Tesla Lights Fire Under Automobile Industry

Tesla is the world’s only all-electric automaker capable of delivering a driving experience comparable to gasoline-powered cars. Its mission? “To accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible”. To do this, Tesla (a) creates unparalleled value for customers and (b) effectively aligns its business and operating models.

Business Model
Tesla builds the Model S, a luxury sedan powered by a 85kWh battery which offers a single-charge range 265 miles, double that of any competitor.[1] The vehicles also come with the world’s first fully-integrated autopilot system and over-the-air updates technology.[2]

Tesla sells through self-owned stores. It charges between $70,000-$100,000+ for the Model S. Customers can “refuel” their vehicles using Tesla’s Wall Connectors or at pay-per-use charging stations with an adaptor, but also have complimentary access to Tesla’s worldwide solar-powered Supercharger network. [3]

It is critical to note that this is only a small part – the setup – of Tesla’s business model. In line with its mission to universalize zero-emission transportation, its plan is to generate sufficient revenue, expertise, and brand buzz to ensure the success of a third $35,000 “mainstream” model (the upcoming Model X and Model 3), and yet more economical models thereafter. The company also manufactures and sells electric powertrain systems to other automakers and energy storage products for home and commercial use. While the company is still unprofitable, it’s building toward an ecosystem and a full-sized portfolio of affordable electric vehicles (EVs) that will dilute the fixed costs of its enormous capital investments.

Tesla creates value by using its competitive advantages
1. superior batteries
2. superior technology
3. superior support system and
4. superior brand perception
– to deliver on two customer promises:
Range and convenience: Environmental benefits without trade-offs in speed or convenience. Tesla removes two prohibitive pain-points of EV drivers – poor charging infrastructure and driving range
Design and experience: Cars that “wow”. Tesla is associated more with fashion and a luxury experience than with energy efficiency, making its target demographic broader than “tree-huggers”

Tesla’s operating model both creates and sustains its competitive advantages above. The four pillars of this model are its design and manufacturing processes, ecosystem development, technology infrastructure and supply chain centralization.

Design and Manufacturing Process
Impacts: batteries, technology, brand perception

Tesla’s design and manufacturing process diverges from competitors’ in two major ways.
First, it is built for the strategy of designing cars from the ground up, and of designing cars around their batteries, and not vice versa
Second, it is built to focus on perfecting one model at a time, rather than many

Tesla’s speed and range, two of its most critical differentiators, could not be achieved if it didn’t boast much larger batteries than its EV counterparts (85 vs. 42 kWh). This, in turn, could not be achieved had Tesla adhered to manufacturing based on conventional gas-fueled engine and transmission platforms. The floor of the Model S, for example, is a flat slab which supports larger batteries without forgoing interior space, a feat impossible in a traditional vehicle.[4] Unlike Nissan and Chevrolet with their Leafs and Bolts, as an automaker with an exclusive focus on EVs, Tesla developed its cars from scratch. It was free to create manufacturing systems dedicated to maximizing its battery advantages.

Tesla also manufactures one model at a time, despite having the plant and charging capacity to support simultaneous production of multiple models. Its Fremont, California factory lies 80% idle [5], a reflection of Tesla’s commitment to completing its learning curve on the Model S before introducing additional production complexities for Models X and 3. This ensures Tesla is able to fully digest feedback from customers on the Model S and translate them into feature updates for both the S and future models. A staggered production ramp sharpens Tesla’s competitive edge in technology and design. In addition, it ensures the higher quality essential to maintaining equity as a premium brand (2013 owner satisfaction was 99/100) [6].

Ecosystem Development
Impacts: batteries, support system, brand perception

Tesla uses its free-for-use and soon-to-be open-platform Supercharger network and its powertrain/energy storage products to render the trend toward EVs permanent and sustainable.

Even with its best-in-class batteries, Tesla cars cannot promise unlimited range without its celebrated (and free) Supercharger network. Although CEO Elon Musk has stated that “people drive long distance a lot less than they think they do”, indicating modest short-term demand, Tesla has moved extremely quickly to build out charging infrastructure that will cover 98% of the US population by end of 2015. [7] This not only reassures existing Tesla customers that wherever they go, they will not be stranded, but also serves to signal EVs’ user-friendliness and Tesla’s market dominance to potential customers.

