CONSULTING PROJECTAlex Field, Thomas Claes Johnson, Mac McGuire, Parker Powell, Sindy Wang

Agendao Tesla History: Key Eventso Industry S-Curves: Car & Automobile Manufacturingo Tesla as a Disruptive Technologyo Tesla: Sources of Attractivenesso How Do Innovations Diffuse? A Look into Teslao Issue: Too Expensiveo Recommendation: Cut Costso Tesla’s Efforts in Cost Cuttingo Recommendation: Create State Incentive Programso Issue: Insufficient Infrastructureo Recommendation: Increase Infrastructureo Issue: Straight-to-Consumer Retail Model Blocked by Lobbyistso Recommendation: Increase Spending on Lobbyingo Conclusion

2003

2006

2009

2010

2012

2014

2013

2015

Tesla Motors is incorporated

Begins production of the Roadster

Model S unveiled$465m loan from Department of EnergyDaimler investment subsidiary buys 19.1m shares of convertible preferred stock

TSLA IPO launched

Panasonic purchases 1.4m shares

Toyota purchases 2.9m sharesAnnounced partnership to develop powertrain system with Toyota RAV4

Started building Supercharger Network across AmericaUnveiled designs and plans for Model X

ExtremeTech “Best Selling Luxury Car

Gigafactory announcement200th Tesla Charging Station opened (2 months later, 300th opened)Musk announces anyone can use their patent in good faith

Consumers report “Best Overall Car”400th Tesla charging station- 1st solar powered charging stationModel 3 announcement- Before incentives: $35k- After incentives: ~$25k

Tesla History: Key Events

?

Industry S-CurvesCar & Automobile Manufacturing

Time

EV

Hybrid

Performance

Internal Combustio

n

Fuel Cell

Diminishing returns on R&D?

Exceeding market needs?

New S-curve

close to inflection

point?

Identified market

segment of early

adopters?

Enter market

Market research

R&D partnership

Marker on strategic

game board

Status Quo

Disruptive Technology

NO

NO

NO

NO

YES

YES

YES

YES

• First developed in 1860, the internal combustion engine has long been our most commonly used source of power to move automobiles

• At max efficiency, our most modern engine operates at a maximum thermal efficiency of 25-30%

• 70% of the thermal energy released by consumed gasoline is wasted

“We are currently in a stage at which improvements in internal combustion engines are running into diminishing returns”

Tesla: Disruptive Technology Diminishing Returns to R&D

• Development of Tesla batteries currently at inflection point • Current Tesla estimates place battery at $30k-40k• Industry-wide cost estimates declined by 14% annually between 2007 and

2014• $1,000 per kWh to around $300 for market leaders, including Tesla• Battery costs will reach $230 per kWh by 2018

• Estimated further cost reduction if production doubled: 6%-9% per battery• Batteries are a major cost driver for fully electric vehicles

• As they cheapen, so will total ownership cost

Tesla: Disruptive Technology New S-Curve Close to Inflection Point

Tesla: Disruptive Technology New S-Curve Close to Inflection Point

Consumer Appeal• Sleek design• Quiet in drive• 0 to 60mph in under

4 seconds• No traditional fuel

costs

Environmental Appeal• Zero emissions• Sustainable energy

source

Sources of Attractiveness

How Do Innovations Diffuse?A Look Into TeslaRelative Advantage

Is it better than the product it replaces?• More environmentally friendly, cheaper in the long

run• BUT it is too expensive

CompatibilityIs it consistent with existing value and experiences?

• You drive it as you would any other car• BUT charging stations are not widely available

Complexity Is it difficult to understand and use?

• You drive it as you would any other car• Could carry perception of being technologically

complexTrialability

Can the product be experimented with on a limited basis?• Test drives can be requested online or through retail

stores• VIP test drives

Observability Are product usage and impact visible to others?

