Tesla Motors - A Look at Strategic Model

Contents Tesla Motors and its Strategy Industry and Competitor Analysis

Disruptive Innovation Model Business Units: Production | HR | Finance | Marketing Future Outlook

What is Tesla? Named after the pioneer of Alternating Current, Nikola Tesla, TESLA is a typical Silicon valley company that only makes totally electric vehicles No hybrids. No hydrogen. No hype.

Vision Vision of a world without gasoline cars Proving to the world that electric is not only cleaner but better Trigger an electric transport revolution

Driving Forces A CLEAN START

COMMITTED TO ELECTRIC

BUILT AROUND THE DRIVER

SPARKING REVOLUTION

Porter’s Potential Five Force Analysis Entrants

Buyers

Potential Entrants

Buyers

Low Threat

There are few competing vehicles Only one successful entrant company in 100 years

Moderate Threat

Moderate bargaining Power in B2C segments

Industry Competitors Moderate Competition

Due to high entry barrier Competing major brands and evolving market

Suppliers

Low Threat Low Bargaining power of suppliers due to multiple suppliers supplying similar parts High Bargaining Power of company due to inhouse talent for Engine and Chassis and transmission

Substitutes High Threat

Newer hybrid variants like Plug-ins Very few viable alternatives to cars

Corporate Strategy Emulate Technological Product life cycle Enter with high end product Wait for acceptability Penetrate Cost Conscious consumer markets

Pushing Products through Thought Leader/Early Adopters Following the Cell-phone, Laptop like technology intensive product introduction strategy

Management is aware of the push and patience required to the market to accept the product in larger numbers

Strategy & Product Evolution

2008-12 • High price Low volume • Roadster, the first fully electric sports car • Base Price $1,09,000

2012 • Mid price Mid volume • Model S, the fully electric sports sedan • Base Price $ 69,900

Use sales of Roadster & Model S to drive battery business

2014 Lithium Ion battery packs to automakers like Daimler & Toyota

2015 Model X, full size Electric Crossover Utility Vehicle base price announced

2017 • Low price High volume • Model 3, a scaled down version of Model S • $ 35,000

Use battery sales to drive future affordable models

In 2006, when the co-founder and current CEO of Tesla Motors Elon Musk was asked about their strategy, he stated: “The starting point is a high performance sports car, but the long term vision is to build cars of all kinds, including low cost family vehicles”

Strategic Goals Selling its own vehicles online & in company-owned showrooms Selling powertrain components to other automakers Serving as a catalyst and positive example to other automakers

Expansion Achieve 20K Model S Production Goal

Partner with Toyota, Mercedes Expand to all Automakers Standardize EV parts for efficiency

Battery technology & electric motors have broad potential

A focused differentiation strategy because their customers are mainly from middle & upper income levels, and Tesla focuses on providing high performance and creative electric cars

Strategy Summary

Partnering with Auto Makers

Hunt for newer technology

Business Level Strategy

Corporate Level Strategy A market penetration strategy as Tesla intends to enhance its influence on the current markets with their current products.

International Level Strategy A Transnational strategy as Tesla focuses on the domestic markets but is also continuously expanding into global markets

Cooperative Strategy A Strategic Alliance strategy as Tesla Motors formed partnerships with many firms like Toyota, Daimler, Panasonic, etc.

SWOT Analysis Potential Entrants

Buyers

Strengths     

First mover in fully electric sports car Strong supplier to other Automakers like Toyota Strong technological expertise in the area of electric transmissions & drive train Ability to develop vehicles completely in house including the sub-assemblies required Current platform developed for Model S has the ability to be used for their future crossover model

Weaknesses 

  

Threats  Competition from large Auto companies in Electric and alternative fuels  Selling to average public seems difficult to achieve at their current business model  Their strategy for pricing (skimming) has not been used so far in the auto industry  Increasing Internal Combustion Engine efficiency

Full in-house development of sub-assemblies leads to higher costs due to diseconomies of scale Higher prices for car models than similar combustion engine powered cars Dependence on continuing innovation Less Awareness as compared to Audi, Toyota or Mercedes

Opportunities    

Growing support by Governments in the form of exemptions from duties, etc. Increasing Oil & Gas prices Large International Market potential Increasing awareness and support for Green Automotives

Portfolio Sports Performance Car, based on the Lotus Elise platform First commercially available Tesla automobile First car to run on lithium ion batteries 0-60 mph in 3.7 seconds Range: 245 miles

$85,000

Seven passenger MiniVan blended with SUV Multiple drive train configuration availability Falcon Doors 0-60 mph in less than 4.4 seconds for the single motor version Range: 267 miles

$35,000

$110,000

Premium Sedan World's first Dual Motor electric car increases efficiency Autopilot Mode 0-60 mph in 3.2 seconds Range: 285 miles

$75,000

New platform to be revealed in 2016 Challenger to BMW 3 Series Mercedes C Class, Audi A3 & others Sales to begin in 2017 Gigafactory essential to bring down battery prices Range: >200 miles

