What Strategy Is Tesla Using to Reach the Mass Market?
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Tesla Strategy Analysis
If yous're looking for Tesla strategy analysis, you've come up to the correct place! To run across Tesla'due south latest share price – become here.
A brief history of Tesla
Tesla is a remarkable company. Information technology is the first US motorcar company to get public since 1956, the first electric car company that non only builds cars simply also constructs a nationwide integrated charging network, and – arguably ane of its greatest accomplishments – the company that changed the public perception of electric cars. Tesla made electric cars cool.
The company was founded in July 2003, and opposite to popular belief, was not originally founded by Elon Musk, merely rather two entrepreneurs and engineers: Martin Eberhard and Marc Tarpenning. After a string of issues and multiple CEOs, Elon, who at the time was the primary financier of the company, stepped in every bit the CEO in October 2008.
Tesla'due south mission is to advance the world'southward transition to sustainable energy. Itschief programme is outlined in a letter Elon wrote:
- Build sports car
- Utilise that money to build an affordable car
- Utilisethat money to build an even more affordable car
- While doing above, also provide zero emission electrical power generation options
And so far the visitor has stayed on this path (seeFigure 1 for the historical journey of the visitor'south production). After building its offset performance roadster, the company and then released its first premium sedan – the Model S, followed past the premium SUV – the Model X, and the mass market sedan – the Model 3. In the upcoming years, Tesla plans to release the Model Y (mass market place SUV based on the Model 3), the cybertruck, and the new generation roadster.
Fun fact: Tesla's Models: South, 3, Ten. Y reads SEXY . The company chose the name 'Model 3' (instead of Model E) because information technology couldn't get the rights, which is owned past Ford.
Figure 1: Tesla cars' base toll vs. release date
What Tesla has accomplished and so far cannot be trivialized. As mentioned before, Tesla is the commencement United states car company to successfully IPO since 1956. One of the reasons the company was able to achieve this is because of two central shifts in the motorcar landscape: (1) with the exception of the engine, much of automobile parts manufacturing has been commoditized and can exist acquired from 3rd party vendors (windshield, dashboard, pause, etc), and (2) the electric motor is much simpler to develop than the internal combustion engine. The traditional gasoline power engine has more than 2000 moving parts, while the electric motor that propels an EV has about 20. This means a small-scale startup such equally Tesla could develop a powertrain that combined off-the-shelf parts (li-on battery from laptops, chassis from lotus, etc) without breaking the banking concern.
In this article, nosotros will delve into three central reasons why Tesla has been successful, compare the company's progress with its principal competitors, and discuss its financials.
Three reasons why Tesla has been successful
There are three reasons why Tesla has been successful thus far. It has(i)superior technology, (ii) a supercharger network, and (3) vertical integration. These three factors create a virtuous cycle that continues to extend the company's pb.
1. Superior engineering science
Figure two: Anatomy of a Tesla
A typical Tesla car can be broken downwardly into three core components:
Electric motor
Tesla's electric motors are superior compared to the company'southward competitors. Tesla motors are equipped with proprietary magnets, making them not only smaller, but also cheaper and more efficient than competitors'. For example, the Model 3'south motor is estimated to price approximately The states $754 (at 46.ane kg), while the BMW'due south i3 and the Chevy Bolt, are estimated to cost US$ 841 (at 48.37 kg) and Usa $836 (at 51.49 kg) respectively. Furthermore, Tesla'south motor too has more than torque and ameliorate performance.
Battery
Tesla'southward free energy storage system consists of thousands of private lithium ion batteries arranged in serial. This component is manufactured by Panasonic (ticker: PCRFY) and by far the heaviest part of the car – weighing more than 500 kg. This is why the energy storage system is placed at the bottom of the car to help with stability and treatment. Experts in the field consider Tesla's bombardment engineering science to exist a couple of years ahead of competitors'. For example, the battery pack in the model 3 is estimated to have 14% better energy density.
Tesla's superiority in bombardment does not end on the engineering attribute.The company also has admission to the largest battery manufacturing capacity in the globe. Since its early days, Tesla has had a shut relationship with Panasonic. The Japanese visitor would produce batteries in Nippon and export them to California for Model S and X cars. The 2 companies have since partnered to make batteries in the US at Gigafactory ane in Nevada, U.s. (note that Tesla calls factories that combine battery manufacturing with electric car assembly "Gigafactories").
Currently, Tesla has about 44 gigawatt hours (GWh – unit of energy output that represents 1 billion watt hours) of bombardment chapters. 35 GWh comes from the Nevada Gigafactory 1 (although but ⅔ of this capacity is currently operational) and nine GWh is imported from Panasonic Japan. This 44 GWh figure almost exceeds the chapters of all other automakers combined, making Tesla'due south production chapters far ahead of its competitors. This gap may increase even further as Tesla is nearing completion of Gigafactory iii in China and recently announced Gigafactory 4 in Deutschland.
