Case Analysis: Tesla Motors: Disrupting the Auto Industry

  

Read the case, “Tesla Motors: Disrupting the Auto Industry” on page 576-588 use the case analysis format provided below to address to identify the problems and provide several suggested solutions that the Tesla Motors executive team can review for possible implementation.
 

Be sure to identify “identify 2 to 3 problems” and “develop 2 to 3 possible solutions to the problems identified”, and use this as the focus for making your case in the case format. Note: The case questions provided at the end of each case can be used as an insight to what the problems might be; so be sure to investigate the case carefully.

*** Required reading attached (Tesla Motors: Disrupting the Auto Industry)

Case Format
 

I. Write the Executive Summary

• One to two paragraphs in length
• On cover page of the report
• Briefly identify the major problems facing the manager/key person
• Summarize the recommended plan of action and include a brief justification of the recommended plan

II. Statement of the Problem

• State the problems facing the manager/key person
• Identify and link the symptoms and root causes of the problems
• Differentiate short term from long term problems
• Conclude with the decision facing the manager/key person

III. Causes of the Problem 

• Provide a detailed analysis of the problems; identify in the Statement of the Problem
• In the analysis, apply theories and models from the text and/or readings
• Support conclusions and /or assumptions with specific references to the case and/or the readings

IV. Decision Criteria and Alternative Solutions

• Identify criteria against which you evaluate alternative solutions (i.e. time for implementation, tangible costs, acceptability to management)
• Include two or three possible alternative solutions
• Evaluate the pros and cons of each alternative against the criteria listed
• Suggest additional pros/cons if appropriate

V. Recommended Solution, Implementation and Justification

• Identify who, what, when, and how in your recommended plan of action
• Solution and implementation should address the problems and causes identified in the previous section
• The recommended plan should include a contingency plan(s) to back up the ‘ideal’ course of action
• Using models and theories, identify why you chose the recommended plan of action – why it’s the best and why it would work

VI. External Sourcing

• 2 to 3 external sources (in addition to your textbook) should be referenced to back up your recommendations or to identify issues. This information would be ideally sourced in current journals, magazines and newspapers and should reflect current management thought or practice with respect to the issues Identify.

The below must be met for your paper to be accepted and graded:

• Write between 750 – 1,250 words (approximately 3 – 5 pages) using Microsoft Word in APA style, see example below.
• Use font size 12 and 1” margins.
• Include cover page and reference page.
• At least 80% of your paper must be original content/writing.
• No more than 20% of your content/information may come from references.
• Use at least three references from outside the course material, one reference must be from EBSCOhost. Text book, lectures, and other materials in the course may be used, but are not counted toward the three reference requirement.
• Cite all reference material (data, dates, graphs, quotes, paraphrased words, values, etc.) in the paper and list on a reference page in APA style.

References must come from sources such as, scholarly journals found in EBSCOhost, CNN, online newspapers such as, The Wall Street Journal, government websites, etc. Sources such as, Wikis, Yahoo Answers, eHow, blogs, etc. are not acceptable for academic writing. 

Case

1

3

 

Tesla Motors:

Disrupting the Auto Industry

Tesla Motors’ strategy was no secret: in

2

00

6

the chairman and CEO, Elon Musk, announced:

So, in short, the master plan is:

· Build a sports car.

· Use that money to build an affordable car.

· Use that money to build an even more affordable car.

· While doing above, also provide zero emission electric power generation options.

· Don’t tell anyone.1

The remarkable thing was that by 20

1

5

, Tesla had kept to that strategy and executed it almost flawlessly. Phase 1 (“Build a sports car”) was realized with the launch of its Roadster in 200

7

. Phase 2 (“Use that money to build an affordable car”) began in 20

13

with the launch of the Model S.

