Tesla Motors: Innovation Ecosystem
Lauren Fraser – Kyle Kyle Khasigian – Amanda Amanda Lynch – Frank Frank Madden – Hans Hans Reichstetter – Catherine Catherine Sharp
EIS Section 2 October 12, 2009
Introduction
Though today‘s electric vehicles (EVs) are commonly viewed as a nascent technology, their roots trace back to the 1830s1, predating those of the now-standard internal combustion engine (ICE). Moreover, by 1912 America boasted nearly 34,000 registered electric vehicles and 20 EV manufacturers, as wealthy buyers took advantage of improving electric infrastructure to use EVs as city transportation2. But despite this early success, electric vehicles were inherently limited by expensive batteries offering limited ranges, long charge times, and middling performance. With the advent of the highway system and cheap gas, the economics and practicality of ICE vehicles came to dominate, relegating EVs to non-highway applications and making true electric cars little more than novelties. A century later, EVs still hold a trivial at best share of automotive sales, but the mass production of hybrid electric vehicles (HEVs) by manufacturers such as Toyota, Ford and Honda have helped open the door once again for the electric car. GM and Toyota are among the major manufacturers readying plug-in hybrids (PHEVs) capable of running 20-40 miles on pure electricity, while Nissan is preparing to release its mid-priced Leaf EV in la te 2010. However, perhaps the most interesting EV story thus far is that of Tesla Motors. As of September 2009, the California startup had sold more than 700 of its $109,000 Roadsters, which are still the only serial-produced highway-ready EVs available in the US. Overall, the company‘s innovation ecosystem highlights the myriad challenges of introducing ―new‖ technologies into well-established, highly capital-intensive industries. And while Tesla‘s longterm success is far from certain, the company‘s evolving product strategy and ambitions for broad adoption of EVs underscore the need to continually reassess ecosystem dynamics. Initially, capital constraints, IP protection, and a lack of manufacturing expertise were the predominant drivers of the company‘s ecosystem strategy. Lithium-ion cell commoditization and a high-end product strategy shielded the company from significant interdependence and integration risk, while Tesla gained significant industry expertise from its relationship with niche sports car maker Lotus. But as the company has sought to move beyond its current niche market of high-end sports cars, it has necessarily had to adapt to achieve profitability. On the one hand, Tesla is pursuing a more vertically-integrated strategy in the production of its proposed $60,000 Model S sedan, which the company hopes can extend EV adoption into more mainstream cars buyers. But acknowledging the huge challenges of building a global car brand, Tesla also realized that its relationship with a small manufacturer such as Lotus would be less helpful in breaking into more mainstream segments. In January 2009, Tesla sold an equity stake and agreed to a non-exclusive powertrain supply contract with automotive giant Daimler, signaling that its future cou ld also be as a supplier rather than competitor to major manufacturers. 1
“Timeline: Life & Death of the Electric Car.” PBS. June 9, 2006. http://www.pbs.org/now/shows/223/electriccar-timeline.html 2 “Early Electric Automobiles.” Encyclopedia Britannica. http://www.britannica.com/EBchecked/topic/44957/automobile/259061/Early-electricautomobiles#ref=ref918099
Prologue: The 1990s California Experiment
In many ways, the roots for Tesla and modern electric vehicles began twenty years ago. In 1990, GM unveiled its all-electric Impact concept vehicle, which had been developed largely by AeroVironment and Hughes Electronics, with AC Propulsion providing power electronics. GM CEO Roger Smith quickly announced the Impact would be a production vehicle3, lending instant credibility to the long-dormant notion of everyday EVs. Given California‘s continued struggles with air pollution and optimism over GM‘s progress with the Impact, the California Air Resources Board shortly thereafter passed its Zero Emission Vehicle (ZEV) standard, mandating that 2% of the California