Case Tesla Motors Part I

Sigvald Harryson & Sebastian Keller – Case Study on Tesla Motors Part I

TESLA MOTORS CASE STUDY I: Company Creation and Early Exploration1 Tesla Motors, Inc., incorporated in 2003, designs, develops, manufactures and sells electric vehicles and advanced electric vehicle powertrain components. The Company owns its sales and service network, and markets and sells its vehicles directly to consumers through the phone and Internet, in-person at its corporate events and through its network of Tesla stores. The Company commercially produces an electric vehicle, the Tesla Roadster. The Tesla Roadster offers acceleration and performance without producing any tailpipe emissions. In addition, it provides services for the development of electric powertrain components and sells electric powertrain components to other automotive manufacturers. On July 1, 2010, it introduced the Roadster 2.5, with new styling and an upgraded interior. The Company’s vehicle, the Tesla Roadster, can accelerate from zero to 60 miles per hour in 3.9 seconds and has a maximum speed of approximately 120 miles per hour. The Tesla Roadster has a range of 245 miles on a single charge and a battery pack capable of storing approximately 53 kilowatt-hours of usable energy. This equals the hypothetically a fuel consumption of one gallon per 135 miles. As of December 31, 2010, over 1,500 Tesla Roadsters had been delivered to customers in 31 countries, almost all of which in North America and Europe. The Tesla Battery Pack Despite the manufacturing challenges, Tesla’s engineers had successfully designed a durable and powerful battery pack using lithium-ion laptop cells. It was no easy task. Lithium-ion batteries can explode if overheated, so the team came up with an innovative cooling system that circulates water and antifreeze in sealed tubes throughout the battery array. They installed sensors that would disconnect the battery within milliseconds in the event of a crash or if smoke, humidity, or water entered the pack. At the same time, it provided 200 kilowatts of power—enough to let the 288-horsepower motor rocket the Roadster from 0 to 60 in less than four seconds. Each module contains 2,000 cells and weighs 300 pounds. The cells are the same kind you’ll find in your laptop -18650-lithium cobalt oxide. Plug the truck into a 220-volt line and it’s good to go in six to eight hours. In 2010 Panasonic, the world’s leading battery cell manufacturer and a diverse supplier to the global automotive industry, also partnered with Tesla. Tesla currently uses Panasonic battery cells in its advanced battery packs and has collaborated with Panasonic on the development of next generation battery cells designed specifically for electric vehicles. While Tesla’s current battery strategy incorporates proprietary packaging using cells from multiple battery suppliers, Tesla has selected Panasonic as its preferred lithium-ion battery cell supplier for its battery packs. 1

I am grateful to Sebastian Kellner – Graduate student at the CBS OIE Program – for valuable support in putting important parts of this case-‐study together, and to CIEL for funding an important part the time that went into this case project. Some interviews marked by “quotation marks” were made by myself at company visits in 2008 and 2011. Please read this as work in progress and – in line with case-‐reflection number 5 – let us know how you would like the case to be developed.