Competitor Analysis

COMPETITOR ANALYSIS

Plug-in Pure Electric Vehicle Segment Tesla Model S

Nissan Leaf

BMW i3

Toyota RAV4 EV

Launch Year

2013

2013

2014

2012

EPA rated Combined Fuel economy

95 mpg-e (35 kW-hrs/100 mi)

115 mpg-e (29 kW-hrs/100 mi)

124 mpg-e (27 kW-hrs/100 mi)

76 mpg-e (44 kW-hrs/100 mi)

Avg. Fuel Cost to drive 25 miles

$0.94

$0.87

$0.81

$1.32

Base model Sticker Price (in USD)

$69,900 (60 kW.h bat. pack)

$30,000

$42,300

$50,700

The Premium Sedan Segment Tesla Model S

BMW 7-Series

Mercedes-Benz S-Class

Audio A8

Launch Year

2013

2013

2014

2012

Avg. Fuel Cost per milecalc

$0.03

$1.65

$1.42

$1.87

Base model Sticker Price (in USD)

$69,900 (60 kW.h bat. pack)

$74,195

$92,350

$71,990

Q1 sales (2013) (in units)

4750

2338

3077

1462

DISRUPTIVE INNOVATION

Disruptive Innovation

Tesla Model-S 85kWh battery pack (265 miles; 2013) Tesla Model-S 60kWh battery pack (208 miles; 2012)

Performance demanded by `the market RANGE

BMW i3 (100 miles; 2013) Toyota RAV4 EV (83 miles; 2012)

Mitsubishi i-MiEV (62 miles; 2010)

TIME

Superchargers Proprietary recharging stations across nations to enable free-for-life countryside travel Cost of superchargers to Tesla = $2,25,000 Most setups run on solar energy and recharges the Model S for half range in 20 minutes Superchargers station will soon allow swapping of batteries that takes only 90 seconds, for a small fees So the only decision one has to make at a supercharger station is if they want the charge fast or free

Production Policies Tesla currently operates in NUMMI, California, a facility that was abandoned by Toyota and GM Facility has an area of 5 million square feet of factory spread out on 2 levels Model S production lines fill just 20% of the current production facility space Space readily available for future expansion for Model III Very high level of automation for ensuring consistent high quality

Gigafactory Investment of $5 billion for production of Li-ion batteries in Nevada It would double the capacity of battery production of the world (by 2013 standards) The gigafactory would be a net-zero energy footprint and will be run by renewable sources of energy (wind and solar) Estimated cost reductions by 30 percent by 2017 and 50 percent by 2020

Gigafactory Cheaper batteries will aid in achieving Tesla’s strategic goal of producing a $35,000 third generation car The investment in R&D will ensure improvements in battery design and performance Tesla will no longer be just an EV company. It will be positioning itself to compete in one of the biggest and most lucrative industries on the planet: the utility and power generation industry Tesla has confirmed the Giga factory is not just for electric vehicles. It will supply batteries for use in solar industry. Elon Musk is the Chairman of the board of SolarCity, a company that provides solar systems for homes, business and governments

Human Resource Policies Employees strongly believe that they are part of a great change

Every car they roll out reduces the carbon footprint a bit and makes earth more sustainable This sense of gratification motivates them Fresh approach to car manufacturing facilities. Tried to make the factory beautiful with Skylight and windows flood factory with sunlight. The factory is very clean with the walls and floor painted white and machinery bright red. This gives a sense of cleanliness and are pleasing to look at and work in Bikes (non-motorized) are provided so that workers can get around the factory Elon musk says “If you make the factory pristine and clean that sets the tone for the vehicle. We want the same sense of quality and precision in the car itself”

ARNNON GESHURI VP, HR (TESLA)

Financial Policy

Financials

Financials Items

Three months ended March, 2013

Revenue (‘000 $) Gross Profit Margin Net Income (‘000 $) Operating Cash Flow (‘000 $) Capital Expenditure (‘000 $) Free Cash Flow (‘000 $)

2014

555,203

618,811

17%

25%

11248

-49800

64079

60640

-57727

-141364

6352

-80724

A 11 % jump in Revenues due to sales of S model A 25% Gross Profit Margin (twice that for big players like GM)

Operating losses due to R&D investments, Sales & Service expansion

Negative free cash flow due to expansion in sales, services, charging stations & production capacity

Tesla remains unprofitable and doesn’t generate cash. The current valuations supporting the $25 billion market capitalization are based on future expectations. While Tesla’s product is beautiful and the company is a technological pioneer, Tesla remains a speculative stock. The story holds water only with projections of profitability and volumes well in excess of Tesla’s current 35,000 vehicles per year. Toyota (TM), General Motors (GM), Volkswagen (VOW), and Ford (F)—have billions of free cash flow, thousands of established sales and service sites, and a long history of generating value for shareholders.

Ratios

Annual Qtly data Jun 2014

Annual

Dec 10

Dec 11

Dec 12

Dec 13

Dec 10

Dec 11

Dec 12

Dec 13

2.51

2.99

2.41

5.12

0.45

0.37

0.45

1.14

Qtly.

Sep 13 1.09 D/E ratios

Heavy borrowing

Inv T/O

Dec 13 1.33

Mar 14 1.18

Jun 14 1.06

Light Inventory

Qtly.

