case study

timer Asked: Jun 11th, 2018
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Must read the case (do not find the answer online) and answer the question below:

Tesla Case Study Questions:

  1. Perform a SWOT analysis for Tesla
  2. Should BMW expect Tesla to grow into a strong direct competitor like Audi, versus Tesla being limited to a niche or being just a flash in the pan? Is Tesla at a competitive advantage or disadvantage? How will that evolve?
  3. What do you think of Tesla’s entry strategy? What barriers did it have to overcome? Should Nissan learn something from Tesla’s approach? Will other firms follow in Tesla’s footsteps?
  4. How is Tesla's business model different than the business models of traditional car companies?
  5. Do you think Tesla’s secret plan (p. 9) was really a plan or an ex-post rationalization? Would it matter?
  6. How do you expect the industry to evolve? What key factors will influence the industry’s evolution?

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For the exclusive use of H. WANG, 2018. 9 -7 1 4 -4 1 3 REV: DECEMBER 17, 2015 ERIC VAN DEN STEEN Tesla Motors “Tesla is in California, so it is not April Fool’s yet!” tweeted Elon Musk, CEO of Tesla Motors, around 10 PM PT on March 31, 2013. “First profitable Q for Tesla thanks to awesome customers & hard work by a super dedicated team”1 he had tweeted a few minutes earlier. And indeed, on May 8, Tesla announced a net income of more than $10mln on $560 mln in sales. 2 Tesla had outsold both Nissan and GM in electric cars in the U.S.3 Its Model S had sold more than the BMW 7 and Audi A8 combined.4 Tesla raised its Model S sales target for its first full year from 20,000 to 21,000 cars. 5 Over the next three months, its stock price almost tripled.6 In its 10 years since founding, Tesla had launched both a high-end limited edition “Tesla Roadster” and its “Model S” production car, and was now taking reservations on its upcoming “Model X” electric crossover SUV. Despite a public controversy about its range, the Model S had received the coveted Car of the Year award and earned the highest rating that Consumer Reports ever gave to a car, an astonishing feat for a company that was only at its second car. While some of its most visible EV competitors went bankrupt or halted production, 7 Tesla became profitable. Elon Musk wanted Tesla to be a mass manufacturer of electric cars.8 Becoming profitable meant that that goal was within reach. Or was it not? The Car Business America was sometimes said to have a love affair with cars.9 In 2011, American households owned 1.17 vehicles per licensed driver, with almost 20% of households owning three or more cars.10 The average trip was less than 10 miles, with less than 1% of trips exceeding 100 miles. 11 Households spent on average more than 15% of their income on cars, gasoline, and related expenses. 12 At more than 3% of GDP and 1.7 million employees, the car business—manufacturing, distribution, and service—was one of the largest industries in the U.S.13 It was also concentrated, with the three largest car companies making up 49% of the U.S. market in 2012, though that was down from 98% in 1969.14 Despite this high concentration, two of the three large U.S. car manufacturers went bankrupt in 2009. Since WWII, no U.S. firm had successfully entered the car industry with a mass-produced car, until (maybe) Tesla. ________________________________________________________________________________________________________________ Professor Eric Van den Steen prepared this case. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School, and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2014, 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. This document is authorized for use only by HUAIXIAO WANG in Strategic Management - Summer 2018 taught by RON ROMAN, San Jose State University from Jun 2018 to Aug 2018. For the exclusive use of H. WANG, 2018. 714-413 Tesla Motors Car Design15 A car was a complex marvel of technology with thousands of parts, often sourced from more than a thousand suppliers.16 A typical car consisted of a number of subsystems: 1) The powertrain made the car move and was the most complex part of the car. It consisted of the engine, the transmission, and a number of auxiliary systems. The engine in a conventional car (CVs) was an internal combustion (IC) engine that converted gasoline into power in the form of a fast-rotating axle. Because of its size and weight, the engine was typically placed above the front wheel axis, and then required a special design to prevent it from being pushed into the car’s passenger cabin in a crash.a The transmission transformed the rotation of the engine axle into an appropriate rotation speed for the wheels through a variable set of gears. This was necessary because IC engines had a limited speed range in which they were effective, losing power and stalling below 700 rpmb while topping out at 7000 rpm.17 The transmission also permitted to disconnect the engine from the wheels when the car was standing still to allow the motor to keep running. Transmissions were complex and required their own lubrication. In most cars, the transmission powered the front wheels. Such front-wheel drive cars had more conservative handling and were cheaper to make than rear-wheel drive cars, such as BMW and Mercedes, which required a costly and space-taking connection between the motor in the front and the rear wheels. The auxiliary systems included fuel storage and injection system, the exhaust system with catalyzer to eliminate polluting fumes, the cooling system to prevent the engine from overheating, the oil system to lubricate the moving (and hot) parts of the engine, and the—typically electronic—control system to control the engine and all related systems. 