Tesla strategic analysis

Tesla STRATEGIC ANALYSIS Emily Chan, Kylie Chun, Christine Doan, Katherine Haghverdian, Megan Lee, Ariel Martin, Kylie Yamamoto and Timothy Yu

Table of Contents

Contents Executive Summary __________________________________________________________ 1 Recommendations __________________________________________________________ 2 Industry Structure ____________________________________________________________ 3 Overview _________________________________________________________________ 3 Chronology of the Industry ___________________________________________________ 3 Industry Today _____________________________________________________________ 5 Products__________________________________________________________________ 6 Markets __________________________________________________________________ 7 Suppliers _________________________________________________________________ 8 Manufacturing Processes ____________________________________________________ 8 Distribution ________________________________________________________________ 9 Common Financial Arrangements ______________________________________________ 9 Remote Industry Environment _________________________________________________ 11 Social Factors ____________________________________________________________ 11 Political Factors ___________________________________________________________ 12 Economic Factors _________________________________________________________ 14 Technological Factors ______________________________________________________ 16 Resource Factors _________________________________________________________ 16 Market Analysis _____________________________________________________________ 18 Electric Car Market ________________________________________________________ 18 Market Segment Analysis ___________________________________________________ 18 Critical Success Factor Analysis ________________________________________________ 21 Industry Success Factors ___________________________________________________ 21 Tesla’s Success Factors ____________________________________________________ 23 Failure Analysis ___________________________________________________________ 25 Industry Structural Analysis ____________________________________________________ 29 Threat of Entry: Moderate ___________________________________________________ 29 Threat of Substitutes: Moderate ______________________________________________ 30

Table of Contents Bargaining Power of Buyers: Moderate to High __________________________________ 31 Bargaining Power of Suppliers: High ___________________________________________ 32 Intensity of Rivalry: Moderate to High __________________________________________ 33 Competitor Analysis: BMW ____________________________________________________ 35 Overview ________________________________________________________________ 35 History __________________________________________________________________ 35 Assumptions _____________________________________________________________ 36 Financial Statement Analysis ________________________________________________ 37 Capabilities ______________________________________________________________ 38 Operations _______________________________________________________________ 42 Suppliers ________________________________________________________________ 45 Core Competencies & Sustainable Competitive Advantages ________________________ 48 Current Strategy & Future Goals ______________________________________________ 49 SWOT Analysis ___________________________________________________________ 51 Competitor Analysis: Mercedes-Benz ____________________________________________ 53 Overview ________________________________________________________________ 53 History __________________________________________________________________ 53 Assumptions _____________________________________________________________ 54 Financial Statement Analysis ________________________________________________ 55 Capabilities ______________________________________________________________ 56 Operations _______________________________________________________________ 57 Product: Mercedes-Benz B-Class _____________________________________________ 58 Manufacturing Process _____________________________________________________ 59 Distribution _______________________________________________________________ 59 Marketing ________________________________________________________________ 59 Human Resources _________________________________________________________ 60 Suppliers ________________________________________________________________ 61 Core Competencies & Sustainable Competitive Advantages ________________________ 61 Current Strategy __________________________________________________________ 62 Future Goals _____________________________________________________________ 63

Table of Contents SWOT Analysis ___________________________________________________________ 64 Strategic Map ____________________________________________________________ 65 Company Analysis ___________________________________________________________ 66 Overview ________________________________________________________________ 66 History __________________________________________________________________ 66 Assumptions _____________________________________________________________ 67 Financial Statements Analysis _______________________________________________ 67 Suppliers ________________________________________________________________ 70 Capabilities ______________________________________________________________ 71 Operations _______________________________________________________________ 72 Target Market ____________________________________________________________ 73 Marketing ________________________________________________________________ 73 Products_________________________________________________________________ 74 Manufacturing Process _____________________________________________________ 76 Distribution _______________________________________________________________ 77 Human Resources _________________________________________________________ 77 Brand Image _____________________________________________________________ 78 Competitive Advantage & Core Competencies ___________________________________ 79 Cost and Comparison Analysis _______________________________________________ 81 Current Strategy __________________________________________________________ 82 Future Goals _____________________________________________________________ 82 SWOT Analysis ___________________________________________________________ 84 Competitor Comparison & Evaluation __________________________________________ 85 Strategy Formulation _________________________________________________________ 87 Current Strategy __________________________________________________________ 87 Strategy Recommendation __________________________________________________ 87 Appendix A ________________________________________________________________ 91 Appendix B ________________________________________________________________ 92 Endnotes __________________________________________________________________ 93

Executive Summary

01

Executive Summary Founded in 2003 in San Carlos, California, Tesla was created by a group of engineers. Its initial mission was to prove that electric cars are better than gas powered cars. Dedicated to making each new generation of vehicles to be designed with incredible power and zero emissions, Tesla strives to ultimately transition the entire world towards sustainable transport. The inventor that the company is inspired after, Nikola Tesla, patented an AC induction motor in 1888 that the engineers based the Tesla Roadster on in 2008. In 2012, Tesla redefined the car industry with the first four-door electric sedan with the Model S and continues to spread its footprint into areas such as the Gigafactory in Nevada that will produce lithium ion battery cells. There has been an increasingly popular trend towards more sustainable living. This social shift has led way for many well-established automakers like Mercedes and BMW to enter the electric vehicle industry, posing potential threats to Tesla. With increasing competition and the demand of electric vehicles higher than ever, Tesla has the opportunity to capitalize on many of its strengths: rapid innovation, high performance, disruptive technologies, strong customer experience, and consistent brand image. Tesla’s brand is not just about being an automaker, it also entails a focus on being an innovator of energy. Its cars are integrated with all-wheel drive configurations, high efficiency motor, and high speed charging. Because of Tesla’s ability to be charged at home, Tesla owners never have to worry about fueling at gas stations. Free charging stations are placed on popular routes around the world that can replenish a charge by 50% in 20 minutes. Tesla has been able to capitalize on its core competencies to achieve strong competitive advantages, ultimately providing high value to its customers. The following table demonstrates the correlation between the two:

Core Competencies

Competitive Advantage

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Gigafactory

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Industry Standard Batteries

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Efficient Engineering

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Supercharger Network

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Computer Aid Design

•

Strong Customer service

•

Innovative Manufacturing

•

Made to Order Purchases

•

No storage costs

•

Autopilot feature

•

Direct Dealership

Executive Summary

02

With pressure to stay ahead in the industry and high production goals for the future, Tesla will need to identify the areas in which it must focus on for the future.

Recommendations The following recommendations highlight areas for Tesla to continue to stay as a top competing performer in the electric car industry.

Production Tesla should focus on increasing automation in its manufacturing processes to ensure that it will efficiently meet the demands of its existing and future models. While many of its operations are currently automated, Tesla can stand to invest in this effort more as it is expecting to ramp up production exponentially with the release of the Model 3. Tesla should also look into expanding its facilities into the East Coast to boost production volume and make delivery times faster.

Marketing Tesla currently does not use traditional advertising methods. Staying true to its current strategy, Tesla should continue to rely on customers’ word of mouth and updating their blog with current and relevant information. Tesla should work to increase its brand visibility through social media by creating engaging content on Facebook, Instagram, LinkedIn, and Twitter. They should also expand into other marketing efforts like creating a community group where other Tesla owners can meet and connect with each other.

Financial In its current financial state, Tesla is operating at a loss and will not see profitability until 2020. Tesla should look into alternative ways to raise capital instead of taking on more debt, like a stock split or dilution. Tesla should work to build more partnerships as well as capitalize on the Gigafactory to sell its batteries to other companies to raise capital.

Industry Structure

03

Industry Structure Overview Electric vehicles are a rising and compelling segment of the automobile manufacturing market that has continuously been gaining ground in the United States. In the past decade, the electric vehicle (EV) industry grew from just a few players to a booming and expanding market, comprised of mostly established automakers and one solely electric-focused carmaker. Consumers have gravitated towards this alternative drive type over conventional motor vehicles in recent years to join the movement towards sustainable mobility and long-term savings. States pushing government incentives to tighten emission norms have also contributed to the EV growth beyond the consumer level. 1 Electric vehicles present progress in reducing the world’s carbon footprint of automobiles.

Chronology of the Industry The electric vehicle industry is relatively young. Although it has been gaining in popularity today, the electric vehicle has been around since the early 1800s. Since the beginning, the demand for these vehicles has come in waves.

The Beginning Stages Between 1832-1839, Robert Anderson of Scotland invented and built the first electric powered carriage using non-rechargeable primary cells. However, American Thomas Davenport is credited with building the first electric vehicle to operate on a track in 1834. In 1891, William Morrison built the first successful electric vehicle in the United States, which could hold six passengers and travel up to 14 miles per hour. By the very early 1900s, the electric vehicle had 28 percent of the automobile market share, and according to a survey conducted at the National Automobile Show in New York, the top choice of automobile was the electric vehicle. 2

The Switch to Gasoline In 1908, Henry Ford started production of the affordable Model T car, which was powered by gasoline. In 1912, Charles Kettering invented the practical electric automobile starter which eliminated the need for the hand crank starter used in gasoline-powered automobiles. This was the turning point for the automobile industry, and the effects would influence the electric vehicle sales and market share. The downhill trend felt by the electric vehicle was a result of shifting consumer demand, which was attributable to cheap gasoline and the improvement of the internal combustion engine (ICE).

Industry Structure

04 Renewed Interest in the Electric Vehicle

Between 1966 and 1976, a few key incidents sparked a renewed interest in the electric vehicle. Congress started to pass more regulations because of increased health risks associated with air pollution, and gas prices began to increase as a result of the 1973 Embargo. In 1976, Congress passed the Electric and Hybrid Vehicle Research, Development, and Demonstration Act which supported the research and development of hybrid and electric vehicles. Not only was Congress taking interest in alternative energy, but so was California. In 1990, the state passed the Zero Emissions Mandate. The California Air Resources Board required automakers to manufacture some of its vehicles with zero emissions if the company wanted to sell cars in California.3 During this time, General Motors (GM) invested in building a practical electric car, and teamed up with AeroVironment to design the EV-1. Increased regulations pressured automobile manufactures to comply and start producing electric vehicles. Several thousand electric vehicles produced by Honda, GM, Nissan, Chevy and Toyota were available to lease. Although showing a steady demand, the mandate and increasing regulations did not go without pushback from the automakers and large oil companies. In 2001, GM, joined by various automakers, led a lawsuit against the California Resources Board and the mandate of 1990 was repealed. GM did not renew any leases and reclaimed all of its EV-1s by 2004, and soon after it was discovered that the company crushed these electric vehicles.

A Growing Market In 2006, Tesla Motors, a Silicon Valley startup, unveiled its Tesla Roadster which could travel more than 200 miles on a single charge. With Tesla’s success, car manufacturers began to invest into the research and development of electric cars with the government's help. In 2009, the government allocated $2 billion in the development of electric vehicle technologies through the American Recovery and Reinvestment Act of 2009. Along with this funding, the Department of Energy also invested $400 million to finance the infrastructure needed to support electric vehicles. The Chevy Volt and the Nissan LEAF were released in the United States in 2010, which was just the beginning of new releases from new car manufacturers.4 This leads into the electric car industry of today. There are more than 234,000 fully electric vehicles on the market today and this number will continue to grow with new competitors and new styles of electric vehicles produced.

Industry Structure

05 Industry Today

The electric vehicle industry is still in its budding stages, only a few years since its beneficial factors were introduced to affect consumer choices. Demand for full hybrids is projected to surpass 983,000 units in 2018.1 The continued decline in the price premiums of full hybrids will stimulate demand continuously every year. The United States and Europe are expected to lead the global EV market in sales because of higher disposable income and more developed EV infrastructure.5 Currently, around 16 low-end and high-end auto manufacturers are competing in this market. A few are fully dedicating R&D to this industry in their business models such as Tesla, while most are entering this industry as an expansion to their conventional gasoline vehicle line such as Ford, Nissan, and BMW (see Figure 1).

Figure 1: EV Sales by Manufacturer, 2015

Market share is widely represented by Nissan, Tesla, Mitsubishi and VW as the forerunners, and the rest of the pie is divided into much smaller slices (see Figure 2). This represents the market accurately with a rising move in established auto manufacturer entrants to compete in the electric vehicle industry and vary their product portfolio by assimilating to sustainability shifts. In joining this industry, market participants are required to consistently focus on innovative mobility technology. Autonomous driving, voice assistance and other enhancements to the performance of the vehicle that will attract a wider range of consumers are currently in the process of improvement or development. Regulatory pressures encourage moves towards electric-powered vehicles and grant tax incentives. 6

Industry Structure

06

Figure 2: EV Market Share by Manufacturer, 2015

Products Electric vehicles are more energy efficient than their internal combustion engine (ICE) counterparts, rendering electric vehicles the most optimal and sustainable source of transportation for the future. Not only are electric vehicles zero-emissions, but the high-tech technology of the battery-powered electric motor converts all of its fuel energy into usable power, a stark differentiation from the ICE, which only utilizes 20 percent efficiency. With the reduction or elimination of transmissions in electric vehicle designs, the overall weight is lighter and maintenance costs are lower relative to hybrid and ICEs. Due to lower maintenance care without oil filters, engine valves, consumers no longer must constantly devote these expenses to their vehicle. Outer appearances of electric vehicles do not give obvious identifiers that its carbon footprint is exponentially less than ICEs. The chassis, or body, of electric vehicles are manufactured in the same process as bodies of ICE vehicles are. The drastic differences are not visible externally in the styling of the vehicle or in the interior of the vehicle. Rather, the differentiation is experienced during the drive, distinctive to the battery-powered motor of the electric model.7 To

Industry Structure

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captivate the consumer weighing the options of a conventional combustion engine vehicle and an electric vehicle, the EVs must maintain functionality, safety, convenience and sleek design, while optimizing energy efficiency and performance.8 Figure 3 below illustrates the primary differences between electric and gasoline vehicles that compare emission, source of power, driving range, refueling/recharging time, and cost per mile.9 The battery, as the essential component keeping an electrical vehicle running, is refueled by household wall outlets or at public charging stations. Electric vehicle batteries are typically composed of lithium-ion that have a higher energy density over lead-acid or nickelmetalhydride batteries.1 As the premium type of battery for EVs, lithium-ion carries a hefty price which increases per kilowatt-hour (kWh) incorporated into the battery. Due to lithium-ion battery price tags, the typical mass market EV holds a range of less than 100 miles. However, as lithium-ion batteries decline in price, so will the overall EV manufacturing cost. Batteries require extensive testing and R&D in-house to further improvement and leads in range technology. Since the recent surge in electric vehicle offerings released amongst various low and high-end car manufacturers, the prevalence of public charging stations has increased to respond to this alternative charging transition. Recharging times vary, depending on the voltage capacity and battery type of the car.4

Figure 3: Electric vs. Gasoline Vehicles

Markets Most battery-electric vehicles available today have only been on the market since 2010. Many established ICE players have ventured into the EV industry due to a shift towards energy efficiency and sustainable living. Greater demand for EVs is seen in more developed areas,

Industry Structure

08

where there are larger markets, higher levels of disposable income and greater demand for sustainable mobility. Because the electric vehicle industry is still in its early stages, market segments have not yet been fully defined. However, as the industry continues to experience significant growth, the EV market will likely become segmented by price. The industry will see the EV market roughly segmented into smaller, mass-produced EVs at affordable prices (under $40,000) and longerrange, luxury electric EVs at higher prices. The level of disposable income and value placed on certain EV capabilities will be determinants of consumer interest.1

Suppliers Even with the replacement of an internal combustion engine with an electric motor, what accessorizes the internal and external elements of the car are still comprised of many parts. The extraneous parts that structure a whole car are provided by numerous different suppliers. Batteries are one of the most crucial components of the electric vehicle. Some automotive companies have technology and expertise and systems in lithium-ion cells to have proprietary technology while some continue with lithium-ion cell suppliers. Panasonic, Samsung SDI, and LG Chem are among the few original equipment manufacturers (OEMs) who dominate the lithium-ion battery market.5

Manufacturing Processes An electric vehicle, in some ways, can be seen as a modification of the traditional gasolinepowered vehicle. Externally, both types of vehicles have similar bodies, but internally, the components greatly differ. Generally, gasoline-powered vehicles have an internal combustion engine, transmission, alternator, carburetor, spark plugs, crankshaft, and battery. Production of an electric vehicle would mean differences in the powertrain and energy storage system. This would require changing the design of the body to accommodate rechargeable, high-power batteries and installing the infrastructure to be able to recharge the batteries. The manufacturing of an EV, not including design considerations, follows the general process of that of a traditional gasoline-powered vehicle. The process takes place at a manufacturing facility, where the body of the car is first formed by welding pressed aluminum panels together. General assembly of the car’s operating components is split up into several workstations. Each workstation is reserved for a specific purpose: installation of complex electronics, assembly of

Industry Structure

09

the car’s interior, insertion of the AC/heating system, addition of the battery pack, completion of the car’s exterior and finally, quality inspection. Typically, EVs are produced in small volumes for most car manufacturers since they represent a small segment of their predominantly ICE product lines. Therefore, the manufacturer’s cost per vehicle remains relatively high. As EV adoption becomes more widespread, they can become produced in higher volumes in which manufacturers would see larger cost reductions as economies of scale increase. Manufacturers that have a larger stake in the EV industry, such as Tesla, produce EVs at higher volume and prove to be more cost-competitive in terms of the supply base for components.

Distribution The electric vehicle industry’s dealership network is no different than the conventional automobile industry’s in terms of the prominent and vital role it plays in the supply chain. With the exception of Tesla’s vertical integration of its distribution centers, franchised car dealerships are the standard middleman between the auto manufacturer and the consumer. Generally, these car dealerships are franchised by automotive retailers such as Autonation and Penske, which are granted franchising rights of the auto manufacturing company to act as an intermediary for the car company’s products. Car dealership businesses will purchase the vehicles of that specific automotive brand to gain steady inventory in order to meet various consumer needs and specifications. Prices of the car models and advertising activities are all set and managed by the company to meet factory prescribed norms, but specific retailers that own the car dealership franchises will offer varying services per location. 10

Common Financial Arrangements When it comes to financing a car, there are many ways to get a good deal. Dealers always try to make money by up-charging the potential customer and a good way to avoid extra fees is to forgo dealer financing and focus on different outlets. Choosing pre-owned vehicles that come with manufacturer-backed warranty can be a smart move, considering cars on average lose 18 percent of their value within the first year. Prior to going on the market, they are also inspected and fixed, just like a new car. For gas-powered cars, leasing should not be an initial option because the car must eventually return to the dealer and if bought after the term, its price is usually higher compared to a car of similar value. However, for electric cars, leasing proves to be a choice that most customers go for, as 75 percent of the electric car market is leased. This is related to the types of incentives

Industry Structure

10

that are provided on a local, state, and federal level that are incorporated into the price of a lease. Other factors that lead customers to lease include the battery life of an EV and the fact that electric cars only retain 30 percent of their value after three years, compared to gas cars retaining 50 percent (see Figure 4).

Figure 4: EV Value Retained

When it comes to choosing what size the car loan should be, the monthly car payment should be less than 20 percent of the disposable income. Taxable investments should be considered, rather than tapping into 401Ks when considering all pools of money. Credit unions or nonprofit banks hand out loans at a lower cost than traditional banks but looking at the APR, annual percentage rate, to compare between various lenders. Timing for when to visit the dealership changes how motivated the salesperson will be in terms of cutting a deal. The busiest time is on the weekend which means that by starting early in the week, a salesperson is more inclined to give a customer a good deal. Visiting a dealership at the end of the month gives more incentive to a salesperson to sell a car since dealers receive bonuses depending on how many cars leave the lot. The last tip would be to look for older models since they will sell for less as the car companies try to roll out new versions and get rid of inventory.