Sep 13 0.21

Dec 13 0.27

Asset T/O

Mar 14 0.18

Jun 14 0.16

Increasing

Stock Price Movement Charismatic Investor-cumCEO

Musk tweets on Oct 2nd, 2014 about “mysterious D & another” Models Stock Price up by 5%

Announcement & Delivery of Model S generates buzz Stock Price up by 287%

Consistent announcement & delivery of Model-S led to massive increase in stock perception Other projects in pipeline are also expected to materialize & stock prices are going strong

8x times increase since 2010

Marketing Model Brand building before selling Three customer segments- the environmentalists, the car-buyers & the mall-shoppers

Focus is stimulating the mall shopper’s interest & awareness to remain at the forefront of the EV market Tangible benefits like battery-swap technology & superchargers add to the positive Word-of-mouth Gratification of using an electric vehicle vis-à-vis a gasoline one is secondary in case of a Tesla. The primary reason for buying a Tesla is the car itself

Marketing Model Tesla positions it’s car as the best car, and not the best “electric car” Elon Musk presents strong opposition to false negative publicity (Top Gear and New York Times incident)

Tesla has on-road presence in 37 countries It’s a radically different car with a very high focus on technology. It is an ‘upgradable’ car which adds features with software updates. This focus on technology flows with today’s smartphone loving generation. Tesla’s innovation in automobile sector are often pegged to be what Apple did to the smartphone sector

Starting in the spring of 2016, many Model S’s will be 3 years old, a point at which customers can sel-back vehicles at or near 50% of their original price. The expectation is that many early Model S buyers will take Tesla up on its trade-in option (presumably to buy a new Tesla). Tesla will service these used vehicles and then resell them at prices probably in the range of $35,000 to $50,000—pricey by used-car standards, but a deal compared to the sticker price of a new Model S, which starts at around $70K.

Selling Model: Direct to Customer Tesla's strategy of direct customer sales and owning its own stores and service centers is a significant departure from the standard dealership model currently dominating the U.S. vehicle marketplace Tesla operates over 100 company-owned showrooms worldwide

Tesla owned stores serve the dual purpose of selling and educating the customers Provides a better control over the selling process ensuring little to no dissatisfaction Tesla owned stores face stiff opposition from franchisee dealers, and in many states Tesla sales and stores have been banned in the recent past

Patents: A Twist in the Tale In June 2014, Tesla “opened” up its patents Not trying to build a car company but a whole new industry Tesla needs the public to stop thinking of them as electric cars, and to start thinking of them simply as cars. Lose the weird tag

PR benefit. And even then, very few companies can actually copy and start a company If new EV vehicles are launched, then they too improve the charging infrastructure that will help Tesla too as building superchargers is not very sustainable

“We are all on the same ship. If Tesla succeeds, but the planet is

destroyed, it does not help Tesla. It is similar to a situation in which we are on a ship with many people, but the ship has a lot of holes in it. And if we are good at removing the water of our section, then it would be foolish to not share that bucket design with others. Because if the ship goes down, we’re going with it

”

3-C Analysis

C C C

Higher value for customers

Customer

No compromise on performance rather a better and futuristic technology availability

Starting with premium models like Model S, Model X

Company

Penetrating market with Economical models like Model III after higher acceptance of earlier models Coming in direct competition to established players like BMW, Mercedes, Audi etc.

Higher pressures to match up and up-scale the technology for customers Companies coming up with their own version of EV cars like BMW i3, BMW i8 and other pilot projects

Competition

Infrastructure

Space readily available for future expansion

HRM

Flat/horizontal structure, Strong leadership, Strong management team

R&D

Leading edge in technology, reinvesting in R&D, excellent product design

Procurement

Partnerships and alliances with suppliers, short-term agreements

Inbound Logistics In-house production Numerous suppliers JIT

Operations

Outbound Logistics

Innovated and automated Multi-functional robots Easily reprogrammable

Own stores in 18 countries Online reservation Showrooms

Marketing and Sales Direct to Customer Sales Brand Building Technologically superior positioning

Service

Service centers Superchargers Warranty policy

Product

Primary Activities

Support Activities

Value Chain Model

What does the Future hold? Technology Leap Frogging Autopilot technology, advance safety and driver assistance capabilities

Potential Tesla Vehicle Deliveries

challenges rivals to innovate or being left behind in the automobile arena

When will the competition truly heat-up?

500000

It isn't likely is that none of the global automaker giants will challenge Tesla as it grows.

Giving away Patents: Stroke of Ingenuity?

High Volume production of lower-cost car begins

Important step to equalize the main auto-industry between electric cars and

Gigafactory completed, production of lower cost car begins

petroleum cars Brand recognition will take centre-stage: consumers will immortalize Tesla as pioneers & game-changers of the Auto industry

Volume Model X production begins 75000

conventional auto-industry

2658 2012

22450 2013

200000 150000

If Tesla’s technology is being harnessed by competitors alike, Tesla can summon an army of lower cost companies on their side to attack the

300000

100000

35000

2014

2015

2016

2017

2018

27 2019

2020