Date: 10/10/2013

To: Mr. Elon Musk, CEO Tesla Motors

From: Rahul Ramesh, SRM Corporate Consultancy

Re: Tesla Motors Strategic Analysis

Foreword

Headquartered in Palo Alto, California which had been a cradle for many futuristic innovations, Tesla Motors design, manufacture and sell electric cars and electric vehicle powertrain components. The growth of electric vehicles in the US Market from a mere 2.23% of total vehicle sales in 2011 to 3.90 % of the total vehicle sales till September 2013 is a strong indicator of the companys growth prospects in the coming years. With a unique goal to accelerate the worlds transition to electric mobility with a full range of increasingly affordable electric cars Tesla has been catalyzing change in the industry.

A report by from Pike Research, predicts annual worldwide sales of electric vehicles (EVs), will reach 3.8 million by 2020. This confirms that Tesla can do a wonderful job and can command the market in years to come by laying out proper strategies and plans. Increasing competition from both old rivals like Toyota, General Motors, and Nissan added with foray of big entrants like BMW, Subaru into the EV market will complicate the situation. In this report I will be focusing on determining the existing positions, both market and competitive, industry structure and capabilities review of Tesla in the US Electric Vehicle Market

The Competition Scenario

Rising expense of fuelling a gas mobile, the ever stringent pollution control norms, the increased attractiveness of customers towards a trendy yet efficient vehicle has altogether made the US Electric Car market an attractive prospect. New davids and the old goliaths are fighting for capturing a sizeable market share. The scenario is much more rewarding than the Hybrid vehicle market according to what reports say. According to the United States Department of Energy, around 40,000 plug-in electric vehicles were purchased by Americans in the first six months of 2013, thats more than double the amount sold throughout the same period last year. In 2012 there were 52,000 EVs sold, which was an increase from 17,000 in 2011. Tesla delivered right around 10,000 of its Model-S cars in first half, those sales appear to be coming at the expense of BMW, Mercedes, Lexus and Porsche. So it can be approximately estimated that Tesla accounted for almost 25% of the total sales this year. If we combine the sales of Roadster the numbers may go up by a fraction. At first glance it dont seem quite bad as BMW and Mercedes are both registering double-digit sales increases for 2013. But exhibit 5 paints a different picture. Its in the BMW 7-Series and Porsche Panamera that the presence of the Model S is probably being felt most acutely. Model X which is to be in market sometime in 2014 has already seen 6000 bookings. Tesla is a David who had certainly outrun some Goliaths but still there is a long way to go. Tesla certainly has a First mover advantage in the electric vehicle market. It has state-of - art engineering and technology capability which is certainly not easy to imitate for its competitors. The company could also raise huge amount of capital which is completely devoted to the creation and betterment of the electric vehicle. Tesla also produces many components for the car including power electronics, motor and battery packs. All these will help Tesla earn Ricardian rents. The patents like Battery Pack Pressure Monitoring System for Thermal Event Detection, Rotor Design for an Electric Motor, Efficient Lead Battery Recharging etc. can provide Tesla Monopoly rents in the EV components manufacturing.

This doesnt ensure Tesla an upper hand in the market for a long term .Already signs of tough competition is being seen, both from hybrids and pure electric ones. Porsche has developed a powerful electric Porsche 918 Spider which, can go zero to 60 miles per hour in less than 3 seconds, and packs nearly 900 horsepower. At $845,000, the Spyder is hardly a rival to the Model S taking price into account. But it is evident they could develop similar technologies to create a similar car, now if they can bring their cost down drastically Tesla would be under pressure. Bigger electrically powered threat from Porsche is the Panamera Hybrid. With a start price somewhere under $100,000, the Panamera Hybrid is more competitive and certainly an option for customers.BMW has launched its two new offerings: the i3 and i8. With a far lower starting price than the Model S, the i3 is cost-competitive with the than the Model S. Looking at the BMW i8 (which is a sports car) they can also make a great difference not by competing with Tesla S Model but bettering the technology to create a new offering to compete. There also comes Nissan Leaf and Ford Focus EV which are competitively priced and caters to the family market. Already price wars have started in the industry. BMW which announced a lower than expected price , for its new i3, of $41,350

(before any tax credits). Ford has also cut prices for the 2014 Focus EV by $4,000. Hybrids like the forerunner Chevrolet Volt, Nissan Leaf and Toyota Prius also pose threat to Teslas sales. Kia and Volkswagen are also preparing to set their foot in US car market in coming years. This shows that future is going to be turbulent in the EV market.