sales of the seven largest automakers be ―zero emission vehicles‖ by 1998, rising to 10% by 20034. By mid-decade, GM, Toyota and Honda had released their first ZEVs, but sales were disappointing despite largely positive reviews and waiting lists for the limited production vehicles. The automakers also showed little enthusiasm for their new products, and successfully campaigned the CARB to delay and eventually abandon the ZEV mandates altogether. Years later, the documentary Who Killed the Electric Car? cast a shadow over the California experience, suggesting automakers, oil companies, and the entrenched ICE value chain had conspired to submarine EVs from the start. Still, there was little doubt that battery cost, range, and the lack of support infrastructure were fundamental issues that would limit the production volumes required for profitable production by major manufacturers. Part I. Launching Tesla: The Roadster Ecosystem
Before starting Tesla in 2003, cofounders Martin Eberhard and Marc Tarpenning found practical inspiration in a meeting with AC Propulsion‘s Alan Cocconi and Tom Gage5. Over a decade after its involvement with GM, AC Propulsion had developed a prototype EV called the tzero: a sports car capable of sprinting from zero to 60 in less than four seconds while driving 200 miles on a single charge. Eberhard and Carpenning saw the kind of halo car that could shatter public misconceptions about EVs and usher them into the mainstream. But Gage and Cocconi expressed little interest in starting a car company to produce the tzero, viewing its market as too limited. Instead, they connected Eberhard with Elon Musk, the PayPal founder who had also expressed interest in helping Gage and Cocconi produce the tzero. With Eberhard‘s electrical engineering experience, Musk‘s financial backing, and a handful of licenses for AC Propulsion technologies in tow, Tesla Motors was bo rn. Its goal was undoubtedly ambitious: to profitably manufacture a $100,000 sports car that replicated the tzero‘s performance while delivering total well-to-wheel efficiency of over twice that of a Prius. In light of the new company‘s lack of experience building cars and the failures of previous EVs,
3
Jamerson, Frank. “EV1 Electric Car Timeline.” EV World. http://www.evworld.com/article.cfm?storyid=1053 Cogan, Ron. “20 Truths About the GM EV1 Electric Car.” GreenCar.com. May 26, 2008. http://www.greencar.com/articles/20-truths-gm-ev1-electric-car.php 5 Siry, Darryl. “Will the Real Tesla Founder Stand Up?” Wired. June 25, 2009. http://www.wired.com/autopia/2009/06/tesla-founder/ 4
Tesla set about assembling a product strategy and supply chain meant to address the significant innovation risks it was about to face. Tesla Roadster Ecosystem Risk Assessment Initiative Risk:
Interdependence Risk:
Integration Risk:
Increasing eco-consciousness amongst consumers, favorable legislature, and strong sales of hybrid vehicles suggested a robust market for the Roadster. Niche targeting further shields Tesla from risk. Though AC Propulsion’s development of the comparable tzero is encouraging, t he ability of the company to successfully exploit its innovation remained a concern, given its capital constraints and manufacturing inexperience. Given that Tesla is the primary innovator within the R oadster ecosystem, the level of interdependence risk is relatively low. The commoditized nature of Liion batteries minimizes potential lags in supply. In addition, Lotus’ experience with chassis design and manufacturing suggest a stable relationship on this front, at least for small volume Roadster production. The primary delays related to interdependence came as a result of transmission delays, a problem which the company eventually solved internally. Tesla has largely mitigated integration risk from the Roadster’s eco system by completing final Roadster assembly in its own facility. By retaining control over the purchase process through the elimination of franchise dealerships as intermediaries, Tesla ensures uninterrupted market access, t hough establishing the network has required time. Moreover, combining premium performance and green efficiency attributes meant t he company developed substantial brand awareness well before its first Roadsters came to market.