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What did other car manufacturers do? In 2007, Daimler unveiled plans to develop an electric version of its Smart car. Also BMW and Volkswagen intensified their efforts to get a food down in the EV race to mass market. With a test series of electrified Minis and prototyping with the Golf series both car manufacturers try to develop models that could be suitable for customer segments with an interest in green awareness and driving habits profiles that can be served by available battery packs. To get an even more green perception of their activities and to serve the customers demand of more fuel-efficient cars, both companies introduced hybrid versions of their models. In the recent past BMW also intensified the research & development with one of its major partners in the carbon industry (SGL Carbon) to reduce more weight of the chassis to counter the increasing weight of the battery backs. Also Toyota, Nissan and General Motors were bringing vehicles like the Rav4, Leaf and Volt (in Europe know as the Ampera) to the market in 2011. In the sphere of supercars Fisker, Porsche and Audi recently announced that they are developing models that have similar characteristics and performance such as the Tesla Roadster, but it will still take a few months, if not even years until those models will be cruising the highways in a similar number as the Roadster. With the ability to learn from their current fleet of more than 1300 Tesla Roadsters no competitor has such a knowledge and feedback-base of real customers like Tesla Motors. Tesla Motors On the 9th of July 2007, Tesla went public, netting $238 million and making it the first American car company to complete an initial public offering since Ford in 1956. As a result, the company now has access to more than $700 million, a significant portion of which will go toward retrofitting the manufacturing facility in Freemont and ramp up their production. Just three years ago, Tesla Motors was in big trouble. The company’s inaugural product - the $109,000 Tesla Roadster - was due to begin production in September 2007, but an internal audit done over the summer revealed that the cost to actually build the car had climbed to $140,000. It was a money-loser before a single unit had been delivered. Musk was the lead investor but wasn’t running the company then, and he was taken aback by the state of affairs. He’d been led to believe that manufacturing the car would cost $65,000 and decided to investigate the discrepancy himself. He visited the body panel fabricator in England and discovered that the facility didn’t have the right tools to do the job. The car wasn’t just too expensive - as things stood, it couldn’t even be built. At this point, Musk and other investors had invested nearly $100 million in the company and didn’t have a single car to show for it. Martin Eberhard, CEO at the time and one of Tesla’s founders, was demoted and in a matter of months left the company. Michael Marks, an investor and former head of electronics maker Flextronics, stepped in as interim CEO. Marks immediately drew up a list of roadblocks standing in the way of the car being built. The transmission didn’t work, the air-conditioning didn’t work, the quality of the seats was unreliable—the list kept going. The situation, Marks wrote in an email, was “a lot

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scarier and [more] pressing than I thought.” At the end of 2007, Musk decided to put another $20 million into Tesla. He wasn’t ready to concede defeat, because for him there was more at stake than just creating a viable company. Musk then tried to accelerate the rollout of the Roadster by hiring Ze’ev Drori, a no-nonsense former Israeli paratrooper and microchip executive, to take over as CEO. While Drori focused on solving the Roadster’s problems, Musk started to think about ways to bring in more income. Other members of the founding team left the companies to pursue their own goals in the new blue ocean of EVs. Founding Partner Ian Wright: Tesla cofounder Ian Wright started his own electric car company “Wrightspeed” in 2005 and made the X1 prototype, which beat the Tesla Roadster and also some other European supercars on a racetrack in 2010. As a serial entrepreneur Wright wanted to create his own venture utilizing his knowledge in the fields of electric engines and batteries to develop vehicles with extraordinary drive-train performance. Today Wrightspeed is also developing electric engines for mid-sized trucks that can be combined with range extenders (fuel combustion engines) to find their use in delivery trucks in the future. For the development of his company he recently collected venture capital and moved the company from his garage in Woodside to a larger facility in San Jose. Distinguishing the Wrightspeed from Tesla is the fact that Wright has a stronger interest in developing EV technology to sell it to car manufacturers on the globe, rather than involving its company in the car manufacturing process, which requires a strong capital base and very diverse knowledge in multiple fields. Interestingly, Wright spoke recently more critically about the mass market of EV vehicles, trying to explain why he is focusing more on the combination of combustion and electric engines as well as the niche market of supercars. Martin Eberhard

From 2003 until August 2007 Martin Eberhard was the CEO of Tesla Motors and also responsible for research & development. He was one of the driving forces in the early days of Tesla and created a community around the start-up, making employees, shareholders and customers equally committed to bringing the company to live. In 2010, Volkswagen hired Martin Eberhard to head up their battery lab. His major task was the battery lab in Silicon Valley to support the electrification of some VW models and prototypes from the Volkswagen garage bringing the Audi E-Tron and the VW E-UP! for intensive testing to the streets of California. At the time when Eberhard’s contract expired both sides agreed on parting their ways, offering Eberhard the opportunity to start a new, yet undisclosed car-related business. Marc Tarpenning

Trapenning was co-founder and VP-engineering at Tesla. Previously he founded NuvoMedia a web agency being also involved in the field of e-reader. Furthermore Marc Tarpenning is entrepreneur in residence at Mayfield; there he pursues the path of VCs approach to the cleantech space.

