Tesla Motors’ Strategy to Revolutionize the Global Automotive Industry

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Transcript of Tesla Motors’ Strategy to Revolutionize the Global Automotive Industry

  • The Tesla Model S had received widespread praise and acclaim not only as the worlds best electric vehicle but also as a product far superior to any other brand or model of electric vehicle cur-rently on the market. In 2013, the Model S was the most awarded car in the United States. In picking the 2014 Tesla Model S as the best overall model out of 260 cars tested, Consumer Reports awarded the Model S a score of 99 out of 100 (the highest score any vehicle had ever received from the mag-azine) and described it as a technological tour de force with blistering acceleration, razor-sharp handling, compliant ride, and versatile cabin.1 The sleek styling and politically correct power source of the Tesla Model S was thought to explain why thousands of wealthy individuals in North America and Europeanxious to be a part of the migration from gasoline-powered vehicles to electric-powered vehicles and to publicly display support for a cleaner environmenthad become early purchasers and advocates for the vehicle. Indeed, word-of-mouth praise for the Model S among current owners and glowing articles in the media were so pervasive that Tesla had not yet spent any money on advertising to boost customer traffic in its showrooms. In a presen-tation to investors, a Tesla officer said, Tesla own-ers are our best salespeople.2

    In fall 2013, the Model S ranked as the best-selling car in 8 of the 25-wealthiest zip codes in the United States, as ranked by Forbes.3 At the top of that list was Atherton, California, a Silicon Valley town near Teslas Palo Alto headquarters where the median home price in 2013 was $6.65 million. Other

    Tesla Motors Strategy to Revolutionize

    the Global Automotive Industry

    Arthur A. ThompsonThe University of Alabama

    In his February 2014 Letter to Shareholders, Elon Muskan early investor in Tesla Motors and its current chairman and CEOwas pleased with the

    companys future prospects. Teslas strategy was producing rapidly improving results, and by all indi-cations the companys execution of the strategy was very much on track. Musks report left little doubt that Tesla Motors was making good progress in its journey to manufacture premium-quality, high-performance electric vehicles capable of winning widespread customer acceptance and accelerating the worlds transition from carbon-producing, gasoline-poweredvehicles to energy-efficient, environmentally respon-sible electric vehicles.

    After suffering five years of losses total-ing $943.5 million on combined revenues of just $861 million between 2008 and 2012, Tesla delivered 22,477 of its recently introduced Model S vehicles to customers in 2013. Production rates had recently increased to 600 vehicles per week and were expected to reach 1,000 vehicles per week by year-end 2014. Tesla reported global revenues of $2.0 billion in 2013 and over $100 million in net income on a non-GAAP basis. Deliveries to customers in Europe began in August 2013, and deliveries to China were set to begin in spring 2014the companys sales show-room in Beijing was already generating the heaviest traffic of any of Teslas showrooms worldwide. Musk was confident that sales of Tesla vehicles in Europe and China would exceed sales in the United States in two, or no more than three, years. Tesla was well along on its plan to begin producing two new mod-els in 20142016an SUV and a mid-priced sedan. The companys stock price had climbed from $34 in January 2013 to over $250 in March 2014.

    CASE 17

    Copyright 2014 by Arthur A. Thompson. All rights reserved.

  • C-246 PART 2 Cases in Crafting and Executing Strategy

    posh Silicon Valley zip codes where the Model S had a leading market share included Los Altos Hills, Portola Valley, Montecito, and Woodside. Almost 5,000 new Model S Teslas were registered in Cal-ifornia in the first six months of 2013, equal to 1 Tesla for each 108 registrations of new passenger cars. However, Washington state had the distinction of having the highest ratio of Model S registrations relative to all other new car registrations in the first half of 20131 Model S per 100 new passenger car registrations. The high densities of Model S sales in California and Washington were attributed partly to the relatively large percentages of residents in these states who were green-minded. But the popularity of the Model S relative to other premium-priced lux-ury cars in the United States was widespread. In the first nine months of 2013 in the United States, unit sales of Teslas Model S sedan (14,200 vehicles) were higher than sales of Mercedes top-of-the line S-Class sedan (9,600 vehicles), BMWs 700 series luxury sedan (9,600 vehicles), the Lexus LS 460 luxury sedan (9,200 vehicles), BMWs 600 series (8,000 vehicles), Audis premium-priced A7 series (6,700 vehicles), and the Porsche Panamera sedan (4,300 vehicles).4

    According to Jessica Caldwell, senior analyst at Edmunds.com (a respected website for automotive industry data):5

    Influential people set trends while the mainstream aspires to follow. Weve seen this countless times in many different retail sectors. Cars are no different, albeit more expensive than most other purchases. Additionally, with the proclivity of tech geek being chic, the Sili-con Valley area will set trends faster than traditional high-income markets like New York that have roots in (highly vilified) banking.

