The Tesla Acquisition

Archit Lohokare (archit_lohokare@mba.berkeley.edu)

Sam Kanakamedala (sam_kanakamedala@mba.berkeley.edu)

Shone Tran (shone_tran@mba.berkeley.edu)

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TABLE OF CONTENTS

Executive Summary ........................................................................................................2

Market and Competitive Landscape ............................................................................2

Product and Technology Mix .......................................................................................3

Core Competencies .....................................................................................................3

Culture-Fit and Talent Acquisition................................................................................3

Why Should Apple Enter the Automobile Market? ........................................................4

Strengths: Why is Apple the right company to redefine the in-car experience? ...........4

Product Development..............................................................................................4

Brand and Consumer Loyalty ...................................................................................4

Innovative Marketing...............................................................................................4

Leadership ...............................................................................................................5

Ecosystem ...............................................................................................................5

Weaknesses: What is preventing Apple from entering this market? ............................5

Partnership Development ........................................................................................5

Expertise in the Automotive Market ........................................................................5

Opportunities: Why should Apple invest in this market? .............................................5

Are consumers asking for a change? ........................................................................6

Are the consumers willing to spend? .......................................................................7

What are the current solutions and what are consumers willing to adopt?..............8

Threats: Apple’s Competitors in the Car Market ..........................................................9

Building Blocks: The Apple Ecosystem in the Car..........................................................11

Why Tesla? ...................................................................................................................12

Culture Fit and DNA ...................................................................................................12

Growth Market..........................................................................................................12

Controlled Platform and Ecosystem...........................................................................13

Strategic Partnerships................................................................................................14

Product and Technology Fit .......................................................................................14

Tesla’s Financials ..........................................................................................................15

Conclusion ....................................................................................................................16

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Executive Summary

On October 18th 2010, Apple© (NASDAQ:AAPL) announced record revenues of $20.34

billion for its fiscal year ended September 25th 2010 with over $51 billion in cash on its

balance sheet, begging the question: “What is Apple going to do with all that money to

return the most shareholder value?” One immediate option is to start issuing dividends

again, but that would be inconsistent with Apple’s strategy over the last 15 years. The

firm has clearly proven that plowing cash back into R&D to continue leading the pack

has yielded generous returns for shareholders in the long-run. Vertical integration

would not generate much value because there is little margin left for Apple to gain by

bringing its supply chain in-house. Beefing up R&D and product development further for

current or roadmap products realistically would not push Apple much ahead of the

technology curve than it already is, and their existing R&D strategy is clearly on the right

track.

The only real way for Apple to substantially grow is to expand into new markets. They

are fundamentally a consumer technology company with products that have already

gained significant mindshare of consumers at home, school, work, and the gym. In each

of these settings, Apple has created paradigm-shifting products that completely

revolutionize user experiences for TV, video, personal computing, reading, phone,

music, and fitness. The one remaining avenue that Apple captures little consumer

awareness, and which could make the Apple experience truly omnipresent, is the car.

We propose that Apple strategically acquire Tesla Motors (NASDAQ:TSLA), leveraging its

cash position to make a foray into the automotive industry for future top-line growth

and profitability. This summary discusses the synergies of such an acquisition.

Market and Competitive Landscape

Automobiles can be envisioned as a hardware platform, much like computers and

smartphones. The automobile market is still relatively untapped by large consumer

technology companies like Apple, although that is rapidly changing. Google’s alliance

with Toyota in developing an unmanned Prius and Ford’s alliance with Microsoft to

develop Sync, an in-car communications and entertainment system, indicate this

market’s promise and readiness for disruptive innovation. Apple’s minimal participation

in this market to date can be effectively jumpstarted by this acquisition. Tesla’s strategic

alliances with Toyota and Daimler, who are also investors in Tesla, give Apple access to a

large new market it does not serve today.