Remote Industry Environment

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Remote Industry Environment Social Factors Consumer Perceptions In its 10-K report Tesla lists consumers’ willingness to adopt electric vehicles (EVs) as one of the most important factors for the company’s future growth, which is an element that also presents a threat to the industry.5 The current eco-friendly trend that has people becoming more conscious of their environmental impact will help the electric car industry because it offers consumers a mode of transportation that is both zero-emissions and powered by a renewable resource. Reductions in the prices of EVs and concerns about volatile gas prices are expected to increase the demand of hybrid and electric vehicles by 25 percent per year through 2018.11 Consumer hesitations tend to circulate around issues related to the limited driving range and convenience of charging electric vehicles, since it can take hours to fully charge the battery and there is a limited network of charging stations in comparison to the availability of gas stations. In a recent survey by financial services company UBS, only 43 percent of respondents said that 200 miles is an acceptable range for an electric car, and 69 percent considered 300 miles to be acceptable.12 Tesla’s Model S has a driving range of 219 to 337 miles, depending on the battery type and use conditions. 13 The average American drives about 37 miles a day and electric vehicles can be charged anywhere an outlet or public charging station is available, so perhaps manufacturers should do more to drive the message that EVs are not as much of a hassle as people think.14 However, development of batteries that charge more quickly and have the capacity to fuel cars for longer distances between charges would go a long way to dissuade major concerns and improve consumer perceptions of electric vehicles. The electric car industry has a high potential for growth, but manufacturers need to stress to consumers the benefits of going electric, including reducing their impact on the environment, saving money fuel costs and enjoying a smoother, quieter ride. Improving consumers’ attitudes towards EVs by alleviating their apprehensions serves as a huge opportunity for the industry to tap into a large group of potential customers who may be on the fence about electric vehicles.

Buyer Demographics Based on 2013 sales, about 55 percent of people who purchased electric vehicles are between the ages of 36 and 55 years old, which is a younger demographic than most purchasers of hybrid vehicles. EV buyers also tend to be wealthy; almost 21 percent had household incomes of $175,000 or greater.15 This customer demographic reflects the higher price point of electric vehicles and growing popularity of luxury electric cars. Particularly in the luxury electric car


12

segment, the anticipated entry of BMW, Audi, Porsche and Mercedes threatens to unseat Tesla as the dominant competitor. A survey revealed that 41 to 52 percent of households earning $100,000 or more would choose to buy an electric car from an incumbent brand, and 20 to 29 percent would purchase from Tesla.16 The entry of existing luxury car companies may be beneficial for the electric car market if brand familiarity attracts consumers to purchase an electric vehicle, especially among the wealthy, who tend to purchase EVs as a secondary or tertiary car due to their limited range.

Overpopulation The world population is currently at over 7 billion people. If that number were to grow at an unexpected rate, especially in heavily populated urban areas, then it may cause a shift in the modes of transportation preferred and used by consumers. Areas with a very high concentration of people already experience a ton of traffic on daily commutes, so overcrowding may render traditional and electric cars impractical to use if there are too many vehicles on the road.

Political Factors Government Incentives Government support of electric vehicles is a reflection of the goal announced in President Obama’s 2011 State of the Union speech to have one million electric vehicles on the road by 2015 as “a key pathway for reducing petroleum dependence, enhancing environmental stewardship and promoting transportation sustainability, while creating high quality jobs and economic growth.”17 Unfortunately, his objective was not met but the electric car industry benefits from the mechanisms enacted in attempts to reach this goal. One of the most important political factors affecting the electric car industry is the availability of government tax credits, which serve as a big incentive for consumers to purchase an electric car. Currently, buyers of new electric vehicles are eligible for up to $7,500 in credits, depending on the size of their vehicle’s battery. The full credit can only be applied if the buyer’s income taxes for the year are equal to amount of the credit or more, meaning that the remaining amount cannot be carried over to the next year’s taxes or issued as a check.18 The idea behind the electric vehicle tax credits is that greater economies of scale will contribute to the ability of manufacturers to eventually lower the high initial costs of new innovations and technology, eliminating the need to offset the costs with these credits. The government has already phased out similar plans for hybrids and clean diesel vehicles and plans to do the same for electric vehicles as each manufacturer hits the mark of 200,000 qualified vehicles sold. According to the U.S. Department of Energy’s Office of Energy Efficiency and Renewable Energy, “The credit begins to phase out for vehicles at the beginning of the second


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calendar quarter after the manufacturer has sold 200,000 eligible plug-in electric vehicles in the United States as counted from January 1, 2010” (see Figure 2).19

Figure 5: EV Tax Credit Phase-Out Plan

The tax credits present a current opportunity for electric vehicle companies to use from a marketing standpoint, but may become a threat to the industry if manufacturers are unable to lower the costs of batteries and technology to keep their prices affordable for consumers when the credits are no longer available. The price premium for electric vehicles is one of the reasons people opt for traditional cars, so it is critical for the EV industry to find a way to reduce costs and pass those savings on to consumers to make EVs an attractive option.

Investment in Public Transportation If local and state governments were to make the decision to invest heavily in modes of public transportation like buses, trains and subways to improve reliability and comfort, then consumers may choose those methods over traditional cars due to the decrease in perceived benefit. Upgrades in public transport would cause consumers to reconsider whether owning a car or using other methods of transportation is more valuable, in terms of cost, time spent looking for parking or walking to pick-up locations and convenience, which presents a threat to the electric vehicle industry.

Government Regulations Increasingly stringent car safety and emissions standards will help push automakers away from gasoline-powered cars and towards alternative fuel vehicles. The Clean Air Act is a federal law most recently amended in 1990 that sets standards for air emissions in order to protect the environment and health of the public from the effects of air pollution. 20 California’s Zero Emissions Vehicle Mandate requires car manufacturers to sell a certain number of electric vehicles in proportion to its overall sales within the state. 21 As a result of 2003 legislation enacted to reduce greenhouse gas emissions to 80 percent below 1990 levels by the year 2050, California is also increasing sales targets for alternative fuel vehicles from about 1


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percent today to over 15 percent by 2025. Nine other states (Connecticut, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island and Vermont) have also adopted California’s standards, which are much stricter than federal regulations. 22 The future implications of these requirements will prompt manufacturers to begin focusing more heavily on developing alternative fuel vehicles, if they have not already, which will hopefully drive production costs down and provide consumers with a greater variety of EV choices than are on the market today. It is also likely that the government will continue to enact even stricter environmental standards for car manufacturers, which will give another push to increase the demand for more environmentally friendly vehicles. On the other hand, if government safety and environmental mandates become too strict, then it may deter new competitors from entering the electric vehicle industry and inhibit the industry’s growth.

Oil Industry Lobbying Lobbying by the oil and gas industries also presents a threat to the electric vehicle industry. Groups backed by fossil fuel companies are organizing to advocate against government subsidies and promote the use of petroleum-based fuels who do not want electric vehicles to gain popularity and cut into their profits. Koch Industries, an energy corporation with $115 billion in revenues, is working to launch a new pro-petroleum fuels group that will spend about $10 million a year to advocate fossil fuel use and attack government subsidies for alternative energy.23 Groups like this one have the support of companies with enormous financial resources and have the potential to overwhelm the EV industry’s progress and the government’s stance of working to phase out fossil fuels. In 2010, Koch Industries, Valero and Tesoro teamed up to fund a multimillion dollar ballot initiative against California state standards aimed at reducing carbon emissions. Although the initiative was unsuccessful, the influence of the oil industry in the political realm is a threat the electric vehicle and alternative energy industries cannot afford to ignore.

Economic Factors Economic Conditions Following the 2008 recession, the unemployment rate in the U.S. has steadily declined each year since 2009 (see Figure 6). Lower rates of unemployment imply that people have more disposable income to spend on leisure activities and products, like perhaps purchasing a second car for the family that is electric. Since electric cars typically sell for a higher price than traditional internal combustion engine cars, it is less likely for consumers to opt for EVs when the economy is in a slump. Approximately 26.4 percent of U.S. households earned more than $100,000 in 2015, which is roughly constitutes the wealthy demographic that tends to purchase electric cars (see Figure 7). With income inequality on the rise, it is possible that the group of buyers who can afford to


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purchase electric vehicles will shrink as the top one percent of the population accumulate more and more wealth. In 2013 the top one percent earned more than 25 times more than the entire bottom 99 percent of the population, and the income inequality gap has widened in every state since the 1970s.24 Future economic upturns and downturns will affect the electric car industry in the form of consumers’ ability and willingness to spend the money to cover the upfront cost of purchasing an EV, despite future savings on fuel costs.

Figure 6: Unemployment Rate Trend, 2006-201625

Unemployment Rate (%)

12.0 10.0 8.0 6.0 4.0 2.0 0.0 2006

2008

2010

2012

Figure 7: Distribution of Household Income, 201526

2014

2016


16 Oil Prices

There is an income effect tied to the price of gas: lower gas prices correspond to greater levels of discretionary income, and vice versa.27 According to a consumer price index by AAA, “Half of U.S. adults consider gas prices to be ‘too high’ when it reaches $3.44 per gallon … [and] roughly two-thirds of Americans (62 percent) are offsetting high gas prices by changing their driving habits or lifestyle,” with 54 percent choosing to do so by driving a more fuel efficient car.28 When gas prices are high, consumers are more sensitive to the number of miles per gallon their cars get and search for more fuel-efficient vehicles, increasing demand for more energy efficient cars like hybrids and EVs. If oil prices were to rise in the future due to shortages or other unforeseen reasons, it is likely that demand for electric vehicles will skyrocket.

Technological Factors Battery Improvements Improving electric vehicle batteries presents the industry the opportunity to give consumers the ability to drive farther with less charging, which will increase consumer confidence in EVs. A breakthrough in battery technology that allowed EVs to be charged faster or less frequently would greatly benefit the industry because it would reduce the inconvenience of owning an electric vehicle. The battery is also one of the most expensive parts of an electric vehicle; in 2010 the average battery cost $1,000 per kWh. Fortunately, costs have been falling at a fast pace, with the average dropping to about $350 per kWh last year. 29 Once battery manufacturers can reduce the price of batteries to a point where EVs can be priced to compete with traditional cars, electric vehicle sales are expected to take off to a point where they will hopefully become mainstream vehicles of choice. Tesla’s 10-K states that negative perceptions by the public toward the use of lithium-ion cells for their battery packs present a risk because in “rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames.” Safety concerns may dissuade consumers from purchasing an EV, so it may be beneficial to make also improvements to the battery pack’s design.

Resource Factors Competent Employees With schools and programs placing a greater emphasis on STEM (Science, Technology, Engineering and Mathematics) education at an early age, there will most likely be a surge in


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students studying subjects that will prepare them to work in high-development sectors like the electric vehicle industry. With their STEM backgrounds, these new employees present a huge opportunity because they can contribute greatly to new technology development that will attract interest and increase the prevalence of EVs in our society. The increasing presence of women in these fields will also bring a fresh perspective that may lead to breakthroughs in technology and other design factors.

Availability of Lithium The U.S. is one of the largest consumers of lithium, which is found in high concentrations in only a few places. Bolivia, Chile, China, United States and Argentina are known to possess around 90 percent of the world’s lithium resources, but there are no clear quantifications of the total amount of lithium resources worldwide. Batteries are expected to become the most common use of lithium in the future, in applications such as cars, cameras, cell phones and laptops.30 Experts do not expect there to be a shortage of lithium in the near future, but it is still possible that estimates of lithium reserves are inaccurate or unexpected circumstances such as wars, natural disasters or unfavorable political relations with other countries inhibit the ability of battery manufacturers to acquire lithium. It is also possible for lithium prices to increase due to shortages or labor costs, which would in turn push the price of lithium batteries and electric vehicles up and reduce the sales and profit margins of the EV industry.

Charging Station Infrastructure Government support for expanding the number of charging stations throughout the country will greatly benefit the EV industry by providing the infrastructure necessary for the industry to grow to its full potential. These efforts will help to alleviate consumer concerns about getting stuck in the middle of nowhere with a dead battery because charging stations are not as widely available as needed. The Obama administration has planned to establish 48 new electric vehicle “charging corridors” in 35 states, covering about 25,000 miles of highways. 31 The charging corridors will be placed near restaurants and other amenities so drivers can recharge their vehicles when traveling long distances. Broadening the infrastructure is a necessary step for expanding the adoption of EVs and making them more practical for everyday and long-distance use.

Market Analysis

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Market Analysis Electric Car Market The electric car market consists of namely Battery Electric Vehicles (BEVs) whereas hybrid cars are referred to as plug-in hybrid electric vehicles (PHEVs). The future of the automotive industry lies in electric cars due to its potential for environmental protection and oil crisis. Elon Musk’s Tesla Motors commands the green spotlight and is setting the pace for cleaner cars. Though people are making the shift towards electric cars for its green value, no technology is 100% green. In terms of competitors, BMW and Mercedes Benz are offering three electric car models this year. Thirteen car companies in total have at least one electric car option with car sales up 34% with about 17 million vehicles being sold in 2016. Right now, electric vehicles are 1.6% of the car market but is expected to rise to 6% by 2025. 32 The company applies a differentiation focus strategy based on the uniqueness of its products. It continues to stay competitive against the competition by integrating advanced environmentally friendly technology. Market penetration allows Tesla to maximize its revenues from the market with its current intensive growth strategy. Based on how much market share Tesla owns, it develops more competitive advantages in relation to its strategy.

Market Segment Analysis The demographics for electric car buyers skew towards a more young and affluent audience. A little more than half of that group, 55 percent, are between the ages of 36 and 55. The average household income for 21 percent of the buyers are $175,000 or more. About 44 percent mentioned that there is at least one child living with them at home. Only 26 percent are people over the age of 56 with 12 percent having a household income greater than $175,000. 33 Considering that Tesla belongs in the luxury electric

Market Analysis

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car market, the customers tend to be from affluent backgrounds. Those who are looking to buy a Tesla must have the necessary infrastructure near their homes; a garage or convenient access to a proper electrical system for charging purposes. Most of these car buyers are found in cities along the west coast. Electric cars are offered mainly in California due to state regulations that require at least one zero emission model be sold by major car companies. The cities with the most green car buyers are in California and Virginia. San Francisco, Oakland, and San Jose are tied for first, followed by Charlottesville in second, and Los Angeles in third place.30

Demand Trends According to a report done last year, the US electric car market has very strong growth overall despite the collapse in oil prices which gave consumers the impression that new energy vehicles were not as economically viable as they once were. Recent pressure that the government and consumers are facing considering alternative fuel options to limit pollution has contributed to the growth of the electric car industry. Since buyers are price sensitive, many manufacturers invested heavily into reducing switching costs as much as possible and building their brand to weaken the buyer power in a new cars market.

Product Life Cycle The product life cycle consists of inception, growth, maturity, and decline. For the electric car market, since it only consists of less than five percent of the overall car market, it is still in its early stages in growth. At the growth stage of the life cycle, that is where sales are increasing at its fastest rate after the researching, developing, and launching of the product is finalized. Tesla’s main focus lies on early adopters in the high-end market. Tesla has come out with a few models and other companies are joining in on this trajectory towards building more ecofriendly electric vehicles. A company reaches the maturity stage once the growth rate starts winding down and sales near its peak. The decline stage, or final stage, happens when sales move downward.

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Market Analysis

20 Customer Analysis

Before the price on electric vehicles can be reduced to satisfy most customer demands, rentals become a major objective in research. Customer participation, service quality, and customer value are being analyzed for post purchase intentions. Problems such as difficulty finding enough charging stations pose as a risk for consumers when comparing between electric and the more traditional automobile. Nowadays there is the trend of car sharing and that helps alleviate the purchase price burden of electric cars which is why rental service is key. Customer satisfaction, as proven in studies on multimedia telecommunication services, heavily influences post purchase intentions as it is composed of emotional response and consuming experience. Customer perceived value (CPV) requires extensive research since greater levels of customer satisfaction leads to stronger competitive position and higher market share.

Critical Success Factor Analysis

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Critical Success Factor Analysis Critical success factors, an idea popularized by MIT’s John F. Rockart, are the few essential factors that directly impact the competitors in an industry. 35 Companies should strive to execute activities related to the critical success factors at the highest level to outperform the competition. The electric vehicle industry is still relatively new, and analysts do not have a set of established critical success factors because of its rapidly changing environment. However, by analyzing the industry’s successful companies as well as researching the industry failures, we have identified five critical success factors for the electric vehicle industry. These factors are access to capital, government support, battery technology, charging infrastructure and customer education. We have also identified four critical success factors for Tesla, which are “disruptive” technology, customer experience, superchargers and a strong, consistent brand image.

Industry Success Factors Access to Capital The most important success factor for developing, producing, and selling an electric car is capital. Electric vehicles require hefty investments in research and development because the internal workings of the car (software, battery capability, etc.) are more crucial to the success of the car than its exterior look. Martin Eberhard and Marc Tarpenning, the original minds behind Tesla Motors, reached out to family, friends, and smaller VC firms to raise their first round of money. However, this was not nearly enough to finance company growth, so the two men set out to find a lead investor. They found it in Elon Musk, co-founder of PayPal and visionary of Space Ex. Musk led the $7.5 million round. A successful proof of concept was important to securing more funding, which was led by Valor Equity Partners and Elon Musk of $13 million.36 The government also helps fund clean energy projects to encourage entry into this space because without the money, companies would not be able to successfully produce the new technology or develop completely different cars. Capital is also necessary for the additional components needed to maintain the success of an electric vehicle producing company. Money needs to be invested in the charging stations, as well as repair and maintenance infrastructure and staff. Capital is much easier to come by for existing automobile manufacturers than smaller start-ups, however, venture capital firms are taking interest in this growing market which makes it an opportune time for new competitors to reach out to investors.


22 Government Support

The government’s support is essential to the success of this industry. Government policies that support the production and manufacturing of electric vehicles will allow this industry to continue to grow, as more car companies will need to comply with requirements and customers will have the incentives needed to switch to electric vehicles. There are already some government programs that have influenced the growth of the industry and are pushing towards clean energy. The EV Everywhere program, launched by President Obama in 2012, is part of the Energy Department’s Clean Energy Grand Challenge. Secretary Chu describes this program as, “... advancing electric vehicle technologies and continuing to reduce costs, so that a decade from [2012], electric vehicles will be more affordable and convenient to own than today’s gasoline-powered vehicles.” According to fueleconomy.gov, the official U.S. government source for fuel economy information, owners who purchase electric and plug-in hybrid cars after 2010 are eligible to receive a federal income tax credit up to $7,500 under this program. This does not include the extra incentives that individual states and cities provide to consumers. For example, in San Jose, California the city is providing free parking for street parking meters, at regional parks and in four downtown garages. These financial incentives will provide an additional pull for consumers to purchase electric vehicles. Financial support is also available to electric car manufacturers in the form of government loans. With heavy support from the government, the electric vehicle industry can continue to grow and may even become the vehicle of the future.