Relationship with Lotus
While Tesla initially had no internal expertise in exterior and chassis design, its requirements for the Roadster were largely indistinguishable from that of a regular gasoline-powered car, significantly lessening interdependence risk. After preliminary work with a number of car designers, Tesla eventually agreed to a multi-faceted agreement with Lotus, which provided design services, certain technology licenses, and also agreed to manufacture the rolling car chassis on a contract basis6. After Lotus built the rolling chassis at its plant in England, Tesla would then integrate the electric powertrain and perform final assembly in California. By installing its proprietary Energy Storage System (ESS) in the final step, Tesla also designed out most concerns over IP. Benefits to Lotus
Thus far, the relationship would appear to have been a successful one for both parties, providing near-term benefits as well as the flexibility for both companies to pursue di vergent strategies as Tesla matures. Lotus was well-positioned for the smaller production volumes Tesla was planning for and had a history of diverse collaboration with other manufacturers, working with GM on its Ecotec engines yet relying on Toyota-sourced engines for its own Elise and Exige 6
Eberhard, Martin. “Lotus Position.” Tesla Motors official website. July 25, 2006. http://www.teslamotors.com/blog2/?p=7
models. The relationship was thus consistent with previous contract design work and also allowed the company to leverage similarities between the Roadster design and its own Elise. For Lotus, producing up to 1,000 Roadsters a year meant guaranteed utilization of its manufacturing capacity, which has historically produced approximately 3, 000 cars per year 7. As a contract manufacturer, Lotus would not be directly entitled to the long-term upside they helped build at Tesla, but they did retain the guaranteed revenues associated with the Roadster‘s design and manufacturing. While Lotus has not had direct access to Tesla‘s powertrain technologies, the relationship has also undoubtedly improved its green car credibility. In 2008, Lotus supplied the chassis for Chrysler‘s Dodge EV concept vehicle, which n ot coincidentally bears a close resemblance to the Roadster. As noted below, the relationship also provided additional context for developing Lotus‘ own green car. Benefits to Tesla From Tesla‘s perspective, Lotus‘ engineering and design de partments were obvious partners given their expertise in designing sports cars with superior handling cha racteristics — a must given the competition the Roadster would be facing. Moreover, many of the Roadster‘s parts and safety systems carried over from the Lotus Elise, which significantly streamlined component sourcing8. Lotus‘ expertise allowed Tesla to bring the Roadster into serial production ahead of any other EV, while attaining the handling characteristics expected of a sports car. In the process, Tesla was also able to develop internally its own design and manufacturing expertise. As a result, Tesla‘s new Model S (due in 2011) was designed in-house, while this summer the company also received a $465 million DOE loan to build both a powertrain facility and an assembly plant for the Model S. The collaboration‘s non-binding structure has also provided both companies flexibility. Tesla‘s desire to become less reliant on outside manufacturing and expand into larger segments is evident in its relationship with Daimler as well as the decision to manufacture the Model S itself. Conflicts and Risks
The relationship has not been without controversy. Tesla was forced to recall 345 Roadsters in May 2009 when it was revealed that Lotus had failed to properly tighten chassis bolts, a flaw that also affected Lotus-branded cars9. The collaboration also led to a series of high-profile defections from Lotus to Tesla, with Lotus eventually demanding that a ―no-poaching‖ clause be written into the companies‘ manufacturing contract10. 7
“Lotus Targets Tesla With EV of its Own.” Wired. January 9, 2009. http://www.wired.com/autopia/2009/01/lotus-targets-t/ 8 Ibid 9 Ritch, Emma. “Tesla recall: Good for the electric car industry?” Cleantech Group. May 29, 2009. http://cleantech.com/news/4517/tesla-recall-good-electric-car-indu 10 Davis
In January 2009, Lotus revealed that it was working with a major manufacturer — rumored to be 11 GM — to develop a PHEV that could compete with the Roadster . Thus, the companies‘ collaboration has not eliminated the possibility of the two eventually competing against each other. Future Collaboration Following Lotus‘ PHEV announcement, Musk quickly noted that Lotus had informed Tesla well in advance of its intentions, and Tesla has stated its hopes of possibly supplying powertrain components should Lotus go ahead with the project12. Though their collaboration continues, it appears both companies are clearly preparing for life after the Roadster: Tesla by going after bigger markets and Lotus by competing directly against the Roadster it designed.