• Highly visible in news, social media• BUT not many people own it in real life

Price & Cost per unit

Industry Average

Competitor

Margin

Costs

Costs

MarginPriceav

gCostavg

$32,000$28,160

$100,000

50,000

0

Issue: Too ExpensivePrice/Cost Comparison

Recommendation:Cut Costs

• Decrease cost per unit of batteries and production process through economies of scale by doubling current production

• Estimated 8% decrease• Continue to partner with companies that can utilize lower

capital cost to make car more affordable• US Bank does not operate on East Coast, find regional partners

Tesla’s EffortsCost Cutting

Estimated production costs per battery:- Market Average: $400/kWh- Tesla: $300/kWh

“If batteries fall as low as $150/kWh could lead to paradigm shift in vehicle tech”

• At current rate, a conservative estimate by 2018 is $230/kWh

Gigafactory currently under construction• Instrumental to dramatically reducing cost per unit and increasing supply

of tech• Will decrease cost of Tesla battery by more than 30% by 2020• Will be able to meet estimated world demand in 2020 but must avoid

pitfalls of low utilization if demand does not meet expectations

Bay Area factory cost < one third of US average cost ($1b)• Focused attempt to lower costs in order to compete with conventional car

models

2014 Partnership with US Bank• Decreases leasing cost by 25%

• 37/50 states have incentive programs to promote purchase of hybrid or EV cars

• In addition to existing Federal Tax exemption of $7,500•Target remaining 13 states

• The Northeast presents a major market for Tesla• Highly educated/environmentally aware market• BUT most of it has no current state incentives

• Tesla lobbying headquarters are in Carson City, California due to gigafactory lobbying efforts, but it is no longer a strategically positioned office

• The West Coast has adopted technology well• Focus lobbying efforts on NE

Recommendation:Create State Incentive Programs

• 400 Supercharger stations vs. 168,000 retail fuel locations for internal combustion engines

• Supercharger 30 minute charge = 170 miles• Regular charging stations outdated, 1 hour charge = 30-60

miles

Issue: Insufficient InfrastructureUS Supercharger Locations

Recommendation:Increase Infrastructure

Partner with regional utility providers• Existing grid has enough excess capacity to support over 150 million

electric cars (75% of all cars driven in USA)

Why would utility providers partner with us?• SolarCity (founded by Elon Musk) has ability to underprice current

providers by reselling stored energy back into grid• This would allow Tesla/SolarCity to leverage their threat to industry

and gain favorable deal• More outlets = more revenue

Convenience of charging locations will help in the diffusion of EV technology:• Increased compatibility resulting in higher observability• Increased value of product, stimulating revenues

Issue: Dealership PACs Preventing Straight-to-Consumer Retail ModelLobbyists/Tesla Political Contributions

New Jersey (2014) Texas (2013)0

500000

1000000

1500000

2000000

2500000

3000000

3500000

LobbyistsTesla

Polit

ical

Con

trib

utio

ns (

$)

• Tesla lost against Car Dealership PAC group in both New Jersey and Texas, preventing their ability to sell directly to customers

• Between 2003 and 2012 Car Dealership PACS spent $140m,compared to Tesla’s $500k

• Average annual expenditure difference of $15,611,111 vs. $55,555

Loss in NJ stats•2nd Most liquid millionaires as % of population in America•456,949 millionaires•Unable to meet large possible customer base

• Inability to retail in both Texas and NJ creates loss of ability to target 700,000 millionaires

•0.25% of this group = 17,500 cars •17,500 purchases 15% margin (25% actual) increase of $262m in NI

Issue: Dealership PACs Preventing Straight-to-Consumer Retail ModelImplications

• Current Dealership PACs are preventing Tesla from selling• Tesla should increase lobbying expenditures to counter

Dealership PACs and to gain state acceptance •4x-6x current expenditures• Increasing total to approximately $4m-$6m

Recommendation:Increase Spending on Lobbying

ConclusionIssues• Too expensive• Insufficient infrastructure• Dealership PACs are preventing straight-to-consumer

retail model

Recommendations1. Cut costs:

- Decrease cost per unit- Create state incentive programs with a focus on the Northeast

