Tesla, Inc. Case Analysis
Jeff Wu Yang Lin Yiqi Yang Liqing Lin Xicheng Lin Huarui Zheng Leylya Agliullina
External opportunities & threats
Let us now take a look at some of the external opportunities and threats that Tesla may face in the near future based on our projections.
To begin with the political environment, we believe that lowered corporate tax rate (21% vs former 35%) will incentivize new investment into the electric car industry, leading to an increase of the capital stock. Furthermore, current political climate suggests that the federal Internal Revenue Service (IRS) tax credit for $2,500 to $7,500 per new EV purchased will continue to hold which will help Tesla to capture more market share in the years to come.
However, Tesla must pay close attention to the Exit of UK from EU since Tesla operates its European business from Netherlands - Amsterdam and Tilburg. With BREXIT free flow of labor and goods across the borders will be limited resulting in extra expenses on taxes, tariffs and other surcharges.
Recent economic uptick and increase in customer spending, after years of recession, is an opportunity for Tesla to capture new customers and increase its market share.
Emerging markets are set to eclipse developed nations in their capacity to generate wind and solar power as equipment costs fall and the energy market approaches “peak coal”, according to Moody's. Tesla, being an American company faces a challenge to keep up and lead in this fierce competition.
According to the Bloomberg analytics, Electric cars will outsell fossil-fuel powered vehicles within two decades as battery prices plunge, turning the global auto industry upside down. With this in mind, we believe there is a huge opportunity for Tesla in the electric car industry.
Tesla being a relatively young company faces a huge competition from the established automobile players in the market - BMW, Volkswagen, Toyota etc. which are having established business operations over decades. They have a huge customer loyalty, stable supplier base as well as huge cash/credit sources to finance new technological developments. On top of it, Volvo, Jaguar and Land Rover, Volkswagen, Mercedes, Audi and BMW have all promised to roll out electric models over the next decade. This is a direct threat for Tesla.
In terms of technological opportunity, the exponential technological growth takes credit for “Lithium-ion battery prices are going to come down sooner and faster than most other people expect.” Thus the investment into electric car industry will increase significantly.
Increased automation can lead to manufacturing malfunctioning, which Musk admitted a few times in the past. Manufacturing malfunctioning in turn damages long built reputation. We believe that it is crucial in its eagerness to lead the technological progress for Tesla not to lose a common sense and have a sound balance of AI and Human Intelligence.
Analysis of Tesla's business in Porter's five force model
The Threat from New Entrants (weak threat)
The sector which Tesla Motors company is in has challenges for those who want to enter that market segment. The capital expenditure needed for this electric vehicle sector is very high and keeps new business away from this sector. Besides, high brand development cost in car industry is also a barrier that keeps new business away from it. Established and successful companies like Tesla can enjoy from increasing economies of scale while new entrants cannot.
The Bargaining Power of Buyers (moderate threat)
Tesla is a vital company in the electric vehicle sector and today they have a very solid relationship with their customers. Since the company has invested a lot of money and skill in research development, they created advanced power management system, comparably high range in electric cars and Autopilot. Tesla has a manufacturer, produces cars which are unique and scarce hence, with increased demand likely to set in the market, they will have considerable power thought, this is only vital if they are able to generate awareness of their brand.
Threat of Substitution (strong threat)
The threats of substitution are the Tesla Motors market segment can be seen from hybrid cars, diesel cars as well as other electric cars and solar power cars. There are also substitutes arising from people choosing to ride buses, trains as well as use bicycles instead of purchasing an electric vehicle.
The Bargaining Power of Suppliers (moderate threat)
Even though Tesla Motors is highly dependent on its suppliers and this is due to adopting lean management system where parts sought when an order is availed. Tesla has its core technology- the power management system, which is the key to manufacture electric cars. Tesla also has a wide-distributed supercharging network that no other companies can compete with.
This means suppliers have some sort of bargaining power but it is limited.
The Intensity of Rivalry in the Industry (Strong threat)
The global car sector is fiercely competitive with car manufacturers competing on a global platform with different categories of their products to cater for different clientele. In the electric vehicle, sectors server car manufacturers have created cars, which have not been able to
meet the standard of Tesla though; companies such as Toyota have created compact affordable electric cars, which are selling in different countries.
From the analysis above, I think Porter's five forces show a growing threat to the Tesla car company if they do not work quickly and cater for other segment. This threat is mainly from already established car manufacturer. The sector is still inaccessible due to the high capital-intensive investment an organization will have to undertake and the skill needed to ensure an organization is competitive.
General macro-level environment analysis framework
The macro environment has effect on all business in our daily lives. If we can handle in
very well, we can expand our business. However, if we leave it uncheck, that can destroy the business. For the macro environment that including four facts such as political, technology, social and economic. Social factors consist of consumers' lifestyle and habit including religion, wealth, and psychological behaviors. Recently, customers become more mindful about protecting the earth and keep our environment green since human being suffer to too many negative effect we ruined the environment such as the earth becomes more and more warm. So, consumers advocate to have a lower carbon lifestyle. In addition, when we use too much natural resources, the resources are not renewable. We need to use renewable energy to save natural resources for next generations.