Battery Technology Companies who want to successfully compete in this industry need to continue to innovate in lithium-ion battery technology. Currently, the energy capacity of the battery is low and it takes long to charge. Companies need to stay ahead or keep up with the competition in this crucial area by heavily investing in the research and development of the battery. Whether that is by investing the money into the company to produce the battery technology itself or partnering with another company who is solely focused on making the necessary improvements, the development of the interior parts of electric vehicles at this stage is more critical than the exterior specs. Battery efficiency is important to the consumer, and so is the cost. Batteries are still expensive to produce, and if the cost of battery drops, so will the overall price of the car. According to an analysis of the electric vehicle market by Bloomberg New Energy Finance, the cost to produce the lithium-ion battery has fallen 35 percent since last year. Bloomberg New Energy Finance lead advanced transportation analyst Colin McKerracher has said, “Lithium-ion battery costs have already dropped by 65 percent since 2010, reaching $350 per kWh last year. We expect EV battery costs to be well below $120 kWh by 2030, and to fall further after that as new chemistries come in.”37


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One-third of electric vehicle manufacturing costs are battery-related, and if the projection were to hold true to the analyst reports, the costs of manufacturing electric vehicles will drop drastically as improved technology becomes available. The battery efficiency and cost are differentiating factors of each electric car competitor.

Charging Infrastructure Convenience and quality of the charging stations available to electric vehicle owners is a critical success factor because although not a direct component of the car, is necessary for the continued function of the vehicle. Without chargers in optimal locations, the cars will not be able to function. To make the move away from gas completely, chargers need to be made available in locations that are accessible to drivers, meaning that chargers need to be placed in an appropriate range of proximity, just like gas stations. To increase the overall size of the industry, the quality of the chargers is also crucial. Currently, it is inconvenient to recharge the electric vehicle and may take hours to bring the car back to full power, which is 80 percent.38 Time is precious to consumers, and charging stations need to be improved if this industry wants to continue its growth.

Customer Education Educating customers on the financial, economical and environmental benefits and costs of switching to a fully electric vehicle will lead customers to make a more informed decision when purchasing or leasing their next car. The industry is relatively new, so shifting consumer demand is crucial to the success of this industry. As shown in the industry chronology section, there were periods of time when the electric car may have been sustained its success in the automobile market. However, there was not enough push from automakers and the government alike in educating the public, who ultimately determine the demand. Fully electric vehicles are starting to trend again, but the market for gas alternatives is still relatively small. Potential customers need to be educated of the benefits of investing in a fully electric car. It is essential for competitors to market the short and long-term benefits of electric vehicles or consumers will continue to pick the gas car.

Tesla’s Success Factors “Disruptive” Technology “Disruptive” technology, a term coined by Harvard Business School Professor Clayton Christensen, is technology that changes an industry. The disruptive technology of efficiently powering a high-performing car with lithium-ion batteries drives Tesla to the innovative forefront of the electric vehicle industry. Its initial plan of producing a high-performing sports car that was both environmentally friendly and highly efficient led the company to its success today. 39


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The company has only improved the technology since the release of its first car, The Roadster, and continues to dominate the industry. According to fortune.com, Tesla’s new Model S P100D has a range of 315 miles and is the third fastest accelerating production car produced, comparing gas-powered and electric vehicles alike.40 Tesla continues to develop new technology that will once again change the automobile industry in general, and especially the electric vehicle industry. Tesla is broadening its scope to include autonomous driving. And if successfully executed, this will change how people travel to and from their destinations. Tesla stays ahead by disrupting the industry and pushing the limits of technology. Its continued investment in technological advancement is the result of innovative, forward thinking leadership.

Customer Experience Tesla management made an early decision to eliminate the middleman and not sell its cars in the traditional dealership route. Tesla, unlike its other automakers, sells its cars in its own showroom. Delivery of the vehicles takes longer, however, this is because each car is customizable and made to order. In Tesla’s showrooms, customers are educated about both Tesla vehicles and the electric vehicle industry in general. Customers are not yet fully knowledgeable about this new type of technology, and Tesla provides customers with representatives who are willing to take the time to educate customers on the pros and cons of their potential car purchases. Unlike in the traditional dealerships, the Tesla representatives do not work on commission.41 With these showrooms, Tesla has its cars and its customers on its mind, and the level of individual service that Tesla provides sets it apart from its competitors who use dealerships to sell both electric and gas powered cars.42

Superchargers According to Tesla’s website, Tesla’s Superchargers are “The World’s Fastest Charging Station.”43 The Superchargers are strategically placed along highways, city centers, and the company even partners with specific destinations to provide a Tesla Wall Connector at the location. There are 735 Supercharger stations with 4,625 Superchargers available for Tesla owners use, and the Superchargers are easily located on the vehicle's interior screen. Tesla is currently building more Supercharger Stations to increase accessibility. Tesla owners are able to use both Tesla’s Superchargers and public charging stations, while other electric vehicles are only built for the generic station. Tesla's superchargers are more efficient than most of the other charging stations already in place. The Tesla Superchargers charge its car in minutes rather than the other publicly available charger which normally takes hours. The 40A High Voltage Outlet provides 14 miles of range after a half hour charge while the Tesla Supercharger will provide 170 miles in the same amount of time.44 The Supercharger compliments the design of the battery to provide


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the user with the most efficient charging stations in the world. This significantly decreases the amount of time customers spend charging their cars while increasing the distance the car can travel. Tesla’s Supercharging technology coupled with its unique battery differentiates Tesla from its competitors.

Strong, Consistent Brand Image Tesla has built itself a remarkable brand and reputation not only in the electric vehicle industry, but also in the automobile industry in general. The company has coupled its commitment to sustainable energy with a unique, attractive car design. Tesla has created significant demand for its cars in the industry and has successfully delivered on its promise of producing sleek, sporty looking cars that consistently outperform its competition in numerous ways. The Model S has achieved the best safety rating in history from the National Highway Traffic Safety Administration (NHSTA), and it was also awarded with Motor Trend’s 2013 Car of the Year award.45 The young company is world renown in the electric vehicle industry, and Tesla needs to find ways to maintain and grow its strong brand image. The company is not without issues. It has pushed back car release dates, and it has had fatal issues with its autonomous driving aspects. However, Tesla has been able to overcome its obstacles, and continues to push out high performing cars. Resilience will be essential in maintaining and improving Tesla’s strong brand image moving forward, which will eventually attract new customers and maintain its existing customer base.

Failure Analysis General Motors In 1988, General Motors first teamed up with the California company AeroVironment to build a practical electric car. This prototype, “Impact,” eventually evolved into the General Motors electric vehicle, EV-1. The EV-1 was fast, quiet and well-liked by those who leased the car. However, the future success of this vehicle was bleak. General Motors produced this vehicle, but many believe the company did not fully support the development of this product due to multiple factors. At best, it was designed as a commuter car and marketed as an alternative second car.46 According to consumer interviews in the documentary “Who Killed the Electric Car?” people were cautious about the electric car. They wanted strong, dependable cars, and addressed concerns about the battery life and charging infrastructure availability. The consumer was focused on getting the best automobile for their buck, but was not educated on the other nonfinancial benefits of electric vehicles. GM did not combat against consumer fears because of external and internal pressures.


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Because the electric vehicles were not mass produced like the gas powered cars, GM argued that it was costly to manufacture. And although California passed its Zero Emissions Vehicle Mandate in 1990, there was no significant government support at the time to help with improving the technology of the electric vehicles. Many auto manufacturers, including GM, believed that this mandate was too strict and the California Air Resources Board faced significant backlash of its mandate from automakers, oil companies, and small advocate groups who opposed utility companies.47 California was forced to work with the auto manufacturers to negotiate flexibility in the mandate, which would eventually require automakers to build and market the electric vehicles in accordance with demand. Those who supported the electric vehicle movement within GM tried to convince management that there was significant demand for the vehicle. GM, still convinced that the electric vehicle would eventually die, argued against its own sales people. Presented with a list of 4000 people on a waitlist, management concluded that only 50 people would have signed up for the vehicle. 48 Even with celebrity endorsements, and the governmental push towards a cleaner environment, GM was still not convinced that this investment was worthwhile. General Motors undermined the success of its EV-1 by leading a lawsuit against the mandate, which GM eventually won. As a result, General Motors quickly stopped renewal of EV-1 leases, and took back the cars. Although informing the public that it would recycle the parts, it was soon discovered that the EV-1s were crushed and disposed of in the dumps. The company was at fault for the “failure” of its own electric vehicle. It did not invest in increasing the battery charge from 120 miles, and it did not push hard enough for consumer education.

Fisker Automotives Fisker Automotives, named after the co-founder and Aston Martin designer Henrik Fisker, failed to sustain its electric car, the Fisker Karma which was unveiled in 2008. Fisker Automotive was a startup that focused on innovative technology, similar to Tesla. Fisker had a sleek design, also similar to Tesla. But what lacked in this automotive company was its inability to design, implement and sustain the new technology. Theoretically, the Fisker Karma had a vehicle that would run smoothly and revolutionize the car industry. However, after a while, the company and the public realized that the technology was not up to par and the Fisker Karma was still at a prototype level. There were many issues that Fisker faced, especially as a startup. The Department of Energy set aside $25 billion to fund the production of clean-energy vehicles, and Fisker received over


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$500 million of that government funding.49 With the generous amount of financial support from the government also came increased pressure to produce. The added pressure from the government led to the release of the Fisker Karma before it was ready. Unlike Tesla, Fisker outsourced its car components, including its batteries. Its battery supplier, A123 System, produced some faulty batteries which hurt the reputation of the Fisker name.50 Suppliers were short on supplies, and with all of this outsourcing, quality control became an additional issue that Fisker had to deal with. Fisker Karma car owners paid over $100,000 for their cars, but were issued vehicles with software bugs and expensive repair jobs.51 As a result of increased repair expenses and recalls, Fisker faced financial issues. It was soon unable to pay back the government loans, and eventually, government funding and support eventually stopped. Without financial backing or a working battery supplier, one of the most important aspects of the electric car, the car manufacturer had no other choice but to look at bankruptcy options and layoffs. Fisker had looked promising to many, especially the government and consumers. However, it could not deliver on its platform to produce an innovative car of the future because it was more focused on the sleek exterior than the necessary, working internal systems that are essential to the success of the electric vehicle.

Aptera Motors Company founder Steve Fambro and CEO Paul Wilbur set out on a great endeavor with Aptera Motors. The then car company was focused on developing an electric three wheeled vehicle. The company was faced with financing issues, and looked toward the Department of Energy loan program for assistance. The issues with this type of funding came early on. The funding program was focused on Advanced Technology Vehicles. However, Aptera’s first loan request was rejected because the government did not define a three-wheeled vehicle as a car. During this time, Tesla and Fisker were both awarded millions of dollars ($465 million and $529 million respectively) to develop their electric vehicles.52 Aptera decided to change its approach and apply for government funding for both its three-wheeler model and to a four door, four seater vehicle. The application was once again denied because the Department of Energy believed that Aptera would be unable to pay back the loan under the current sales projections. Once again, the company changes its strategy and requests money from the Department of Energy to fund only its four door, four seater electric vehicle. This request was met with a conditional letter from the Department of Energy which stated that the company would receive $150 million if the company was able to raise $80 million from private investors. Aptera was unable to do so, and three months later in December of 2011, the company shut down.53


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Many of the issues that the company faced stemmed from the financial issues. Aptera wanted to create a vehicle that would revolutionize the way cars operated and looked. However, because the company was so focused on the three-wheeled design, which lacked support from its biggest potential funder (Department of Energy), the company was unable to move forward with not only product designs, but system innovations, too. Without the access to capital and a lack of government support, the company was unable to move forward with its idea and this put an end to Aptera Motors.

Industry Structural Analysis

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Industry Structural Analysis The electric car industry is still an emerging industry so there are many unknowns and complexities. Tesla is the only automobile company that exclusively produces electric cars. Other automobile companies are primarily focused on gasoline cars and electric car models are their secondary focus. Moreover, many automobile companies haven’t been producing 100% pure electric cars yet; they have only produced plug-in hybrids or hybrid electric cars. Exploring Porter’s Five Forces of the electric car industry can hopefully clarify the forces driving the electric car industry’s competition.

Threat of Entry: Moderate The threat of entry for the electric car industry is moderate because barriers to entry are high for new companies, but are significantly lower for existing automobile companies that are beginning to invest in electric cars because they are more established and have the necessary financial resources to fund the research and development of electric cars. It took Tesla eight years of research, engineering and development to produce the world’s first premium electric, zero-emissions sedan.54 Producing an electric car is a capital intensive and time consuming process that takes years of designing, engineering, testing, and manufacturing. Some of the major sources of barriers to entry are economies of scale, product differentiation, capital requirements, and government policies. Dominant industry leaders benefit from economies of scale with lower unit costs and higher barriers to entry against newcomers. For example, Tesla’s Gigafactory, which is a partnership with Panasonic, aims to reduce the costs of lithium-ion battery packs.55 Lithium-ion is one of the most commonly used type of battery for electric cars. This joint venture will considerably lower unit costs for Tesla and deter entrants because entrants must accept a cost disadvantage or take a risk and enter with a larger scale. Product differentiation builds a barrier that forces new entrants to formulate their own and unique identification. Product differences, customer service, branding, and customer loyalty are factors that help differentiate between different electric cars. Product differentiation is crucial for the emerging electric car industry because it will build customer loyalty and help establish its position in the industry. Luxury cars differentiate themselves primarily through brand name, quality, customer loyalty and excellent customer service. By being the first entrant and securing a niche market, Tesla has created strong product differentiation and prides themselves for their quality, innovation, brand and customer service.


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Capital requirements for manufacturing an electric car are high due to the upfront costs of R&D along with manufacturing, advertising, and establishing infrastructure. During BMW’s early experimentation with electric cars, BMW unsuccessfully tried to replace gas components of a Mini Cooper with electric components in an effort to reduce costs.56 The build and design of electric cars are different from traditional gasoline cars. Thus, building an electric car is not simple and the knowledge of building a traditional gas car isn’t necessarily transferable to building an electric car. The capital requirement to build an electric car is high due to the intensive R&D, design process and safety testing that is required. Switching costs are moderate for new entrants because existing automobile companies would need to bear the cost of retraining employees, investing in new equipment, and testing new vehicles. Employees would need to be retrained with the specific knowledge regarding electric vehicles since the mechanics and the engineering of electric cars are different from traditional gas cars. Companies will also have to invest in new equipment to be compatible and efficient to produce new vehicles. It is also a timely and costly process to research, test and produce a new vehicle. Government policies may also deter new entrants from entering the electric car industry. There are many laws and regulations that automobile manufacturers must follow, including vehicle safety regulations, battery safety regulations and automobile manufacturer and dealership regulations. Cars need to be in compliance with National Highway Traffic Safety Administration (NHTSA) requirements, United States Federal Motor Vehicle Safety Standards (FMVSS) requirements, as well as many other laws and regulations. 57 Government policies create a barrier for prospective new entrants seeking to enter the electric car industry.

Threat of Substitutes: Moderate The threat of substitute products in the electric car industry is moderate because there are a variety of vehicles for consumers to choose from. Aside from electric cars, alternative forms of transportation include traditional gas cars, hybrid cars, plug-in hybrid cars, fuel cell cars, bicycles, electric bikes, public transportation and more. However, the most direct substitute to electric cars are hybrid cars because both electric and hybrid cars are environmentally-friendly and sustainable vehicles, both striving to be alternatives to gas cars. One of the most notable hybrids in the auto industry is the Toyota Prius, which is one of the best-selling hybrids to date with cumulative global sales of around 9 million vehicles.58 Toyota holds more than half of the hybrid electric vehicle market share. The Toyota Prius was the most popular hybrid in America in 2014 and is considered to be the best-selling hybrid in America in 2015. The Toyota Prius is successful because of its quality, reliability, price, fuel


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efficiency and mileage. Moreover, in 2017, Toyota will be releasing their all-new Prius Prime, a plug-in hybrid, which combines electric and hybrid power and averages over 600 miles in range. Another rising substitute is the hydrogen fuel cell car. Hydrogen cars are a cleaner and greener form of transportation because the only byproduct that leaves the tailpipe is water. 59 Hydrogen is also the most abundant element in the universe, so there will not be any shortages, unlike traditional fossil fuels. Hydrogen fuel cells have been used to power other machineries and buildings like generators, submarines and even spaceships. 60 Hydrogen fuel cells are a reliable source of energy but have yet to be adopted by the mass market because hydrogen fuel cell stations are limited and need to be expanded in order to be competitive against traditional fossil fuel and electric vehicles.

Bargaining Power of Buyers: Moderate to High The bargaining power of buyers is moderate. There is only a modest concentration of buyers since the electric car industry is still relatively new. For example, Tesla’s customers have no negotiation power because they buy directly from Tesla at specified prices. 61 Moreover, Tesla’s cars have unique features that other cars do not have, such as advanced autonomous driving capabilities, top-notch software, supercharging stations, premium quality, sleek design and long driving ranges. Consumers are left with few alternatives if they want to purchase an electric car that has such a wide range of features. BMW is also adopting set-price strategy for their electric car line.62 This limits the buyer's bargaining power and influence to drive prices down. Contrastingly, other automobile companies utilize dealerships and still allow for negotiations. Tesla was the leading seller of electric cars in 2015 and sold 25,700 units of the Model S, compared to Nissan Leaf sales of 17,269 units. 63 The top two sellers of electric cars, Tesla, which provides a premium electric car, and Nissan, which has a more economical electric option, shows that the electric car industry has two completely different buyers. When looking exclusively at Tesla, Tesla was the top seller in 2015 indicating that many buyers of electric cars were not concerned about price but rather quality and branding. According to Akshay Aghakar, a sales specialist and a top seller at Tesla, about 45 percent of people who buy Tesla’s Model S have not previously bought a car more expensive than $35,000. This means that consumers are choosing to buy a Tesla as their first luxury car and price is not an issue. Also, the volume of demand for Tesla is higher than its ability to produce, which further lowers the buyers’ bargaining power. Tesla is a unique electric car that is distinctly different from other electric cars, from its exterior and interior design to the technological advancement, enhancing


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the value of their cars. There is currently no electric car like Tesla and buyers are willing to pay more for this premium product. On the other hand, more price sensitive buyers may look into government incentives. There are government tax credits when buying hybrids or zero-emission vehicles, and the different amounts might influence decisions on which vehicle to purchase. In California, the Clean Vehicle Rebate Project (CVRP) offers up to $7,000 in electric vehicle rebates for the purchase or lease of new, eligible zero-emissions and plug-in hybrid vehicles.64 The rebate amount in California for zero-emission electric vehicles is $2,500. In addition to the state rebate, there is also a federal tax credit of up to $7,500. As there are increasingly more electric car options and when price is an important factor for buyers, buyers will have more bargaining power. Additionally, there are low switching costs when the buyer is switching from one company’s product to another’s. All electric cars are generally very similar when it comes to driving the car and charging the car. There are little differences when you switch from one company’s electric car to another company’s electric car. With low switching costs, buyers will have more bargaining power.

Bargaining Power of Suppliers: High Supplier power is high because there are only a few suppliers to many electric car companies. Tesla uses over 3,000 purchased parts which are sourced globally from over 350 suppliers. 65 The bargaining power of suppliers who supply raw materials, like steel and aluminum, and other components of the car is lower because they provide commodity items for which there are substitutes, and automakers tend to buy these items in high volume. The most important element of an electric car is the battery, which determines the range, longevity and charging abilities of the car. The major providers for batteries are LG Chem, Samsung SDI, and Panasonic Corporation, and top automakers are increasingly choosing these three companies as their suppliers.66 There are only a handful of battery suppliers while the electric car industry is expanding rapidly and these suppliers provide an essential input for electric cars. With technology changing so rapidly, automakers are not willing to take the risk of producing their own battery and few battery companies can meet the challenging demand to build innovative batteries with costs, quality, size, and weight that automakers request. Also, there are no available substitutes and to change from one supplier to the next would be difficult due to contract and commitment bounds. Therefore the bargaining power of battery suppliers are high. Tesla is vertically integrating because aside from manufacturing and directly selling their cars, Tesla has built their own Gigafactory, which supplies their batteries. Tesla also recently bought


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SolarCity, which manufactures solar panels. Tesla is producing its own batteries when most automakers are outsourcing to other companies. Tesla also plans to sell solar panels which will power homes and charge the electric cars in those homes. So since Tesla is their own supplier for batteries, they have control over pricing and they can significantly lower their battery prices as well as their overall cars.