The partnership betwixt Panasonic and Tesla has been rocky in contempo months, all the same. Clashes over management way, engineering science bug and battery prices have frayed the relationship.Panasonic's share price has suffered due to the lack of profitability of the joint venture, dropping by 33% over the by 2 years, while Tesla's has increased past 34%.
Figure 3: Tesla vs. Panasonic returns from the past 2 years
Equally a result of this tension, Panasonic is non participating in Tesla's Gigafactory 3 construction in China (instead, Tesla has signed an agreement with LG Chem to supply battery for this new manufactory).
For its role,Tesla needs to continue to increase efficiency and lower manufacturing prices as it introduces new lower-priced vehicles for the mainstream. The visitor has expanded its partnership with other battery manufacturers, is looking into developing its ain proprietary battery, made acquisitions to bolster bombardment manufacturing capabilities, and may fifty-fifty get into mining to be able to secure raw materials for battery production.
Democratic driving technology (Autopilot)
Many pundits often discuss the upcoming electric vehicle (EV) revolution in the same vein as the self driving innovation. Notwithstanding, in reality, the two may non be compatible, at least in the medium term.Fully autonomous cocky driving technology may not be compatible with EVs as the computational ability required to run an advanced self driving auto (which corresponds to automated driving level 4 – 5) will sap also much free energy and volition significantlyreduce the EV's range. Currently, Tesla'due south autopilot is at level 2.
Nonetheless, it is worth briefly discussing Tesla'southward autonomous driving capabilities (when compared to other automakers). Self driving algorithms employ neural networks that require gobs of data to develop – the more data one has, the more than robust and accurate the cocky driving algorithm volition be. In terms of driving data, Tesla is just second to Waymo. With more than x million miles on the road and 7 billion simulated miles, Waymo has the most driving data. While Tesla, which relies on more than half a 1000000 cars using autopilot mode, has recorded ane.3 billion miles.
Despite the quantity of driving data, the quality of Tesla's data may non exist suitable for full autonomy. Tesla took a different arroyo in developing its autonomous capabilities. Unlike Waymo (and nearly other players in the autonomous vehicle (AV) industry), which employs loftier precision GPS, LiDAR and cameras to create a detailed map of the environment, Tesla relies on radar and cameras merely.Tesla primarily uses cameras to map the 3D world into the second space.Information technology is unclear if this arroyo will ever work to achieve total autonomy, as information technology is less accurate.
In a sense,Tesla had no choice. When it get-go launched in October 2015, the cost of LiDAR was nearly $75,000, which made the technology too expensive to be deployable in a production motorcar. And so Tesla took the only approach that was feasible at the time: a camera and radar system, combined with software that tin be updated via the net.
The company has promised full autonomy capabilities by 2020. Take this with a grain of salt, even so, as Tesla has a history of overpromising its autonomous capabilities.
two. Supercharger Network
The average American drives 29.eight miles (47.7 km) per twenty-four hours. At first glance, this range is sufficiently covered past an EV. But the average can be misleading. Despite the low average, there are circumstances where the driver drives very long distance – exceeding the range coverage of EVs. As such, about 95% of driving needs can be satisfied by an EV, butnigh consumers require 100% of their driving needs to exist met (including long distance trips 1-2 times per year). The fear of not being able to bulldoze long altitude using an EV is called range anxiety, and is the number one reason consumers cite to be the barrier to adopting EVs on a wider scale.
Recognizing this, Tesla has adult a network of superchargers. Superchargers are electric charging stations that canfast accuse (50% charge in almost xx minutes) Teslas. They use a proprietary connector, which means other EVs cannot use Tesla'due south network.
Although requiring significant capital investment, Tesla's supercharger network provides the company a competitive advantage. No other EV makers have a charging network. While Tesla has floated the possibility of opening its supercharging network to other car makers, no specific plans have been announced.
Since 2012, Tesla's supercharger capabilities take increasedfrom but a scattering in large US cities, to more than 1760 stations(Figure 4), with more than 15,000 stalls in 37 countries (59% of these are located in the United states of america and Cathay).
Figure four: Tesla's global supercharger network. Information is taken from hither source
It costs Tesla an estimated US $270,000 per station (costs may vary depending on various circumstances). At close to 1800 stations, this suggests that Tesla has invested approximately The states $486 million on its supercharger network thus far. Although a large amount, this represents a pocket-size portion of the company'southward upper-case letter expenditure. In 2019 alone, Tesla expects to spend The states $1.5 billion in majuscule expenditure for R&D, manufacturing expansion and building out its Supercharger network.