The acclaim that greeted both cars had propelled Tesla’s reputation and its share price. Since its initial public offering in June 20

10

, Tesla’s share price had followed an upward trajectory. On June

12

, 20

15

, Tesla’s stock market value was $

31

.7 billion. By comparison, Fiat Chrysler was valued at $20.5 billion despite that fact that Fiat Chrysler would sell about 2.5 million cars in

2015

against Tesla’s 55,000. The optimism that supported Tesla’s valuation reflected the company’s remarkable achievements during its short history and investors’ faith in the ability of Elon Musk to realize his vision “to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.”2

Indeed, Musk’s vision for Tesla extended beyond revolutionizing the automobile industry: Tesla’s battery technology would also provide an energy storage system that would change “the fundamental energy infrastructure of the world.”

A central issue in the debate over the appropriate market valuation of Tesla was whether Tesla should be valued as an automobile company or as a technology company. In practice, these two issues could not be separated: Tesla’s principal source of revenue would be its cars, but realizing the expectations of earnings growth that were implicit in Tesla’s share price required Tesla to maintain technological leadership in electric vehicles. Given that Tesla’s rivals were some of the world’s largest industrial companies—Toyota, General Motors, Ford, Volkswagen, and Renault–Nissan, to name a few—this was a daunting prospect.

Electric Cars

The 21st century saw the Second Coming of electric cars. Electric cars and buses were popular during the 1

8

9

0s and 1900s, but by the 1920s they had been largely displaced by the internal combustion engine.

Most of the world’s leading automobile companies had been undertaking research into electric cars since the 1960s, including developing electric “concept cars.” In the early 1990s, several automakers introduced electric vehicles to California in response to pressure from the California Air Resources Board. However, the first commercially successful electric cars were hybrid electric vehicles (HEVs). Sales of HEVs in the US grew from 9,350 in 2000 to 352,8

62

in 2007. By far the most successful HEV, both in the US and globally, was the Toyota Prius, which by early

2010

had sold 1.6 million units worldwide.

Mass production, plug‐in electric vehicles (PEVs) were first launched in 2008. There were two types of PEV: all‐electric cars—of which the pioneers were the Tesla Roadster (2008), the Mitsubishi i‐MiEV (2009), the

Nissan Leaf

(2010), and the BYD e6 (launched in China in 2010)—and plug‐in hybrid electric vehicles (PHEVs) which were fitted with an internal combustion engine in order to extend their range. General Motors’

Chevrolet Volt

, introduced in 2009, was a PHEV.

However, there were also a number of other types of battery electric vehicles (BEVs). Some of these were highway‐capable, low‐speed, all‐electric cars such as the Renault Twizy and the city cars produced by the Reva Electric Car of Bangalore, India. There were also various types of neighborhood electric vehicles (NEVs) intended for off‐road use—these included golf carts and vehicles for university campuses, military bases, industrial plants, and other facilities. Global Electric Motorcars, a subsidiary of Polaris, was the US market leader in NEVs. Most NEVs used heavier, but cheaper, lead–acid batteries.

Electric motors had very different properties from internal combustion engines—in particular they delivered strong torque over a wide range of engine speeds, thereby dispensing with the need for a gearbox. This range of torque also gave them rapid acceleration. Although electric motors were much lighter than internal combustion engines, the weight advantages were offset by the need for heavy batteries—which were also the most expensive part of an electric car, costing from $10,000 to $25,000.

Electric cars were either redesigns of existing gasoline‐powered models (e.g., the Ford Focus Electric and Volkswagen’s e‐Golf) or newly designed electric cars (e.g., the Tesla Roadster and Nissan’s Leaf). Complete redesign had major technical advantages: the battery pack formed part of the floor of the passenger cabin, which saved on space and improved stability and handling due to a lower center of gravity.

Predictions that electric cars would rapidly displace conventionally powered cars had proved false. In 2009, Frost & Sullivan had predicted that the market for electric vehicles (including hybrid electric vehicles) would grow to 0.6 million units worldwide in 2015—about

1

4

% of new vehicles sold.3 In 20

14

, global registrations of electric cars totaled 340,000. Although this was a 70% increase on

2013

, it was a tiny fraction of the total automobile market. The US was market leader in terms of numbers sold, yet electric cars accounted for a mere 0.74% of total car sales. During 2015, the market for electric cars, especially in the US, was adversely affected by lower oil prices: total sales for the first five months of 2015 were little changed from the year‐ago period (

Table 1

). However, electric car sales in China grew rapidly, overtaking the US as the largest market for electric cars.