The US Electric Vehicle Industry- The Future Prospects United States has the largest fleet of plug-in electric vehicles in the in the world. Since 2008 over 140,000 highway-capable plug-in electric cars have been sold in the country through September 2013. An analysis published in September 2013 by Navigant Research forecasts overall sales of plug-in electric vehicles to grow at a compound annual growth rate of 18.6% between 2013 and 2022, and annual sales in the U.S. will reach 416,153 pure electric vehicles (PEVs) by 2022. Navigant also predicted that PEVs will represent a 2.4% market share of total new vehicle sales in the United States in 2022. US Government provides lots of incentives for production and consumption of EVs.Lets take a look at these incentives and legislations that support:

The Energy Improvement and Extension Act of 2008, and later the American Clean Energy and Security Act of 2009 granted tax credits for new qualified plug-in electric drive motor vehicles. The tax credit for new plug-in electric vehicles is $2,500 with additional $417 for each kilowatt-hour of battery capacity over 4 kWh. The American Recovery and Reinvestment Act of 2009 (ARRA) authorized federal tax credits for converted plug-ins.The credit is equal to 10% of the cost of converting a vehicle to a qualified plug-in electric vehicle and in service after February 17, 2009. The maximum amount of the credit is $4,000.

This combined with strict legislations to curb pollution and to discourage gas mobiles had started showing results. There has been an increasing demand for green transportation and it too promotes to growth of the industry. People are increasingly becoming aware of environmental health and have started using public transportation, biking, and walking. All these factors have improved the market for Electric Vehicles better than ever before.

Teslas Future The EV market is still in an emergent phase, if Tesla can create a dominant design and capitalize on it then there would be no turning back. I think Tesla has taken the right decision to mass produce its Gen 3 vehicles. Gen 3 sedan cost about half the price of the Model S and is expected to arrive at the end of 2016. This is a good decision that would help Tesla affordable to the middle class families, who are the most affected due to the rising gas prices. Being based on Teslas thirdgeneration platform design, the Gen 3 sedan will also pack some interesting new technologies like autopilot or self-driving elements. Battery technology which is a major concern in the EV domain, will also be greatly improved by the time of the Gen 3s arrival. By partnering with Panasonic, Tesla expects that the Gen 3 sedan will have a driving range of about 200 miles despite its battery being smaller, lighter and less expensive than the battery in the current Model S. Tesla also plans to expand outside of North America. The automaker will start sales in Europe this year and will soon expand to Asia. Tesla is also ramping up locations for its Supercharger network, allowing for coast-to-coast EV drives, and later plans to unveil an even faster charging technology. Tesla must try to create a demand advantage.

Recommendations to Tesla

Recommendation 1: Tesla must start Franchising or Co-Owning Outlets I know this is a bitter soup for Tesla as you have always stuck on to owned distribution channels amidst many controversies and lawsuits. I do accept that owning a sales, service and distribution network is good in long term to reduce costs. I am aware of factors that make Tesla stick to their retail strategy, theyre:

Tesla thinks that there is a conflict of interest for existing franchised dealers between selling gasoline-powered vehicles, the bulk of their business, and selling EVs and blames that they lack knowledge about the vehicles. For this purpose I dont think there is a need to have a whole retail store! The retailers employees can be trained and taught about these. Co-owning the retail store will also be a good idea, though complex where Tesla can save lots of money in establishing yet implement their strategies. It will help better Economies of Scale. By locating in shopping malls and other high-traffic locations, Tesla is trying to reach people before they decide what new vehicle to buy. A franchisee will also be able to do the same. Tesla can send their specialists to educate people for a period of 6 months. Ultimately the franchisor also aims profit so there must not be any conflict is marketing the vehicle according to Teslas ideologies. I believe though in a significantly market Apple also operates exclusive stores in these locations and they are able to educate people regarding products and maintain a strong identity.

Tesla has to ensure that its vehicle owners have proper service coverage. These should also be outsourced or partner entities. It will help in widening the service network.