Beyond Lotus: Other Key Aspects of the Roadster Ecosystem
Though it outsourced much of the Roadster‘s production to Lotus and various component suppliers, Tesla overall maintained its independence. Indeed, much of its strategy was based on the ability to utilize existing battery and automotive technolo gies to avoid innovation risk. Batteries
Developing cost-effective batteries that provided the power and rang e needed to satisfy customers had long proven an Achilles heel of EV development. Yet the explosion of laptops and battery-powered consumer electronics beginning in the late ‗90s had turned lithium-ion cells into near commodity products, eliminating the need for Tesla to spend money developing its own battery cell solution. Instead, Tesla developed a solution for patching 6,831 battery cells together in its proprietary ESS, while leaving it to the big PC makers to invest in improving 11
“Lotus Targets Tesla with EV of its Own.” Abuelsamid, Sam. “Tesla CEO Comments on Lotus EV Report.” AutoBlog.com. January 3, 2009. http://green.autoblog.com/2009/01/03/tesla-ceo-comments-on-lotus-ev-report 12
battery cell performance13. The company reportedly sources batteries from a number of Japanese cell manufacturers while maintaining its own state-of-the-art battery testing facility. Of course, the development of the li-ion battery market did not mean putting an EV battery system into a car would be cheap, but as a startup Tesla did not have the credibility, production bandwidth, and distribution network to sell mass market cars anyway. Instead, building a lowvolume, high-performance piece of eye-candy seemed the obvious path around the battery limitation issue. If the wealthy were willing to buy the slow, oddly-shaped Toyota Prius to park next to their Porsches, then getting the best of both worlds – performance and environmentalfriendliness — seemed to fit an obvious market niche that no gasoline-powered car would ever be able to satisfy. However, Tesla‘s CTO J.B. Straubel also admitted in 2009 that Tesla‘s piggybacking strategy was practical largely because of its limited scale: "There is no question that we can make 10 million cars. The motors are not a problem. Power electronics the same. But with batteries, you're beyond the existing manufacturing base. You need to build a whole new industry to make the batteries, as big as the industry that is making the cars themselves."14 Concerns over longterm capacity were likely at least part of the motivation for the eventual Daimler transaction, as detailed later. Electric Motors and Powertrain Among Tesla Motors‘ key innovations was the production of high-yield, high performance copper rotors for its ESS, which serve the crucial purpose of converting the motor‘s AC current into the mechanical energy used to drive the wheels15. GM‘s rotor design had suffered from low efficiency for the sake of scale production, while AC Propulsion had developed a more laborintensive process for its very low volume, higher performance rotors. Demanding the best of both worlds, Tesla established its own rotor manufacturing facility in Taiwan to develop this key competitive advantage, while also sourcing motor and controller assembly from multiple manufacturers on the island-nation16.
Tesla faced significantly more challenges in developing a transmission robust enough to handle the motor‘s massive power output. From the outset, Tesla‘s powertrain was designed around the target of reaching 0-60 in four seconds, which required a new two-speed transmission instead of the simpler one-speed reductive design used in the tzero and other EVs. However, after a number of false starts with outside designers, the company found a solution while doing work for the Model S17. Rather than adapt the transmission to fit the motor, Tesla switched the motor to a 13
Davis, Joshua. “Batteries Included.” Wired. August 2006. http://www.wired.com/wired/archive/14.08/tesla.html 14 Mufson, Steven. “Batteries Drive Everything.” Washington Post. January 31, 2009. http://www.washingtonpost.com/wp-dyn/content/article/2009/01/30/AR2009013003741_pf.html 15 Eberhard, Martin. “Motor City.” Tesla M otors official website. http://www.teslamotors.com/blog2/?p=30 16 “Electric Vehicle Maker Tesla to Expand Procurements in Taiwan.” Taiwan Economic News. July 9, 2009. http://news.cens.com/cens/html/en/news/news_inner_28382.html 17 Wojdyla, Ben. “Tesla Finalizes Single Speed Transmission, Ups Output, Range.” Jalopnik. September 11, 2008. http://jalopnik.com/5048606/tesla-finalizes-single+speed-transmission-ups-output-range
liquid-cooled design that allowed for increased power production while still using a traditional one-speed transmission. To avoid further delays of the initial vehicles, the company opted to deliver the first Roadsters with a lower-performance interim transmission and then replace the powertrain once the new transmission was ready. Despite the significant costs associated with the plan, the company clearly felt pressure to avoid another production delay — both for PR reasons as well as the need to bring in some of the cash tied up in its order book. Sales, Distribution and Service
Tesla has also taken a decidedly independent approach to distribution of the Roadster, establishing its own network of dealerships that provide sales and maintenance. The company currently has eleven ―Tesla Stores‖ located in major metro areas in the U.S. and Europe, and provides on-site service anywhere in the U.S. and Canada through its mobile ―Tesla Ranger‖ service18. This is in contrast to the strategy being pursued by rival Fisker Automotive, which has signed up 32 existing dealerships to sell the $90,000 Karma PHEV it plans to debut in mid201019. Tesla‘s model is again suited towards low-volume, high-margin products, allowing the company increased control over customer interactions and vehicle service at the expense of up-front investment and broader market access. Though EVs should have far less maintenance than traditional vehicles, the lack of mechanics capable of servicing the cars means customers need access to company-approved service. Tesla‘s approach thus limits interdependence risk associated with educating and equipping a broad dealer network to sell and service a new type of car, but increases their cost of selling a car. Charging Infrastructure
The lack of electric recharging infrastructure for EVs has always been a fundamental barrier to entry that has protected ICE dominance. Though electrician-installed home charging systems mitigate this concern for everyday commuting and trips to the grocery store, most buyers remain uncomfortable having their primary car be incapable of long road trips, while city dwellers who park in the street would appear out of luck entirely. The problem is further complicated by limits on charging speed, with even the fastest high-voltage charger systems requiring 20 minutes to boost a battery to 80% capacity20. Better Place, a company developing EV ―services‖ in conjunction with the governments of Israel and Denmark, has proposed battery swapping stations as part of a leasing model in which EV drivers would not own their batteries, but instead subscribe to a service entitling them to switch out their batteries at Better Place-owned swapping stations21. Needless to say, this model would significantly complicate the EV ecosystem.