According to iSuppli, smartphone-based systems are increasingly taking over the in-car

navigation and dashboard systems. This year’s projections are nearly 81 million units

and iSuppli forecasts a tenfold increase by 2014 with an explosion to 297 million

units. This market represents a significant opportunity for Apple to redefine the

consumer experience much like it did with the mp3 player, smartphone and tablet. Tesla

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would be the ideal launch pad for Apple to bring a fresh perspective on human-car

interaction. By taking the “Apple approach” at redefining contemporary dashboard

systems, Apple can embed its ecosystem into the automobile to act as a channel for

selling more of its devices, software, ads, and multimedia.

Product and Technology Mix

The increasing intertwining of a car’s mechanical systems with computing systems is

evidenced by the advanced dashboard communications and electronics in modern cars.

The electric car is a new platform to host Apple’s iOS based devices and can serve as a

gateway to the iTunes and Apps Store. Additionally, geo-location based applications and

services, led by Foursquare and GoWalla, present a natural fit with the car, the most

pervasive tool of personal mobility today. These products point to increased revenue

opportunities for Apple and developers through Ping, the Apps store and iAds network.

Additionally, iTunes in the car is sure to give a big boost to Apple’s ventures into music

in the cloud and give it a leg-up over emerging competitors like Pandora and traditional

ones like FM and satellite radio. The Apple TV platform, modified for the car,

revolutionizes passenger entertainment which is currently a fragmented market and far

behind home entertainment. Bringing products to the automobile truly completes the

Apple experience, with Apple at home, in the office, in the car, and on the go. There is

undoubtedly an immediate synergy between Tesla’s cars and Apple’s products that will

translate into higher growth and profitability for both companies.

Core Competencies

Apple’s demonstrated track record of innovative design and ability to rethink user

experiences shows great potential for enhancing the in-car experience. The Tesla brand

bolstered by its superbly-designed customer focused products in the burgeoning electric

car market draws a parallel to Apple’s brand in consumer technology. Tesla hiring

George Blankenship, one of the key players responsible for Apple’s enormously

successful retail strategy, also points to a commonality in the companies’ marketing and

distribution philosophies, which are Apple’s core competencies.

Culture-Fit and Talent Acquisition

Tesla’s strong culture of disruptive product innovation resonates with Apple’s culture.

Both Tesla and Apple boast risk-taking industrial designs and marketing teams that fit

naturally together. The acquisition will also bring with it Elon Musk, co-founder of

Paypal, SpaceX and Tesla Motors. Musk has a history of developing and bringing to the

market game-changing ideas, much like Steve Jobs. His success with Paypal

demonstrates familiarity of software and the Internet, making him effective in

collaborating with Jobs to revolutionize the in-car experience and bring growth to Apple.

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Why Should Apple Enter the Automobile Market?

The hardware technology that Apple brings to the Automobile industry is not

particularly revolutionary or even really on the very cutting edge. In fact, there is

already a $38.3B infotainment & telematics market in 2011 that Apple has no part of,

which uses similar technology. However, the existing market is very fragmented with

solutions that do a poor job of enabling consumers to achieve the connected lifestyles in

a car, which they have become accustomed to at the home, office, and gym.

To answer the question of why Apple should enter the automobile market, consider first

the strengths which enable Apple to redefine the user experience in a confused market,

and then follow up with what challenges might prevent Apple from succeeding.

Strengths: Why is Apple the right company to redefine the in-car

experience?

Product Development

Apple, in essence, is a consumer technology company with a consistent and superlative

track record of revolutionizing consumer experiences in existing markets. The Macintosh

redefined people’s interactions with the computer and what they expect functionally

and aesthetically from a computer. The iPod and iTunes consolidated the portable music

experience to a fragmented portable music market. The iPhone, close on iPod’s heels,

has opened new vistas in mobile communications, providing direction and driving

forward a refreshed vision for mobility. The initial success of the iPad brought fresh

perspective to the tablet market, revitalizing what has time and again been labeled as a

‘dead market’. Apple’s strength lies fundamentally in its mastery of redefining the way

humans interact with technology through superiorly designed hardware and software

products.