Intensity of Rivalry: Moderate to High The intensity of rivalry in the electric car industry is moderate to high because currently, there are several distinctive industry leaders but as more automobile firms enter the electric car industry, the intensity of rivalry will inevitably rise. The electric car industry is an appealing and expanding industry with many major automobile firms releasing their own electric car within the next few years. Major industry leaders in the electric car industry includes Tesla, Nissan, BMW, Fiat, Volkswagen and Kia. Cumulatively since 2010, Nissan Leaf (97,513 units) is the best-selling all electric car followed closely by Tesla Model S (80,461 units) and then BMW i3 (22,488 units). 67 Since all electric cars are somewhat similar as it provides a mean of transportation, automobile firms utilizes distinctive branding. For example, Tesla is known for their luxury design, advanced innovation, and high performance, displaying their vehicles in showrooms/galleries, which is unique and different from traditional car dealerships. Contrastingly, Nissan Leaf appeals to a demographic who are seeking for a greener vehicle but are also more price sensitive. There are diverse competitors where different companies are targeting different target markets as well as offering different innovative designs and technologies. Also, there is low switching cost to switch from one company to another, which contributes to the intensity of rivalry to be higher.


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Threat of Entry: Moderate High barriers to entry High capital requirement Established auto companies have an advantage

-

Bargaining Power of

Intensity of Rivalry:

Suppliers: High

Moderate/High

-

Three major battery suppliers No available substitute

-

Few major competitors Lack of switching costs Diverse competitors

Threat of Substitute Products: Moderate -

Hybrid vehicles Hydrogen fuel cell vehicles

Bargaining Power of Buyers: Moderate/High -

Low switching costs Price sensitivity customers Luxury car buyers

Competitor Analysis: BMW

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Competitor Analysis: BMW Overview Bayerische Motoren Werke, better known as BMW, is a German based automobile manufacturing company. The BMW Group AG serves as the parent company of BMW, MINI, and Rolls-Royce. Known for its unparalleled combination of high performance and comfort of luxury, BMW is among the top ten automakers in the world. With recent social and technological changes towards more sustainable ways of transportation, BMW has created a series of environmentally sustainable cars for the mass market. This would be the BMWi series, which currently provides the i3 and i8 as options. Through BMW’s four company pillars: growth, shaping the future, profitability, and access to technology and customers, BMW will be able to excel and achieve their stated goals. BMW continues to demonstrate their ambition for excellence through the multiple awards they receive every year. This would include “The World Green Car of the Year” in both 2014 and 2015 for the BMW i3 and BMW i8, respectively. In addition, the BMW i3 also won “World Car Design of the Year” in 2014. 68 Their mission statement up to 2020 is to be the “world’s leading provider of premium products and premium services for individual mobility”.69

History In 1916, Gustav Otto (pictured on the right) founded BMW, to manufacture aircraft engines. This is where the inspiration for their logo came from, which is supposed to be a white-and-blue propeller. Production of aircrafts came to a halt in 1923 because of the Treaty of Versailles, which banned Germany from producing aircrafts. This political and legal change forced BMW to improvise and look towards ground transportation. In the 1930s BMW soon realized that automobiles would become the preeminent mode of transportation, replacing motorcycles. They established themselves by acquiring British Austin model, and not long after did it start to drawing its expertise in high-performance engines and aerodynamic designs. These would later lead to manufacturing of world-class automobiles such as, the legendary BMW 328 sports car from 1936. However, even with all the engineering triumphs, BMW remained a niche player in the luxury car market. There were multiple times during history where BMW faced weak


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financial positioning and threat of takeover by Mercedes-Benz, however in 1959 the firm was rescued by Herbert Quandt, a wealthy German and reclusive industrialist. BMW didn’t really establish itself as what we see today until the 1960s when the company “found its stride when it combined its high-performance sports car engineering with the comfort of luxurious cars.”70 This would move the company standing from 69th to 11th among Germany’s top corporations. By the 1990s BMW grew exponentially, employing more than 116,000 people worldwide and located in 140 nations. In 1997, there was a 10% increase in deliveries of new cars over the past year worldwide. BMW growth led to a higher customer demand for more choices. Cars manufacturers were forced to respond with an acceleration of new model development and increase in model variation. This example demonstrates consumer’s high buyer power and BMW’s shift towards a mass market product. However, this also led to more opportunities for other automakers such as Japan, Korea, and U.S. to enter the market once the European market barriers fell. BMW views itself as a “manufacturer of unique automobiles for a clearly defined, exclusive and demanding clientele all over the world.”71

Assumptions BMW assumes that they will continue to excel at producing efficient and high performance cars. Throughout the 100 years that BMW has survived as a company they have been able to establish a reputable brand that consumers seek to buy. With BMW being a mass marketed product, the consumer market has set standards that BMW must exceed each year. In order to stay ahead of the curve, BMW is constantly innovating. We assume that BMW will also continue to pursue their goals of becoming sustainably efficient and producing little to no carbon dioxide emissions. In the automotive industry, many people are focusing of the social and global issues that we are facing with climate change. In order to achieve their goals of sustainability, BMW assume that the company will expand their alternative energy fleet and slowly phase-out their gas cars.


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Financial Statement Analysis Ratios Derived from the BMW Annual Report 2015: ROCE

16.34%

ROA

6.17%

ROIC

10.73%

ROE

15.38%

Net Profit

6.02%

Asset Turnover

1.03

Current Ratio

1.22

Debt Ratio

0.60

Debt to Equity Ratio

1.49

There are three financial measures that BMW should focus on: increasing return on capital employed, increasing sales volume, and increasing revenue. Increasing return on capital employed is a key performance indicator used in the automotive segment. BMW’s strategic target for their automotive segment’s RoCE is 26%. The higher the ratio, the more favorable it is for the company because it means that there are more dollars being generated by each dollar of capital employed. In 2014 BMW forecasted that there would be a moderate decrease in RoCE, however there was actually significant increase of 10.5 % pts. Another important financial measure would be sales volume. The 2014 annual report forecasted that there would be a solid increase in units from 2014-2015. There was a 6.1% increase, totaling of 2,247,485 units. However, BMWi only totalled at 1.5% of BMW’s total sales volume. Lastly, it is important that there is an increase in revenue. BMW forecasted to have a solid increase, which was later that there was a significant increase, specifically in Q1. Overall there was a 13.8% increase in


38

revenue with the actual outcome of 85,536 Million Euros, or about 79,465 Million USD. During 2015, the U.S. dollar had an average exchange rate of 1.1 to the Euro. This was because of the monetary policy the European Central Bank and the US Federal bank caused the U.S. dollar to appreciate in value against the Euro. 72 A 2017 BMW i3 has an MSRP starting from $42,400 versus a 2016 Tesla Model S which has an MSRP starting at $66,000. Any additional cost will be from added features because, both BMWi and Tesla have set prices that are nonnegotiable.

Finance The 2015 stock market year was very volatile, with the Chinese economy, the weakness of the Euro, the Greek debt crisis, and many more political and economic events. Especially with the “loss in value of the euro against the U.S. dollar, provided a boost for European exports and contributed to a more amenable stock market climate”.73 In addition, the news of other diesel competitor manipulation caused a negative effect on investor sentiment. BMW’s common stock in 2015, was 601,995 (number of shares in 1,000) which has stayed the same since 2011. BMW’s Preferred stock in 2015 had 54,809 (number of shares in the 1,000) which was a slight increased from 2014’s 54,500 (number of shares in 1,000). 74

Capabilities Organizational Structure: Supervisory Board Management at BMW Group is devised of two main boards, the supervisory board and the management board. The supervisory board serves a variety of duties for the company, many of which are to manage and supervise the management board. In general, the supervisory board closely monitors BMW’s business performance and macroeconomic developments in the market. Supporting the board of management by advising them on significant projects and plans, as well as managerial changes. The supervisory board makes the rules and insures that everything the board of management is doing is within the laws and rules of BMW and the countries they work in. The Chairman of the supervisory board is Norbert Reithofer, who was previously the Chairman of the board of management. In addition to the chairman of the board, there are also four deputy chairmen and multiple members that evaluate the actions of the board of management.


39 Chairman, Dr. Norbert Reithofer

Reithofer was previously the Chairman of the Board of Management, so he would not only provide insight into what the new Chairman of the Board of Management is thinking, but he would also have a greater understanding of what his new job requires. He has been working at BMW since 1991, which means he has a well-rounded understanding of how the company operates, as well as its strategies and goals. Deputy Chairman, Manfred Schoch Schoch was born in 1955 and studied industrial engineering at Karlsruhe Technical University. He would later join BMW AG in 1980 where he now sits on multiple committees. He is Chairman of the Works Council in Munich, BMW AG, and the European Works Council. His work experience demonstrates that he has a great understanding of how to advise people and what would be best of the situation. Deputy Chairman, Dr. Jur. Karl-Ludwig Kley Kley was born in 1951 and received an industrial business apprenticeship at Siemens AG. He went on to study law at Ludwig Maximilians University in Munich and practical training in law in Hamburg and Johannesburg, South Africa. He served as a member of the executive boards of multiple companies, generally with an emphasis on finance. His well-rounded background would give him a better understanding of the legality of the projects the Board of Management proposes. Deputy Chairman, Stefan Schmid Schmid was born in 1965. He started out with an apprenticeship in power plant electronics as a metalworking foreman. He later joined BMW AG in 1985 and became a member of the Chairman of the Works Council in Dingolfing. In addition, since 2004 Schmid became the Deputy Chairman of the General Works Council. Schmid’s background gives him indepth knowledge of the process of manufacturing and how operations are handled. Deputy Chairman, Stefan Quandt Quandt, was born in 1966, the youngest of the Deputy Chairmans. He received his degree in industrial engineering from Karlsruhe Technical University, just like Schoch. Since 1996, Quandt has worked as an independent entrepreneur. His father was Herbert Quandt, the wealthy industrialist, who helped save BMW from bankruptcy in 1959. He is a large shareholder, therefore his decisions can be influenced by self-interest.


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Organizational Structure: Board of Management The management board is the equivalent to America’s C-suite. The management board specifically focuses on topics regarding economic development and the prospects of key world regions. There is constant and close collaboration with the board of management and the supervisory board. Informing each other of the status of projects and acquisitions on a regular basis. This can be seen through their regular reports on current sales and workforce figures, as well as the discussions on the economic developments and performance around the world. Chairman, Harald Kruger Krüger was born in 1965 and joined BMW in 1992. He slowly worked his way up from project engineer at the Spartanburg plant to a Member of the Board of Management responsible for Human Resources, then the After Sales of BMW group and Production. Finally in 2015, when Reithofer was picked for the Chairman of the Supervisory Board, Krüger was picked as Chairman of the Board of Management. Krüger was an obvious choice because of his vast knowledge of the company and its inner workings within different departments and sections. Human Resources, Milagros Caina Carreiro-Andree She was born in 1962 in Boboras, Spain. She trained as an industrial representative and had her start at Vossloh Aktiengesellschaft, Werdohl in 1984. From 2006-2012 she held many executive positions and was a member of the Management Board of responsible for HR at Schenker Logistics AG. In July 2012, Carreiro-Andree became a member of the Board of Management of BMW AG, specifically responsible for HR. Recently, both the supervisory board and the board of management have been moving towards a generational change. This shift towards younger board members would ensure personnel continuity and help shape BMW’s future strategy. This can be seen through the recent managerial changes in 2015. Before the shift towards a younger board, the Chairman of the supervisory board was Professor Joachim Milberg, who was 72 years old at the time. The Chairman of the board of management was Norbert Reithofer, who was 59 years old. Therefore, Harold Kruger (pictured on the right) would replace Reithofer as the Chairman of the board of management, who was only 50 years old.75


41 Figure 8: BMW’s Company Structure76

The composition of corporate structure greatly affects a company’s corporate culture and plays a key role in how the company operates. However, all of these are even further impacted by country culture. BMW being a German company can be described by Hofstede’s six characteristics: Power Distance, Individualism, Masculinity, Uncertainty Avoidance, Long Term Orientation, and Indulgence. The chart shows that Germany has high uncertainty avoidance, high masculinity, high individualism, low power distance and low long term orientation. This is clearly shown through BMW’s corporate culture and structure. Germany is considered to have low power distance and high individualism, meaning that they encourage the ability to be independent and self-reliant, as well as, emphasizing the importance of co-determination and direct and participative communication. This is characterized through BMW’s clear responsibility, mutual respect, and trust for each other. However, Germany also has a strong aversion towards uncertainty and the unpredictability of things. This is highlighted in one of BWM’s primary goals “to avoid risk which could jeopardize the trust our customers, shareholders, business partners and the general public place in BMW Group.”77 Their high masculinity demonstrates that the culture is really driven by competition, achievement, and success. Which is evident of BMW’s constant need to innovate and cater to the evolving needs


42

of their customers. Germany is also more inclined towards long term orientation which indicates that they are a pragmatic country, with people who can adapt easily in changing conditions and persevere to achieve results. 78

Operations The company operates in more than 140 countries and has 30 production and assembly facilities in over 14 countries. They are constantly innovating new products through their 12 research and development centers around the world. These centers are located in countries like Austria, Germany, the United States, Japan, and China. These locations make sense, since about half of BMW’s revenue comes from inside Europe, whereas the rest is mostly split between the United States, and China.79 Operations management, if done well, can reduce cost of products and services by being efficient, as well as increase revenue through increased customer satisfaction in producing quality goods and services. BMW is able to be efficient because of their effective team management and support for cross-functional teams. Utilizing these diverse set of people can help solve problems more efficiently and effectively. 80 In addition, BMW has created a great structure of easy change management. BMW research and development is continuously


43

looking for efficient and effective ways of building sustainable cars that their customers would like. A great example of this is the production of the BMW i3, though it took longer to get on the market compared to the low end electric cars, it wanted to maintain its premium brand and quality. Quality management is very important to BMW. It is key to have continuous progress and improvements that match the needs of the consumers. This can be done through implementing operation management such as, total quality management, reengineering and/or outsourcing. If done productively, operations management can reduce ROCE by being effective and innovative in creating a solid base of operations and knowledge.

Product The focus of this competitive analysis is on the BMW i3, which is their first all-electric car. This automobile provides all the best qualities of BMW, by still focusing on high performance engines and the design importance of the automobile, as well as sustainability. The 2017 BMW i3 has an MSRP of $42,400, which would be considered cheaper than most of the other automobiles that BMW provides, such as the BMW i8 hybrid, which has an MSRP of $140,70081 BMW i3’s target market would consist of people with an average annual income of $77,000 to $199,000. Therefore, you see a variety of people buying this car, from young adults to the aging baby boomers. The BMW i3 is targeted towards customers that appreciate environment-friendly, cost-saving improvements. However, with an all-electric BMW the consumer doesn’t have to give up the comfort, performance, and driving dynamics that they would associate with BMW.

Manufacturing Process Specifically, for the BMWi3, the BMW Leipzig factory in Germany would be considered the epicenter of i3 production. The steps below are still relevant to the manufacturing of BMW i3, however they are oriented towards the manufacturing of BMW’s core automobiles. The manufacturing process has four main steps of production. The first step of the production is the press shop. This happens at the stamping plant, which provides the sheets of metal for the bodywork of the car. The process begins with extremely heavy rolls of steel and aluminum coils. From there they are taken to the coil system where they are initially cut to form boards and then pulled with fully automated high-speed servo presses. This process results in molded parts like the side frames, doors, hoods, and roofs. BMW is continuously looking for higher strength materials that will complement their unique design and extremely rigid, but lightweight bodies. The second step of the process is the body shop. This is where the assembly of several hundred individual parts are made of steel and aluminum. Each part depends on the vehicle


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requirements, for example the BMW i3 uses carbon-fiber which is incorporated in their stitched nonwoven materials, which are molded into the rear seat structure and roof sections. Many of these parts require a high degree of technical knowledge about welding, and joining techniques. However, most car manufacturing plants have modern autonomous robots that perform these important and difficult steps with maximum precision. Next is the painting step of the process. The paint color on a car serves two main purposes, to protect and preserve the value of the automobile. The materials produced in the above steps create the body of the car which is then cleaned and coated in a zinc phosphate layer. This layer creates a lasting corrosion protection, which is then followed by four coats of paint. Lastly, is the mounting and final assembly of the automobile. This step includes putting the engine, transmission, axles and exhaust system with the corresponding body. The wheels are added and the engine is started for the first time.82 Since customers are allowed customization of their car, BMW expects extreme attentiveness of their employees.

Distribution The BMW i3 is distributed through BMW’s existing channels. Such as dealerships, like the one located on Stevens Creek. However, to differentiate its separate brand they have created a building separate from the main lobby that focuses just on the BMWi series. This building structure, as well as their employees are similar to those of Tesla’s. The separate building is used as a showroom for the BMW i3. Embracing technology companies like Apple and Microsoft, BMW implemented the “Genius” position. They are available to offer their knowledge and assistance before and after sale. Currently there are 500 BMW Geniuses at dealers and there will be about 750 by the end of the year. Similarly, to Tesla, BMWi Genius’ are not allowed to bargain with the customer, creating fixed price products. In addition, BMW plans to have about 100 new stores that will be completed at the end of this year specifically catered to the BMWi series. By 2019, BMW hopes to have 95% of its network transformed, with $30 billion investment and 30% increase in showroom capacity. 83

Marketing It has been three years since BMW first came out with their BMW i3. The BMWi series have become a very well-established brand under the BMW name. It is considered one of the bestselling frontrunners of the electric car industry. The BMW i3 has gained widespread acceptance with “over 80% of BMWi buyers are first-time customers”.84 BMWi also provides the option of a Mobile Sales Advisor, this employee would offer potential customers the option of a one-on-one consultancy for a BMWi product. This alternatives has become an integral part of the BMWi sales model in multiple markets. In addition, with their partnership with ChargeNow, BMW is able to provide their customers a simple and transparent option of charging their electric vehicles. ChargeNow stations can be found in most major cities across


45

the country. Since, a car is an experiential product, BMW will need to appeal to both the rational and emotional side of the consumer so that the product is truly memorable. It is important for BMW to strive for repeat customers because making new customers is much more difficult than keeping them. In addition, BMW should look into social bonding activities which can build their community. Doing so opens up the possibility for creating a community like the Harley Owners Group (H.O.G.) of Harley Davidson. If effectively instituted, it could further the company into cross-marketing, creating a more loyal customer base and increase brand equity.