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Winning Daimler- a Smart move One option was to try to ride the electric wave by selling battery packs to the larger manufacturers. The income could keep Tesla alive long enough to eventually compete head-tohead. After all, electric vehicles were going to need batteries, and Musk was convinced that Tesla had the best power packs. Of course, most manufacturers weren’t inclined to make a huge bet on a struggling start-up. Still, Musk tried. In September 2007, he flew to Stuttgart, Germany, and met with a group of Daimler executives, who listened skeptically as Musk told them how great his technology was. They weren’t sold. But two months later Musk got an email from Herbert Kohler, Daimler’s head of advanced engineering, saying that he and some other Daimler execs would be in California in six weeks and would be willing to look at Tesla’s technology. It was all Musk needed. He immediately called JB Straubel, Tesla’s CTO. “We need to make an electric Smart car in six weeks,” Musk said. “Can you do it?” Straubel pointed out that it would mean he’d have to pull engineers off the Roadster at a time when they were still desperately trying to solve production problems. It was a tough call, but Musk believed that if they could prove themselves to Daimler, they could win a valuable contract. In addition to the much-needed cash, it would validate Tesla in the eyes of the world. They had to try. Straubel had another question: Where was he supposed to get a regular, gas-powered Smart car to retrofit? At the time, Daimler didn’t sell Smarts in the US. With a bit of research, he discovered that the cars were sold in Mexico. He made a few calls and located a dealership in Tijuana with stock on hand. He hurriedly decided to send someone to fetch a car. A Tesla engineer suggested a friend who was fluent in Spanish, and, after a quick call, the guy agreed to make the trip south. Straubel walked over to the finance department. “I need $20,000 in cash in a bag right now,” he said. “We’re sending someone to Tijuana to buy a Smart car.” The finance person noted that a lot could go wrong with that scenario but got Straubel the money. Three days later, the engineer’s buddy showed up at Tesla headquarters with a brand-new Smart car. Straubel and his team immediately removed the 83-horsepower gas engine and set to work building a custom battery pack that would fit in the tiny car’s engine compartment. Next, they refashioned a Roadster motor to power it. When they got too tired, they napped underneath a staircase, but the pounding of feet overhead made it hard to stay asleep for long. Finally, at one o’clock in the morning, five and a half weeks after setting to work, the reengineered Smart was fully assembled. Straubel got in the driver’s seat and switched on the power. He goosed the accelerator and rocketed out of the garage and into the parking lot. When Straubel floored it, the front wheels lifted off the ground and the back tires left marks on the asphalt. He called Musk and told him the car was ready for the Germans. The Daimler executives sat down in Tesla’s conference room midmorning on January 16th, 2008. Musk walked them through a PowerPoint presentation that explained the advantages of the

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Roadster’s technology. Kohler wasn’t impressed. He wasn’t here to talk about a flashy, limitedrun show car. He wanted to know if Tesla could mass-produce battery packs quickly for the Smart. His frosty demeanour indicated that, in his opinion, it didn’t seem likely. “We’ve actually got something to show you,” Musk said and asked the Daimler execs to follow him. Kohler spotted the shiny new Smart sitting in the middle of the garage and didn’t smile. It might have seemed like a gimmick at first. Musk managed to get a Smart into the US. Big deal. “It’s electric,” Musk said. “What do you mean?” Kohler asked. “We put in a Tesla battery and motor.” Kohler examined the car. Straubel had been careful not to alter its shape or interior, so it was impossible to tell that it had been modified. Kohler got behind the wheel and Musk hopped in the passenger seat. When the German stepped on the accelerator, the car bolted out of the garage and disappeared. Straubel waited nervously with the other Daimler executives. After 15 minutes, the Smart tore back into the garage. Straubel noticed that the normally taciturn Kohler was trying hard not to smile. “Let’s explore a partnership,” Kohler told Musk.