18
http://www.teslamotors.com/teslastore/ Blanco, Sebastian. “Fisker Signs Up 32 Dealers in 17 States.” AutoBlog.com March 24, 2009. http://www.autoblog.com/2009/03/24/fisker-automotive-signs-up-32-dealers-in-17-states/ 20 Loveday, Eric. “ Quick Charge Stations To Become Primary Means For Away From Home Fill Ups? ” AllCarsElectric.com. October 8, 2009. http://www.allcarselectric.com/blog/1036338_quick-charge-stations-tobecome-primary-means-for-away-from-home-fill-ups 21 http://www.betterplace.com/solution/ 19
While Tesla sells both home ($3,000) and mobile ($1,500) charging equipment22, the company has thus far mitigated its interdependence and integration risk mostly through its choice of market segmentation, rather than innovation. Though Tesla touts the everyday practicality of the Roadster, it is clearly targeted at wealthy buyers who have several cars at their disposal and will never need the Roadster for a 500 mile drive. Moreover, the Roadster‘s high price point also means Tesla can outfit the car with a large battery storage system capable of ranges up to 250 miles, approaching that of comparable gasoline-power cars. Tesla and California utility PG&E announced in 2007 a joint effort to develop vehicle-to-grid smart charging technologies23, but there is no evidence that the effort has tangibly impacted end users. However, for mass-market cars the costs of large battery systems become prohibitive. It is thus not surprising that Nissan‘s Leaf— likely to be priced in the range of $30,000 — will reportedly offer a range of only 100 miles24. Thus, the issue of charging infrastructure becomes significantly more important for cheaper mass market cars. The need for affordability dictates they use smaller battery packs, and consumers‘ increased reliance on them makes the issue of range limitations more acute. For many, this means that current EVs cannot be true substitutes for their gasoline-powered everyday car. Summary: The Roadster Experience
Despite initial delays, Tesla has largely delivered on the expectations it set for itself when the Roadster was unveiled in 2006. In July, the company announced it had become profitable for the first time, selling 109 Roadsters and earning $1 million on revenues of $20 million25. But the process was not without its casualties: Eberhard was ousted as CEO in late 2007 following a power struggle with Musk, who eventually took over the CEO role himself. In 2006, Eberhard had been confident that successful product and process innovation, as well as continued improvement in battery technologies, would help the company drive down costs far enough to make more affordable cars possible: ―We‘re going to ride that technolog y curve all the way home.‖26 Growing Tesla into more than a niche manufacturer necessarily would require the company to leverage its learning and move into larger, lower-priced segments — either by expanding its own product portfolio or selling powertrains to other carmakers. In early 2009, Tesla made its move on both fronts.
22
http://www.teslamotors.com/electric/charging.php “PG&E and Tesla Motors Co-Pilot Vehicle-to-Grid Research .” PG&E press release. Sept ember 12, 2007. http://www.pge.com/about/news/mediarelations/newsreleases/q3_2007/070912.shtml 24 Squatriglia, Chuck. “Nissan Turns Over An Electric Leaf.” Wired. August 2, 2009. http://www.wired.com/autopia/2009/08/nissan-electric-leaf/ 25 Schonfeld, Erick. “ Tesla Says It Is Now Profitable, Ships 109 Roadsters In July .” August 7, 2009. http://www.techcrunch.com/2009/08/07/tesla-says-it-is-now-profitable-ships-109-roadsters-in-july/ 26 Davis 23
Part II. Looking Forward: EVs for the Masses?
