Background:

By $2016,$ Tesla had been named the most innovative company in the world by Forbes. After years of focusing on the high$-$end market $($Roadster$,$ Model S$,$ Model X$),$ Tesla was preparing to scale up production with the launch of the Model $3,$ its first mass$-$market vehicle. Elon Musk announced a bold production and sales target of $400,000$ vehicles in $2018,$ a move that puzzled many analysts.

While scale$-$ups are typically seen as growth strategies, Tesla's situation raises a strategic puzzle: Can scaling up actually reduce risk, particularly the risk of underperformance and capacity underutilization?

You are asked to assess this decision using two key economic principles:

$-$ Experience Curve: Costs fall with cumulative production $($due to learning over time$)$

$-$ Scale Curve: Costs fall with higher production volume in a given period $($due to economies of scale$)$

Learning Objectives

$-$ Understand how scale and experience curves influence cost dynamics.

$-$ Assess strategic capacity decisions in light of cost structure and market goals.

$-$ Apply regression analysis to real$-$world strategic decision$-$making.

$-$ Evaluate vertical integration versus outsourcing in scale$-$up strategies.

Your Role:

As a future business school graduate, you are tasked with analyzing Tesla's scale$-$up decision and answering the following questions:

$1.$ Was Elon Musk's decision to enter the low$-$end EV market and scale up production a sound strategic move?

$2.$ Musk publicly sets the target of $400,000$ vehicles for $2018,$ but where does this number come from?

$3.$ If Tesla is entering the low$-$end market, why does it continue to insource key components like batteries instead of outsourcing like other automakers?