For economic factors are consist of taxes, unemployment, and the recession overall economy. When there is good economy, lower taxes rate, and lower unemployment rate, many people become richer so that they have enough money to enjoy a better life. On the other hand, when it's in bad economy season, most workers will lose job and become homeless. Most of
them will only keep the basic required to survived. Right now, China and the US are in an ongoing trade war as each country has introduced tariffs on goods trade. The trade war between two superpowers will give end up with either global economic shock or new trade agreement which is likely to happen in the next 5 years.
Tesla's Strengths & Weaknesses
Let's take a look at Tesla's strengths and weaknesses using the value chain analysis and resource based-view framework. Tesla has many technological and physical assets such as their factories and intellectual properties. For example: Tesla's Gigafactory is one a kind for auto manufacturers. Tesla is the only company that is building their own lithium-ion batteries for their electric vehicles. This is extremely rare and expensive for their competitors to imitate, thus Tesla is able to reduce their battery prices and sell their batteries to other auto manufacturers.
Tesla is spending a lot of money on R&D since 2010. Their R&D expenses consist primarily of personnel costs for their teams in engineering and research. Their R&D expenses increased $543.7 million or 65%, during the year ended December 31, 2017 compared to the year ended December 31, 2016. Tesla is heavily focusing on introducing breakthrough innovative technologies such as their battery pack and electric engines to the market, however it is difficult to retain profit due to expensive R&D expenditures.
Tesla uses a vertical integration strategy; which means they have their own supply chain and distribution channel. Tesla owns and operates two automobile manufacturing plants in California and Nevada (Tesla Factory and Gigafactory 1). Tesla's electric vehicles uses over
3,000 parts from all over the world from over 350 suppliers, but majority of the manufacturing processes occur in house that enables Tesla to maintain control over their quality standards and intellectual properties. Because majority of Tesla's manufacturing processes are in house; sometimes they may not be able to meet the demand due to production delays or technical issues. Marketing
Historically, Tesla has been able to provide important media coverage for their company and their vehicles, and they believe they can continue to do so. So far, for vehicle sales, media coverage and word of mouth have been the main drivers of their sales leads and helped them achieve sales without traditional advertising and relatively low marketing costs. On the downside, due to Tesla's limited budget for marketing activities, their products may only reach to limited customers.
Tesla currently distributes its vehicles to consumers directly through their online stores. Additionally, Tesla provided to many of their customers with a resale value guarantee that enables their customers to resell their vehicle back to Tesla for a predetermined price at a certain time in the future. This eliminates customer concerns regarding the resale value of their vehicles while enabling them to enjoy ownership of the vehicle during this period.
Tesla have their own service centers where they provide exclusive services to their own customers. These services will be discussed in details in Tesla's corporate-level strategy. However, these services are only available at Tesla's own networks. For example, if you need to charge your vehicle, you can only charge at Tesla's charging stations. And if your vehicle
encounters a problem, you cannot go to other car repair shop, you can only go back to Tesla to fix your vehicle. In other words, Tesla is responsible for everything for your vehicle.
Tesla's Corporate-Level Strategy
Future Strategy: CEO Elon Musk stated, “the overarching purpose of Tesla is to help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy.” In order to make this happen, two strategies should be implemented.
1. Market Penetration Strategy: Develop and expand charging infrastructure to enable Tesla's customers to be able charge their vehicles anywhere. Tesla's current problems should not only focus on surpassing their competitors, but the mass market is resistant with the introduction of electric vehicles. This is mainly due to the lack of global charging infrastructure. At present, the sales of electric vehicles account for only a small part of global car sales. In order for Tesla to adopt a market penetration strategy, they need the long-term support of other automobile manufacturers to stimulate the development of charging stations.
2. Product Development Strategy: Continue to develop cheaper alternatives to enable Tesla to sell to the mass market. To support Tesla's vision, it is suggested to maintain its product development strategy. Tesla is currently taking a top-down approach and recommending that they continue to do so to make their vehicles such as Tesla's ‘Model 3' more attractive and affordable in the mass market. Tesla will offer a variant of this model, starting at $35,000, and is expected to produce ‘Model 3' far more than ‘Model S' or “Model X.” However, in order to expand the customer base, this suggests that cheaper electric vehicles should be developed to accommodate those who want to buy electric vehicles in the mass market.
1. Kynge, Jemes. “Emerging markets poised to lead pack on renewable energy”. The Financial Times, 14 September 2017. https://www.ft.com/content/b0a5f72a-9fa4-11e7-9a86-4d5a475ba4c5
2. Schankleman, Jess. “The electric car revolution is accelerating”. Bloomberg Businessweek, 6 July 2017. https://www.bloomberg.com/news/articles/2017-07-06/the-electric-car-revolution-is-acce lerating
3. Vaughan, Adam. “All Volvo cars to be electric or hybrid from 2019”. The Guardian, 5 July 2017
4. Dia, Hussein. “Jobs, tax and politics: three ways electric vehicles will change our world”. The Conversation, 5 October 2017. https://theconversation.com/jobs-tax-and-politics-three-ways-electric-vehicles-will-chang e-our-world-84910
5. Tesla, Inc. (2017). FORM 10-K 2017. https://www.sec.gov/Archives/edgar/data/1318605/000156459018002956/tsla-10k_2017 1231.htm
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