In moving to these different markets and developing its product line with the Model S, Tesla‘s ecosystem shifted and the company needed to find a new partner to provide experience, capital and credibility. Tesla‘s expertise lies in building powertrains using its battery technology. While Lotus was the appropriate partner for the Roadster to help establish its strategy and build awareness for EV technology, an experienced automaker could bring experience in building the other parts of a car at volume with lower costs. Enter Daimler. The Mercedes parent company has allowed Tesla to move on to the next part of its strategy, building the more affordable, practical Model S and selling its powertrains to other carmakers, namely Mercedes‘ own Smart brand. Tesla Model S/Powertrain Sales Ecosystem Risk Assessment Initiative Risk:
Interdependence Risk:
Integration Risk:
While the success of the Roadster suggests a reduction in initiative risk, the introduction of Daimler as a partner presents a potential conflict between Tesla’s own Li-ion technology and the Daimler-Evonik joint venture. Additionally, the proposed mass nature of the Model S initiative and the required scaling up of facilities present substantial risks not present in the Roadster’s ecosystem. The powertrain risks are limited given the company’s expertise is largely in this area, though it may have difficulties adapting its technologies to different types of cars and adapting to new battery technologies. In addition to leveraging its Roadster experience, Tesla has moved a significant amount of product design and manufacture in-house for the Model S. Using a Daimler chassis or working with Evonik on a new battery platform necessarily increases interdependence risk, and the company could not have moved forward without its DOE loan guarantee.
On the powertrain side, Tesla necessarily is dependent on other automakers’ willingness to develop EV platforms to use their technology. While Daimler is already buying powertrains, this has only occurred on a limited basis. Tesla continues to shield itself from integration risk in the Model S ecosystem by completing final assembly in its own facility. Should it choose to leverage Daimler’s distribution network in order to cope with volume sales, however, it will face additional risk as it relinquishes control over the sales process. For powertrains, Tesla will be reliant on othe r manufacturers being able to successfully assemble, distribute and sell the final products.
Relationship With Daimler
While Tesla and Daimler had been in talks since the fall of 2007, the two companies announced their partnership in January of 2009. In the deal, Tesla agreed to provide Daimler with the battery technology to get 1,000 electric Smartcars on the road by the end of 2009. Specifically Tesla will be providing Daimler with the battery packs and chargers for the Smart EV. This nonexclusive deal positioned Tesla as a supplier to Daimler. However, by May of 2009, the two companies decided to embark on a more strategic partnership.
This past spring, Daimler announced it was taking a 10% stake in Tesla estimated to be worth about $50 million. Beyond simply supplying battery systems, this partnership allowed Tesla to focus on its value proposition of bringing high performance electric vehicles to mainstream consumers while helping Daimler navigate the nascent electric car industry. Benefits to Daimler When announcing the partnership, Daimler‘s Chairman Dieter Zetsche acknowledged a ―paradigm shift [in the automotive industry and the need] to reinvent itself ultimately to be independent of petroleum and without CO2 emissions.‖27 Daimler can leverage Tesla‘s existing technology and knowledge and more quickly incorporate technological changes into their vehicles. Additionally, the scale of the automotive industry, and more specifically Daimler, inhibits it from undergoing rapid transformation. Working with a start-up allows Daimler to benefit from Tesla‘s agility without completely transforming its internal structure.
From a more long-term perspective, Daimler hopes to introduce an electric Mercedes Benz by 2010. Working with Tesla on their lithium-ion batteries may help Daimler bring this vehicle to market more effectively. Benefits to Tesla
While funding might be the most obvious benefit for Tesla, the start- up‘s partnership with Daimler is largely strategic. Though Musk claimed he had bigger offers from two other investors, he cited Daimler‘s supply chain and produ ction expertise as the deciding factor: ―The investment is about cementing the strategic relationship. Daimler felt it needed to be at least a part-owner of Tesla and we‘re interested in expanding the strategic relationship, so we agreed to take an investment.‖28 Tesla‘s first product, the Roadster, attracted a great deal of media attention; however, its introduction was fraught with cost overruns and delays. Working with a renowned automotive company like Daimler instantly injects credibility into Tesla‘s pursuits. Additionally, as Tesla works on the mid-range Model S, it can utilize Daimler‘s knowledge to power through potential roadblocks. Tesla will also have access to the Mercedes-Benz CLS parts bin, which would help the company develop certain parts like brakes, suspensions and safety systems that are not only expensive to develop but also require expertise that Tesla currently lacks29.