While I give these recommendations I dont mean this are straight line methods, it will be iterative in nature. These recommendations are solely intended to create a broader market for Tesla Motors. Proper deeds, guidelines and agreements should be there in place while tying knot with the franchisees or other firms. These recommendations are for the long term and mainly focused on the sales of Gen 3 vehicles which I believe will certainly create waves in a large medium priced segment. Recommendation 2: Tesla must start supplying proprietary components to more auto manufacturers to increase revenue which in turn can be used for R&D and expansion purposes. Recommendation 3: Start globally outsourcing components other than the crucial EV components

Recommendation 4: Try to stick with suppliers who are more futuristic in their plan and products. For all its innovation, the Model S uses ordinary commodity batteries produced by Panasonic. . The chemical composition is nickel-cobalt-aluminum, which costs less than many rival chemistries but is ordinarily rejected by carmakers because it easily catches fire and it had happened in a few of Teslas on-road cars . Even though your team has overcome the safety issue by building a control system that manages the batteries it still have cost significant time, money and effort. While another suitable option was to to optimize a lithium-ion battery composition and that was to be done by the supplier. GM is precisely doing the same with significant progress.

Exhibit 1 (Source: Electricdrive.org)

Exhibit 2: Environmental Analysis Demographic Trends Increasing demand for green products. High pollution rates Socio-Cultural Influences Increasing awareness of environmental health Organizations and government environmental awareness programs. Technological Developments EV battery lifespan increasing. More R&D activities taking place in car companies and research institutions that accelerates development Better engines Global Factors Globalization International alliances and treaties Significant outsourcing activities taking place.

Macroeconomic Factors Rising fuel prices. Increasing demand for green transportation. U.S. auto and oil imports exceeds exports. Low electricity prices Political-Legal Factors Tax Credits up to $7500 are provided to EVs Emission Regulations are strict CAF standards -35 mpg wide by 2020

Exhibit 3: Five Forces

Threat of Entry
New entrants with similar technologies: Low power New entrants with dominant technologies: High power Industry giants making EVs: High power Big automakers with better distribution networks: High Power

Threat of Substitutes
Roadster Competes with BMW, Mercedes, Etc.: High power Model S Competes with Toyota Prius,GM Volt, Nissan Leaf, Porsche Panamera, Etc.: High power

Rivalry
Low; high entry barrier, market sector is niche and largely untouched

Buyer Power
High current demand for Model S: Low individual buyer power Licensees for EV technology: Moderate power

Supplier Power
Sotira Body panels: Low power Brembo : Brake, Brake Calipers: Low Power Borgwarner Parts: Low power Panasonic & Samsung- Batteries : High Power

Exhibit 4: Tesla Motors Competitor Analysis Companies Capabilities Objectives/ Values Strategy

Tesla Motors

Better Technology, Owned Retail outlets, In-house parts production, Brand image, Superchargers

Pioneer the EV industry and educate people about EVs

General Motors

Huge Brand recognition, Large Distribution network, Prominence in Hybrid Market, Skilled Marketing team. Efficient distribution system, High quality products, JIT production, strong supplier relations, well trained inventory specialists
Strong finances, strategic partnerships, innovative culture, growing brand reputation

Toyota

To create a streamlined brand that represents quality and fuel efficiency through innovative Design with the utmost respect for quality. Always better cars Enriching lives of Communities - Stable base of business.

To initially attain huge margins and brand value through luxury cars to realize costs. Then move into mass market with low priced offerings. Build broad network of charging stations Emphasizing the Developments in sustainability and fuel efficiency.

Nissan

Objective revolves around environment, safety, dynamic performance and life on board. Create technologically advanced and high quality product portfolio to create ultimate driving experience

To maintain the leadership in the Green Car market by bettering the offerings enter into new markets and penetration into existing ones Aggressive price cutting and focuses on cost of ownership. Better R&D facilities to capitalize technology. Introduce competitively priced cars and move through low cost delivery service model.

BMW

Brand reputation, Quality products, Highly skilled workforce, and leadership in emerging markets.

Exhibit 5 : Comparison of Car Sales From January 2013 till June 2013 ( Tesla Sold 10,000 Model S in this period)

Exhibit 6 : Sales Figures of Top Four (Source : Wikipedia)

Plug In Car Sales as on September 30,2013

60,000 50,000 40,000 30,000 20,000 10,000 0 Chevrolet Volt Nissan Leaf Toyota Prius Tesla Model-S

References

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

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