The industry characteristics at the inception of Tesla involved the cost of producing an electric car, which was prohibitively expensive. Tesla entered the market when there was a serious debate about fossil fuel consumption and the damage it was doing to the planet. Tesla’s Roadster which was positioned as a high-performance sports car, had a niche that was already dominated by established automobile companies such as Porsche, Ferrari, and Lamborghini.
To be competitive in this niche, the cost of the lithium ion battery needed to drop to $100/kWh to reduce the cost of production. Tesla, as a first mover, internalized the lithium ion battery chain so they could control the cost reduction. Incumbent automobile companies did not have to worry about this problem because they already had a huge market share and they were patiently waiting for lithium ion battery manufacturers to reduce the cost of their batteries.
Considering the cost of driving Tesla’s innovation forward, they obtained a low interest loan from the US Department of Energy to enable them to compete and stay in business. However, Tesla had to find a way to convince their clients that their vehicles were worth paying for although they could get cars with similar performance and updated technology from incumbent automobile companies at a lower price.
As companies tend to innovate frequently, some organisations end up making products that are too sophisticated, too expensive, and too complicated for many customers in their market. Companies pursue these “Sustainable Innovations” at the higher tiers of their market because this is what has historically helped them succeed. Tesla did this by charging the highest prices to their most sophisticated and demanding customers at the top of the market pyramid to achieve greater profit. Tesla set up a website where customers could order and have their cars delivered to them as compared to the traditional automobile companies who were using third party licensed distributors. This move saved customers 8.6% on a vehicle worth $26,000 USD.
They also had ‘Rangers’ whose job was to offer home services and give specialized attention to its clients; something traditional automobile companies did not do. Putting into consideration the fact that Tesla’s production output was low, they could not afford to initially invest in an equipment manufacturing site. Therefore, they partnered with Dialmer and Toyota in exchange for battery and power train technology.
Challenges
The Tesla Roadster was the first model Tesla rolled out of the assembly line. Its realization highlighted the most often overlooked holes in the conventional automobile manufacturing process, as well as made new ground that would need to be broken with regards to electric vehicles (Baer, 2014).
Previously, dedicated factories for an entire car were not a focus before Tesla. Initially, manufacturers concentrated on designing, building and testing the internal combustion engines and outsourced the electronics of the car to others. Relying on other companies to make the critical parts of a complicated product is held as a potential risk in conventional business wisdom. This would be particularly risky with the starting Tesla as battery technology was not where the founders would have ideally liked it to be. As a result, a higher consumer price needed to be set to make up the expense.
It was therefore important for the company to shorten the supply chain as much as possible as a means of keeping the price down and reducing their vulnerability to future crises of external suppliers. This would in turn require a larger amount of capital than if they were a traditional car company. Although, if they were a traditional car company, they may not have lasted very long because of the well-established competition.
In the present day, Tesla manufactures about 80% of its cars; but in the beginning, Tesla’s lithium battery needs were sourced from Panasonic, BYD and LG Chemical Ltd. Doing so added $10,000 for 50kW, but Tesla has aimed for $100/kWh to push their cars into the mainstream affordable market. To succeed in this, Tesla created a business model that put several business conventions to the test. Ordinarily, high tech companies want to pay as little as is feasible for low skilled workers, and that regularly means buying metals from Africa, moving factories to China or India, shipping parts to an assembly site and then putting the product to market. Tesla, on the other hand, built its production lines in the US to better integrate executive, development and production departments to initiate quick changes where necessary; in addition to greatly shortening the supply chain.
Customer Value Chain
Tesla was introduced into the automobile industry with ideas that changed the scene of the industry. The introduction of its unique electric cars which seemed to be ahead of their time got the attention of keen followers of automobiles. Not only did the Roadster amaze enthusiasts with its high-performance, it marked the beginning of a new Customer Value Chain for Tesla and the automobile industry.
The inclusivity of environmental factors in the design of Tesla cars played a smart role in playing on the emotions of the affluent customers who minded their social status. Tesla offered these group of customers specifications based on reducing carbon emissions, as well as offering them an exclusive, high-performance car that could be paired with the likes of Lamborghini, Porsche and Ferrari. This was even to the point of customers overlooking the fit and finish so long as they were pleased with the performance of the models they purchased. Tesla went a step further by providing solar recharging stations to offer recharge services to their customers for free which was in support of moving away from coal usage and carbon emissions; granting Tesla a better image for its eco-lover customers. Tesla continued to take steps to make customers feel valued by offering house calls for mechanical works and increased product confidence of the Model S by increasing warranty to 8 years, in addition to the dual distribution mode offered by Tesla (Chatterjee, 2018).