Brand and Consumer Loyalty

These successes have helped create an aura around the Apple brand and spurred a

generation of die-hard loyalists. A large percentage of these individuals are early in the

technology adoption curve and their enthusiasm in evangelizing new technology has

given them an unparalleled sphere of influence in the market. The Apple brand itself will

go far in convincing consumers that the Apple in-car experience is what they’ve been

waiting for.

Innovative Marketing

The ‘Apple-reality-distortion-effect’, a term sometimes used in jest, nevertheless sums

up Apple’s expertise in marketing its products to the end consumer. The coherence and

the sheer brilliance of its product definition, distribution and retail strategies, and

consumer communications and advertising are known to be legendary in the

contemporary technology industry. The company has consistently been able to weave

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the marketing mix with complete perfection, from the consumer buying experience to

customer satisfaction and retention.

Leadership

Larry Ellison, founder and CEO of Oracle Corporation, famously described Steve Jobs as

an individual with the mind of an engineer and the heart of an artist. Jobs, undoubtedly,

is one of the greatest visionaries the technology industry has seen till date. That coupled

with Apple leadership’s in product design and strategy execution is a strong

differentiator and a definite strength.

Ecosystem

Probably one of the most compelling strengths Apple possesses is the ecosystem it has

in place to monetize almost all aspects of consumer lifestyles, including music, radio,

and video entertainment, email and mobile communications, computing, reading,

fitness, etc. This ecosystem, if brought to the car, opens up unlimited revenue potential

for Apple, all by leveraging and repurposing existing products and infrastructure.

Weaknesses: What is preventing Apple from entering this market?

Partnership Development

Historically, Apple’s go-to-market initiatives have included few partners or OEMs that

can potentially accelerate product penetration in the consumer space, albeit

inorganically. In the car market, this might be a shortcoming considering the difficulty

to booting up product sales without the support of existing carmakers.

Expertise in the Automotive Market

The introduction of new technology in the car is characterized by a lengthy and intricate

qualification process. Building the right technology and navigating through this process

requires industry knowledge and experience, which Apple presently does not have.

Additionally, Apple’s location away from the automobile hub in Detroit could impede

how quickly and effectively it could penetrate the automobile market because

automotive talent is not abundant in Silicon Valley.

Opportunities: Why should Apple invest in this market?

To gauge the attractiveness of the automotive infotainment market to Apple, three

important questions to ask are:

• Are the consumers asking for change from the current solutions?

• Are the consumers willing to pay for it?

• What are they currently paying for, and what will they buy in the future?

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Are consumers asking for a change?

Consumers today want to stay connected in the car. Strong data exists from CEA1

showing that consumers are broadly interested in the following features built into a car:

Figure 1. Activities using Smartphone-integrated systems

Additionally, as smartphones and mobility computing become more pervasive, driver

and passenger expectations from in-vehicle electronics have been evolving. CEA also

describes the results of a survey administered to driver and passengers separately for

their expectations of what activities can be performed with in-vehicle systems:

1 Consumer Electronics Association, Sep 2010, “Staying connected on the Go: A Look At In-Vehicle

Smartphone Integration Systems”

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Table 1. Driver & passenger activity preference in the car

As Table 1 illustrates, the driver and passenger requirements today range from basic

navigation and audio/video entertainment to complex activities such as social

networking, gaming, and location-based services over the Internet. People are clearly

looking for a richer, more holistic, revolutionary in-car experience that does not disrupt

their ongoing activities outside of the vehicle.

Are the consumers willing to spend?

Data shows that consumers are willing and ready to spend. In a survey by CEA on

consumers readiness to spend on in-vehicle integration systems, over 64% of

respondents said that they would buy the system within 2 years, and about 45% said

that they would buy it within 1 year.

