Tesla Motors: Disrupting the Auto Industry? Custom Case Solution & Analysis

Evidence Brief

Financial Metrics

• Revenue reached 2.01 billion dollars in 2013, a significant increase from 413 million dollars in 2012.
• Research and development expenses totaled 464.7 million dollars in 2013.
• Net loss for the fiscal year 2014 was 294 million dollars.
• The company received a 465 million dollar loan from the Department of Energy in 2010, which was repaid in full by May 2013.
• Model S pricing ranges from 70,000 to over 100,000 dollars before federal and state tax incentives.
• The company maintained a gross margin of 22.5 percent in 2013.

Operational Facts

• The Fremont facility spans 5.3 million square feet and was previously operated by NUMMI.
• The production capacity of the plant is 500,000 vehicles per year at full utilization.
• The Supercharger network included 150 stations by early 2014, providing free charging for Model S owners.
• Battery costs represent approximately 25 to 30 percent of the total vehicle cost.
• The Gigafactory is planned to occupy 10 million square feet and employ 6,500 people.

Stakeholder Positions

• Elon Musk: Chief Executive Officer and largest shareholder with 27 percent ownership, providing the primary strategic vision.
• JB Straubel: Chief Technology Officer focused on battery pack and powertrain design and integration.
• Toyota: Invested 50 million dollars in 2010 and provided the NUMMI plant for 42 million dollars.
• Daimler: Acquired 10 percent equity in 2009 to secure battery supply for the Smart car and Mercedes A-Class.
• Automobile Dealers: Oppose the direct sales model of Tesla in multiple states.

Information Gaps

• The specific production cost per unit for the upcoming Model 3 is not disclosed.
• The case does not provide long term maintenance cost data for the Model S after the warranty period.
• Data on the recycling efficiency and environmental impact of the battery packs is absent.
• The exact price per kilowatt hour for battery cells sourced from Panasonic is not provided.

Strategic Analysis

Core Strategic Question

• Can Tesla successfully transition from a low volume luxury manufacturer to a high volume mass market competitor?
• Will the massive investment in the Gigafactory yield enough cost reduction to make the 35,000 dollar price point profitable?

Structural Analysis

The automotive industry is characterized by high capital intensity and entrenched dealership networks. Tesla has bypassed these barriers by utilizing a direct sales model and focusing on software integration. Supplier power is high for battery raw materials like lithium and nickel, which are critical for the Gigafactory. Buyer power is currently low for luxury electric vehicles but will increase significantly as the company enters the mass market. Competitive rivalry is intensifying as BMW, Nissan, and General Motors introduce electric models with established service networks. The threat of substitutes is low for high performance vehicles but high for urban transport where mass transit and ride sharing provide alternatives.

A PESTEL analysis reveals that political support via subsidies is a major growth driver, while legal challenges from dealer associations pose a threat to the distribution model. Economically, the price of oil influences consumer interest in electric vehicles. Technologically, the rate of increase in battery energy density is the primary constraint on performance and cost.

Strategic Options

Option 1: Maintain Luxury Niche Focus. This path involves focusing on high margin production of the Model S and Model X. The rationale is to preserve brand prestige and avoid the capital risk of massive scaling. However, the trade-off is a limited total addressable market and vulnerability to luxury incumbents like Porsche and Mercedes. This option requires fewer resources but limits the long term impact of the company.

Option 2: Become a Powertrain and Battery Supplier. Tesla could pivot to selling battery packs and drivetrains to other manufacturers. This reduces manufacturing and distribution risks. The trade-off is the loss of the direct relationship with the consumer and the erosion of the brand value of the vehicle. This option utilize the technical expertise of the company without the burden of high volume assembly.

Option 3: Mass Market Expansion. This involves launching the Model 3 at a 35,000 dollar price point and scaling production to 500,000 units. The rationale is to achieve the mission of the company to accelerate sustainable transport. The trade-off is existential risk. If the Gigafactory does not achieve the 30 percent cost reduction target, the company will burn through its remaining capital. This requires billions in capital and a total transformation of the operations of the company.

Preliminary Recommendation

Tesla must pursue mass market expansion. The luxury segment is too small to justify the 5 billion dollar investment required for the Gigafactory. Vertical integration is the only path to control costs and ensure a stable supply of battery cells. The company must move fast to establish its charging network and brand as the industry standard before incumbents can coordinate their response.

Implementation Roadmap

Critical Path

The completion and ramp up of the Gigafactory is the primary dependency for all other activities. Without the economies of scale from this facility, the battery cost per kilowatt hour will not drop to the levels required for a 35,000 dollar vehicle. The sequence must be: secure long term lithium and nickel supply contracts, complete the first phase of the Gigafactory, and then begin pilot production of the Model 3. Simultaneously, the company must expand the Supercharger network to cover all major transit corridors in North America and Europe to alleviate range anxiety for mass market buyers.

Key Constraints

• Capital availability: The company requires constant access to equity or debt markets to fund the Gigafactory and the Model 3 development.
• Manufacturing expertise: Transitioning to 500,000 units requires a different set of operational skills than low volume luxury assembly. The company must hire industrial engineering talent from outside the traditional auto industry.
• Raw material supply: Global production of lithium and cobalt may not meet the demands of the Gigafactory at current prices, creating a potential bottleneck.

Risk Adjusted Implementation Strategy

The implementation plan assumes a 30 percent reduction in battery costs via the Gigafactory. A contingency plan must be established. If battery costs do not drop as expected, the company should delay the Model 3 and focus on a mid priced Model S variant to preserve cash. The 90 day action plan involves finalizing the site selection for the Gigafactory, initiating the Model 3 design freeze, and expanding the service center footprint in states that allow direct sales. The company must also prepare for a potential drop in federal tax credits, which would increase the effective price of the vehicles for consumers.

Executive Review and BLUF

Bottom Line Up Front

Tesla is not merely an automobile manufacturer. It is a vertically integrated energy firm. The success of the company depends entirely on its ability to scale manufacturing by 1,000 percent while simultaneously reducing unit costs through the Gigafactory. The Model S proved the technology is viable. The Model 3 will prove the business model is sustainable. If the Gigafactory fails to hit cost targets, the company will become a prime target for acquisition by a traditional incumbent with superior manufacturing discipline. Speed is the only defense.

Dangerous Assumption

The analysis assumes that traditional automakers will remain slow and inefficient. This is a dangerous premise. If a competitor like Toyota or Volkswagen pivots to a dedicated electric platform before 2017, the first mover advantage of Tesla will vanish. Incumbents have deeper pockets and existing global service networks that Tesla cannot replicate quickly.

Unaddressed Risks

• Regulatory Risk: Many states in the United States prohibit direct sales. If the company cannot overturn these laws, its growth will be capped by geography, regardless of the quality of the product.
• Commodity Risk: A spike in the price of lithium or nickel would destroy the margins of the Model 3. The company is highly exposed to the volatility of raw material markets.

Unconsidered Alternative

The team should consider spinning off the Supercharger network into a separate entity. This would unlock capital and allow the network to serve other manufacturers for a fee. This would create a high margin recurring revenue stream and establish the charging technology of Tesla as the global standard, while reducing the capital intensity of the core vehicle business. This would provide a financial cushion if the Model 3 production ramp is delayed.

VERDICT: APPROVED FOR LEADERSHIP REVIEW