Human Resources BMW Group is the leading manufacturer of premium automobiles, with more than 115,000 employees in over 140 countries worldwide with 115 unique nationalities working together in Germany. To ensure quality products for their customers, prospective employees have to meet higher standards. They want to attract potential employees who are driven and perform their work with enthusiasm. This standard of hiring provides the infrastructure for personal and business success within the company. 85 They have a variety of jobs that they offer, whether it be technical engineering, or sales management. There is always room for career development, because BMW focuses on internal promotion. BMW employees are also well-paid, with aboveaverage wages which include social benefits, as well as health and accident insurance. This translates into high levels of employee satisfaction which can lead to high levels of customer satisfaction. In addition, to good pay and structure, BMW also offers employees to constantly develop their skills through training. BMW explains that they believe that well-trained employees are the most valuable asset a company can have because development of skills and promoting employee’s strengths is an investment in BMW’s future. 86 In addition, BMW has added their BMWi Geniuses, who give consumers consultations on any BMWi series. The BMWi Geniuses deliver a pressure-free product consultation for the consumers, instead of your stereotypical pushy salesman.87

Suppliers BMW’s 2015 annual report states that there are three major categories they plan to focus on. The first is creating an ideal balance between quality, innovation, flexibility, and cost. This objective would ensure that BMW would be able to easily react to the fluctuating demand of a volatile market environment, in regards to production materials, raw materials, service and capital goods. BMW must also focus on the increasing pace of globalization and how the interconnected nature of supplier markets means that the distribution of purchase volumes will be continuously changing. This is especially evident in the NAFTA region which has become a focus of growth in the coming years. This is because BMW plans to increase production


46

volume at the Spartanburg plant in South Carolina. In addition, there is a new plant that is scheduled to open for production in San Luis Potosi, Mexico in 2019. This strategy would further enhance BMW’s goals of achieving globally balanced growth in terms of sales, production and purchase volumes. Lastly, it is also important to understand that the purchasing and supplier network is also responsible for component production at BMW. They are continuously investing in state of the art manufacturing facilities to guarantee efficient structures that increase the competitiveness of in-house production. For example, the Landshut plant that will focus on a new lightweight design for future cars. This plant houses 160 engineers who will be testing and researching innovative materials, construction concepts and new manufacturing processes.88

Batteries In July of 2014, BMW announced that they would expand their partnership with Samsung SDI by signing a memorandum of understanding for delivery of further battery cells.89 These battery cells would be used for the BMW i3, BMW i8, and other hybrid models in the coming years. Dr. Klaus Draeger, member of the Board of Management of BMW stated that “Our partnership with Samsung SDI is a good example of successful Korean-German cooperation on innovative technologies…” explaining that BMW feels that they have chosen the supplier that offers the best-available technology. Though Samsung SDI is known for supplying batteries for Apple Inc., this partnership will allow them to expand into their automotive business. 90 The battery is the most important part of an electric car. And the sales of hybrid and electric vehicles are “projected to grow steadily to reach 5.2 million units by 2020” according to the 2010 report by J.D. Power.91 This deal is mutually beneficial because Samsung SDI gets a larger presence as a high quality and efficient electric car battery maker, and BMW is able to expand into the electric car market with a long-lasting car battery.


47 Charging Stations

Another important component to an electric car is the charging stations. BMW has partnered with ChargeNow, in cooperation with ChargePoint, “the biggest provider of electric-vehicle recharging stations.”92 With more than 18,000 publicly accessible charging locations. This partnership is mutually beneficial to both companies. With a BMW i3 you can easily find the nearest public charging stations through the use of the ConnectedDrive, via the invehicle navigation, or by using My BMWi Remote app. 93 BMWi owners are provided with two complimentary ChargeNow cards which they can link to their ChargeNow account and easily add their credit card information. Chargepoint provides three different types of charging stations. The DC Fast charging station (pictured at right), the fastest of all three, can charge 80 percent of a BMW i3 in 45 minutes.94 Any BMW i3 2015 or newer is eligible to enjoy 24 months of no cost charging. The second type of charging station is commonly found at local malls or places of business. It doesn’t charge as fast the DC Fast charging station, but it is a great way to charge a car while running errands or while at work. Many local companies like Google, Cisco, and Netflix have installed these stations.95 It called a Level 2 charge station, which can fully charge most cars in less than four hours. Level 2’s are the most common type of port that is non-residential. Lastly, there is the Level 1 port, which is a grounded receptacle or a standard household outlet. This type of charging is done using your own cable, which is usually provided with the vehicle. 96 This partnership has created an opportunity for big automakers to close Tesla’s competitive advantage gap. Tesla’s Supercharger network is seen as a big competitive advantage, but they only recharge Teslas. With the introduction of the DC Fast charging stations, ChargePoint has an opportunity to lessen the cap. Especially since there was a recent announcement that the Tesla charging stations will no longer by free. Creating more equal ground to compete between ChargePoint DC Fast and Tesla’s Supercharger.

Carbon Fiber-Reinforced Polymers (CFRP) Multiple research and development companies have identified carbon fiber as a key means to lightweight production passenger vehicles. However, there is a lot of tension amongst EV discussion boards about the commercial capacity of carbon fiber and the pricing of it. Though there was some hesitation, it was obvious that the greatest sales potential was in high-volume automotive applications. This can be clearly seen through the production and use in the BMW


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i3 and i8 automobiles. BMW partnered with SGL Automotive Carbon Fibers which collects weaving and preform-kitting scraps for production of the BMWi vehicles.97 Though the carbon fiber was light and efficient BMW decided to scale back the quantity of RCF in each car because of the expensiveness of the material. They responded to the problem by combining the carbon fiber with other lightweight materials such as aluminum and steel in order to avoid making the car too expensive. In addition, Oliver Zipse, BMW’s production chief explains that the lighter you can make the car, lessens the need for a large battery to power it. 98 Since carbon-fiber is a upcoming and popular new material to use, several carmakers have entered into cooperation deals with specialist companies to advance carbon manufacturing. BMW gets their carbon fiber from SGL Carbon, whereas General Motors with Teijin, and Daimler with Japan’s Toray Industries.

Core Competencies & Sustainable Competitive Advantages Core Competencies

Sustainable Competitive Advantages

•

Strength of premium brand

•

Premium brand

•

Strives for globally balanced distribution of value creation

•

Innovative technology

•

Battery unit

•

Consistent positive sales development

•

Superior customer service

•

Continues to fascinate their customers with new models and technologies

•

Corporate social responsibility

•

Sustainable company

•

Strategic acquisitions

•

Research and development

•

Highly motivated associates

Core Competencies BMW’s strong core competencies have allowed the company to last for the last 100 years. They are great at reiterating the strength of their premium brand through its marketing as a luxury performance brand. In addition, BMW does not cease to fascinate their customers with new models and technologies which they create through their research and development process. This core competencies leads to their consistently positive sales development, which are reflected in their key financials. Furthermore, BMW strategically acquires and/or invests in companies that will benefit them in the long run. Lastly, BMW has highly motivated associates


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who provide great customer service. Happy associate leads to happy consumers, and happy consumers possibly leads to loyalty or repeat buying.

Competitive Advantages Customers appreciate these environment-friendly, cost-saving improvements, which allow them to enjoy the benefits without foregoing any of the comfort, performance and driving dynamics they are accustomed to with a BWM. All these advantages are possible because of BMW’s strong branding. Strong branding leads to revolutionary product design, high performance corporate culture, customized brand experience, and cutting-edge technology. This gives the BMW Group a clear competitive edge, which they continue to build with new innovative technology and having a unique understanding of their customers. For instance, BMW’s efficient battery unit. In the interview with Steve, he explained that unlike Tesla’s single battery unit, the i3 is made of up eight smaller units (pictured on the right). Steve expresses that replacing one small unit instead of the entire battery unit is more efficient and sustainable. In addition, since BMW is a premium brand they focus solely on providing premium products and services to their customers. This can be demonstrated through their superior customer service, specifically the BMWi Geniuses, who focus on consultation rather than selling. Going hand in hand with their sustainability strategy, BMW practices corporate social responsibility through practicing sustainable manufacturing, but also funding and supporting organizations that promote preservation of ecosystems and wildlife, such as Nature Conservancy, Palmetto Conservation Foundation, South Carolina Wildlife Federation, and many more. 99

Current Strategy & Future Goals Current Strategy BMW’s ONE strategy is an initiative for individual mobility of the future that began in 2007 that continues today. The BMW strategy focuses on providing a premium product that focuses on design and digitization. This is achieved through their constant research and development, innovation, and their younger and more ambitious board of management. Some of BMW’s goals include boosting profitability, enabling expansion of global production and sales networks, and changing the environment. As shown in BMW’s income statement they have


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been consistently profitable. In addition, from 2007-2014, the company had expanded from 23 production facilities to 30. Strategy ONE, focused on being profitable and enchaining long-term value in times of change. In addition, through strategy ONE, BMW applied technology, structural as well as cultural aspects of their company. 100 With the changing environment, BMW needs to devise a strategic plan that can adapt and embrace digitization. One way to do this is through BMWi Ventures, which invests in startups and growing companies that concentrate on mobility requirements in large urban areas. BMWi Ventures, currently comprises of 14 investments. Their future goals and strategies include their idea of NUMBER ONE > NEXT, which is the concept of expanding the BMWi product range with the new BMW iNEXT. This new product would set new standards for future technology and a leading role in automated driving. Combining the future of the automotive industry, electric mobility, and autonomous driving capability. 101 Steve, BMWi Genius, also explains that eventually BMW plans to phase out all their gas-powered cars and switch to sustainable power only. Though this phase is still a long way from now, it is important to take into account that this assumes BMW will be able to sustain its competitive advantage. Therefore, BMW will be looking into other alternative forms of energy, such as hydrogen fuel cells, instead of exclusively electric. In addition, they plan to perfect the autonomous driving aspect through their partnership with Mobileye and Intel.

Future Goals BMW is actively trying to reduce their carbon emissions through the implementation of sustainability initiatives. This is seen throughout their manufacturing process and the materials they use to produce the car. In the 2015 annual report BMW, had forecasted in 2014 that there would be a slight decrease in their fleet emissions and they were successful in decreasing it by 2.3 %.102 This decrease in gCO2/km was made possible because BMW strives to reduce fuel consumption and carbon emissions by using innovative technology in conjunction with their Efficient Dynamics strategy. The Efficient Dynamic strategy is based on BMW’s four pillars to promote sustainability. First, is focused on optimization of diesel engines and optimize lightweight construction, aerodynamics and energy management. The other three pillars are hybridization and electrification of vehicle power, as well as long-term use of regenerative hydrogen as a source of fuel.103 Some of the ways they implemented this strategy was by investing in developing technologies that would support vehicle efficiency and reduce carbon dioxide emissions. In addition, in the interview with Steven, a BMWi Genius, he had mentioned multiple ways that BWM actively tried to lessen their carbon footprint. He talked about how the manufacturing factories were powered by alternative fuels, such as hydroelectric and wind turbines. Most raw materials used in the manufacturing process were locally sourced near the factory. Such as, the factory that make the leather interior is naturally tanned and is sourced from local cows. In


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addition, the wood components of the car are made with eucalyptus tree, because it is an invasive species which kills other trees. This ensures that BMW is not mowing down an entire forest, but rather picking specific trees and using the entire tree in the process.104 BMW’s end goal is to decrease their carbon dioxide emissions, and in the long run they hope to improve their idea of sustainable mobility. This is further reiterated through their “Clean Production” philosophy which states that their goal is to minimize their environmental impact and resource consumption.105

SWOT Analysis Strengths

Weaknesses

•

Established brand

•

High Production Cost

•

Current alliances with Intel and Mobileye (Autonomous driving)

•

EV only 1.5% of Sales

•

Expensive Spare Parts

•

Co-operates on open platform

•

Recent Recall

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Pre-existing co-operation with Toyota on fuel cells and batteries

•

BMWi series

•

Partnership with ChargePoint

•

Sustainability

Opportunities

Threats

•

More partnerships to increase resources

•

•

A shared standard and engineering criteria for autonomous driving

Other competitors providing similar products (i.e. Tesla)

•

Possible backlash from Samsung batteries

Increased gas prices

•

Political and global economic risk

•

Strategic and sector risk

•

Risk in Sales and Marketing

•

Financial risk of raw materials

•

BMW’s strengths include their established brand. This is important because unlike Tesla, they already have established channels, customers, factories, and capital. Granted there are differences between diesel car channels, customers, and factories, compared to the electric car industry, but it only requires slight modification on BMW’s part. In addition, as an established brand coming up with capital is not as difficult because the company has proven itself successful through previous car models. In addition, their alliance with Intel and Mobileye to work on autonomous driving will keep them competitive with other car companies that are


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pursuing autonomous driving as well. Another important strength of BMW is their BMWi series and how it focuses on their goal of creating sustainable mobility. This is further strengthened through their partnership with ChargePoint, and creating the ChargeNow stations. Unfortunately, producing cars is really expensive and spare parts for cars are just additional cost to consumers. BMW produced the BMW i3 in order to stay competitive in the car market, but also start their move towards production of sustainable cars. However, BMW’s i3 and i8 only account for 1.5% of BMW’s overall sales. This can be contributed to that fact that the electric car industry is still very new and that BMW focuses more on producing diesel cars. In addition, BMW had to recently recall over 154,000 vehicles in the United States because of faulty fuel pump module. With Volkswagen’s recent emission scandal, this recall might not look so great for BMW and may cause loss of trust among the customer base. 106 Some opportunities that BMW should pursue include making more strategic partnerships to increase their resources. In addition, the Chairman of the Board of Management thinks that the industry as a whole should come together and establish a shared standard and engineering criteria for autonomous driving. This will create a safe and efficient way for the industry to introduce autonomous driving. Furthermore, increased gas prices give BMW the opportunity to create a more sustainable fleet of cars. Though there are some opportunities for BMW to pursue, there are also threats that they have to be aware of. BMW has to be attentive to the idea that there are other competitors, like Tesla, who are providing similar products. As well as, the political and economic risk that the industry faces when entering a new market. BMW also faces the threat of financial risk of raw materials, such as carbon fiber, that are very expensive and need to be used in limited quantity. Also, to keep in mind is the possible backlash that they may experience with their partnership with Samsung SDI providing the car battery. There haven’t been any adverse reactions, however with Samsung’s recent recall of their Galaxy Note 7’s, there is the possibility of negative press on the subject.

Competitor Analysis: Mercedes-Benz

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Competitor Analysis: Mercedes-Benz Overview Mercedes-Benz (Daimler AG) is a global premium automotive brand, competing directly against Tesla in the luxury car market. Mercedes-Benz is the most valuable, key brand under the Daimler Group of parent company Daimler AG, headquartered in Stuttgart, Germany. Daimler Group is one of the largest and renowned premium vehicle manufacturing companies in the world. With divisions such as Mercedes-Benz cars, vans, and Daimler trucks and buses, the MercedesBenz brand is widely recognized and successful in nearly every country they do business in.107 Their slogan “The best or nothing” reflects their business core model to deliver the highest quality, highest performance, and the safest vehicles to consumers that will anchor them to be at the forefront of the industry. In response to the ever-changing economy and views of sustainability, Mercedes-Benz strives to continually invest in innovative and green technologies that can be incorporated alongside their flagship diesel models into alternative drive systems such as hybrid and electric vehicles.108 Mercedes-Benz has been named one of the top “100 Best Companies to Work For” by Fortune Magazine for the fifth consecutive year and is the only automaker to have such a title in that time period. Mercedes-Benz also holds the title as #20 World’s Most Valuable Brand.109

History Mercedes-Benz dates back its inception to the first engine-driven automobile invented in 1886 by German racer Carl Benz, which is now the “birth certificate” of the automobile, bearing the name “Patent Motor Car.” From initiative of converting the horsepowered stagecoach into a petrol-driven one, German racer Gottlieb Daimler and German engineer Wilhelm Maybach founded Daimler-Motoren-Gesellschaft (DMG) and pioneered the first Mercedes automobile in 1901. Introduction of Austrian businessman, Emil Jellinek, into DMG yielded the trademark of the name “Mercedes,” taken after his daughter, for the 1901 automobile model. In June 1909, the world-famous three-pointed star trademark logo was brought to life, commemorating Gottlieb Daimler’s use of stars for a symbol in his prior work. In order to maintain financial stability following World War I, competitors DMG and Benz & Cie. entered into a joint merger in 1924. Daimler-Benz AG was established in 1926 and introduced the first jointly developed Mercedes-


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Benz brand name vehicle models thereafter. During the Second World War, Mercedes-Benz was criticized for alleged forced employment and violation of human rights. However, since then, the company has been successful in expanding its product variety and focusing on delivering top quality and engineering to the luxury car market.110 Mercedes-Benz did not reach the United States until 1957, when it entered into a distribution agreement with Studebaker-Packard Corporation. The company parted away from the agreement in 1965 and thus formed Mercedes-Benz USA as a subsidiary of Daimler AG.111

Assumptions It can be assumed that Mercedes-Benz will follow premium brand automakers to expand their battery electric vehicle line outside of the current B-class electric drive. Mercedes-Benz has been envisioning their “Mercedes-Benz 2020” strategy since 2015, which includes the addition of more full-electric vehicles to their product portfolio. It is also expected that Daimler will continue to be a primary conventional gasoline-fueled automaker, while expanding their R&D investment into the electric vehicle market. As of now, they are in the higher league of electric vehicles in the industry and it is expected that they will continue to compete against other luxury carmakers, as they have been with their gasoline-powered models.


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Financial Statement Analysis Ratios Derived from the Daimler Annual Report 2015: ROCE

15.68%

ROA

8.19%

ROIC

9.09%

ROE

17.08%

Net Profit

5.86%

Asset Turnover

1.3987224

Current Ratio

4.3315618

Debt Ratio

0.5203584

Debt to Equity Ratio

1.0848900

In 2015, Mercedes-Benz sold roughly 1.87 million vehicles worldwide and has been achieving record-breaking sales for five consecutive years. Mercedes-Benz’s 2015 annual report showed revenues of $91,007.35 million for Mercedes-Benz cars, which is a growth of 13.90% from the previous year. Net profit in 2015 for all Mercedes-Benz automobiles was $8,299.45 million, which grew 19.29% from 2014. There is a positive growth trend, indicating stronger sales and returns.109 Further analysis of financial ratios reveals that return on capital equity employed (ROCE) is 15.68%, which measures performance, profitability, and the efficiency of capital employed by the company. A higher ROCE can be a sign of effective growth. The return on equity (ROE) for Mercedes-Benz is 17.08%, which measures the profitability in regards to shareholders’ investment. Given that the auto industry’s average ROE is 12.40%, Mercedes-Benz has a higher profitability ratio compared to other auto companies.112


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Another important aspect of financial ratios to analyze are debt ratios. Debt ratios generally examine the financial risks of a company. Mercedes-Benz’s debt ratio is 0.52 and debt-toequity ratio is 1.08. A debt ratio of 0.52 can be inevitably risky because it indicates a large amount of liabilities in proportion to assets; however, since the industry is relatively stable, the debt ratio does not impose too much risk. As for the debt-to-equity ratio, 1.08 is not too concerning because it is quite low. Investors will start to worry about the debt-to-equity ratio once it surpasses 5.109 Overall, Mercedes-Benz’s financial ratios indicates a stable company who manages their finance well. Mercedes-Benz has growth in sales volume, revenue, and net profit but there is always room for improvement. In order to stay in the industry, Mercedes-Benz must keep up with the innovation and new technology that are constantly changing, which includes engineering sustainable vehicles.