TABLE 1 Sales of leading models of plug‐in electric cars in the US during January to May (units)

2015		2014
Tesla S (estimated)	9,200	9,000
Nissan Leaf	7,742	8, 30 1
Chevrolet Volt	4,400	5,290
BMWi3	3,900	336
Ford Fusion PHEV	3,563	3,553
Ford C‐max Energi PHEV	2,900	2,415
Toyota Prius PHEV	2,426	5,988
Chevy Spark	1,559	454

Source:
 evobsession.

While oil prices were an important factor influencing consumer choice between gasoline and electric cars, government incentives were even more important. Norway had the highest penetration of electric cars (14% of the market in 2014). This reflected incentives that included exemption from purchase taxes on cars (including VAT), road tax, and fees in public car parks; electric cars were also allowed to use bus lanes.

“Range anxiety”—the threat of running out of battery charge and the limited availability of charging stations were seen as the primary obstacles to the market penetration of all‐electric PEVs. However, both issues were being resolved. Between 2015 and 2018, the range of EVs was expected to double—most EVs would then have a range of close to 200 miles (though still far from the 265‐mile range of the Tesla S (with an 85 kWh battery pack). Charging stations were widely available in most urban areas, but they were sparse in many rural areas.

While most experts expected the plug‐in electric car to be the primary threat to conventional cars, it was not the only zero‐emission technology available to automakers. Fuel cells offered an alternative to plug‐in electrical power. Fuel cells are powered by hydrogen which reacts with oxygen from the air to create electricity that then drives an electric motor. Fuel cell technology was developed during the space program and became applied to experimental land vehicles during the 1960s. Although a number of automakers had developed prototypes of fuel cell cars, only Toyota, Hyundai, and Honda had marketed cars powered by fuel cells. Since fuel cells consume hydrogen, a key factor limiting the adoption of fuel cells was the absence of a network of hydrogen fueling stations.

Disrupting the Auto Industry

Tesla’s willingness to share its patents only added to the uncertainty over the extent to which Tesla represented a disruptive force within the auto industry.

Tony Seba, a prominent advocate of clean energy, argued that “the electric vehicle will disrupt the gasoline car industry (and with it the oil industry) swiftly and permanently … Even worse from the standpoint of gasoline and diesel cars, the EV [electric vehicle] is not just a disruptive technology; the whole business model that the auto industry has built over the past century will be obliterated.”14

Others downplayed the whole issue on the basis, first, that Tesla’s patents did not represent a significant barrier to other companies and, second, it probably did not make much sense for Tesla to devote time and money to litigating infringements of its patents. Professor Karl Ulrich of Wharton Business School stated: “I don’t believe Tesla is giving up much of substance here. Their patents most likely did not actually protect against others creating similar vehicles.” He suggested that patents are increasingly less about protecting innovations from imitation as strategic bargaining chips: “Big technology‐based companies amass patent portfolios as strategic deterrence against infringement claims by their rivals … Tesla is essentially deciding it doesn’t want to spend money litigating patents, which is a great decision for its shareholders and for society.”15

In the debate over, whether or not the electric automobile represented a disruptive innovation, Clay Christensen and his team at Harvard Business School, were emphatic that Tesla’s electric cars were definitely not such a disruptive force. While classic disruptive innovations typically target overserved customers with lower‐performance products at a lower price (or open up entirely new market segments), Tesla offered incrementally higher performance at higher prices. A further feature of disruptive innovation is that incumbents typically have low incentives to adopt the disruptive innovation—yet all the major auto firms had been working on developing electric cars for years. If Tesla is not a disruptive force, who is in the automobile market? A more likely source, according to Professor Christensen’s associate Tom Bartman, was the neighborhood electric vehicle: a cheap, low‐powered, easy‐to‐park vehicle that is well suited to urban transportation and can readily be upgraded for use on public roads.

