Tesla Motors: Luxuriously Green
Tesla redefined innovation in the slow moving automotive industry with its luxury electric cars and unique operational model.
Company Background & Business Model
Tesla Motors, recently named the most innovative company in the world by Fortune Magazine has captured the imagination of many becoming the first successful American car startup since Ford. Based in Fremont, California, Tesla manufactures and sells electric luxury cars retailing between $70,000-100,000. For a car startup that’s only been in existence for about ten years, Tesla’s success is nothing short of a miracle. In recent market report, Tesla announced that it delivered 11,574 Model S sedans to customers in the third quarter of 2015 an increase of 48% from the same quarter last year. Building on the success of the Model S, Tesla’s second design, the Model X is set for delivery sometime in 2016 and is already oversubscribed. Today, Tesla has a market capitalization of $25 billion and has taken the lead in the luxury sedan segment.
Tesla’s successful business model is supported by the following operating strategies:
Direct to Consumer
Tesla succeeded in the saturated automotive industry by first offering innovative product and breaking all the rules of the traditional industry. Traditionally, car manufacturers sell their cars through a network of dealerships who act as intermediaries between car manufacturers and consumers. By contrast, Tesla disrupted the market by completely bypassing the middlemen and going direct to consumers. Tesla sales orders are taken through its website and if customers want to see the cars in person, they can go to the company-owned show room style stores located in major cities all over the world (See Figure 1).
Figure 1. Tesla showroom
Network of Charge Stations
To support the growing demand for its electric cars, Tesla is building charge stations in major markets around the world. Tesla aims to cover 98% of the US population with its charging network by end of 2015. Typically, customers can fully recharge their Model S in less than 20 minutes at these supercharge stations. As consumers gain better access to charge stations, the barrier for purchasing electric cars will be minimized (See Figure 2).
Figure 2. Supercharge station
Unlike most car manufacturers, Tesla makes most of the components in-house. This strategy has helped Tesla achieve impressive quality standards while reducing costs. Because Tesla is vertically integrated, it can offer customers a unique opportunity to customize and configure each Model S cars to their tastes. To gain additional manufacturing efficiencies, Tesla is building a huge factory that will manufacture lithium-ion batteries further differentiating it from competing manufacturers. This move could save Tesla a lot of money since 25% of the cost of making a car is related to batteries. The company hopes to reinvest the additional margins gained from these types of investments to reach its business strategy of making a more affordable Tesla starting at $35,0005.
Focus on Technology
Staying true to its Silicon Valley roots, Tesla leverages technology to achieve maximum efficiency in the manufacturing process and post market release updates. Unlike standard assembly robots in the auto industry that perform single task, Tesla’s factory has 160 advanced robots that can each perform four tasks in the assembly of the Model S. This level of automation is credited for Tesla’s higher profit margin in comparison to its competition4 (See Figure 3). Furthermore, Tesla vehicles are outfitted with a powerful computing system so much so that the Model S is referred to as “an app on four wheels”. This operating system allows Tesla to remotely diagnose any problems that may arise and also update the operating system.
Figure 3. Model S factory
Utilizing these technological innovations, Tesla continues to gain competitive advantage. Traditionally, automakers release new models with added features every two to three years. Tesla on the other hand is able to perform these types of updates via software. For example, Tesla recently remotely shipped self-driving features to the Tesla Model S 70D cars . Without having to invest in production of new models, Tesla is able to generate additional revenue by charging customers for these software updates, which could cost as high as $10,000.
Tesla has adopted an effective operating model that will continue to sustain its business model for many years to come. Tesla’s CEO Elon Musk envisions his company to not only dominate the luxury car segment but also transform the automotive industry as a whole. In line with this vision, the company released all of the patents related to electric cars effectively making them open source. In response to skeptics Musk said, “What we are doing is a modest thing. You want to be innovating so fast that you invalidate your prior patents, in terms of what really matters. It’s the velocity of innovation that matters”4.
Student comments on Tesla Motors: Luxuriously Green
Model X is the 3rd model, not 2nd. The very first model was Roadster. Model X is not a sedan, it is SUV.
Interesting about supercharges: they are build for travelers only. Tesla actually tracks cars and the rate a car uses a given supercharger, and if on the way home from work you always use conveniently located supercharger, the Company would send you an email notifying that you should not do so. In other words, these stations are there for you only if you are traveling from city X to city Y on a non-regular basis.
Quality of Tesla: not that great as one thinks. Consumer Report at first reported that Tesla stands as one of the best performing vehicles; however, the report’s “recommended” rating was pulled off immediately after 1,400 owners of Tesla Model S reported variety of issues, such as leaky sunroofs, problems with the drive train, center touchscreen console, and power equipment. That day stock fell by ~7%, roughly $2B. This was only a little more than a month ago, at the end of October.
Yes, you are right the Roadster is the first model but it was discontinued before a wide market acceptance. Today, Tesla only sells the Model S until the release of the Model X. Since the Model S is Tesla’s first widely distributed model so I chose to focus on that. Secondly, the Model X is indeed an a crossover SUV. I don’t think I mention that it’s a sedan, I just mention that it’s the second design. As far as superchargers’ go I wasn’t aware about the emails Tesla’s sends but I do believe that there’s still room for improvement in terms of accessibility and the time it takes to charge as mentioned below in the Jorge’s comment.
As far as the quality issues, you bring up a very good point. Even though they had a set back, I believe Tesla is still positioned to overcome some of these quality issues because of its open communication platform with customers. Also, Tesla has strong brand loyalty that it will be able to come out on top, the over subscription of the Model X could be sited as a good indicator of this royalty. Lastly, only a month after the negative reports, Consumer Report the magazine “awarded one version of the car the all-wheel-drive Tesla Model S P85D 103 points, a tally so high it broke the Consumer Reports road-test ratings system. Its driving performance was better than any other vehicle the magazine has evaluated.” according to an LA times article that discussed the issues. http://www.latimes.com/business/autos/la-fi-hy-consumer-reports-tesla-models-20151020-story.html
Thank you for such an interesting post!
In my opinion, the 20-minute charge can be unacceptable for many users, and this is the main factor slowing down the growth of Tesla. I always thought that the solution would be battery swap stations – a much faster way to have an electric car ready to go. Nonetheless, Elon Musk said in January 2015 that Tesla was no longer working on this solution. You can find more information at http://fortune.com/2015/06/10/teslas-battery-swap-is-dead/
It will be very interesting to see how hydrogen cars and electric cars fight to become the zero-emissions solution to transportation in coming years. In favor of hydrogen cars, I will say that they have longer ranges than electric cars, and their filling-up is much faster. What do you think?
Yes, I do agree with you that the charge time is an issue that Tesla must address in the future. Even though the battery swap program didn’t gain as much acceptability, Tesla might be able to leverage its new mega factory to come up with a solution. Another alternative would be to maybe leverage solar energy, it would be interesting to see if they would use solar energy to compliment the batter life.
I don’t know too much about hydrogen cars, but I think Tesla’s mission is to increase competition in the auto industry that’s alternative to the traditional internal combustion engines. If hydrogen cars are indeed superior to electric cars, I don’t see why Tesla wouldn’t create the next generation of hydrogen cars as well.