Finance Despite the Greek debt crisis and China’s stock market turbulence in 2015, which affected the world’s stock market, Mercedes-Benz hold a strong financial position because their parent company, Daimler has several other world renowned brands which helps the group of companies to minimize their operational cost by using shared resources. Mercedes-Benz Daimler AG (DAI) is traded on Frankfurt and Stuttgart. Daimler AG is owned 69.9% by institutional investors, 20.2% by private investors, 6.8% by Kuwait, 1.54% by Renault and 1.54% by Nissan.113 Recently Mercedes-Benz stock price has been inclining due to the development of new cars being positively received by investors. At the end of the third quarter, the share price was 62.71 euros and had an increase of 17% higher than the Dow Jones STOXX Auto Index.114 In Daimler AG’s 2015 Annual Report, their stock price was $84.24, net profit of $8.54, and a dividend of $3.54. Mercedes-Benz had a 2% market share in the United States. So despite the 2015 stock market’s turbulences, Mercedes-Benz was still able to generate a profit and pay out dividends, demonstrating a more stable and robust company who is prepared for difficult times. Daimler AG get their funding needs by means of “bonds, commercial paper, bank loans, customer deposits in the direct banking business and the securitization of receivables in the financial services business; the focus will be on bonds and loans from globally and locally active banks.”109

Capabilities Organizational Structure Chairman of the Board of Management, Head of Mercedes-Benz Cars: Dieter Zetsche


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Mercedes-Benz USA & NAFTA CEO: Dietmar Exler Mercedes-Benz USA CFO/VP: Harald Henn Mercedes-Benz USA CTO: Norbert Litzkow Mercedes-Benz Cars Marketing & Sales: Ola Kallenius Human Resources and Director of Labor Relations: Wilfried Porth Finance & Controlling/ Daimler Financial Uebber: Bodo Uebber

At the top of the board of management of Daimler AG is Dieter Zetsche, Chairman of the Board of Management of Daimler AG and Head of Mercedes-Benz Cars. His contribution as a member of the Board of Management since 1998 and Chairman of the Board of Management of Daimler AG since 2006 proves his dedication and expertise to Daimler’s overall strategy striving towards innovation and digitization. The Board of Management positions are all crucial positions required to focus on the company’s overall capabilities to run under substantial terms such as financing, marketing, and human resources. Daimler AG Board of Management sits in Germany and consists of eight heads overseeing all management activities on a global scale. There exists a Supervisory Board that communicates extensively with the Board of Management on key financials and corporate planning. Mercedes-Benz USA operates as a subsidiary of Daimler AG and is comprised of key figures, such as the CEO, CFO, and CTO to operate activities in the United States.109

Operations Daimler AG is compartmentalized by five divisions: Mercedes-Benz Cars, Daimler Trucks, Mercedes-Benz Vans, Daimler Buses, and Daimler Financial Services. Each division is managed by a head of the Board of Management. As of 2015, the Daimler Group has production facilities in 19 countries in Europe, North and South America, Asia, and Africa and has more than 8,500 sales center globally that employ a workforce of 284,015 people.109 Mercedes-Benz USA employs 1,600 people and has 368 associated dealerships that employ over 22,000 people themselves. Mercedes-Benz USA was founded in 1965 and is


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headquartered in Montvale, New Jersey and houses another office in Long Beach, California. On a dealership and collision center level, there exists managers, sales associates, and service employees.115

Product: Mercedes-Benz B-Class Mercedes-Benz’s sole fully electric vehicle out in the market is the BClass Electric Drive. The B-Class competes directly with the BMW i3 and Tesla’s Model S. The styling details of the B-Class drive are no different from the other lines of the brand; the familiar star emblem, sleek creases around the body, and wrap-around headlights identify this vehicle as an authentic Mercedes. However, it is the smallest vehicle they have available, a foot shorter than the CLA luxury compact. Although well-designed, its hatchback style offers a deviation from the usual size and shape released from Mercedes. The only indication that this vehicle is a battery-electric model is its “Electric Drive” badging near the bottom of the back door. The B-Class is one of the fastest electric cars in the market, delivering an estimated zero-tosixty speed of 7.9 seconds. The powertrain, the main component that generates power from the original source to the road’s surface, is supplied by Tesla Motors, but is still not as fast as the Tesla Model S. The model has a 28 kilowatt-hour battery pack that allows for 98 miles if driven at 3.5 miles per kWh, which is much more than BMW’s 22 kWh i3. This impressive driving range puts Mercedes’ electric vehicle at an advantage over competitors, except for the Tesla Model S again. Although the propulsion system is supplied by Tesla, the Mercedes BClass will be limited in using the Tesla supercharging stations. An empty-to-full charge takes four to five hours as a quick charge port is not incorporated into the fueling system. Unlike the BMW i3, the B-Class electric is able to seat five passengers. Despite compactness, the Mercedes EV was meant for comfortable commuting, not long-distance highway drives. The base price of the vehicle is $41,450, only a $100 higher difference than BMW’s electric model, making the drive range availability and styling preferences the main buying factors against one another. However, compared to the Tesla Model S, the price of both the BMW i3 and the Mercedes-Benz B-Class are exponentially lower, targeting a lower average income shopper for the same luxury brand group.116


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Manufacturing Process Customers can select a vehicle at the dealership’s current inventory or place an unique order customized from the available options. Mercedes-Benz passenger cars are produced and manufactured in Europe while other product lines are built in Alabama. Models produced in Europe are shipped to the United States through the German port of Bremerhaven on vessels that hold up to 6,500 vehicles. The vehicles are then received into three US ports, Baltimore, MD, Brunswick, GA, and Long Beach, CA. The estimated transit time is around 12-30 days from Europe to the named US ports. The vehicles are then inspected and quality-controlled in the vehicle preparation centers. The vehicles undergo another round of inspections once accessories are installed and repairs are concluded. The finished products are then ready to be carried to the dealership for sale.117

Distribution Mercedes-Benz dealerships serve clients with premium customer service and assist in leasing, purchasing, and servicing a Mercedes-Benz vehicle. These dealership centers usually include sales offices, repair and service centers, and stocks of readily available cars for purchase.118 These dealerships, as mentioned in the industry overview, are not owned by Mercedes-Benz, but franchised by automotive retailers. For instance, Mercedes-Benz dealerships in San Jose are owned by AutoNation.119 Mercedes-Benz USA is in the process of building a regional parts distribution center and training facility in Grapevine, Texas that is expected to open in 2017. This opens job opportunities for community members and provides training of Mercedes-Benz dealership technicians.120

Marketing From its established prestige as a quality-centered brand for over a hundred years, they reap the benefits of a recognized and reputable brand. Mercedes-Benz has started to increase communication with its target market by online advertising, establishing outstanding customer service, and social media. These techniques reach beyond the niche market of older, high


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disposable income consumers to younger consumers.121 Another effective in-person strategy includes the extensive presence at auto shows. Auto shows attract the most car aficionados and are the best place to expose a new product. Mercedes-Benz also sponsor major athletic tournaments, such as the tennis grand slam tournament, Wimbledon British Open and the German National Football Team. 122 The “Best Customer Experience” marketing and sales strategy focuses directly on the customer's’ needs and expectations. It incorporates the new “Mercedes me” service brand, a digital platform directed for the consumer to have hands-on access when purchasing, financing, or servicing vehicles. Mercedes-Benz is consistently implementing convenient solutions to aid consumers into choosing their product over a competitor’s.109

Human Resources Daimler AG proposes to offer more than just a job. Working as an employee for Daimler AG suggests that it will open doors to a successful future. Mercedes Benz USA employs 1,600 people and has 368 associated dealerships that employ 22,000 people.76 Both commercial and technical jobs are available at Daimler. Commercial openings include sales and marketing, procurement, logistics, finance, and human resources. Technical openings apply for development, manufacturing, and service departments. Interested candidates apply online through the Daimler Career Portal on their website. Employment options are not limited to corporate or technical positions, but also reach out to dealership positions, often third-party affiliated. The company offers programs and developmental measures to hone and foster professional growth prior to full employment. Once the application is submitted for vocational training, an initial online test will be sent via email that will dictate whether an on-site test will be forwarded to the prospective applicant. This training then determines if an interview will be granted for the applicant to move onto the next step. The technical traineeships provide practical experience, expertise, and access to new and upcoming technologies. At the end of the traineeship, an examination deciphers which occupation is best suited for the trainee’s full-time position.81


61 Suppliers

Daimler’s success depends on their suppliers’ faithful and trusting cooperation to the company’s Supplier Sustainability Standards. Daimler requests proof of certified environmental management from suppliers to ensure environmental standards in their supply chain. Their target for reaching 70 percent supplier certificates of these standards by 2018 has already been met by 45 percent at the end of 2015. 123 Mercedes-Benz is the first automotive manufacturer to use renewable raw materials both for exterior and the interior of the products. By doing so, they eliminate 60% less energy in the manufacturing process. The chassis of electric vehicles are manufactured almost identically to gasoline-powered vehicles, using the same materials from German-specific suppliers.85 The B-Class Electric Drive’s entire drivetrain system was supplied by Tesla Motors. 124 Daimler and Tesla have had a relationship since 2009, when Tesla was in a precarious starting stage. Daimler bought 10 percent stake in Tesla in exchange for a battery supply partnership, benefitting both parties with much needed resources at the time.125 The partnership claimed successful for both companies: Daimler, an early and important investor in Tesla, and Tesla providing one of the main components for functionality of the Mercedes B-Class. However after seven years, news in March 2016 released that Tesla would no longer provide the powertrain for the next generation B-Class Electric Drive, as they planned to move production and development in-house. According to Harald Kroeger, head of electric car technology at Daimler, $550 million has newly been invested in technology to develop its own powertrain and battery for Mercedes vehicles.126

Core Competencies & Sustainable Competitive Advantages Competitive Advantages

Core Competencies

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Pioneer in safety assistances

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Technical feasibility

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Advanced technology

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High value of brand

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Brand reliability

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Continuously innovative

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Excellent customer service

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Skilled, knowledgeable employees

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Corporate social responsibility

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Increasing annual vehicle sales

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High performing and top-notch designed vehicles

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R&D


62 Core Competencies

The basis for their highly advanced safety measures is associated with their long-run technical feasibility. Their technical knowledge dates back to the 1800s and has been one of their leading reasons for drawing such strong competitive advantages. Their continuous innovation would not be achieved if not for their skilled personnel stationed globally. The loyal and committed employee base make up the future stance of the company. Mercedes’ product portfolio across all four divisions create increased annual sales that enables the company to strive and stretch to allocate more into an already intensive R&D department. Their specialized R&D provides a strong foundation for their innovation to soar and captivate larger target markets.127

Competitive Advantages Mercedes-Benz demonstrates several competitive advantages that provide value to consumers of the auto market. Their pioneering expertise in safety protocols communicates their deep understanding and value of quality control measures engraved in their service. Their vehicles have been the benchmark premium in vehicle safety due to their selective crash tests and corresponding driving tests for all vehicles. Safety assistances will continue to be heavily invested in to stay ahead. Their advanced technology has allowed them to retain brand reliability and withhold a credible reputation for their high performing and top-notch designed products for decades. Their impeccable and constantly improving customer service remains as an advantage as they ensure a customer relationship throughout the whole selection process. Mercedes-Benz relays their attentiveness to their customers through these competitive advantages that are specifically unique to their brand. 128

Current Strategy Mercedes-Benz’s current strategy is to achieve sustainable, profit growth to increase the value of Daimler Group through cutting-edge technologies leading to outstanding products. Mercedes-Benz strives to attain their current objectives by strengthening their core business, growing globally, leading in technology, and driving ahead with digitalization. Mercedes-Benz set standards in technologies and innovation, from perfecting autonomous passenger vehicles to sustainable technologies. By utilizing research and shared systems across divisions, Daimler AG optimizes their potential to improve technologies in all products. For customers, they aim to top the rankings in customer satisfaction and impress through first-class quality. Daimler takes pride in their employees who follow the four corporate values- Passion, Respect, Integrity, and Discipline in their daily business activities. In instilling these corporate values into the core business model, Daimler hopes to gain excellent teams that will fuel a diverse mix.


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Financially, they set a goal of achieving an average return on sales of 9% spreading across all of the Daimler divisions and specifically 10% for Mercedes-Benz Cars.129

Future Goals The “Mercedes-Benz 2020” strategy formulated in 2015 addresses customers on an individual basis and expects to expand new concepts into its vehicles. All sales, service, and financial service activities will be tailored to each unique customer relationship duration.109 This strategy is also tailored towards women to view Mercedes-Benz as the most attractive luxury automobile brand by increasing the proportion of female customers and employees. This initiative, called “She’s Mercedes,” is a platform dedicated to empowering women through networking events and creating dialogue through their digital hub. 130 Mercedes-Benz is initiating various strategies to target specific groups, such as women and now those who support sustainable mobility. The framework of the Mercedes-Benz 2020 growth strategy outlines a goal to produce 30 more new car models by the end of 2020. Mercedes states they will strengthen their position as the pioneer in safety technology and autonomous driving. Their feat in being the first automaker to receive official permission to test autonomous driving vehicles on public roads in California positions them ahead of other automakers along their way of developing that technology. The new passenger vehicle models they attest to delivering by the end of the decade, also includes the introduction of more than 10 all-electric vehicles by 2025. These electric models will fall under a new product brand, called EQ, Electric Intelligence. The new generation EVs will exhibit two electric motors, an extended range of 500 km, and “typical Mercedes strengths of safety, comfort, functionality, and connectivity”. The closest to production concept vehicle, Generation EQ, was unveiled at the 2016 Paris Motor Show in September 2016. The projected first EQ model will be the Generation EQ SUV intended to release by 2020. In expanding their portfolio in line with and beyond customer expectations, they are accomplishing their sales and marketing strategy “Best Customer Experience.”131


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SWOT Analysis Strengths

Weaknesses

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Strong brand value and global leader

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High production costs

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No capital constraints

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Expensive spare parts

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Leader in innovation

•

•

Lots of capital dedicated to R&D

EV only small line of car division and sales

•

Patents on safety features

Opportunities

Threats

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Increasing demand for fuel efficient vehicles

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Intense competition

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Government policies and regulations

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Fast growing luxury automobile market and disposable income

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Increased fuel prices can broaden EV market

Mercedes-Benz Daimler exhibits advantageous strengths to contribute to their market success. Their strong brand value and global leadership stance is among the highest of automakers since their evolution over 100 years ago. Due to their high reputation and longevity in the automobile market, there is no foresight of capital constraints, which segways into a larger cap for research and development, especially for the electric car market. Their establishment proves Daimler as a constant leader in innovation, conscientious of the future economy and projected demands. Their movement towards heightened and enforced vehicle safety controls have allowed them to patent their safety features as a Daimler initiative. The accelerating growth of the EV market presents an opportunity for Mercedes-Benz to contribute to the demand towards an energy efficient economy. Also as the economy steadies and does better, there will be a larger pool of consumers with disposable income to invest in a luxury electric vehicle. Mercedes-Benz’s weaknesses are attributed to high production costs, expensive spare parts, and the minimal flow of sales from their B-Class Electric Drive line. The German auto parts come with a high price tag, which is then reflected in their production. From their single B-Class Electric, their expenditure is not highly allocated to this new branch of the Mercedes car division. Thus, the sales of the B-Class is nowhere near that of their gasoline-powered vehicles. Although increased fuel prices can be perceived as a threat to the gasoline-powered vehicles, this turns into an opportunity for a broader EV market with price as a determining factor.


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Intense competition from those EV makers who have been in the playing field and the EV makers projected to enter the market will pose as the biggest threat to Mercedes-Benz. Government policies and regulations will continue to enforce limitations of fuel emissions to auto manufacturers.132

Strategic Map

The strategic map is comparing the 2017 MSRP of major electric car manufacturers and the length of one charge. In addition, the bubble size is a reference to the company’s market capitalization. We must take into account that the market capitalization is for the entire company, and not specific to electric cars. As shown on the map, Tesla is both the leader in price and battery charge, setting themselves as the leading pioneer in the electric car industry. The next bubbles being BMW and Mercedes, Tesla’s biggest competitors. The strategic map shows a gap between Tesla and the rest of the group, therefore it shows that there is an opportunity for a new competitor to fill that spot. This would require the company to produce and sell an electric car between $50,000 to $70,000 with a battery charge of higher that 114 miles and less than 265 miles.

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Company Analysis Overview Tesla Motors, headquartered in Palo Alto, California, is an American automobile manufacturer that specializes in the design, development, and sale of high-performing electric cars and energy storage products.133 When the company first started in 2003, it wanted to prove that electric cars were better than the traditional gasoline-powered cars in terms of emissions, power, and performance. The company’s mission statement is “to accelerate the world’s transition to sustainable energy.”134 Without any capital or economies of scale, and only one design, Tesla showed little potential for growth as an automaker. But with subsequent social and technological advances moving toward sustainable ways of transportation, Tesla has been able to use these efforts to grow and to attempt to sell their cars to the mass market. Now, with more than 200 stores operating globally, Tesla provides three fully electric cars: the Model S sedan, the Model X SUV, and the Model 3 sedan coming out in 2018.

History Tesla Motors was co-founded in 2003 by Martin Eberhard, Marc Tarpenning, JB Straubel, Elon Musk, and Ian Wright. Martin Eberhard and Marc Tarpenning, the original engineers of Tesla, wanted to show the world that they can build an electric car that was better than a gasolinepowered car. But with no capital and no economies of scale, they believed that building a sports car for the luxury car market would be the best way to start out. Using the AC induction motor, patented by Nikola Tesla in 1888, they developed the Tesla Roadster in 2008. This sports car could accelerate from 0 to 60 mph in 3.7 seconds and offered a range of 245 miles on a full charge.135 The idea of a fully electric engine was not unheard of at the time, but the unique design of the Tesla Roadster engine, which was based off a lithium-ion battery, showed the world that the car can produce zero emissions while providing superior performance. The Roadster eventually became critical for the success of Tesla as it showed potential growth for investors and showed the company how it could improve. As Tesla was reaching its last round of funding, the company found itself in financial struggle. In order to help Tesla avoid bankruptcy, two of the biggest automakers, Daimler AG and Toyota funded Tesla with $100 million, which eventually became the funding that helped develop the Model S. 136 Toyota sold Tesla the New United Motor Manufacturing, Inc. (NUMMI) plant in Fremont, California for $42 million, which allowed Tesla to operate at a higher capacity and is still its primary manufacturing facility to date. In addition to support from Daimler and Toyota, Panasonic also invested $30 million and reached a deal to develop batteries for Tesla.

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The company issued its IPO on the NASDAQ Stock Exchange on June 29th, 2010. Two years later, Tesla came out with the Model S sedan, a more commercial car, which was more efficient and offered a stunning range of 275 miles per charge. The cost of developing the Roadster and the Model S was $140 million and $650 million, respectively. Tesla was able to produce high-performance electric cars with reasonable costs, especially in comparison to General Motors’ $1 billion investment into EV1, its first electric vehicle. 137 Three years later, on September 2015, Tesla introduced the Model X SUV. Tesla has always been built around the idea of its mission statement: to accelerate the world’s transition to sustainable energy. In order to do so, one of Tesla’s main goals is to “provide their cars to the mass market as quickly as possible.”138 But, due to the nature of the developing industry, it was difficult to start out that way. In 2018, Tesla will be producing and delivering their first affordable electric car, the Model 3. It will be interesting to see how the company plans to achieve their goals with their brand built on the idea of luxury.

Assumptions Tesla assumes, with the release of the Model 3 sedan and the development of the Gigafactory, they will continue to be the industry standard in high performance electric cars. The results of the Model 3 will determine whether the company is able to sell their cars in the mass market. The problem right now is with production in the Gigafactory. Since there are no storage costs, Tesla waits until release before production starts. But another problem is not producing enough lithium-ion batteries. The company fears that Panasonic will not be able to provide the increasingly high demand for a Tesla Model 3. But the company assumes that they will be able to provide in both aspects without incurring additional costs. Jumping from 80,000 cars per year to 500,000 will be an obstacle for the company.

Financial Statements Analysis Ratios Current Ratio: 2,791,568/2,816,274 = 0.99123 The current ratio is the company’s current assets over its current liabilities. This is to see how capable the company is at paying off its most current debts. With their current assets as $2,791,568 and their current liabilities as $2,816,274, this gives us a ratio of 0.99 meaning that the company has almost enough to pay of its current debt. 139 A ratio of 1 or higher means shows sufficiency.