2) The chassis was the foundation of the car and included a supporting frame, wheels, steering system, and braking system. 3) The body of the car was the space where passengers resided and included the dashboard and the air conditioning as some of its more complex elements. Given this complexity, cars were difficult and expensive to design. Developing a completely new car would involve hundreds of engineers and was estimated to cost between $1bn for a regular car— excluding expenses for retooling and factory modifications—up to $6bn for a global car like Ford’s Mondeo but then including retooling and plant modifications. Such new car design would take four to five years, though simpler redesigns of an existing model were often done in less than a year. 18 Car Manufacturing Cars were manufactured in huge assembly plants, often the size of more than 50 football fields. A traditional assembly plant would reach its minimum efficient scale at between 100,000 and 250,000 cars per year and a plant of such size could cost as much as $1–$2 billion.19 A typical car assembly plant would consist of a body shop, a paint shop, and the assembly line. 20 In the body shop, sheets of metal were stamped or pressed into panels that were then welded together by robots to a car body. The car body and the doors got painted in the paint shop, after which the assembly line assembled the car by attaching all parts to the body. In a traditional plant, the assembly line was a slow-moving chain from which the unfinished cars were suspended and that moved the car bodies past stationary assembly stations where workers added, in a very particular sequence, all the necessary parts. As there were a lot of interactions among the different parts of a car, an error early in the assembly process could lead to cumulative problems down the line. Cars that a Many cars were designed to ensure that the engine would slide under the passenger cabin in case of a serious crash. b Rpm stands for “rotations per minute” and measures the rotation speed of an axle. 2 This document is authorized for use only by HUAIXIAO WANG in Strategic Management - Summer 2018 taught by RON ROMAN, San Jose State University from Jun 2018 to Aug 2018. For the exclusive use of H. WANG, 2018. Tesla Motors 714-413 needed repairs were repaired in a repair zone at the end of the assembly line, which could take up more than 10% of plant floor space in a traditional assembly plant.21 Almost all assembly plants would produce multiple versions of the same car through each other on the same line, with a sophisticated control system that indicated to each station which parts to add to the particular car at the station. Sometimes even two completely different car models were produced on the same line. But building multiple models on the same line really challenged the production design as work would often become unbalanced; i.e., some assembly stations would have much more work than others.22 To produce a broader mix of cars required a more flexible production system, which typically had less scale economies, 23 leading to plants with minimum efficient scale between 50,000 and 100,000 cars per year.24 Cars were not only expensive to design but also expensive to make, with manufacturing cost making up about 80% of a car’s final selling price (Exhibit 1). Moreover, car manufacturing had a considerable learning curve. It was estimated, for example, that both the number of defects and the assembly time in a particular plant dropped by about 70% over the first two months that a new car model went into production with a 90% experience curve for at least the first year.c,25 Across the industry, average assembly time dropped by about 3% per year.26 Car Marketing, Distribution, and Service Car producers were among the heaviest advertisers in business. GM and Ford spent respectively US$ 4.2 bln and US$ 3.9 billion on advertising in 2010, which exceeded Coca Cola’s US$ 2.9 bln.27 The estimated brand value of companies like Toyota, Mercedes-Benz, and BMW was estimated at around US$ 30 bln each, which was more than Disney at US$ 27 bln or Pepsi at US$ 16 bln, while Ford’s brand value was estimated at around US$ 8 bln, and Nissan and Porsche at around US$ 5 bln each28. Cars were sold through dealerships.29 A dealership franchise had a mutually exclusive relationship