innovate in electric
vehicle technology. It should continue to invest in research and development to stay ahead of its
competitors.

2. Build brand awareness and reputation: Tesla has built a strong brand image and a reputation for quality
and innovation. Tesla can continue to focus on its branding strategy and engage with customers to build
loyalty and advocacy. It can also invest in marketing campaigns to reach a wider audience.

3. Focus on customer experience: Tesla can maintain its competitive advantage by providing exceptional
customer service and experience. This includes providing a seamless buying process, high-quality after-
sales service, and creating an emotional connection with customers.

4. Expand the production capacity: Tesla can increase its production capacity by building more factories
and expanding its global footprint. This would help reduce costs and improve efficiency.

5. Develop strategic partnerships: Tesla can leverage partnerships with other companies to gain access to
new technologies, increase production capacity, and expand its distribution network. Strategic
partnerships could also provide Tesla with access to new markets and customers.

By implementing these strategies, Tesla can build a sustainable competitive advantage that will help the company
maintain its position as a leader in the electric vehicle market.
References:
Wikipedia. (2023). Effects of the 2008–2010 automotive industry crisis on the United States. In Wikipedia.

https://en.wikipedia.org/w/index.php?title=Effects_of_the_2008%E2%80%932010_automotive_indust

ry_crisis_on_the_United_States&oldid=1147939693#Federal_government_bailout_process_and_timeli

ne

Wilson, A. (2007, December 3). GM, Ford will trim production in 1st quarter. Automotive News.

https://www.autonews.com/article/20071204/ANA02/71203025/gm-ford-will-trim-production-in-1st-

quarter

Appendix A:

Tesla – Key metrics

2020 2019 2018 2017 2016 2015 2014

Contribution margin Automotive $6,977 $4,423 $4,341 $2,208 $1,601 $918 $861
%age contribution margin 26% 21% 23% 23% 25% 25% 29%
Contribution margin Energy 18 190 190 241 3 2 -
%age contribution margin 1% 12% 12% 22% 2% 14% 0%
Contribution margin Services - 365 - 544 - 489 - 228 - 4 4 20
%age contribution margin -16% -24% -35% -23% -1% 1% 11%
Commulative Contribution Margin 4% 3% 0% 7% 9% 13% 13%

SGA % of Total Revenue 10.0% 10.8% 13.2% 21.1% 20.5% 22.8% 18.9%
R&D (% of revenue) 4.7% 5.5% 6.8% 11.7% 11.9% 17.7% 14.5%
Total Op Expense (% revenue) 14.7% 16.8% 20.6% 32.8% 32.4% 40.5% 33.4%

Income (Loss) (% of revenue) 6.3% -0.3% -1.8% -13.9% -9.5% -17.7% -5.9%

2020 2019 2018 2017 2016 2015 2014

Total revenue 31,536 24,578 21,461 11,758 7,000 4,046 3,198
Automotive revenue 27,236 20,821 18,515 9,641 6,351 3,741 3,007
Energy generation and storage 1,994 1,531 1,555 1,116 181 14 4
Services and others 2,306 2,226 1,391 1,001 468 291 187

Total cost of revenues 24,906 20,509 17,419 9,537 5,400 3,122 2,317
Automotive cost of revenues 20,259 16,398 14,174 7,433 4,750 2,823 2,146
Energy generation and storage 1,976 1,341 1,365 875 178 12 4
Services and other 2,671 2,770 1,880 1,229 472 287 167

Gross Profit 6,630 4,069 4,042 2,221 1,600 924 881

Research and development 1,491 1,343 1,460 1,378 834 718 465
SGA 3,145 2,646 2,835 2,477 1,432 922 604
Total Operating expenses 4,636 4,138 4,430 3,855 2,266 1,640 1,069

Income (loss) from operating 1,994 (69) (388) (1,634) (666) (716) (188)
BMW – Key metrics

2020 2019 2018 2017 2016 2015 2014

Contribution margin Automotive $15,086 $19,572 $19,248 $21,235 $19,745 $19,408 $18,087
%age contribution margin 19% 21% 22% 24% 23% 23% 24%
Contribution margin motorcycles 343 457 435 474 430 448 314
%age contribution margin 15% 19% 20% 21% 21% 23% 19%
Contribution margin financial services 3,086 3,660 3,616 3,581 3,546 3,153 2,816
%age contribution margin 10% 12% 13% 13% 14% 13% 14%
Commulative Contribution Margin 15% 18% 18% 19% 19% 19% 19%

SGA % of Total Revenue 8.9% 9.0% 9.9% 9.7% 9.7% 9.4% 9.8%
R&D (% of revenue) 5.7% 5.7% 5.5% 5.0% 4.6% 4.6% 5.1%
Total Op Expense (% revenue) 15.5% 16.9% 16.0% 15.9% 15.2% 14.9% 16.0%

Income (Loss) (% of revenue) 4.0% 6.1% 8.4% 9.3% 9.3% 9.4% 10.2%

2020 2019 2018 2017 2016 2015 2014

Total revenue 98,990 104,210 96,855 98,678 94,163 92,175 80,401
Automotive revenue 80,853 91,682 85,846 88,581 86,424 85,536 75,173
Motorcycles 2,284 2,368 2,173 2,283 2,069 1,990 1,679
Financial Services 30,044 29,598 27,705 27,567 25,681 23,739 20,599
Other entities 3 5 6 7 6 7 7
Eliminations (14,194) (19,443) (18,875) (19,760) (20,017) (19,097) (17,057)

Total cost of revenues 79,719 80,195 73,157 73,824 71,148 69,772 59,261
Automotive cost of revenues 65,767 72,110 66,598 67,346 66,679 66,128 57,086
Motorcycles 1,941 1,911 1,738 1,809 1,639 1,542 1,365
Financial Services 26,958 25,938 24,089 23,986 22,135 20,586 17,783
Eliminations (14,947) (19,764) (19,268) (19,317) (19,305) (18,484) (16,973)

Gross Profit 19,271 24,015 23,698 24,854 23,015 22,403 21,140

Research and development 5,689 5,952 5,320 4,920 4,294 4,271 4,135
SGA 8,795 9,367 9,568 9,560 9,158 8,633 7,892
Other Op expenses 873 2,316 651 1,214 847 820 872
Total Operating expenses 15,357 17,635 15,539 15,694 14,299 13,724 12,899

Income (loss) from operating 3,914 6,380 8,159 9,160 8,716 8,679 8,241