2. Increase infrastructure:- Partner with regional utility providers

3. Lobby:- Increase lobbying expenditures

Appendixo PEST: Key Trendso Industry: Car & Automobile Manufacturingo Five Forces Structural Analysiso Industry: Trends & Dynamicso Analysis of Strategic Effectivenesso Key Competitor Analysiso Strategic Positioning of Industry Firmso Sources of Competitive Advantageo Tesla: Key Activitieso Tesla’s Strategic Issues

Key TrendsCar & Automobile Manufacturing

P

E

S

T

● Government Regulation: Increased environmental standards for global supply chain, factory emissions, car emissions in CAFE, and general safety standards

● US gov’t has subsidized Tesla R&D: Department of Energy’s Advanced Tech Vehicle Manufacturing Loan Program. $7,500 Federal Tax credit for purchasing car

● Economy coming out of recession and showing strong growth● Increasing consumer spending power over last few years● “Stakeholder” not just “shareholder” model becoming popular● Increasing volatility and destabilization in middle east→ greater foreign

oil uncertainty

● Increasing awareness of Global Climate Change and impact of vehicle emissions

● Greater need for energy efficiency in vehicles to “support your mother earth”

● Millennial generation not as car crazy as baby boomers

● Diminishing returns to investment with Internal Combustion Engine● Tesla battery reaching inflection point on S-Curve● Decreasing costs per unit for rechargeable car battery● Ability for current grid to support mass shift to electric vehicles

IndustryCar & Automobile Manufacturing

oThreat of New Entrants: Low oThreat of Substitutes: Medium-Low oPower of Suppliers: Medium-Low oPower of Buyers: Medium-LowoIndustry Rivalry: Medium-High

Overall, the car and automobile manufacturing industry is dominated by a handful of large firms. The large firms tend to have cars at numerous price points. Brand recognition is strong and there are low switching costs.Unfavorable

MEDIUM-HIGH• GM, BMW, Ford, Fiat Chrysler, Tesla• Buyer propensity to switch car brands• Low product differentiation• High exit barriers – car value goes way

down after driving it off the lot• Customer loyalty to specific brands• Huge advertising and marketing costs• Non-luxury vehicle cost is major

determinant for buyer due to lack of differentiation

• 6 firms have 68% of market• Firms compete on price, fuel economy,

reliability, styling and utility

MEDIUM-LOW• Consumers and dealerships are

major buyers• The market (mostly made up of

individual consumers) determines consumers’ WTP

• Price sensitive buyers• Increasing availability of

information• Medium brand loyalty• Buyers cannot backwards

integrate• Industry has ability to forward

integrate (eg. Tesla)• Buyer concentration much lower

than industry

MEDIUM-LOW• Willing to compromise prices to

form partnerships with automobile firms

• Diversity of firms the supplier sells its products to (usually 1 or 2)

• Additional factors affecting entry include large capital investment in human resources and equipment to produce automotive parts

• Automotive firms can threaten to switch providers

• Suppliers unlikely to drive average industry profits down unless they all agree to increase prices/switching costs

RIVALRY

POWER OF

BUYERS

POWER OF

SUPPLIERS

LOW• Very capital intensive industry• Large investments required to achieve sustainable economies of scale• Without economies of scale, extremely difficult to achieve profitability• Cost of distribution is high, must establish dealership network and licensing• Threat of retaliation from large firms if challenge their market segment• High regulatory costs associated with manufacturing, inputs and outputs• Cost of compliance with environmental benchmarks can be expensive for

small firms

THREAT OF NEW ENTRANTS

MEDIUM-LOW• Developed public transportation in urban areas• Threat is lower in rural where subways and bus systems are not prevalent• Low switching costs in urban areas, similar value, lower costs to participate• Rural areas have few substitutes, high switching costs and dissimilar value

proposition• Public transportation tends to be irregular and stiff with locations served• Cannot access reasonable substitutes outside of developed urban areas with public