16

If Tesla Motors was going to meet strong competition from exceptionally well‐resourced competitors—companies such as GM, Renault–Nissan, Ford, Daimler, VW, and BMW—it lacked clear technological advantages over these firms, and if it also was likely to meet competition from the manufacturers of NEVs in mass‐market electric cars, how feasible was Elon Musk’s goal that Tesla would be “a leading global manufacturer and direct seller of electric vehicles and electric vehicle technologies”?

Appendix

 

TABLE A1 Tesla Motors Inc. financial data ($million)

2014

2013

2012

20

11

2010

Revenues

3,

198

2,013

413

204

117

Gross profit

882

456

30 62 31

Research and development

465

232

274

209

93

O

perating profit

(187)

(61)

(394)

(251)

(147)

Net profit

(294)

(74)

(396)

(254)

(154)

Total assets

5,849

2,417

1,114

713

386

Total long‐term obligations

2,772

1,075

450

298

93

Capital investment

970

264

239

198

105

Notes

1 Elon Musk, “The Secret Tesla Motors Master Plan (Just between You and Me),” (August 2, 2006), 

http://www.teslamotors.com/en_GB/blog/secret‐tesla‐motors‐master‐plan‐just‐between‐you‐and‐me

, accessed July 20, 2015.

2 “The Mission of Tesla,” (November 18, 2013), 

http://www.teslamotors.com/en_GB/blog/mission‐tesla

, accessed July 20, 2015.

3 Quoted in Tesla Motors, Inc. IPO Prospectus(January 29, 2010): 2–3.

4 Tesla Motors, Inc. 10‐K report for 2014:4.

5 See Tesla Motors, HBS Case No. 9‐714‐913 (2014): 7.

6 “Tesla Has Already Received an Estimated $800 Million Worth of Battery Orders,” www.bgr.com/2015/05/08/tesla‐powerpack‐powerwall‐battery‐sales‐estimate, accessed July 20, 2015.

7 “How to Build a Tesla, According to Tesla,” Washington Post (June 23, 2014), 

http://www.washingtonpost.com/blogs/the‐switch/wp/2014/06/23/how‐to‐build‐a‐tesla‐according‐to‐tesla

, accessed July 20, 2015.

8 “Elon Musk wants inventors to stop pitching his battery ideas,” www.ecomento.com/2015/05/14/elon‐musk‐stop‐pitching‐battery‐ideas, accessed July 20, 2015.

9 “Will Tesla’s Battery for Homes Change the Energy Market?” Scientific American (May 4, 2015).

10 Tesla Motors, Inc. 10‐K report for 2012.

11 “All Our Patent Are Belong To You,” 

http://www.teslamotors.com/en_GB/blog/all‐our‐patent‐are‐belong‐you

, accessed July 20, 2015.

12 “Tesla’s New Patent Strategy Makes Sense,” Entrepreneur (July 8, 2015), www.entrepreneur.com/article/25408, accessed July 20, 2015.

13 “Elon Musk’s Patent Decision Reflects Three Strategic Truths,” https://hbr.org/2014/07/elon‐musks‐patent‐decision‐reflects‐three‐strategic‐truths, accessed July 20, 2015.

14 T. Seba, Clean Disruption of Energy and Transportation: How Silicon Valley Will Make Oil, Nuclear, Natural Gas, Coal, Electric Vehicles and Conventional Cars Obsolete by 2030, Clean Planet Ventures (2014): 102–3.

15 “What’s Driving Tesla’s Open Source Gambit?” Knowledge@Wharton (June 25, 2014), 

http://knowledge.wharton.upenn.edu/article/whats‐driving‐teslas‐open‐source‐gambit/

, accessed July 20, 2015.

16 “Idea Watch: Tesla’s Not as Disruptive as You Might Think,” Harvard Business Review (May 2015).