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Figure 2. Time frame of consumer’ intent to spend

What are the current solutions and what are consumers willing to adopt?

Having established that the car consumers are increasingly getting vocal about

demanding to stay connected in the car, the next logical question is, “Are the customers

today actively buying alternatives, even though they do not fully address their needs?

What are they spending their money on?” The following table shows the current

factory-to-dealer sales which does not even include the mammoth after-market and

portable systems. This market is alone expected to generate about $9B in 2011.

Figure 3. In-Vehicle Technologies Market of Factory-Dealer Sales

Source: Consumer ElecSource: Consumer ElecSource: Consumer ElecSource: Consumer Electronics Associationtronics Associationtronics Associationtronics Association

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Additionally, according to ABI Research2, the global automotive telematics3 market is

expected to generate over $38B in 2011, and grow from 37 million users to more than

211 million by 2015. The following histogram shows how the consumers are addressing

their needs in this market and what they are spending on:

Figure 4. Current Telematics Market

Threats: Apple’s Competitors in the Car Market

Research shows us that a number of major technology companies have already

recognized the potential in the car market and have taken steps towards penetrating it.

Considering the “Winners take all” phenomenon in the technology industry as aptly

demonstrated by Google Search, Facebook Social Networking, Microsoft Windows and

innumerable other examples, this could be a potential lost opportunity and a future

threat for Apple if ignored today.

Microsoft has just released Windows Embedded Automotive 74 operating system for in-

car telematics and infotainment systems. Additionally, its partnership with Ford to

release SYNC5 and with Nissan to revamp its touch screen information hub in the new

LEAF electric car is a clear step in that direction. Fiat is also bringing its Microsoft-

powered Blue&Me6 system to North America for the first time in Fiat 500.

2 Wireless News: NA, September 02, 2010, “ABI Research: Global Number of Consumer Telematics Users

to reach 211 Million by 2015. 3 Automotive telematics is the idea of integrating a car as completely as possible. Automotive telematics

includes putting cellular services, GPS systems, weather displays, and dozens of other technological ideas

into a car to serve all the potential needs of a driver – eHow.com, 2010.

4 http://www.microsoft.com/windowsembedded/en-us/products/windows-embedded-

automotive/default.mspx 5 http://www.ford.com/technology/sync/

6 http://www.blueandme.net/blueandme/index.aspx?brand=fiat&lang=en

Source: ABI ResearchSource: ABI ResearchSource: ABI ResearchSource: ABI Research

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The Google Andriod platform is also making in-roads into the in-vehicle infotainment

market. The Chevrolet Volt, GM’s much anticipated plug-in hybrid, will be one of the

first cars to connect with Andriod applications. Also, recent news7 about Google working

with Toyota to develop a self-driving artificially intelligent vehicle is evidence of the

company’s ambitious plans in this space.

Research in Motion (RIM) recently acquired QNX software systems and Dash Navigation

Systems, two companies specializing in in-car telematics and infotainment systems. QNX

Software Systems is the creator of Neutrino an operating system that is deployed across

a range of markets and is licensed for use in more than 17 million car systems.

Lastly, Nokia and Intel have teamed up to create MeeGo8 for a new era of mobile

computing. The European car industry alliance GENIVI9 has officially chosen MeeGo as

its reference release for in-car infotainment system.

These examples are testament to the fact that there is a revolution of the in-car

experience taking place where connectivity and integration with consumer lifestyles is a

lucrative problem to be solved by consumer technology companies.

7 http://www.nytimes.com/2010/10/10/science/10google.html

8 http://meego.com/devices/in-vehicle

9 http://www.genivi.org/

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Building Blocks: The Apple Ecosystem in the Car

Figure 5. The Apple ecosystem’s synergies with the car

Apple’s entry into this market is natural considering that the company already has most

of the building blocks for this system in place and already monetized. The Apple

ecosystem, embedded into the car platform via its iOS devices will serve to consolidate

the fragmented consumer experiences that exists today.