    So, as Tesla increases the number of models on offer and price points, it could find itself in demand by more than just those in these wealthy enclaves. After all, most luxury car companies find the most volume in their entry-level vehicles.

    Headed into 2014, Tesla Model S owners in 20 countries were driving their vehicles almost 1 million miles every dayand had driven their vehicles a total of 200 million cumulative miles. Management believed that more than 80 percent of Model S owners were using their Model S as their primary vehicle. All the available evidence pointed to Teslas Model S as being the best electric vehicle the world had ever seen.

    COMPANY BACKGROUNDTesla Motors was incorporated in July 2003 by Martin Eberhard and Marc Tarpenning, two Silicon Valley engineers who believed it was feasible to produce an awesome electric vehicle. The name-sake of Tesla Motors was the genius Nikola Tesla (18561943), an electrical engineer and scientist who once worked with Thomas Edison and later became known for his impressive inventions (of which more than 700 were patented) and his contribu-tions to the design of modern alternating-current (AC) power transmission systems and electric motors. Tesla Motors first vehicle, the Tesla Roadster (an all-electric sports car) introduced in early 2008, was powered by an AC motor that descended directly from Nikola Teslas original 1882 design.

    Financing Early Operations

    Eberhard and Tarpenning financed the company until Tesla Motors first round of investor funding in February 2004. Elon Musk contributed $6.35 millionof the $6.5 million in initial funding and, as the companys majority investor, assumed the posi-tion of chairman of the companys board of direc-tors. Martin Eberhard put up $75,000 of the initial $6.5 million, with two private equity investment groups and a number of private investors contributing the remainder to Teslas initial funding as well.6 Shortly thereafter, the company had a second round of inves-tor funding amounting to $13 million, with Musk and a third private equity investment group being the principal capital contributors.

    In May 2006, a third round of investor funding raised $40 million in additional capital for the young company, the majority of which was contributed by Elon Musk and an investment group called Tech-nology Partners. This third round included capital contributions from Google cofounders Sergey Brin and Larry Page, former eBay president Jeff Skoll, Hyatt heir Nick Pritzker, and three other venture capital firms. A fourth round of private financing in May 2007 brought in an additional $45 million in new investment capital. But the company continued to burn through the investment capital that had been raisedlargely because of heavy product R&D expenditures and several product design changes. These costs forced a fifth financing round that raised $40 million in investment capital in February 2008.

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  • CASE 17 Tesla Motors Strategy to Revolutionize the Global Automotive Industry C-247

    at a price of $17 per share; of the shares sold to the public, 11,880,600 shares were offered by the com-pany and 1,419,400 shares were offered by selling stockholders. In addition, the selling stockholders granted the underwriters a 30-day option to purchase up to an additional aggregate of 1,995,000 shares of common stock to cover overallotments, if any. Tes-las shares began trading on Tuesday, June 29, 2010, on the NASDAQ under the ticker symbol TSLA. Tesla Motors was the first American car company to go public since Ford Motor Companys IPO in 1956. In October 2012, Tesla completed a follow-on offer-ing of 7.97 million shares from which it received net proceeds of $222.1 million.

    Management Changes

    In August 2007, with the company plagued by pro-duction delays, cofounder Martin Eberhard was ousted as Teslas CEO and replaced with an interim CEO who headed the company until Zeev Drori, an Israeli-born American technology entrepreneur and avid car enthusiast, was named the companys presi-dent and CEO in November 2007. Drori was specifi-cally tasked by the companys board of directors to get the delayed Tesla Roadster into production and start deliveries to customers as fast as possible. To combat continuing production delays (the latest of which involved problems in designing and develop-ing a reliable, tested transmission that would last many miles) and out