The Daimler partnership will also provide Tesla with access to Evonik Industries, Daimler‘s advanced battery venture. Evonik‘s technology has the potential to eventually outperform and outlast the common laptop cells currently used by Tesla. Tesla could also tap into Daimler‘s
27
Palmeri, Christopher and John Carey Electric . ―Connection: Tesla, Daimler .‖ Business Week. 19 May 2009, http://www.businessweek.com/bwdaily/dnflash/content/may2009/db20090519_566476.htm?campaign_id=rss_daily 28 Miller, Claire Cain. ―Tesla Finds a New Investor in Daimler.‖ The New York Times. May 19, 2009, http://bits.blogs.nytimes.com/2009/05/19/tesla-finds-a-new-investor-in-daimler/ 29 Voelcker, John. “Tesla’s New BFF (And Savior?) is Mercedes -Benze.” Green Car Reports. May 19, 2009. http://www.greencarreports.com/blog/1020813_teslas-new-bff-and-savior-is-mercedes-benz
distribution system. Although there are potential issues with this as outlined below, this collaboration could be beneficial in the long-term, even if only in Europe.
Conflicts and Risks
There are several potential issues that could arise over the course of this partnership. Daimler has interests in Li-Tec, its joint venture with Evonik Industries to create automotive batteries. If other battery companies prove to be more efficient than Tesla‘s suppliers, Daimler might not use Tesla‘s battery technology and may even pressure the company to switch to another battery supplier. In general, as the market for electric vehicles expands and if Daimler successfully brings an electric Mercedes Benz to market, the two companies may find themselves in competition. Additionally, Tesla‘s method of distribution deviates greatly from the overall automotive industry. Currently, Tesla sells its vehicles through company-owned showrooms. Typically, auto dealerships have contractual relationships with manufacturers creating a largely inefficient sales model.30 While Tesla is a relatively small scale automotive company at present, as they potentially grow, they may need Daimler‘s help with distribution. Given Tesla‘s commitment to cutting out existing inefficiencies in the way automobiles are sold, working with Daimler on distribution could be difficult.
As Daimler and Tesla enter additional partnerships, it may become difficult for the companies to agree on a strategic direction. In July, Daimler‘s major shareholder Aabar Investments of Abu Dhabi took an equity interest in Tesla as well. Moving forward it may become difficult for Tesla
30
Weinstein, Dave. ―Test-Driving the Tesla.‖ Business Week. 6 October 2009. http://www.businessweek.com/lifestyle/content/oct2009/bw2009106_470083.htm
to balance the competing interests of all of their partners, especially if the company continues to pursue powertrain sales to competing manufacturers. Conclusion : Tesla’s Route to EV Success
With EV development still in its infancy, Tesla has utilized an evolving ecosystem to help further the penetration of EV technology. In each phase of development, Tesla has leveraged its technological advancement with its partners‘ capabilities to grow demand for the overall EV market. From the beginning, like in the Vallourec case, a feasible product did not exist and proof of concept fell on the shoulders of Tesla. First, by partnering with Lotus, Tesla was able to create a product that could compete with the best production sports cars in the world, proving the capability of its EV powertrain while redefining the tradeoffs required between performance and efficiency. However, the ecosystem that brought the Roadster to life could never support Tesla‘s development into a major global carmaker. Tesla‘s partnership with Daimler has added further credibility to the EV story, increasing exposure and providing a ccess to industry expertise in manufacturing, component sourcing and distribution. Tesla is now faced with defining the company‘s business strategy for the future, whether as a powertrain manufacturer or a traditional carmaker. The $465 million loan from the Department of Energy earmarked for the construction of both a powertrain facility and Model S production plant leaves the door open for both opportunities. It still remains to be determined how Tesla‘s technological expertise will transfer to physical car manufacturing, how it will leverage Daimler‘s competencies to achieve its goals, and whether the Smart EV collaboration will create additional opportunities as a powertrain supplier.
At present, CEO Musk considers Tesla a car company, not a component supplier. Musk is hoping to diversify into further product lines after the introduction o f the Model S, which would serve as a platform for vans, sports utility vehicles, and other industrial/civic applications. Nevertheless, the challenges of building an independent, global carmaker are undeniable. An eventual acquisition by Daimler or specialization in powertrain supply seems far more likely, and either strategy will depend on the continued legitimization of EV technologies — far from a certainty. Whether Tesla achieves its goals with the Model S remains to be seen, but it is obvious that how it constructs its ecosystem in the future is essential to its survival.