with a car manufacturer: in exchange for the dealer being exclusive to one manufacturer—though potentially selling multiple brands of the same manufacturer—it would get an exclusive territory for one or more of the manufacturer’s brands. (Some dealer companies would own dealership franchises for different brands, but these franchises would be physically separate standalone entities.) A car dealer would market cars through advertising, a showroom, and salespeople; sell the cars and potentially finance them; service the car; and provide repairs. Some observers had questioned, however, whether it was optimal to combine sales and service in one entity.30 Exhibit 2 captures the typical revenue and cost structure of a U.S. dealership. New car sales had limited profitability but brought in business for the far more profitable service and repairs business. Dealers would also make profits from ancillary offerings at the time of sale, such as financing, special coatings or other treatments, and pre-paid service plans. Ford and GM both had more than 4,000 dealerships in 2011 versus about 1,600 for Toyota.31 Given their complexity, cars needed regular maintenance and occasional repairs. The engine with its moving parts exposed to heat and large forces, was the focus of most maintenance and repair. Indeed, the most frequent maintenance task was changing the motor oil. Most manufacturers recommended change intervals of 7,500 or 10,000 miles, although dealers and oil service centers sometimes recommended changes at 3,000 or 5,000 miles.32 In terms of repairs, 7 to 9 out of 10 repairs were related to the powertrain.33 c A 90% experience curve means that the cost decreases to 90% of its former value, i.e., decreases by 10%, every time the cumulative production doubles. 3 This document is authorized for use only by HUAIXIAO WANG in Strategic Management - Summer 2018 taught by RON ROMAN, San Jose State University from Jun 2018 to Aug 2018. For the exclusive use of H. WANG, 2018. 714-413 Tesla Motors Electric Cars34 Electric cars were popular in the late 1800s. In fact, the first speeding ticket was issued to an electric car (driving 12 mph)35 and the Hartford Electric Light Company even operated an exchangeable battery service. But electric cars were quickly overtaken by the internal combustion engine. The interest in electric cars increased again sharply in the late 20th century when oil prices shot up and when improvements in battery technology increased their range. The main difference between an electric car and a conventional car was in its powertrain, which consisted of an electric motor and a battery pack, but that difference had implications for the rest of the car’s design and manufacturing, for example, through its greater simplicity (Exhibit 3). The electric motors that were used in cars were fairly conventional motors that had been widely used for more than a century. In contrast to IC engines, such electric motors could develop a strong torque (rotational force) at a very broad range of speeds. As a consequence, electric motors could be used without a transmission. They were also much smaller and didn’t need the motor oil and cooling that IC engines required (though EVs needed some form of cooling for the battery). The lack of heat, however, necessitated some other way to warm up the cabin in cold weather, such as an electric heater or a reversible air conditioning. A nice feature of an electric motor was also that it could function as a brake and then generated electricity to charge the battery. (Converting the car’s energy back into electricity was the key feature of hybrid cars such as the Prius.) The battery was the most expensive, heaviest, and most challenging component of an EV. The Nissan Leaf’s battery was estimated to cost about US$ 15,00036 and its weight equaled that of an IC engine.37 Early EVs and hybrid vehicles had used a variety of battery technologies, but all recent electric cars used Li-Ion batteries because of their high capacity per weight. Li-Ion batteries had been introduced in the early 90’s and powered most electronics, including laptops (Exhibit 4). A complete EV battery would be assembled out of a large number of battery cells (similar to consumer batteries but typically considerably larger) that were combined into modules and then further into the battery pack. The modules and pack played an important role as they monitored and managed the batteries both for efficiency and for safety, controlling for example charging, balancing, usage, and temperature. Exhibit 5 captures the cost structure of a newly developed EV battery, like Nissan Leaf’s. Costs decreased by about 10% per year between 2009 and 2012. 