Tesla Motors – HBR Case

by Eric Van den Steen

  • Car business is 3% of GDP–one of largest industries in US
  • Since WWII, no US firm has successfully entered car market…except Tesla?
  • Cars consist of 3 things: power train, chassis, and body
    • because of this conventional cars are complex and expensive to design; it takes $1 to 6 Billion and between 4-5 years to design
  • Traditional car manufacturing assembly plants need huge volumes to reach minimum efficiency
    • assembly lines expensive, sometimes inefficient, and more expensive to manufacture
    • Manufacturing cost is 80% of final sale price
    • High “experience curve” in 1st year; lot’s of bugs and defects worked out by manufacturers
  • Car producers are among heaviest advertising spenders, occasionally higher than Pepsi, Coke, and Disney
  • Conventional Cars sold through Dealerships
  • Electric vehicles (EV) were popular in 1800s, but were overtaken by technologically more advanced internal combustion cars in 20th century
  • The battery was most expensive and complicated component of EVs
    • battery cost decreased by 90% from 2009-2012
  • Gov’t provide rebates for EVs to push adoption…EVs good for environment
  • Hurdles to EV adoption: uncertainty about resale value, safety, range anxiety, and lack of charging stations.
  • Nissan Leaf was most ambitious EV project ever
    • Nissan saw opportunity to be a leading supplier of EV batteries
    • Joint venture w/NEC
  • Fisker, another EV producer, flopped paving the way for Tesla
  • Elon Musk is Tesla’s co-founder. Originally just funded it; later moved into CEO role
  • None of founding team members were from auto industry
  • Tesla Roadster was first production-grade EV and high-end EV
    • used Lotus body
    • liquid cooling system for battery
  • Model S was Tesla’s first mass-produced EV…won rave reviews
    • wireless software updates
    • 17″ touch screen
    • custom suspension
  • Model S assembly line fully in-house in Fremont, CA…plant was bought at 2/3 discount
  • No dealerships, just company-owned stores w/salaried sales people
  • Marketed Model S speed, comfort, and handling instead of energy benefits
  • Tesla also sold its electric power trains to other car manufacturers
  • Tesla working on Model 3 ($35,000) as a part of Musk’s master plan to build accessible EVs

Case Questions:

  1. Was Gen 3 (Model 3) the logical next step or a bridge too far?
  2. And is Tesla here to stay and to become the first US firm since WWII to enter car industry with a mass-produced car?

My thoughts:

Model 3 is a logical next step given Musk’s stated master plan. His ultimate goal is to make the planet more livable by reducing car emissions. Step one was to build an EV for the rich to subsidizes building a mid-sized car…the mid-sized car would then subsidize building the entry level car. There’s not enough people in the world driving high-end cars to sell enough Tesla’s to, to reduce global emissions. Hence entering entry-level markets that reach more people and thereby reduce more emissions.

Is Tesla here to stay? Hard to say. Tesla is no longer Tesla Motors. It’s now just Tesla after the acquisition of Solar City. This could cause a lack of focus and some issues. (Musk runs OpenAI, Boring Company, and Space X) Also, it’s difficult to predict how well the Model 3 will do. Check back with me after the strenuous experience curve in a year or so. That’s going to be a huge test.

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