For instance, the consumers’ entertainment needs could be addressed by iTunes in the

cloud, the AppleTV platform, and Games on the iOS. Requirements related to

navigation, car management, security and such could be addressed through the

phenomenon of the App Store.

Driver safety is being increasingly being compromised by usage of smartphones in the

car to SMS, check directions, conduct phone conversations, etc. A recently

released study10 by the VirginiaTech Transportation Institute found that truck drivers

who were texting were 23 times more at risk of a “crash or near crash event” than “non-

distracted driving.” As per talking on a cell phone, the same study found no increased

risk for truck drivers and 1.3 times the risk for car drivers. Apple could make the driver

experience safe through innovating a new experience using its resources like Siri Voice

Recognition based Personal Assistance and Facetime.

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http://www.vtti.vt.edu/PDF/7-22-09-VTTI-Press_Release_Cell_phones_and_Driver_Distraction.pdf

iOS devices & dashboard

system

Location based iAds

ITunes in the Cloud/Internet Radio

AppleTV, Games

Driver-Safe communication Siri-VR

based PA

App Store/Local Apps/Electric Vehicle

Management Apps

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IAds, a very recent addition to this ecosystem, has the potential of leveraging the

mobility of the car with location based advertising. Not only is this a future revenue

source for Apple, but also presents a strong value proposition to developers, retailers, as

well as the thrifty consumer.

Why Tesla?

Culture Fit and DNA

Elon Musk, Tesla’s founder and CEO, believes Tesla is closer to Apple or Google than to

an automobile company like GM or Ford. The electric car is, for all practical purposes,

consumer technology and Tesla, like Apple, is in the business of redefining the

consumer’s experience interacting with and using technology. Both Apple and Tesla

boast versatile industrial design and consumer marketing teams that have

entrepreneurial streak in them. The close culture and value fit is further evidenced by

Tesla hiring George Blankenship, Apple’s former retail executive, to apply the Apple

values at transforming the consumer buying experience.

Growth Market

The nascent electric vehicle market is positioned for explosive growth over the next

decade. IDC Energy Insights11 estimates that by 2015, there will be greater than 2.7

million plug-in electric vehicles (PEV) on the road worldwide, with 885,346 vehicles in

North America alone. This translates into a market in excess of $81B.

Figure 6. PEV annual sales growth

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IDC Energy Insights “Business Strategy: The Coming Plug-In Electric Vehicle Rollout – Forecasting the

Market”

Source: IDC

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Government subsidies and local market’s requirements for zero emissions will further

propel Asian annual sales to eclipse North American by 2015, and by the end of 2020,

there could be in excess of 8.9 million PEVs driving across the globe. That represents a

market of over $270B. An important date to note in Europe for PEVs is 2020, as the EU

commission has set for itself to cut greenhouse gas emissions by 20%, increase share of

renewable energy to 20% and improve energy efficiency by 20% by 2020. This is sure to

introduce a new urgency in adopting the PEV in the coming decade. Using IDC Energy

Insights aggressive growth scenario for PEVs shown below, the PEV penetration into the

worldwide automobile market could potentially be in excess of 10 million, translating

into a $300B revenue opportunity.

Figure 7. Cumulative growth of PEVs on the roads worldwide assuming three scenarios

Controlled Platform and Ecosystem

The current in-vehicle telematics and infotainment market is fragmented with a number

of point solutions solving differing customer needs. As such, the entire user experience

leaves a lot to be desired. Additionally, the installation process for these devices often

includes modifying the vehicle interiors and attaching contraptions to the car that

diminish the experience.

This draws strong parallels with the traditional MP3 player market and to some extent,

the smart phone with its fragmented applications market. Apple, through control over

the iPod and iPhone platform, revolutionized the user experience and redefined the way

people interact with these devices. Apple can bring this expertise to Tesla through an

acquisition maintaining control over the underlying platform, the Tesla car.