38 The experience curve for LiIon batteries was estimated to be between 85 and 90%.39 Some also expected a rush to build capacity, leading to overcapacity from 2015 onwards.40 There was some speculation on new battery technologies that might replace Li-Ion, but these seemed still far away.41 Li-Ion itself, however, was in fact a family of battery technologies with new variations being developed continuously. In terms of design, all-electric passenger vehicles came in two types: existing cars that were converted to electric, like the Ford Focus Electric, and cars that were designed from the ground up as an electric car, like the Tesla and the Leaf. Converted cars could use the design and production infrastructure of the CV from which they were derived but did not leverage the specific characteristics of the electric powertrain. For example, converted cars typically put the battery and motor where the IC engine used to be, whereas in both the Nissan Leaf and Tesla S the battery pack was part of the floor of the passenger cabin. Not only did this free up space both inside the cabin and for cargo storage, it also considerably improved the handling of the car as it gave the car a low center of gravity. In particular, with the heavy IC engine mounted above the front wheels of the car, conventional cars had a high center of gravity and hence tended to swing or sway a bit when turning. Conventional cars were also more complex than EVs. 4 This document is authorized for use only by HUAIXIAO WANG in Strategic Management - Summer 2018 taught by RON ROMAN, San Jose State University from Jun 2018 to Aug 2018. For the exclusive use of H. WANG, 2018. Tesla Motors 714-413 Governments actively promoted the adoption of EVs to combat pollution, smog, and climate change. One measure was direct tax-subsidies for the purchase of an EV. In 2013, the U.S. federal government gave a $7,500 tax credit for the purchase of EVs such as the Leaf or the Model S. Individual states often gave additional incentives. California, for example, gave another $2500 purchase rebate, and gave EVs free access to HOV lanes until 2015. Some states, including California, also required that a minimum percentage of a car manufacturer’s fleet sales were zero-emission vehicles (ZEV). Manufacturers that fell short could buy ZEV credits from others who were above the mandated minimum. The rule encouraged the production of EVs directly and by giving producers of EVs an extra source of income.42 However, the price of such credits was expected to drop quickly as all producers started selling more EVs.43 There were, however, also important hurdles to adoption. These fell into two broad categories. 44 The first were issues related to EVs being a new technology with considerable uncertainty about longevity, resale value, and safety. The second were different sources of “range anxiety,” which included the limited range of most EVs, the time it took to charge a car , and the early lack of charging stations. The latter issue was being resolved, as many companies and public entities started offering both private and public charging stations. The Department of Energy, for example, listed more than 6,000 public charging stations in 2013.45 Some companies also offered free charging spaces to their employees. On any regular outlet, EVs would recharge between 5 and 10 miles of range per hour. But higher-amp household outlets could double or triple that, while Tesla’s Supercharger could charge 150 miles of range in 30 minutes. 46 To reduce range issues, Tesla also operated a network of more than 15 Supercharger stations where customers could charge their car for free. It also introduced a battery swapping service that could exchange a depleted battery for a charged one in about 90 seconds.47 To reduce worries about resale value, finally, Tesla guaranteed a resale value pegged to similar BMW and Mercedes models, backed by Elon Musk’s personal fortune.48 Nissan Leaf49 In 2007, Nissan started the most ambitious EV project by a mass car producer: the Nissan Leaf. Carlos Ghosn, CEO of Nissan and its alliance with Renault, believed that EVs would capture 10% market share by 2020—an estimate higher than those of competitors and observers—and he wanted to position Nissan and Renault as the leaders in this field. 50 Over the next few years, Nissan and Renault invested over US$ 5.6 billion in the project, including US$ 1.7 billion for modifying an assembly plants and building a battery plant in Tennessee and another US$ 650 million for doing the same in the U.K.51 The Leaf was a fully electric mid-sized family sedan with front-wheel drive that was, in terms of design and size, in the same class as the Ford Focus or the Volkswagen Golf (Exhibit 6). The Leaf was designed from the ground up as an electric car to leverage the benefits of the EV technology. In fact, the technology was sufficiently different that Ghosn expected to rely more on outside hires rather than on Nissan’s experienced IC engineers.52 Developing the car took three years, which was much faster than Nissan’s standard four-year development cycle, despite being a completely new car.53 Nissan was also focused on developing new battery technology. Due to its first-mover status in the mass EV market, Ghosn saw an opportunity to build a lead and become a supplier to others in the industry in a market that was expected to grow to US$ 25 billio ...
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