The modified Smart EV

As a result of the convincing test-drive, Daimler started the development of a test fleet of 100 smart EVs together with Tesla. The developed EV Smart cars were used to evaluate the EV concept in London with day-to-day assignments together with fleet operators and private users.

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Daimler as a partner In 2009, 18 months later, Daimler decided to acquire a 10 percent stake in Tesla and to create a corporate partnership to drive the development of their battery technology. During the press conference, Elon Musk and Dr. Thomas Weber provided a bit more insight on their plans. "Our strategic partnership is an important step to accelerate the commercialization of electric drives globally," said Dr. Thomas Weber, Member of the Board of Daimler AG, responsible for Group Research and Mercedes-Benz Cars Development. "As a young and dynamic company, Tesla stands for visionary power and pioneering spirit. Together with Daimler’s 120 years of experience in the automotive sector this collaboration is a unique combination of two companies' strengths. This marks another important milestone in Daimler’s strategy for sustainable mobility." "Daimler has set the benchmark for engineering excellence and vehicle quality for more than a century. It is an honor and a powerful endorsement of our technology that Daimler would choose to invest in and partner with Tesla," said Tesla Chairman, CEO and Product Architect Elon Musk. "Daimler is also on the leading edge in the field of sustainable mobility. Among others the lithium-ion pouch-cell battery developed by Daimler and especially designed for automotive applications is of interest to us. We are looking forward to a strategic cooperation in a number of areas including leveraging Daimler’s engineering, production and supply chain expertise. This will accelerate bringing our Tesla Model S to production and ensure that it is a superlative vehicle on all levels. “Together on the road to electro-mobility”. The two companies have already been working closely to integrate Tesla’s lithium-ion battery packs and charging electronics into the first 1,000 units of Daimler’s electric smart car. In order to benefit from each other’s know-how, the investment enables the partners to collaborate even more closely on the development of battery systems, electric drive systems and in individual vehicle projects. As part of the collaboration, Prof. Herbert Kohler, Vice President E-Drive and Future Mobility at Daimler AG, took a seat on Tesla’s board of directors. In July 2012, Daimler divested part of its shares to an Abu Dhabi investment fund keeping only a 4,7% stake in Tesla Motors. Still, Elon Musk recently admitted that not only Daimler benefited strongly from Tesla’s IP but also secured the survival of the Tesla Motors: "The credit for saving Tesla should go to Daimler. It was the Daimler investment that saved Tesla in early 2009. [...] 2007 and 2008 were especially bad for us. [...] There were a couple of near-death situations" (Autoblog.com).2

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http://www.autoblog.com/2012/09/05/elon-‐musk-‐the-‐credit-‐for-‐saving-‐tesla-‐should-‐go-‐to-‐daimler/ 6


Dr. Herbert Kohler, Elon Musk and Dr. Thomas Weber at the press conference in July announcing the partnership between Daimler and Tesla Motors.

Toyota and new the production facilities Shortly thereafter, Toyota decided to invest $50 million in Tesla through a private placement of common stock in Tesla Motors. The auto giant also signed on to develop prototype electric vehicles with the startup and indicated that it would support Musk’s $42 million offer for the billion-dollar Nummi factory in Fremont. In July 2010, Tesla signed a deal with Toyota to cooperate on the development and manufacturing of the electronic version of the RAV4 as announced in May of that year by Elon Musk and Akio Toyoda. With an aim to market the EV in the United States in 2012, 32 prototypes were made combining the Toyota RAV4 model with a Tesla electric powertrain. The prototypes were developed by two competing teams: one pure Toyota team and one mixed Tesla and Toyota engineering team working on the best solution to power an RAV4 with Tesla drive train and battery components. For Toyota, this was one part of creating a more entrepreneurial culture into Toyota.