                 

Tesla will also release its Supercharge technology to all EVs, but on the condition that other automakers conform both to its power level and to its cost structure (customers don’t pay for charge). [8] This gives a tremendous boost to the entire EV industry, moving it closer to the incumbent system where gas stations are agnostic to customers’ car-brands. By making itself the universal standard for EVs, while also selling competitors its energy storage products, Tesla kills two birds with one stone: it reduces technological competition, while increasing the convenience and attractiveness of EVs overall. As the poster-child of EVs, it will stand to benefit the most from an increase in the size of the industry pie.

Technology Infrastructure
Impacts: technology, brand perception

Tesla’s boasts state-of-the-art technology, such as speed-limit detection and remote control. However, what will drive its success is its method of managing and delivering technology and its analytics infrastructure.

Tesla’s technology is built on its own operating system, which gives the company maximum security, flexibility and standardization. It has also made as much of its technology transmittable over-the-air as possible. As a result of an advanced remote technology infrastructure, Tesla can upgrade all cars to new operating systems at once, and generate software updates on a daily basis. This dramatically reduces time-cycles needed for enhancements [9] and guarantees a convenient, and equally importantly, a “cool” experience for drivers, two of Tesla’s selling-points.

In addition, Tesla has developed “fleet learning technology,” which deploys machine-learning to connect its fleet and facilitate information transfer among networked cars so they automatically improve with each extra mile driven or charge made. Combining Big Data feedback with infrastructure capacity to apply uniform changes fleetwide within minutes gives Tesla the knowledge to get a head-start over competitors in innovating its technology, and a distinct lead in delivering an always-evolving experience to satisfy customers.

Supply Chain Centralization
Impacts: batteries, technology, support systems

Tesla’s supply chain is maintained entirely in-house to reinforce its core strength in batteries. Battery construction generally entails a time-consuming and costly global process: sourcing minerals from South America, shipping to North America for refining, then to Asia for further assembly, and finally back to North America for installment. Tesla’s plan to build a $5 billion “Giga Factory” will eliminate the labor, time, and transport inefficiencies in this process, and is expected to cut the cost of producing batteries by 30%, which will be passed down to customers in Tesla’s upcoming “economic” models. [10]

Tying back to its design, ecosystem, and technology systems, Tesla’s control over its own supply chain offers freedom to quickly define and change its custom manufacturing processes, prevent loss of its industry-leading patents, and increase speed of innovation and speed-to-market, both of which have helped it gain first-mover advantage for its batteries and Superchargers.

 

Going forward, Tesla must be aware of the complexity posed by its inevitable expansion into more models. Although most of its competitive advantages will only grow with its scale and market share, it may suffer from diluted focus on improving each model and ability to tailor manufacturing accordingly. Separating production plants by model may be a way forward, and Tesla must leverage its cutting-edge fleet learning technology to make learnings from each model actionable for others.

 

Works Cited

[1] 2014 10-K form. Retrieved from http://quote.morningstar.com/stock-filing/Annual-Report/2014/12/31/t.aspx?t=:TSLA&ft=10-K&d=9339cdc620dd76cd0556368ac795f321

[2] Sparks, Daniel. “Tesla Motors, Inc. Flexes Fleet Learning Technology and Over-The-Air Updates”. (2015, October), http://www.fool.com/investing/general/2015/10/15/tesla-motors-inc-flexes-fleet-learning-technology.aspx

[3] Shahan, Zachary. “Tesla’s 3 Huge Competitive Advantages.” (2015, May), http://cleantechnica.com/2015/05/03/teslas-3-huge-competitive-advantages/

[4] Ottaway, Luke. “What makes Tesla’s batteries so great?” (2014, October), http://www.torquenews.com/2250/what-makes-tesla-s-batteries-so-great
[5] Trefis Team. “Tesla’s Business Model Highlights What The Shift To Electric Means For The Auto Industry”. (2015, September),
http://www.forbes.com/sites/greatspeculations/2015/09/01/teslas-business-model-highlights-what-the-shift-to-electric-means-for-the-auto-industry/
[6] DeMorro, Christopher. “Tesla Adds First Driver Assist Features To Model S”. (2014, October), http://cleantechnica.com/2014/10/02/tesla-adds-first-driver-assist-features-model-s/
[7][9][10] Buvat, Jeremy. “Tesla Motors – A Silicon Valley Version of the Automotive Business Model” (2014), (https://www.capgemini-consulting.com/resource-file-access/resource/pdf/tesla_motors.pdf
[8] Hruska, Joel. “Tesla reveals plan to share Supercharger network with other electric car makers”. (2014, June), http://www.extremetech.com/extreme/184141-tesla-reveals-plan-to-share-supercharger-network-with-other-electric-car-makers