Company Analysis

68 Return on Assets: -888663/8092460 = -0.10981

Return on Assets is a financial measure that measures the how much of the profit comes from the company’s assets alone. If the company is heavily dependent on capital, then this measure is a very accurate measure on its performance. Since the return in negative, it means that the company is losing money through its assets. Return on Equity: -888663/1088944 = -0.81608 Return on Equity is another financial measure that measures the “amount of net income returned through a percentage of shareholder’s equity. This measure shows that there is a great negative return on shareholder’s equity. These financial measures are the key ratios for Tesla because of many factors, including its industry, how it operates, and how it finances. Since an automobile company is dependent on high capital, it becomes important to see how much return it gets from it. Since the company focuses on equity financing, it is also important to see the return on that as well. Tesla is a company that is currently incurring a lot of debt. It becomes important to see how quickly and able the company is at paying off its debts.

Finance As the company reached the end of their 3rd quarter at the end of September 2016, Tesla announced that their Q3 sales were more than double a year ago.140 This brings their total car deliveries this quarter to 24,500. This is good for the company as it exceeded analysts’ expectations, which drove Tesla’s stock price up. Even though sales are improving every

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quarter, it will be difficult to predict how Tesla will perform with more acquisitions and the development of the Gigafactory. Tesla Motors currently sells cars in three models: the Model S sedan, the Model X SUV, and the Model 3 sedan beginning production in 2017. The Model 3 coming out in 2017 becomes a significant milestone in Tesla in that it is their first economical car. Pre-orders are set for 400,000+ cars with a base price of 35,000 dollars. To prepare for the upcoming production needs, Tesla began production for the Gigafactory and was finished in 2016. The cost of the Gigafactory is around 5 billion dollars with some of the money coming from other companies. As of November 2016, Tesla has finished its acquisition deal with SolarCity for 2.6 billion dollars.141 With 2017 right around the corner, Tesla would need more cash to begin production of the Model 3 sedans. This puts the company in a tight financial position since Tesla continues to incur costs and debts without much show for profitability yet. If all goes well, Tesla expects the company to reach profitability by 2020.142 Standard & Poor’s, an institutional credit rating agency, gave Tesla a credit rating of B-, classifying it as a speculative bond, or junk bond. 143 This sort of credit rating makes it difficult for the company to issue corporate bonds, a way of financing through debt. Corporate bonds are usually more appealing than bank loans in that the company gets better interest rates. But since it was given such a low rating, investors will not want to invest. So, it becomes easier for the company to finance their projects through equity. As of right now, by looking at their financial statements and ratios, we can see that the company can barely pay off its debts with the assets that it has. With the company running under a net loss while still acquiring more assets, it is difficult to see what the plans are for the company and how they are going to perform in the future. Since equity financing is one of their own choices right now, Tesla needs to utilize and maintain that as an option. Even though the company plans to reach profitability by 2020, it is still a long time before we can see those results.

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Suppliers As of April 16th, it has been made known that Tesla gets its materials from 33 different vendors, with 40 percent residing in the United States and 30 percent residing in Switzerland, China, and Japan.144 Panasonic provides the car batteries, Magna International is responsible for the design of the exterior and powertrain, Shiloh Industries provides the aluminum, magnesium, and steel, A. Schulman offers plastics and colors, and AK Steel Holding Corporation is responsible for electrical and stainless steel. But with the development of the Gigafactory, Tesla is planning to produce most of everything in house, integrating their entire company vertically. In Tesla’s 10-K, which ended on December 31st, 2015, there were three things that Tesla stated that it was going to focus on: batteries, energy storage, and lightweight material.

Batteries Tesla’s batteries are very unique since they provide a mile range better than any other electric car in the market. Tesla used to source its batteries from Panasonic, a Japanese electronics company, as a third party supplier. However, with the recent development of the Gigafactory, Tesla will now be making all of their batteries in-house with the help of Panasonic as its strategic partner. The massive Gigafactory venture comes in response to the company’s search for more lithium-ion battery options to supply the demand for the upcoming Model 3 sedan. Tesla will utilize Panasonic’s battery cell technology to create energy efficient and cost effective batteries that will go into the newer models. The raw materials needed for Tesla’s new battery cells are graphite, cobalt, and lithium. These materials are mostly sourced from different parts of the world - with graphite coming from Japan and parts of Europe, cobalt acquired by Sumitomo Metal Mining in the Philippines, and lithium extracted from mines in Chile. With the introduction of the Gigafactory, Tesla is hoping to source its raw materials from

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North America to reduce the costs of acquiring resources internationally, establish a localized supply chain, and minimize the company’s environmental impact.145

Energy Storage With the recent acquisition of SolarCity, a company that focuses on solar panels and sustainable energy, Tesla plans to enter a market that focuses around their Powerwall and energy storage. As for their cars, Tesla plans to use this new technology for their battery charging to create a more integrated system.

Lightweight Material Tesla talks very briefly on providing more lightweight materials and applying them in their future cars.146 Since the battery’s mile range is dependent on the car’s weight, Tesla plans to research more durable and lightweight materials, such as carbon fiber that it could possibly apply to its automobiles. Considering how Tesla works with Shiloh Industries in providing aluminum and other metals for their cars, it is possible that we will see a more direct partnership with them in the future.

Capabilities Organizational Structure Tesla’s organizational structure in Tesla is split up into two main groups: Board of Management and Board of Directors. In the Management board, we have the Elon Musk as CEO, JB Straubel as CTO, and Jason Wheeler as CFO. In the Board of Directors, we have Elon Musk as Chairman and a total of six directors, five independent directors and one director with affiliations with the company. Tesla’s CEO Elon Musk has been instrumental to the company’s success. Twenty five years ago, Elon Musk listed five areas that he thought would affect the future of humanity the most and now he has already tackled three of them so far ; space exploration, sustainable energy, and the internet. His commercial space exploration company, SpaceX, might be putting people on Mars within the next fifteen years and never stops envisioning what is next.147 He has been dedicating his life work to making the world a better place and continues to strive for greater collective enlightenment. Driven with a purpose, Musk accomplishes whatever he sets his mind to and that is why he remains as a vital part to the strategy and structure of the organization. His expertise and intelligence pushes forward refusing to be constrained by limitations of whatever lies in his path. In Tesla’s Board of Directors bylaws, you can purchase enough shares to be placed in the Board of Directors. But there will always be more independent directors required by law. All of

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the elections and nominations are governed by Tesla’s Nominating and Corporate Governance Committee.148

Board of Management Chief Executive Officer: Elon Musk Chief Technical Officer: JB Straubel Chief Financial Officer: Jason Wheeler

Board of Directors Chairman: Elon Musk Lead Independent Director: Antonio J. Gracias Independent Director: Brad W. Buss Independent Director: Ira Ehrenpreis Independent Director: Steve Jurvetson Independent Director: Kimbal Musk Director: Robyn M. Denholm

Operations Unlike many companies in the automobile industry, Tesla’s operations are about 80% vertically integrated.149 The company’s focus is to minimize outsourcing as the majority of its processes are done in-house at Tesla’s state-of-the-art manufacturing plant. The flagship factory is located in Fremont, California and operates at full capacity in the 5.3 million square feet space, producing over 100,000 cars annually.150 The facility houses 160 specialized robots with advanced capabilities, which demonstrates Tesla’s emphasis on utilizing automation to the fullest extent to improve process efficiency. 151 Tesla has recently built the Tesla Gigafactory in Nevada dedicated solely to producing lithiumion batteries. Expecting to reach full capacity in 2018, the 13.6 million square feet facility was built to accommodate the increased volume of Tesla vehicles expected to be produced, especially on the heels of a new model release.152 The Gigafactory will bring Tesla’s vertical integration to the next level, as production of the lithium-ion batteries are no longer being outsourced to their supplier Panasonic. Instead, Tesla will partner with Panasonic to help oversee battery cell production within its own factory. The ultimate goal is to optimize quality

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while reducing the production cost of a battery pack by 30%. The target cost is $100 USD per kWh of energy storage by 2020 as opposed to its current cost of under $190 USD per kWh. In the future, Tesla has plans for annual battery production capacity of 50 GWh once at full capacity, enabling the company to produce 1,500,000 cars annually. 153 Reaching these goals will solidify Tesla position outside of the niche market and make them extremely competitive with traditional internal combustion engine vehicles.

In addition to these facilities, Tesla has an assembly facility in Tilburg, the Netherlands as well as a specialized production plant in Lathrop, California. 154 With future projections of higher sales volume, Tesla’s expansion of manufacturing facilities will likely continue.

Target Market Tesla markets its cars as premium electric sedans and SUVS. Because its products are considered luxury, premium-brand vehicles and have a higher price point, Tesla’s target market can be seen as consumers with higher annual income of over $100,000. However, since its initial introduction to the market, Tesla’s cars have transitioned from an indication of socioeconomic status to a statement about sustainable living. Tesla’s target market are consumers who, still wanting a high-performance car, are concerned with being environmentally friendly and are willing to invest in a higher end vehicle to produce greater returns in the long run.

Marketing Tesla’s marketing strategy is different in that it does not allocate for marketing; costs are expensed as they are incurred. The 2015 annual report shows that Tesla spent a total of $58.3 million on advertising, promotion, and marketing expenses – a small portion of its $4 billion generated revenue in that same year. 155

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With no major marketing campaigns or traditional advertising efforts, Tesla relies on media coverage and word-of-mouth to build brand awareness and generate demand. Because of its innovative technology and unique product line, the company’s every move is highlighted and documented by the likes of news outlets, business journals, online blogs, etc. CEO Elon Musk’s presence in the public eye as a visionary further drives media coverage, especially when there are major announcements or product reveals. The company has a fascinating story to tell, as it resonates with consumers because of the value that it offers to the industry. Another primary driver of marketing is Tesla’s direct sales model. Instead of traditional franchised car dealerships, Tesla’s company-owned network consists of retail stores and galleries located in premium outlets in metropolitan areas. Tesla’s stores bring visibility to the brand because they welcome potential customers to learn more about the cars with the help of Tesla-employed staff. In-store interaction also encourages people to provide feedback about the products and input about the product development process. This creates a unique relationship between the company and its consumers, differentiating the buying experience and allowing consumers to learn about the brand in a pressure-free environment.

Products Tesla designs, develops, manufactures, and sells electric vehicles and energy storage products. Tesla’s cars are characterized by their sleek, innovative design and high performance unparalleled by other electric vehicles. The use of an electric powertrain allows the vehicles to be energy efficient and mechanically simpler than traditional vehicles on the market using internal combustion engine vehicles. Simpler mechanical design allows for lower maintenance costs. Currently, Tesla has two electric vehicle models on the market, the Model S sedan and the Model X SUV. The Model S, launched in 2012, is their classic four-door car that combines both functionality and luxury style. With a base price of $66,000, it has a 218-mile range from a single charge and is available with premium features like the autopilot system and a 17-inch touch screen interface with corresponding software.156 If a customer is looking beyond the standard 60 kWh battery, the Model S has the capacity to go all the way up to a 100 kWh battery pack with a 315-mile range and a $134,500 price tag.

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The Model S has been named the best-selling luxury sedan in the United States, even beating out competitors in the traditional automobile industry. It has also received the highest consumer satisfaction rating of 98% in a survey conducted by Consumer Reports. Factors that were considered include drive, style, features, comfort, fuel economy, value, repair cost, and cargo space - all of which received either an ‘excellent’ or ‘very good’ rating.157 In addition to high consumer ratings, The Model S was awarded five stars from the National Highway Traffic Safety Administration for its safety track record. Tesla prides itself on safety technologies which include electronic stability control, traction control, adaptive lighting, bio-weapon defense mode, and plenty more. The Model S has proven to be Tesla’s most successful model to date, surpassing the satisfaction rate of both plug-in and conventional cars, and helping the company to fully penetrate the market. The next model currently on the market is the Model X, which was introduced as Tesla’s sport utility vehicle. Its base price starts at $88,800 and offers more space and passenger seating. Following the company’s commitment to high performance and design, the Model X starts at a 237-mile range with its 75 kWh battery and has a falcon wing door system.158 It can reach a 289-mile range with a 100 kWh battery pack, priced at $138,800. Like the Model S, the Model X offers technological features such as overthe-air software updates, Autopilot hardware, and navigation system with real time traffic information. In addition to these two models, Tesla has plans to produce a third generation of compact, affordable vehicles starting at $35,000 called the Model 3. The Model 3 can be seen as Tesla’s foray into the mass market, as its current models are priced a bit higher. In preparation to meet the model’s high demand, Tesla has built the Gigafactory to supply the hundreds of thousands of batteries as well as increased the working capacity at its current facilities. Production and delivery is slated to take place in late 2017.159 Tesla aims to create value that extends beyond its electric vehicles. The company’s ultimate goal is to create a more sustainable world. With the two existing models and the third being released soon to the mass market, Tesla is working to ensure the universal adoption of electric vehicles.

Company Analysis

76 Manufacturing Process

The process of transforming raw materials to finished goods takes about 3-5 days and occurs at the Fremont facility. The body of the Model S, Tesla’s most popular car to date, is 98% aluminum. The factory operates massive stamping presses, taking 50 to 60 coils of aluminum per car to create stamping panels for various parts. Those aluminum parts are transported to the central location of the body center, where robots perform assembly on the shell of the car using adhesives, self-piercing rivets, cold metal transfer, and welding. A robot will then lift the body shell onto a conveyer leading to the paint shop; once painted, the car is ready for general assembly. “Smart carts” move the body as well as other parts throughout the factory by following a magnetic strip on the floor of the factory. This allows for quicker transport and efficiency in operations as the interior of the car is built. Design engineers and factory workers are present to inspect the quality and the production process.160 However, the majority of the factory’s functions are completed through automation and have a relatively small margin of error.

Company Analysis

77 Distribution

Tesla has a direct-to-consumer sales model that allows the company to exercise complete control over its sales and services. Rather than following the standard, independently owned dealership model, Tesla uses its corporate-owned model to its advantage. Currently, there are 99 retails stores and galleries across the U.S. and over 120 stores worldwide, with imminent plans to add more.161 The stores are located in prime, high-traffic locations to attract an optimal amount of people. They act as showrooms where customers can see sample models, interact with product specialists, learn more about the implications of purchasing an electric vehicle, and potentially place their orders. In addition to the retail stores, Tesla also utilizes an online sales model that allows customers to directly order their model through the Tesla website. All cars are custom-built and made-to-order in the Fremont factory. Once an order is placed, it takes about 1 week for the order to be submitted to the factory. Customers within close proximity can pick up their vehicle on site within 6-8 weeks, while customers located further away receive their delivery within 8-10 weeks.162 Tesla’s deviation from the traditional sales model carries a strategic purpose. CEO Elon Musk stated that, “Our technology is different, our car is different, and, as a result, our stores are intentionally different”.163 The company’s distribution channel is controlled internally, therefore reducing selling costs as well as inventory holding costs.

Human Resources Arnnon Geshuri is Tesla’s Vice President of Human Resources. Having previously worked at Google as Senior Director of Human Resources and Staffing during a pivotal time of growth, Geshuri possesses the expertise to guide Tesla in the right direction. Since taking on the position, Geshuri has helped the fast-growing company hire top-notch employees, including executive staff, engineers and other key employees. At its IPO in 2010, Tesla had an estimated 650 employees. 164 In its 2015 10-K filing, Tesla reported 13,058 full-time employees, a number that is expected to increase significantly within the next year. The company offers jobs in a multitude of business areas and are divided into over 20 generalized teams. Technical job openings include - but are not limited to engineering, R&D, manufacturing, and IT. Non-technical, business-related job openings include communications, marketing, HR, sales, retail development, finance, etc. 165 Interested candidates can apply to open positions through Tesla’s online Career Portal. Attracting the right talent is extremely important for a company whose standards are as high as Tesla’s. The company values agility, efficiency, and excellence in all of its workers. To

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encourage this, Tesla names employee engagement as part of its core strategy. A presentation by Tesla’s Head of Global Employee Engagement Louis Efron and HR Business Partner Juliana Bednarski outlined how Tesla turns employee engagement into accelerated business results.166 The company aims to attract qualified talent, foster exceptional leadership, instill purpose, and drive innovative results. The idea is that employee engagement equally impacts customer engagement. To help understand the needs of its employees, Tesla launched a company-wide survey to gauge its current employee engagement and strengthen its overall employee relations. The Tesla360 survey had a 91% participation rate and enabled employees to make comments and suggestions. The results were released within 2 weeks of the survey close, allowing for transparent communication from the top down. Based on the results, there was a call to action for each team and progress for those stated goals were tracked over time. 167 These efforts place importance on the people that make up the company, and not just the products. With high employee engagement, there is 15% more profitability, 30% more productivity, and 12% higher customer engagement – a clear indication that a company is most successful when it values its employees.

Brand Image Tesla began as a small startup with a big vision in 2013. Since then, the company has proven to be a force in the automobile industry. Having made Interbrand’s Best Global Brands list in 2016, Tesla has positioned itself as an exceptional brand with a promising future. 168 A large part of this can be attributed to Tesla’s innovative efforts. As seen in each of its models, Tesla has revolutionized the concept of the electric vehicle with cutting-edge technology and sleek design. Tesla’s brand image is not only reliant on its high-quality products, but also the direction of the company in the future. The strength of its brand lies in the public perception that Tesla is constantly creating and reinventing ways to live sustainably without compromising aspects valuable to consumers like high performance and style. Tesla’s relatively quick trajectory into one of the world’s top brands can also be attributed to its customer loyalty. The company values customer engagement and enables this through its service offerings, such as alerting customers when a check-up is needed or being able to call upon a service ranger when in need. Tesla also holds customer events to showcase new technological developments and updates to its vehicles. Although it is a newer brand in comparison to other automakers, Tesla has secured a loyal customer base through its emphasis on building strong customer relationships.

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Competitive Advantage & Core Competencies Competitive Advantage

Core Competencies

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Industry Standard Batteries

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Gigafactory

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Supercharger Network

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Efficient Engineering

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Before January 2017: Free

•

Computer Aid Design

•

After January 2017: Costs money

•

Innovative Manufacturing

•

Strong Customer service

•

No storage costs

•

Made to Order Purchases

•

Direct Dealership

•

Autopilot feature

Competitive Advantages Tesla demonstrates their competitive advantages through the quality and flexibility of their automobiles and through the strength and responsiveness of their salesforce and customer service. Tesla’s batteries, when compared to the electric cars of both BMW and Mercedes Benz, have a higher mile range than its competitors. This means that the cars can travel a greater distance before it has to charge again. As for their Supercharger Station Network, Tesla owners who buys their car before January 2017 can receive a lifetime supply of charging. The Supercharger Network boasts 744 stations with 4,703 Superchargers across the world with superior charging capabilities. The Superchargers, exclusive to Tesla owners, can charge up to 120 kWh in as little as 30 minutes, providing 170 miles of range.169 This becomes important because Tesla’s Superchargers can charge faster than any other charger in the market. With Tesla’s expansion and development of their Superchargers, Tesla drivers can travel greater distances than they could have before. This creates value for the customers because now they have the same capabilities as a traditional gasoline-powered car but at a lower cost. Another competitive advantage is Tesla’s Autopilot system.170 This system gives the customer the ability for the car to essentially drive itself through a series of radar technology. This is a strong competitive advantage as Tesla is the only automaker of the sort that has been able to develop this technology successfully for the consumer market. This is another example of Tesla’s innovation that separates them from other automobile manufacturers. Not only do the features of Tesla’s electric car bring value to the customer, but it is also the process of purchasing it as well. Tesla’s business model capitalizes on the made-to-order customer experience, offering a great range of product features. The unique aspects of the

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purchasing a Tesla automobile is how the customer is able to customize it in a way that fits them best and how effectively the company’s customer service is able to ensure that the customer’s needs are met. By optimizing these competitive advantages, Tesla generates a better brand image of themselves based on care, quality, and customer loyalty.