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The Toyota Rav4 electrified by Tesla Motors shown on the Detroit Motor Show

What’s in it for Toyota? Toyoda said he wanted his company to be more entrepreneurial, learning from Tesla’s EV technology, daring spirit, quick decision-making, and flexibility. That’s why he had wanted to meet Musk and give the Roadster a try in the first place. He liked the fact that Musk had managed to bring the vehicle to market. Plus, it seemed like a fun car. During the press conference announcing the deal at Tesla headquarters, Toyoda took the microphone and talked about getting to drive the Roadster and how it had impressed him. He decided to work with Tesla, he said, so that Toyota could learn from the small company’s “spirit” and “energy.” Tesla on the other hand seeks to learn and benefit from Toyota’s engineering, manufacturing, and production expertise. When asked by a Reuters reporter why he had chosen to partner with Tesla among all the electric car start-ups, Toyoda looked over at Musk. “Musk-san,” he said. “I love him.” Other Licensing Deals: Freightliner, a large Daimler-owned truck manufacturer purchased Tesla’s battery technology in 2010 for use in a fleet of medium-duty, all-electric walk-in delivery van. Therefore Freightliner, Enova and Tesla joined their forces. Enova provided the motor, which produces 120 kilowatts peak power (about 160 horsepower) and 45 kilowatts (about 60 horsepower) continuous. The controller and charger also came from Enova. The power comes from batteries made by Tesla Motors. The pack is comprised of three 18.5 kilowatt-hour modules for a total of 55.5 kilowatt hours. This capacity should last for more than 100 miles. In the case that a larger range is required, more modules can be added to the pack. The still tested vehicle can handle as many as five packs, which would provide 92.5 kilowatts. The battery is essentially the same as the Roadster’s 53 kilowatt-hour pack.

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All of the components fit between the frame rails and what would be the engine compartment in a conventional truck, so there’s no loss in cargo space or capacity. The electric van will have a 2,500-pound payload. Although the battery pack weighs 900 pounds, the electric drive train is lighter than the engine and transmission it replaced.

Freightliner Custom Chassis & Medium-duty Delivery Truck

Tesla Accelerates Over the course of 2008, Tesla solved the production problems on the Roadster and, one by one, the cars started to hit the streets and many reviews were positive. Car and Driver called it a “revelation” and Motor Trend gushed, “The Roadster is a cool automobile technically, a cooler automobile to drive, and an historic game-changer in our perception of battery-electric vehicles.” Musk accumulated hundreds of orders for the $109,000 car. It looked like the company might survive after all. Musk, however, wasn’t interested in just surviving. Though he said the company could reach profitability if it focused just on the Roadster and the battery pack business, he didn’t rein in his ambition. The point, after all, had never been to supply fast cars to rich people. The point was to transition the world to electric transportation. He obviously didn’t think small. His other main business, a rocket company called SpaceX, aimed to replace the space shuttle and eventually take people to Mars. Developing the Model S With Tesla, the Roadster was simply a proof of concept that set Musk up for the next step in his business plan: the Model S. The difficulties Musk encountered with the Roadster hadn’t made him wary of innovation. In fact, in the summer of 2008 he got bolder: To rev up the sedan effort, he hired Mazda’s lead North American designer, Franz von Holzhausen, and told him that he wanted a four-door car that seated seven. “That’s an SUV, not a sedan,” von Holzhausen responded. Musk countered that von Holzhausen had a rare opportunity to design something new. The Roadster was based on a modified Lotus chassis that was manufactured in England and shipped