3. Vertical Integration
Tesla's organizational structure and its arroyo to vertically integrate where possible are what make its technology superior. Unlike other automobile companies, Tesla develops and produces virtually of thecore components in-house. In dissimilarity, established car companies (OEMs) such as Ford, GM and others have an ecosystem of 3rd party suppliers that comprise of three tiers (Figure five).This makes fast technology innovation and iteration difficult.
Figure 5: The multi-tiered supply concatenation of the traditional machine maker (OEM) vs. Tesla's vertically integrated structure
A contempo study by Goldman Sachs estimates that Tesla has accomplished most 80% vertical integration in its manufacturing supply concatenation. The company's innovations range from its supercharger network and custom software, to novel methods to produce the frame of the car.
Theprimary benefit of vertical integration is not to profit from the margin you lot would otherwise pay your suppliers, but rather toenable a much faster rate of innovation and technology development.
This is why the company decided to open source its technology patents. Tesla did not exercise this for altruistic reasons (despite what its PR department would say) – the move is strategic in nature.
To abound fifty-fifty faster,Tesla needs to move electric vehicles to the mainstream (as of 2018, EV penetration in the Us is at almost 3.four%) – and the fastest way to exercise this is to have other car manufacturers produce electric cars as well, and so that when consumers are shopping for EVs, they compare others' electric cars with Tesla'south, which the company believes is best in class.
With its power to innovate faster,Tesla has the conviction that it can out innovate its competitors.The company also has the largest automotive battery manufacturing capacity along with the well-nigh extensive charging network.
Tesla's vertical integration is not limited to technology development – merely also to the manner it sells to customers. In the U.s.,all other car companies rely on a franchise distribution model, just Tesla never opted into this model. When selling through a franchise model, a machine maker sells its cars through a 3rd party that and so sells to the end consumer. In almost every state in the Usa, there are laws that prohibit machine makers from selling direct to consumers one time they have established the franchise model. The goal of this law is two-fold: (1) protect the franchise owner from unfair contest from the car makers, and (ii) protect the public from unfair practices by the auto makers.
Although the laws were established to protect the consumer and the public, it has been used to protect the rights of the dealers/franchise owners and block direct car sales to consumers. One time a car maker opts into the dealership model, they cannot bypass the franchise. For the car maker to get direct to the consumer, they have to repurchase the rights from the franchise owners; and for established motorcar makers, this is prohibitively expensive.
Because Tesla has never gone this route, it can go directly to the consumer. This means that (one) Tesla tin capture more of the profit margin as in that location is less middlemen in the distribution network, (ii) Tesla has control on the customer purchasing experience, an of import fact because 87% of Americans dislike the traditional machine ownership experience, and (3) Tesla can sell its cars online.
Tesla's direct path to the consumer is not without its controversies, however. The company has faced multiple legal disputes in multiple U.s. states. Some states accept not only banned Tesla from selling direct in stores, but too banned Tesla service centers. To circumvent this in states that have strict dealership laws, Tesla has establishedshowrooms – shop fronts that showcase Tesla cars where transactions cannot occur and employees are not allowed to talk nearly pricing or financing options.
Tesla's progress compared to competitors
Figure six shows the number of cars Tesla has sold (delivered) in the Usa from January to September 2019, compared to that of other minor to midsize luxury cars and electrical cars made by other car makers.
Figure half dozen: Total number of small and midsize luxury cars sold in the US from Jan to September 2019. Midsize premium auto sales data are taken from here . Pocket-size premium car sales data are taken from here . Tesla's car deliveries data are taken from the company.
Betwixt Q1 to Q3 2019, Tesla sold virtually 140,000 cars in the US. That is more than the venerable Mercedes, and 10x more cars than GM's Chevrolet Commodities (the 2d best selling EV in the US in 2019). Tesla is non only outselling other EVs, merely other premium cars by a significant margin.Tesla claims that the Model three is addressing a marketplace larger than initially thought. More than 60% of Model three trade-ins are non-premium brands. This seems to be backed by a survey from Bloomberg that shows that most buyers traded in vehicles in the toll range between US $20,000 – 40,000 (vs. boilerplate Model three selling price of The states $fifty,528).
InFigure 7 you tin see Tesla's quarterly car delivery numbers.The number of delivered cars is an important metric for Tesla, equally information technology is a leading indicator for revenue.After the launch of the Model 3, the company's automobile commitment numbers increased significantly, while sales of the premium models, Models S and X, accept decreased in 2019. This might exist because Model 3 is cannibalizing sales of the more expensive models. In Q3 2019,Tesla'due south product mix comprised of 80% Model 3 and 20% Model S and X.
Figure 7: Tesla global car delivery numbers by the quarter
Notation: There was a significant dip in vehicle deliveries in Q1 2019 as Tesla was experiencing production issues that hampered its ability to produce cars at a sufficient pace.