transit

THREAT OF SUBSTITUTES

IndustryCar & Automobile Manufacturing: Trends & Dynamics

Trend 1: Tech Developmento Cheaper development of Tesla battery

will cause fundamental shift in industryo Less demand for internal combustion,

consumer will place greater value in the cheaper (per mile) alternative

o Firms will need to invest heavily in R&D or license tech from Tesla

Impact on 5 Forces

Trend 2: Environmento Consumer preferences shifting towards

“green” option will further decrease demand for pure internal combustion powered vehicles

o Increased desire for hybrid/electric vehicles

o Need for traditional companies to change public image

Total Impact on Industry

Π

BTE

Rivalry

Substitutes

Rivalry

SupplierPower

Analysis of Financial Performance

Economic Average

Industry Influence

Strategy Influence

-7.1%

Company’s Profitability

3.1%

Industry Profitability

4% -0.9%

Car & Automobile Manufacturing Industryo Firms in this industry are engaged in the manufacturing of cars in the United States.

Their finished products are hybrid, fully electric, and internal combustion engine powered cars.

Industry Firmso General Motors, Toyota, Ford, Fiat ChryslerIndustry: Good or Bad?o Tesla is in a highly cyclical industry. The ROA for this industry is less than the economic

average, however this is to be expected because the industry is very asset intensive. This industry has a negative influence on profits.

Outperforming or underperforming the industry average? o Tesla is underperforming the industry. According to this graphic, our strategic influence

is -10%. The combination of negative strategy and industry influence places us at 11.1%, below economic average ROA.

Analysis of Strategic Effectiveness

-10%

Key Competitor Analysis

Tesla GM Toyota Ford Fiat

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

Ret

urn

on A

sset

s (%

) 3y

r av

g.

* We compared profitability using ROA because the manufacturing of vehicles is asset intensive, and we believe this best reflects firm efficiency.

Cost Leadership Differentiation

Broad

Narrow

Scope

Source of Strategic Advantage

Indu

stry

ASP

Strategic Positioning of Industry Firms

Toyota

VWBMW

M. Benz

GM

Ford

Fiat

Chrysler

Consumer Appeal• Sleek design• Quiet in drive• 0 to 60mph in under 4

seconds• No traditional fuel costs

Environmental Appeal• Zero emissions• Sustainable energy

source

Strong Partnership Value• Mercedes, Toyota,

Panasonic

Sources of Competitive Advantage

Effectiveprocurement of

components

Premium distributio

n

Operational Effectiveness

No traditional marketing

expenditures

After-sale support

In-house manufacturing

of most important

components

Short-term agreements

with numerous suppliers

Production based on demand

Highly innovated, automated manufacturing process

Network of ownretailers in high

foot traffic locations

Timely delivery of componen

ts

Easily reprogrammed multi-function

robots

Educating customers

about benefits of electric cars

Online reservationsShowroom

s

Celebrity Tesla owners (free advertising)

Web-based short films

Own service

centers in Europe,

Asia, North

AmericaSuper-fast free

charging station network

50,000 mile

warranty policyGood

relationship with strategic suppliers

YouTube ad campaigns

Cost reduction

All free money

invested in R&D

Constant innovatio

n

New gigafactor

y

Tesla: Key Themes & Activities

Tesla’s Strategic Issueso Key issues facing industry: Low interest rates and economic growth will continue to boost

this industry, a raise in rates or economic slowdown will threaten revenue growtho Key issues for Tesla

▪ Lack of charging stations makes long distance travel an inconvenience▪ High price of product, only current offering is luxury vehicle, limits market based on

WTPo What more information do you need to fully understand these issues?

▪ Cost to produce a Tesla battery▪ Can Tesla utilize economies of scale to further drive down product cost

o What are the firm’s prospects for long-term competitive advantage? ▪ Decreased product price and increased concentration of charging stations will help

make EV close to standard car convenience▪ Increasing environmental awareness will help create a sustainable advantage over

standard car manufacturerso What kind of recommendations can you make to the firm to help it become more

profitable in the future?

▪ Infrastructure development to support ease of charging

▪ Lobby states to incentivize alternative energy and electric vehicles

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