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to Tesla for final assembly. With the Model S, they were going to build their own chassis from the ground up. Since this new platform didn’t have to accommodate exhaust pipes, thermal shielding to protect against engine heat, or bulky catalytic converters, there would be a lot of extra space. That meant it was theoretically possible to put in a third row of seats. Musk didn’t just want to build a functioning electric sedan—he wanted to redefine what a sedan could be. Given the positive response to the Roadster, Musk was confident that he would be able to raise another $100 million that summer to send the Model S into production. Goldman Sachs was arranging the financing and sounded bullish. Then the subprime mortgage crisis began to spiral out of control. Suddenly major banks were on the verge of collapse and Goldman failed to raise any capital. Week after week through the fall of 2008, Musk watched Tesla’s bank balance drop. His team had been able to bring down the cost of producing the Roadster to approximately $95,000 by renegotiating supplier contracts and redesigning parts to be simpler. Still, Tesla had presold the car in 2007 to hundreds of buyers at a discount price of $92,000. Costs were continuing to drop—they could make it to profitability if they didn’t go out of business first—but by the end of the year, Tesla had less than $500,000 in the bank. They were in danger of not making payroll. Bloggers mounted a Tesla death-watch. Musk was down to the last $20 million or so of his personal fortune. Tesla and SpaceX had consumed the rest. If he held on to the $20 million, he could walk away and still be rich. He was 37 years old—he had plenty of time to try something less risky. He called his younger brother, Kimbal, who had invested more modestly in Tesla, and told him that the company needed another cash infusion. The two had made millions together in 1999 when they sold Zip2, an online media services company, to Compaq. Kimbal actually found himself believing they could make it and agreed to put in more of his own money. Musk soon persuaded most of his other investors to pony up emergency funds, raising a total of $40 million. The emergency funds kept Tesla afloat, and almost immediately things started to unfold just as Musk had predicted. With partners like Daimler and Toyota, Tesla slowly but steadily came into a stage where the product- and technology development could be taken as the highest priority again. The Model S In March 2009, von Holzhausen had finished a prototype. It was certainly no ordinary sedan. The car had the sexy, sloping lines of a Porsche and the muscular stance of a BMW. The company unveiled it in front of hundreds of people at Musk’s rocket factory near Los Angeles. When von Holzhausen dramatically pulled a silver sheet off the car, it sparkled under white spotlights. “You’ll see that this isn’t some show car that doesn’t do what it says it’ll do,” Musk told the crowd. “It’ll go fast with a lot of people in it.” “I wanted to make something that would stand out completely from the crowd. It needs to be completely new and unique. I got a unique opportunity from Elon and I did not want to screw it

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up. It is all internal work. There was no competition or any stream of external input. The sport version of Model S will come with some surprises”, said Franz von Holzhausen the chief designer. To set up a team for the Model S many key player had to combine their knowledge and sometimes during the process even new employees had to be recruited. Manufacturing Managers: Patrick Wetherell and Michael Anderson -both Senior Technicians Plant Engineering- described the process as challenging: Tesla has a very rigorous recruitment process for manufacturing engineers. Each candidate has to write an essay on specific topics given at the interview. It is claimed that Elon Musk reads each file before making a recruitment decision. We are 180 people in the Fremont plant, which used to have 5000 employees. Patrick used to be part of logistics, vehicle performance testing and dealt with installations. Mike has a background in specific tooling and production control processes. Tesla has a vast pool of experienced experts to choose from. During the recruiting they ask quite challenging questions in the recruitment process. There is a strong focus on “what can you do for us”? Mike: “The main-difference is the mindset and the organizational culture that have totally changed. Now we are much more open to change. During the old days often reached the point, were we said:” we can’t do it that way - now at Tesla we will find a way to make it work. In the old days, we just brought the problems but no solutions. Now we never bring problems without also bring solutions. I was more tired in the NUMMI days – I really was.” “Tesla is trying to change the way in which the automotive industry thinks. People are hungry; they are ready to give a 110%, they are ready for change! New Years eve was my last day with NUMMI then I started with Tesla on January 3rd. My wife used to work here before and she did not believe her eyes when I showed her how we have put this facility into shape. Two months ago, this place looked completely different. Now we will put in skylights and solar cells. There are also rumors that we will get windmills to offset some of the electricity costs.” Patrick: “What’s going to make manufacturing work this time is the product itself. People are motivated to make a product that will make a difference and actually work. When you see the product and get to drive it, it moves you. Tesla will keep developing its technology and stay one step ahead of competitors.” “Also the operational structure changed for the production facility of the Model S. When taken over the NUMMI from Toyota the TPS was in place (Toyota Production System) but we did not use it. Rather than stopping the line if there was a quality problem, the line would just continue to run. Now we work much more organized and try to address challenges in a new way.” George Blankenship the former chief strategist of apple overseeing now the retail activities at Tesla described the relationship of Tesla to its stakeholders at the unveiling of the Model S as something extraordinary:

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“With Tesla you will never be a number in a spreadsheet – we will always see you as family. We will give you access to things that no one else will do! We are not BMW or Daimler! We will let you discover our plant, show you our ideas and let you take pictures and videos of what you see. We will take our time and introduce you to the world of Tesla and with you help, we will bring you the Model S, the Model X and all other things that will follow up in the future.” The approx. 1735 kg light sedan has a sports car performance, accelerating in 5,6 seconds from 0 to 60 MPH (98 km/h) and accommodates five seats in the passenger room as well as adding two extra seats in the trunk. This allows seven persons to travel in this high-speed electric vehicle with a maximum speed of 200 kilometers per hour and a range of more than 480 km with the high end 85 kw/h batteries. Additionally to the high-end version of the Model S costing around US$100.000, Tesla is planning to provide models with shorter range and fewer accessories in a lower price spectrum, which will come down to US$50.000 in the base model.

The Tesla Model S Prototype “Signature Edition”

Three months after the Model S unveiling, the federal government announced that it would loan Tesla $465 million to bring the sedan to market as part of the Advanced Technology Vehicles Manufacturing Loan Program. Established manufacturers received substantially more to develop their electric vehicle programs. Ford, for instance, was awarded $5.9 billion. Elon Musk- Entrepreneur and CEO He is an excellent leader with good communication; perseverance and constant feedback loop, allowing him constantly evaluate the own behavior and listen to what people are telling him. Running SpaceX and Tesla Motors at the same time requires good time management, flexibility and a lot of power to keep the spirit up. But probably it is also the management style that gives him the ability to handle all this challenges at a time. Major Management Principles of Elon Musk As a serial entrepreneur Elon Musk discovered multiple challenges in the activities that are undertaken by his companies. In general he defined four principles that help him to overcome the challenges an entrepreneur and a uprising company has to face and to handle.

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1. Be Ready to Work If you are motivated enough to start a company, you better be motivated enough to work hard to keep it going because helming any business is no small task, Musk explained. "It's a super huge amount of work. I think sometimes people sort of have this idea that if they were the CEO of a company that they would just give themselves a whole lot of vacations and not work very hard," he said. But actually the reverse is true. "If you're the CEO of a company, you have to work your bloody ass off. And if you're the CEO of two companies you have to work two bloody asses off and you don’t have two asses." And some factors beyond your control can make the job even harder. The dismal economy in recent years has made for gruelling runs at both SpaceX and Tesla Motors, as well as for Musk. He's thankful the economy is improving. "It really took a lot out of me," he said. "I have a lot of mental scar tissue."

2. Be Ready to Learn One of the biggest lessons Musk learned after founding SpaceX (Space Exploration Technologies) was how much more there was still yet to learn. Despite a background steeped in physics, Musk ended up with a tough self-teaching job in order to design SpaceX's first rocket (the Falcon 1) and the larger Falcon 9 booster that made its successful launch debut in June. "It was a huge learning curve for me because I had never designed anything physical apart from building rockets as a kid or something," Musk said. "Initially I didn't intend to be the chief designer of the rocket; I kept trying to hire someone to be chief designer of the rockets. But the people who were willing to join early on weren't up to the task and the people that were weren't willing to join. So I ended up by default becoming the chief rocket designer, which obviously has its plusses and minuses."

3. Pick the Right Team One man or woman does not a company make and Musk firmly believes that choosing the right employees is a core ingredient for success. He looks for employees with a track record of work excellence in general, not necessarily business acumen.