To maintain profitability, Tesla must continuously increment efficiency and reduce costs. Every bit part of this effort, Tesla is expanding its manufacturing capacity. The company is almost completion of Gigafactory 3 in Shanghai (which will produce cars that are fifty% cheaper per unit capacity than existing production lines). The factory was completed in record time, and Tesla plans to begin commitment in People's republic of china in January 2020. Tesla expects China to be the largest market of its Model three, as the market for premium mid-size sedan in Communist china is far larger than that of United states.
Edifice 1,000 cars is hard. Edifice 100,000 cars is exponentially harder.Despite all its successes, the company has stumbled time and time again mastering the operational complexities of manufacturing at a big scale.
- Quality issues: In Q3 2019, Consumer Report (a not profit defended to unbiased product testing) no longer recommended Tesla'due south cars due to production quality issues. The quality issues seemed to be worse during periods when the company's production capacity was stretched sparse due to commencement of overseas exports. Surprisingly, despite the issues, Tesla Model 3 withal receives very high consumer satisfaction ratings. It seems the visitor is making progress on fixing these issues.
- Service issues: Amid a significant increment in vehicle sales, Tesla's sales and services suffered as they were unable to come across deliveries or consummate services in a timely manner. Unlike Ford, which has more than than 5000 dealerships (and many more independent mechanics that can service a Ford vehicle),Tesla only has 413 service centers worldwide.
- Manufacturing stumbles:Tesla has a history of missteps when designing its production line architecture. I example of this was when information technology tried to over-automate the assembly process of Model three. These missteps are not simply costly, buthaveacquired the company to miss vehicle commitment deadlines and as a event, their share price to tumble.
Tesla's Financials
Making the cars is one problem, being able to execute in a timely manner while maintaining liquidity is another. Currently,Tesla's largest chance is likely execution gamble. Tin the company overcome production bug and deliver cars in a timely manner to generate cash and recoup its large capital expenditures?
InFigure 8 beneath, Tesla'due south quarterly car delivery numbers are plotted vs. free cash menses (quarterly operating greenbacks catamenia less majuscule expenditures). Every bit y'all can run into,the auto delivery numbers can significantly affect Tesla'due south cash reserve.Liquidity is an important factor for Tesla as it prepares to ramp up production facilities in Shanghai and Germany and launch new lineups (Model Y).
This is the reason why car delivery numbers are closely watched past investors. In Q1 2019, Tesla missed its commitment target past a large margin, and the share price tumbled.
Figure 8: Quarterly Auto Deliveries (bluish line) vs. Operating Cash Flow Less Capex (millions of USD)
When compared to other car companies, Tesla's valuation is much higher. Yous tin can come across the company's trailing twelve monthsPrice to Sales ratio inFigure 9 (we use the P/Southward ratio – market cap over revenue – instead of P/E ratio since Tesla has not consistently generated profits yet). Tesla leads the pack at 3.i, while established car companies such as BMW, GM, and Ford are significantly lower.
Figure ix: Tesla'south P/S (TTM) compared to other car makers
The market is evaluating Tesla as a growing tech visitor, rather than a traditional car maker. In the past three years, Tesla shares have returned 81%, higher than BMW, GM and Ford that take returned -15%, 1.3%, and -twenty% respectively. In fact, the company's returns trounce the Nasdaq blended, which returned 62% over the same period.
Yet, high growth is accompanied past loftier volatility.Figure x summarizes Tesla's annualized returns, annualized profitability, and Sharpe ratio, and compares them to the broader Nasdaq index over the same time menstruation. Every bit you can see, Tesla'due south return outperformed that of Nasdaq (Figure ten (a)) in the terminal 3 out of 4 years, but Tesla'due south volatility (Effigy 10 (b)) is much higher, ranging from2 – 4X more volatile than the Nasdaq depending on the yr. As a result,Tesla'due south risk adapted return (Sharpe ratio) is by and large much lower than Nasdaq ( Effigy 10 (c) ).
Effigy x: Annualized return (a), annualized profitability (b) and Sharpe ratio (c) of Tesla over the last four years vs. Nasdaq's. The 6 month T-beak at the end of each yr was used as the risk free return when calculating the Sharpe ratio.
Investing in Tesla is not for the faint of heart. Thus far, the company has beaten the odds and built superior technologies, created an organization that out-innovates incumbents, all while building large calibration manufacturing capabilities. And yes, the EV market is projected to increase exponentially in the upcoming decades, equally we transition away from internal combustion technology. However, the margin for fault for Tesla is modest. Currently, the expectation for the company is so high that it propels the share toll to tape highs. Whatsoever issues in production, issues with auto deliveries, or missed sales estimates will result in significant drop of the share price. This is why oft times Tesla'due south share is very pop among curt sellers (investors who bet that the company will underperform).
At present that you have a practiced overview of Tesla's differentiated strategy. Read more about how to easily invest in Tesla from India.
Source: https://vested.co.in/blog/tesla-strategy-analysis/
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