Tesla Motors – Revolutionizing the Auto Industry
Transforming the century old automobile industry by the way of technology and vertical integration
Company Overview
Tesla Motors, Inc. is a U.S. based auto maker that designs, develops, manufactures and sells luxury electric vehicles. Founded in 2003, the company has launched three vehicles to date, and has announced its intention to launch several more. The company’s flagship vehicle, the Model S, is a fully customizable, four door, five adult passenger electric sedan. The company sells its vehicles internationally through its own sales network leveraging the company’s stores and galleries, as well as its online presence. [1]
Business Model
Tesla is determined to do things differently. The founder and CEO, Elon Musk, set out to prove that electric cars could be better than gas powered cars. In the process, the company radically changed the way consumers think about the century old car buying experience. At the core of their disruptive business model are three key focus areas:
Direct to Consumer – Tesla has turned the traditional car dealer network on its head with a direct-to- consumer model. The company refrains from using middlemen and dealerships like traditional automakers, and takes all of its sales orders online. For customers wanting to view and interact with the car prior to purchase, the company has several “galleries” showcasing its vehicles and educating its potential customers on their innovative technology. (See Figure 1) The online, direct to consumer model allows Tesla to build cars on demand, to the exact specification that the customer wants. Not only does this significantly reduce the amount of inventory the company needs to carry, but it also ensures each car is perfectly tailored to the buyer’s taste. As a result, Tesla recieved a score of 99 out of 100 in Consumer Reports’ annual owner satisfaction survey. [2]
Singular Focus – A huge component of Tesla’s success is related to its razor sharp focus of selling one car at a time. Unlike many auto makers, who launch several new vehicle models each year, Tesla choses to launch one model at a time. Historically, model launches are 4-5 years apart from one another. By doing so, the company is able to narrowly focus it resources and innovation efforts. As a result, Tesla packs an impressive amount of technology within the car, which is operated on its own operating system (see Figure 2). The interface shown not only controls the basic functionalities of the car, but is also used to add future functionally through software updates. Effectively, this innovation changes the cycle time for feature enhancement from days (involving trips to the service station) to minutes (done anywhere). [3]
Knocking Down Barriers – Two huge barriers holding back the adoption of electric vehicles are the lack of adequate charging infrastructure and the concern around the vehicles driving range per charge. Tesla has made it a priority to knock down these barriers by installing hundreds of SuperCharger stations in key market areas. (see Figure 3) These stations are designed to provide 170 miles of range, enough to get to the next charging station, in as little as 30 minutes. [4] In addition, use of supercharger stations are free. Developing and expanding this infrastructure has been key to Tesla’s sales as it reduces customer concern.
Operating Model
To support their business model, Tesla operates it business in a way that creates and competitive advantage when compared to other auto makers. The core pieces of their operating model are explained below.
Leveraging Technology – Tesla’s cars are connected wirelessly to a remotely managed central corporate office. Each car generates huge amounts of data. [5] Data that Tesla uses to improve the its product, as well as to improve the end users experience. Upgrades range from adding safety parameters to adding new software and hardware changes. For example, in 2013, when three Tesla Model S cars caught fire due to punctured battery packs, the company released an update to change its vehicle’s suspension settings. This gave the car more clearance at high speeds, thus averting similar problems in all future models. [6]
Vertical Integration – Another key piece of their operating model lies with their degree of vertical integration. Unlike most car makers who source their parts form third party suppliers, Tesla produces the bulk of the parts used to assemble its vehicles. For example, Tesla recently announced that it would build a “gigafactory” to build the batteries for all its vehicle lines. The company hopes that by extending its reach into the battery end of the business, it can reduce the per kWh cost of its drivetrain by more than 30 percent. [7] In addition, the integration should help Tesla further advance battery technology as it relates to electric cars as well as ensure a constant product supply into the future.
Generating feedback – Receiving and implementing feedback in something that CEO Elon Musk strongly believes in, stating “I think it’s very important to have a feedback loop, one where you’re constantly thinking about what you’ve done and how you could be doing it better.” [3] To embody this belief, Tesla has made user forums a big part of the car buying experience. The forums, which are housed on the company website, allow existing customers a place to voice their opinions about the company and it products. This immediate feedback loop coupled with its ability to make software and hardware changes on the fly, allows Tesla to execute worthwhile changes rapidly. In addition, the transparency of the forums allows potential customers to see the passion of existing Tesla customers.
Conclusion
Tesla is a great example of a company that has aligned its business and operating models. By doing so, the business has created a competitive advantage that enables it to quickly respond to product issues (both hardware and software related) that it collects via it’s vehicle data collection technology and its open website forums. In addition, Tesla has been able to leverage it’s direct to consumer business model to reduce inventory carrying costs and manufacturing waste. In response, investors have rewarded the company with superior stock performance compared to it’s peers. (see Figure 4)
Sources
[1] http://www.reuters.com/finance/stocks/companyProfile?symbol=TSLA.O#0mM8D4591FwoMMJy.97
[3] https://www.capgemini-consulting.com/resource-file-access/resource/pdf/tesla_motors.pdf
[4] https://www.teslamotors.com/supercharger
[5] http://www.valuewalk.com/2014/08/tesla-vs-jaguar-its-about-analytics/
[7] http://fortune.com/2014/05/06/for-teslas-gigafactory-a-dash-of-brinkmanship/
Very interesting article! It is amazing how far ahead Tesla is from other auto manufactures. Exactly the type of disruption this industry needs. Having not actually purchased a Tesla (Yet!) I had no idea they focused so heavily on customer feedback.
I have read about their new battery facility, but I wonder what percentage of their components are manufactured in house vs. via 3rd parties.
Similar to Matt, I wonder about the strategy behind vertical integration. As you pointed out, they are aiming to build out an infrastructure of super-charging stations. Would that strategy be better served by an open-standard battery technology, which encourages widespread adoption of electric cars by multiple manufacturers, and provides an incentive for broader distribution of supercharging stations?
Echoing Steve’s comment above, I agree that the infrastructure of supercharging stations will be critical to encouraging consumer adoption of electric cars. I wonder if Tesla could consider partnering with other manufacturers to develop a network of shared charging stations. This may speed up the roll-out process and spread the costs across multiple companies.
Given the relatively low penetration of electric cars, it makes sense for manufacturers to work together rather than compete against each other – it’s more important to increase the size of the pie (i.e., market penetration of electric cars) than fighting for a bigger share of the small existing pie.
To echo Steve’s comment, they did open up their battery technology (and/or other technology crucial to their cars) but they are not sitting on their hands. Instead, they’re opening their own battery factory.
I also think their talent strategy is very fascinating. They have a huge bias for engineers for all parts of the organization and hire mostly hungry ambitious engineering grads from Stanford, pay them way below market rate and sell them the dream of changing the future. It seems to have worked brilliantly so far.
Hey Dylan,
Great article! I was really impressed by the fact that Tesla can deliver service upgrades remotely through software patches. I think this is a revolutionary change. Based on my experience of working in the automotive industry, availability of service stations is one of the key criteria for car purchases. Using this approach Tesla has more or less done away with the concept of service stations using software patches. True that cars would still need to go for repairs from time to time but the frequency of such visits would be definitely reduced through these software upgrades.