Core Competencies In terms of production and manufacturing, the core competencies of Tesla are exemplified through its innovative manufacturing and efficient engineering.171 Tesla has always been built around the idea of innovation. Tesla began selling electric cars when electric cars were barely known or understood to the public, which is what essentially makes them different and more premium than the other brands; their ability to continually innovate and provide value to the customer will be the aspect that progresses them into the future. Another unique core competency is how all their cars are made to order. These cars are customizable and built according to the specific wants and needs of the customer. Since all automobiles are made to order, it puts pressure on the company to manufacture and deliver the car as quickly as possible. Using this method also means that the company does not incur storage costs, which is unique in their industry. Through its efficient engineering computer aid design, Tesla expects to decrease product development times, which will become essential as the demand for Tesla cars grows while the means to produce them do not. For this reason, the Gigafactory will become one of the most important core competencies for Tesla. Through the Gigafactory, Tesla moves most of its production in-house, especially the batteries. Since Tesla purchases their lithium-ion batteries from Panasonic, making the batteries inhouse reduces costs for the company to buy and transport the batteries. 172 It also gives them more control over the development of the battery architecture, bringing more value to the company in terms of proprietary technology. Tesla has huge production goals for the future with high expectations on the quality of the battery pack. The Gigafactory will help meet those goals to create exceptional batteries in terms of range and performance value. In terms of retail, however, the direct dealership allows Tesla to reduce its retail costs since the cars do not have to go through a third-party dealer in order to sell. This gives them more control over their prices and less flexibility on negotiation.

Company Analysis

81 Cost and Comparison Analysis Company

Mercedes Benz B-Class

BMW i3

Tesla Model S

85 mi

114 mi

265 mi

MSRP

$41,450

$42,400

$66,000+ (nonnegotiable)

Battery Capacity

28 kWh

22 kWh

100 kWh

Battery Life

5-10 years

5-7 years

10-12 years

Number of Charging Stations

9,758 (US, Common)

9,758 (US, Common)

9,758 (US, Common)

Battery Range/Charge

4,703 (US, Supercharger) Annual charging cost

Home: $600

Home: $400

Home: $550

(Avg 12,000 miles per year)

Chargepoint (2016): $1,934.52

Chargepoint (2016): $1,131.90

Superchargers (2016): Free

When compared to the Mercedes Benz B-Class and the BMW i3, the Tesla Model S comes out to be superior in terms of battery mile range, battery size, battery life, and annual charging costs. The only downside to Tesla Model S is the non-negotiable $66,000 in comparison to the negotiable $42,000 that of BMW and Mercedes Benz. Although it is more expensive to purchase a Tesla Model S, the features of the Model S in terms of battery and charging stations show that, in the long-term, provide more value to the customer at a lower cost. Under an assumption of an average of 12,000 miles a year and an average electricity cost of $0.12 per kWh, it only costs $400 a year for the consumer to charge at home for BMW while it costs $550 a year for Tesla.173 This is because the battery capacity is more demanding for the Tesla than it is for the BMW. Although there are a lot of other charging stations, Chargepoint is more common and prevalent in the US. Depending on the area and the type of membership the driver has with the company, charging prices can range from $0.35-$0.79/kWh.174 But, in Silicon Valley, prices average about $0.49/kWh. The prices under Mercedes Benz and BMW show the annual cost of charging solely via Chargepoint. Even though Tesla automobiles can use Chargepoint as a charging station, Tesla has its own charging stations, or Supercharger stations. There are

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thousands of Superchargers available to Tesla owners, demonstrating great reach and accessibility to its customers. The Supercharger station is unique to any car in that it is free to any Tesla customer and it charges the car halfway in 15 minutes. This provides value for a Tesla customer in that they would not have to incur more costs in owning a Tesla automobile.

Current Strategy Tesla’s strategy is to deliver a high performance electric vehicle that appeals to the mass market. To achieve this, the company is pursuing to provide value to the customer at an affordable cost. They are increasing the appeal of electric vehicles by upgrading their top speed, range, technology, safety, aesthetics, and ergonomics. In doing so, they hope to increase competition and encourage the world’s transition to sustainable energy. Tesla’s strategic framework is to deliver a high-priced car at low volume (Tesla Roadster), a medium priced car at medium volume (Model S), and a low priced car at high volume (Model 3). The company has chosen to focus on innovation and sustainability efforts over profitability. Constantly striving to stay ahead of the curve, Tesla keeps its customers happy by providing ever-changing software updates, self-driving technology and a constantly expanding charging network. As a leader in innovation, a common thread between Tesla’s current strategy and future goals is the company’s growth and expansion.

Future Goals The company’s goals for the future have been outlined by CEO Elon Musk and align with its commitment to transitioning the world to sustainable energy. The major goals as it pertains to Tesla and its electric vehicles are:

Integration of Energy Generation and Storage Under the primary goal of sustainable energy, Tesla has invested in the integration of a solar roof with powerful battery storage. The concept involves a well-designed roof with individual solar tiles that collects solar energy for use or storage. The Powerwall battery then stores any excess solar energy and supplies clean electricity when needed. 175 Through this, the individual becomes his or her own utility. Tesla’s electric vehicles can be charged at home using only solar energy from the solar roof or battery, ultimately creating a fully sustainable and zeroemissions way of life.

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Expansion to Cover Major Forms of Terrestrial Transport Tesla has plans to penetrate more market segments to address the needs of consumers beyond their current models in the premium sedan and SUV segments, as well as their anticipated models in the compact sedan and pickup truck segments. In the coming years, Tesla expects to expand its product line into heavy-duty trucks and urban transport. The Tesla Semi trucks will bring increased safety measures and cost reductions in cargo transport, while the passenger-dense buses will improve traffic congestion and transform the role of the bus driver.176 Moving into these segments demonstrates Tesla’s mission to extend the notion of sustainability to all people. With heavy consideration on what consumers need in the future, Tesla will make a significant impact on society as it moves towards decreasing the carbon footprint of the population.

Autonomous Driving The Autopilot feature on all current Tesla models allow for partial autonomy. Using sensors, radars, cameras, and digitally controlled brakes, the feature enables vehicles to manage its own speed, steer, and self-park. Tesla is working to improve its system, with a goal of being 10 times safer than the U.S. vehicle average. 177 Graduating from Autopilot, the company’s ultimate goal is to deploy vehicles with full selfdriving capabilities with a fail-operational capability. The computing hardware necessary to do so already exists in its vehicles, but the software is still being refined. Tesla has collected 1.3 billion miles of Autopilot data to date to develop the software and improve the advanced neural maps of its artificial intelligence unit. Tesla expects to deploy fully autonomous vehicles by Q4 of 2017.178

Sharing Once fully autonomous vehicles are approved by regulators, Tesla will create its own network in which owners will have the option to add their own vehicles to a shared fleet. The Tesla phone app will enable customers to summon Tesla vehicles while car owners are busy at work or on vacation. The rationale is that most cars are in use 5% to 10% of the day; owners who lend their vehicles to the fleet will generate income that could potentially exceed the monthly cost of the car itself. This service will increase the vehicle's’ economic utility while offering convenience through an online transportation network.

Company Analysis

84 SWOT Analysis Strengths

Weaknesses

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Unique market position

•

Limited cash funds

•

Strong relationships with partners

•

High debt load

•

Leader in innovation, technology, and design

•

Current lack of economies of scale

•

Proprietary technology

•

Supercharger infrastructure

Opportunities

Threats

•

Increasing awareness and concern of environmental impacts

•

Government policies and regulations

•

•

Appeal of Model 3 to the mass market

Meeting production demands (manufacturing capacity)

•

Innovation of battery technology

•

Increasing competition in the automobile and EV market

•

Established competitors

Tesla demonstrates great strengths that contribute to its success in the electric vehicle market. As the first car manufacturer to offer luxury, long-range electric vehicles with supporting infrastructure, Tesla has solidified its unique position in the market with a strong brand image emphasizing high quality, functionality, performance, and design. Their high innovation premium through proprietary technology and advancements in groundbreaking self-driving technology prove that they are leaders in the market. Their willingness to share patents with other auto manufacturers contributes to a greater vision of the widespread adoption of electric vehicles, as well as creating greater economies of scale. Tesla maintains strong strategic partnerships with companies like NVIDIA, who provide the AI car computer for self-driving vehicles, and Panasonic, who help to oversee battery development and production at the Gigafactory.179 These strong partnerships have allowed Tesla to continue to push its innovative efforts in creating products to meet the demands of the future. Increasing concern surrounding the environmental impact of automobiles have created opportunities for Tesla to contribute to the trend towards an energy efficient economy. In response to this growing demand, Tesla is planning a highly-anticipated release of the Model 3 compact sedan. With over 400,000 reservations before its release, Tesla will be able to reach the mass market, compete with lower end electric vehicle manufacturers, experience exponential sales growth, and finally reach profitability.180 With the Model S and Model X, Tesla produces low-volume, premium vehicles with higher costs. With plans for a high-volume vehicle like the Model 3, the cost per unit will substantially decrease and employ economies of

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scale that is currently lacking. Additionally, efforts in battery technology innovation at the Gigafactory will likely present Tesla as driver in the industry. Tesla’s weaknesses can be attributed to significant investments in R&D as well as rapid expansion. Tesla has made strategic acquisitions in companies like SolarCity and Grohmann Engineering as well as heavy investments in the construction of its $5 billion Gigafactory. 181 Although this allows them to make great strides in transformative technology and innovation, limited cash funds are available to the company. Due to this, negative cash flows and earnings have been reported in consecutive years, leading to long term debt of $2.5 billion compared to its $1.4 billion of cash on hand. Competition from automakers entering the EV market is expected to pose a huge threat to Tesla, especially from established competitors with access to larger amounts of capital to dedicate to R&D and manufacturing. With Tesla preparing to ramp up production for the Model 3, limitations of the facility's limited manufacturing capacity may impede on its ability to meet production demands. Tesla’s goal of manufacturing 500,000 electric vehicles annually by 2018, in comparison to its current number of 50,000, presents substantial threats to the company’s market success.182

Competitor Comparison & Evaluation Tesla’s competitors pose great threats to the company’s position in the electric vehicle industry. Its competitors Mercedes and BMW are much larger, well-established automakers that have dominated the automobile industry for close to a century. In comparison to Tesla, they offer wider-ranging product lines and have greater reach across the globe. As social trends move towards more sustainable living, the industry is experiencing increasing growth with companies like Mercedes and BMW introducing their own electric vehicles. A major distinction to note is that Tesla is primarily an electric vehicle manufacturer, whereas its competitors are traditional automobile manufacturers moving into what they might consider to be a niche market. These prominent brands have more capital and resources that allow them to closely rival Tesla’s efforts. In response to this inherent disadvantage, Tesla will have to continue to build and strengthen its brand. Tesla will need to capitalize on its unique, direct-to-consumer business model in order to differentiate itself from its competitors. This includes increasing the number of retail stores in the United States as well as other major countries to increase its overall reach. More retail stores will allow Tesla to educate more people on the benefits of driving an electric vehicle as well as facilitate more sales. In doing so, Tesla will generate more brand awareness and become visible to a greater amount and wider range of customers, ultimately aligning with

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the company’s goals of reaching the mass market. Tesla has the opportunity to dominate the industry against Mercedes and BMW, since electric vehicles are only small segment of their product lines and do not appear to be the primary focus for those companies. Both Mercedes and BMW are industry leaders in innovation. They are constantly investing in new technologies to provide a greater edge in all of their products. Because they are very well established, they have the resources and capital to support those newer developments. Amid this competitive landscape, Tesla can stay ahead by continuing to outperform its competitors with its disruptive technologies and superior processes. Although it is a relatively newer entrant to the market, Tesla has managed to revolutionize the way electric vehicles are designed, developed, and produced. With ambitious plans for the future like the Gigafactory and fully autonomous car, Tesla has created a new standard for the industry that will challenge many of its competitors. While Tesla’s competitors have strengths in their premium brands, Tesla has been able to surpass its competitors with a vision that resonates with a wider variety of people. Tesla is committed to its mission of accelerating the world’s transition to sustainable energy. In order to maintain its position in the electric vehicle industry, Tesla should focus on reaching a wider demographic, growing its brand visibility in other geographic areas, and continuing to innovate new technologies.

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Strategy Formulation Current Strategy Tesla aims to design and manufacture exceptional electric vehicles geared towards the mass market under the overarching goal of sustainable transportation. The company’s strategy involves using a unique business model to deliver electric vehicles characterized by high quality, performance, and design to drive the world towards a more sustainable future. There are currently over 200 Tesla retail stores worldwide, mostly located in metropolitan, densely-populated areas to attract the optimal number of customers. All stores are corporateowned and staffed with knowledgeable product specialists to better educate those who are potentially interested in purchasing a Tesla. Tesla’s business model relies on a straight-toconsumer strategy, eliminating price mark-ups typical of third-party dealerships enlisted by most other car companies. The purpose of the retail stores is to create Tesla’s own distribution channel and generate brand awareness, cutting down costs of independent dealerships as well as marketing efforts. As it works to expand its presence geographically, Tesla will be able to broaden its reach to the mass market. Tesla leads the industry with a heavy focus on innovation, as demonstrated by its integration of emerging technologies in its electric vehicles. Many of Tesla’s vehicles utilize software and connectivity to provide features such as automatic software updates, remote repairs and partially autonomous driving.105 Its vehicles contain large touch-screen dashboards which enable customer interaction and connectivity. In addition to this, Tesla is continually forwardlooking. Tesla has been ambitious about its venture into fully autonomous, self-driving vehicles to revolutionize not only sustainable vehicles, but transportation itself. Tesla’s innovation-centric strategy allows the company to direct its resources and capital towards R&D and expansionary efforts rather than marketing and promotions. With the construction of the 13 million square foot Gigafactory, Tesla has taken a stake in the development and large-scale production of lithium-ion batteries to enable a longer range and higher performance in its anticipated lower-priced Model 3 sedan. The Gigafactory is expected to be able to supply batteries for the projected production of 500,000 Model 3 vehicles by 2018.110 Tesla is building the factory to move efforts in-house to support the significant ramp-up in production once the Model 3 is released. In doing so, Tesla is creating economies of scale and is on the trajectory of achieving its goal of its very own mass market electric vehicle.

Strategy Recommendation Tesla has plans for expansion and recently shifted its focus to becoming an all-encompassing energy company. The company just acquired SolarCity, and wants to lead the world into sustainable energy. Elon Musk's vision is to revolutionize the world; however, we feel that in order for Tesla to continue to successfully compete and dominate in the electric vehicle


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industry, the company must have a strong corporate structure that will be able to solely focus on the vehicle aspect of its new vision. We recommend that Tesla Motors split into two different subsidiaries under a parent company called Tesla Group. These two subsidiaries will be called Tesla Motors, Inc. and Tesla Energy, Inc. Tesla Motors and Tesla Energy will be led by two separate senior executives, with Elon Musk at the top of the parent company with ultimate control over both subsidiaries. Tesla began as Tesla Motors, solely focused on producing electric vehicles. To be the leading brand and drive growth within the industry, the company should stay focused on its original mission. It needs to grow the electric vehicle industry to accomplish its overarching goal of a sustainable world, and will need to have a dedicated executive team that will not be distracted by Tesla’s other strategic energy moves. With Elon Musk at the top of the parent company and with Tesla Motors continuing its focus on growing in the electric vehicle industry, it will still be able to support Elon Musk's overall energy goal in a more organized, structured way. In addition to this split, we recommend that the motors division of Tesla do the following.

Production Tesla is putting is putting many of its resources towards expansion and is currently getting ready to release the Model 3. It has expanded its Fremont manufacturing site, and has plans to operate at a higher capacity. The company currently operates on a made-to-order model, which has proven successful. However, Tesla is exploring unknown territory by entering the mass market. Manufacturing the cars at a much higher volume will need to be executed efficiently. To increase the efficiency of production, the company should increase automation in the factory. Pushing out cars in a timely manner, and with little to no issues will help keep Tesla’s reputation strong. With increased production volume, Tesla should also consider building another manufacturing factory on the East Coast to decrease delivery times to those customers on that side of the country. The demand for Tesla vehicles is growing, and the company needs to find ways to accommodate that surge. Another possible solution to this issue may be for the company to consider storing cars like other car manufacturing companies. This will detract from the made to order business model, but when the demand for electric cars increases, Tesla will need to find ways to match its competitors who have readily available cars in inventory.

Marketing Tesla should continue its strong presence and activity on its various social media accounts like Instagram, Facebook, and LinkedIn. Using these social media accounts, Tesla should track the engagement of their followers. Likes and hearts are one type of measure, however it does not tell Tesla how memorable and engaging their content is. Tesla can achieve this by promoting conversation and education about topics that are relevant to the company and its followers.


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This could be demonstrated through engaging videos that spark dialogue. In addition, Tesla could look into online advertisements and pay-per-click ads, which would give them an idea of who is looking at their content and show any possible new segments they can target. Up until now, the company relied on the recommendations of its satisfied customers to spread the word of Tesla but going forward, it should not depend solely on word of mouth. Another way of getting more potential customers is to educate them on how environmentally friendly the cars are, considering it is a zero emissions car. The Model S, for example, features an air filtration system that removes almost 100% of allergens and exhaust pollution. Knowledge surrounding the powerful and smart performance of the car can also attract customers. Tesla strives to create its vehicles with safe design capabilities with a bio-weapon defense mode that protects occupants. Marketing can be done through multiple mediums, such as social media, billboards, or even traditional channels like newspapers. Tesla’s brand image is well known in high-tech areas like Silicon Valley, however it may not be as well known in a state like Oklahoma. Therefore, it will become important for Tesla to build a community for their customers. Tesla could host members-only events that would bring people with similar interests together. In addition, it would also be important to build and advocate for sustainable organizations because it is important to give back to the community through corporate social responsibility.

Financial Tesla needs to closely watch their finances because their financials indicate a lot of volatility and risk. Tesla has negative cash flows and negative financial ratios. Tesla’s current ratio is 0.99 and anything under 1 means that the company’s liabilities are greater than its assets and if liquidation occurs, they would not be able to repay debtholders and other liability obligations. From a financial standpoint, it looks like Tesla is being overly aggressive its spending, investments, and expanding too fast. Tesla has negative net income growth but does not expect to be profitable until 2020. However, in the meantime, this can become problematic because shareholders and investors want to see growth and profitability. Tesla should look into alternative ways of raising capital besides taking on more debt. A stock split or a dilution is a less costly method to raise capital. However, stockholders may not be too happy with a split or dilution because there tends to be an initial dip in the stock prices when these methods are used. Another suggestion for Tesla is to build partnerships with companies that have not released an electric vehicle because Tesla can provide their expertise and knowledge of electric cars as a service to companies that are in need of guidance. Selling consulting services can help generate more revenue, which can be used to further invest in R&D and expansion. Another option is to sell batteries to other automobile companies, which would also help to generate additional revenue and pay off the investment to build the

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Strategy Formulation Gigafactory more quickly. As the automobile industry shifts towards electric cars, Tesla would have a competitive advantage by producing and selling its own batteries. Selling batteries can give more stability to Tesla by providing an additional and constant source of revenue.

Appendix A

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Appendix A Tesla Income Statement, 2015

Appendix B

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Appendix B Tesla Consolidated Balance Sheet, 2015

Endnotes

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Endnotes

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