Although competitors produced other electric cars that were more affordable, Tesla had taken strides with its value chain that favoured customers and it is also important to note that despite attempting to break into the mass market, they already had a market niche with the affluent and wealthy customers.
However, their mission statement was to create an electric car for the mass market yet, only the very rich and patient can afford it. Other competitors had begun to produce electric cars that were affordable and readily available to the mass market. Also, Tesla had refused to succumb to the pleas of some customers to work on their design. There still exists the issue of production delays with Tesla which hurts their brand reputation as they are perceived to some as unreliable or prone to disappointing customers.
One could conclude that in some areas, Tesla was considering the views of its various stakeholders (customers as well) with relation to their direct involvement with the product, while ignoring their views with design (Donaldson, 2006).
Financials
As per the financial statements and the case study, we can see that Tesla intended to start volume production and deliveries of Model S in the second half of 2017 (Chatterjee, 2018). We can also notice that Tesla is experiencing losses in the income statements provided due to the large amount of expenses incurred. If we want to rely only on the net income and the large amount of debt, we can say that the financial position of Tesla is highly risky, especially if it wasn’t able to pay the debt. However, the company is experiencing a significant growth and at the same time Tesla is investing in new technologies and Solar City. These investments and technologies will help Tesla to be very efficient in the future and to produce and sell more. This strategy is costly at the beginning, but in the long term it should be very profitable. In the meantime, the stock price kept rising due to different factors: –
– Investors see potential in Tesla since they are the only ones in the market creating these innovative cars. Also, people are becoming more aware of the environment, so there are more future opportunities for Tesla to grow.
– Tesla is controlling the market in electric cars which is a monopoly. It secured its position after a certain period.
– Tesla is growing significantly which means there is an increase in demand for these cars. This is shown in the large increase in automotive sales in the financial statements.
– Usually, the stock price goes higher before introducing a new model. We can infer from this that people were motivated to buy from the good amount of sales deposits.
Acquisitions
Tesla made a bold move with the Gigafactory plan as the major challenge with production was with batteries; supply, cost, quality. Volkswagen was also posing quite a threat to Tesla with the development of a battery of better quality.
The location of the Gigafactory mines was a plus to the company as Nevada had a great amount of lithium. The mining methods were going to cut cost across the value chain from mining, to shipping and then to assembly.
SolarCity has the largest share of the US residential solar market which is about 32%. The former CEO of SolarCity was of the view that Tesla could do more with SolarCity with its brand name and management. He elaborated by saying that Tesla’s brand and retail stores could ultimately lower costs and in turn generate more revenue from SolarCity (Chatterjee, 2018).
The solar recharge stations Tesla already owned had been generating enough electricity to recharge their electric cars and surplus electricity that was being sold to the grid. This acquisition implied that Tesla was going to be in a much better position with electricity as its product or commodity.
Elon Musk had anticipated over half a billion dollars being added to Tesla’s balance sheet over the next three years with Tesla’s dual acquisition. He went ahead to estimate savings from combined marketing, sales operations and lower corporate expenses of about $150 million (Chatterjee, 2018).
Ultimately, these acquisitions are meant to put Tesla in a better financial position in the future and this could be why the stock prices are rising. Stockholder’s have found faith in Tesla even with zero profits.
Recommendations
With regards to insights made in this paper, we recommend that:
1. They either change their mission statement or conform to their mission statement.
a. They vowed to create an electric car for the mass market, but they have limited themselves to serving almost exclusively wealthy clients.
2. Increase production capacity and avoid production delays
a. To rectify this, build heavily automated factories that require more highly skilled workers to monitor and maintain the precision-focus machines.
b. Substitute steel. Tesla favours making its cars out of steel, as opposed to aluminium, which has been problematic in the assembly lines.
c. Set realistic production targets and aim to meet target deadlines in a timely fashion.
3. Tesla ought to give more attention to design and into adding new features in the car especially if they want greater market share.
a. Currently, Tesla’s designs are tailored to suit rich people who are more interested in showing off and have thus ignored developing higher capacity models for families.
4. Tesla should match up their high prices with the production of their exclusive models by making them so prestigious that a buyer will constantly choose them over competitors with similar costs.
5. Optimise the purchased acquisitions by making them fruitful on their own which could further reduce the production costs of cars, rather than purchasing other ventures.
6. History has shown that the use of social media by Elon Musk has had adverse effects on stock prices. It is highly recommended that he surrenders his social media accounts to professional public relations officers to avoid scandals.