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Strategic Partnerships

Tesla brings with it several strategic partnerships with automakers like Toyota and

Diamler. Tesla plans to collaborate with these companies, who use Tesla’s electric drive

train and battery technology in their cars, to bring out an entire generation of new

vehicles such as eRAV4, Smart, Roadster, Model S, etc.

Apple, through Tesla’s acquisition, can penetrate the in-vehicle telematics and

infotainment market more effectively leveraging these partnerships.

Product and Technology Fit

The Plug-In Electric Vehicle (PEV) presents the ideal platform to serve as a showcase for

the confluence between vehicle and computing technology.

Figure 8. The future EV Telematics Package

The above diagram from a Frost and Sullivan12 whitepaper on the Electric Vehicle (EV)

market shows how the ideal EV Telematics package is the confluence of four distinct

packages, viz., Navigation Package, Points of Interest (POI) Package, Vehicle to Grid

(V2G) Communication, and Other value added services.

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Frost & Sullivan, 2010, “Outlook of the Global Telematics and Infotainment Market -2010 and Beyond”

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A number of these services or package components are, in all essence, Apps that can

benefit from the wide Apple App developer network, and the App store infrastructure.

The EV market, thus, has the potential to spur an entire generation of EV vehicle

management Apps. Frost & Sullivan further goes on to summarize its key findings into

five points, as described below:

Figure 9. Key findings and conclusions for EV market

Tesla’s Financials

While this paper doesn’t aim to provide a valuation recommendation for Tesla, some of

the important multiples and their comparisons have been displayed in the key financial

statistics below.

Statistic Tesla GM Toyota Honda

Market Cap $3.29B $50.70B $122.87B $66.40B

Price/Earnings N/A 142.62 18.42 9.02

Price/Cash Flow 34.07 0.99 2.53 4.51

EV/Revenue 33.01 0.19 0.91 0.92

EV/EBITDA -30.09 3.53 9.54 8.02

Enterprise Value (EV) 3.27B 25.31B 220.52B 101.36B

Revenue 99.04M 131.04B 243.63B 109.88B

EPS -1.27 0.24 4.25 4.08

ROA -28.53% 0.39% 1.31% 3.71%

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ROE -82.20% 5.30% 5.49% 14.63%

Debt/Equity 26.11 28.8 118.15 92.9

Book Value per share 2.36 15.17 78.44 29.23

Table 2. Tesla’s key financial statistics

The table gives a quick snapshot of some important Tesla financial statistics13 in

comparison with the major automobile manufacturers today. The table also provides

four critical ratios that can be used in valuation analysis:

• Price/Earnings or P/E Ratio

• Price/Cash Flow Ratio

• Enterprise Value/Revenues or EV/Revenues Ratio

• Enterprise Value/EBITDA Ratio

Tesla’s excellent fourth quarter, 2010, results have caused its market cap to increase by

approximately 61% in the past three months, as shown in the chart below sourced from

Yahoo Finance.

Figure 10. Tesla’s 3 month stock performance

Conclusion

The car industry today is at the cusp of a revolution, one that marries together the

consumer’s desire for continuous connectivity with the inevitable transformation of

today’s automotive technology. The present in-car experience is fraught with a range of

issues ranging from an incoherent and stressful buying experience to safety risks and

inconsistent user experience. The timely advent of the electric drive train and electric

vehicles in general has reignited the consumer’s need and expectation of a clean and

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Snapshot taken on 28th

November, 2010.

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sustainable transportation experience. The intelligent nature of electric vehicles

fundamentally urges the need for connectivity and integration which Apple is best

positioned to provide through its ecosystem. Acquiring Tesla presents Apple with the

unique opportunity to address these consumer needs and revolutionize the field of

human-vehicle interaction.