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"I think it's incredibly important to pick the right people. The right team can accomplish miracles. The wrong team, well….or if a team isn't working together well that can be a huge problem as well," Musk said. "It's just really like any sports game. Running a company…it's like if you're running a major league baseball or football team, or something like that. It's just how good are your players? How good are they working together? And that will define success. "

4. Know When to Grow SpaceX has grown by leaps and bounds since 2002, but it didn't happen overnight. Musk founded the company with around 120 employees and now oversees a staff of 1,100. In 2007, SpaceX moved from its El Segundo, Calif., headquarters into a new, huge space in Hawthorne in order to build a new rocket factory that could handle its larger Falcon 9 rockets. Choosing then the time is right to grow has been key, because most companies don't have the ability to sustain ill-timed growth, he said. "It's difficult to prepare too far in advance because we just don't have the capital to go ahead and spend a ton of money on just sort of hoping that something will happen," Musk said. "So we kind of just have to grow really fast when it happens.” And there's always the danger of being too wieldy. Musk believes in keeping it lean. A company, he said, should not be any bigger than it needs to be to accomplish its goal.

Main Challenges for Tesla Internal Challenges: • • • • • • • • •

Tesla is a new company pitted against established auto companies. Tesla has only one production facility supplying a global market (NUMMI in Fremont). Has a high debt liability, in relation to low earnings. Tesla’s stock price is based on future expectations. Possible supplier problems if demand increases drastically and at the same time requiring a scaled production to be more cost efficient. Boutique showrooms with small inventory lots, which may be ill equipped to handle Model S rollout. “Tesla Rangers” mobile service crews may be bad suited to serve the high demand market of mid-sized autos that Tesla intends to expand into. 800 employees vs. Toyota’s 300,000 employees (Race for the best employees) New technology: product recalls & release delays because of tech issues.

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External Threats: • • • • • • • • •

If the economy does not improve, may have trouble generating revenue to pay back their debt. Competition! Automakers already have production and distribution systems, and may have more ability to absorb losses. The end of subsidies and tax credits. Bad consumer reviews. A new company is vulnerable to the effects of criticism. The EV market is still small, worldwide due to expense. Challenge of achieving market penetration in an already saturated auto market. Partnered firms may reverse engineer Tesla’s intellectual property. Tesla lost a suit against a partner, Fisker Auto, claiming patent infringement. Disruptive technologies from competing firms.

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Reflection Points to be addressed in Class 1. Partnering across industry is an important ingredient both for Open Innovation and New Business Creation. a. What cross-industry partners do you see as most relevant for Tesla and why (cleanenergy, premium brands, etc)? 2. At times when many automotive experts started to doubt how much longer Tesla Motors would survive Tesla acquired investments by Mercedes and Toyota, which boosted credibility and dedication to survive. It also raises an important point related to another management concept: Co-Opetition a. What benefits can Tesla gain from the co-opetition with Daimler-Benz and Toyota? b. How can Tesla manage to collaborate with partners and co-owners, who could also be seen as competitors? c. What other co-opetition partners do you think could be relevant for Tesla? 3. For the Tesla Roadster Tesla applied a market-skimming strategy aiming for extreme celebrities as early adopters, and may consider a similar strategy for the Model S a. What European markets do you see as most relevant and why? b. What celebrities do you think of in your home region – who have a green mind that they may want to show off in ways that would promote the Tesla brand? c. What are the benefits of focusing on celebrities? d. What are the downsides of focusing on celebrities? e. What would you do if you were Elon Musk? 4. Born Local versus Born Global a. What is the best way for Tesla to Grow sales – locally in California, all over the US, selectively across several countries, or all over the World? b. What are the pros and cons of a Born Global strategy? 5. Case reflection a. What aspects in the case did you find most interesting? b. What aspects in the case did you find least interesting? c. What aspects are missing in the case – to make it fully suit your learning objectives?

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Case Tesla Motors Part I

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