Tesla Motors, Inc. is in the business of developing, manufacturing, and selling technology for high-performance electric automotive

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Tesla Motors, Inc. is in the business of developing, manufacturing, and selling technology for high-performance electric automotive and powertrain components. Hoping to develop a greater worldwide acceptance of electric vehicles as an alternative to the traditional internal combustion, petroleum-based vehicles that dominate the market, Tesla is the first company that commercially produced a federally compliant electric vehicle with the design styling and performance characteristics of a high-end performance automobile. Tesla currently offers one vehicle, the Roadster, for sale, as well as supplying electric powertrain components to Daimler for use in its Smart EV automobile. Additionally, Tesla has a partnership with Toyota Motors to develop and supply an electric powertrain for Toyota’s Rav4 SUV.

This teaching case was compiled from published sources. The author would like to thank Lindsay Pacheco, Patrick Toomey, Ned Coffee, William Gormly, and Will Hoffman for their research. Please address all correspondence to Dr. Alan N. Hoffman, Dept. of Management, Bentley University, 175 Forest Street, Waltham, MA 02452; ahoffman@bentley.edu. Printed by permission of Dr. Alan N. Hoffman.

Company Background

Tesla Motors was founded in Silicon Valley in 2003 by Martin Eberhard and Marc Tarpenning to create efficient electric cars for driving aficionados. The founders acquired their first round of financing from PayPal and SpaceX founder Elon Musk who subsequently took over as CEO in 2008. The company unveiled its first car, a two-seat sports car named the Roadster, in 2006 after raising $150 million and going through four years of technological and internal struggles.1 Powered by a three-phase, four-pole AC induction motor, the Roadster has a top speed of 130 mph and accelerates from 0 to 60 mph in under four seconds, all completely silent.2 Production of the Roadster began in March of 2008 with a first-year production run of 600 vehicles.3 In June 2008, Tesla announced that it would be building a four-door, five-passenger sedan called the Model S to be built in California and be available for sale in 2012.4 The Model S is slated to retail for approximately $57,400 and be offered with battery options for 160-, 230-, or 300-mile ranges per charge. The company went public in June 2010 with an initial public offering at $17 a share, raising about $226.1 million in the first stock debut of a car maker since the Ford Motor Company held its initial public offering in 1956.5

Tesla has also used its innovative technology to partner with traditional automobile manufacturers on their electric vehicle offerings. In 2009, Tesla signed a deal to provide Daimler with the battery technology to power 1000 electric Smart city cars.6 Tesla will supply battery packs and electric power trains to Daimler and in return it will receive auto manufacturing and design expertise in areas including safety requirements and mass production of vehicles.7 Later in that same year, Daimler announced that it had acquired a “nearly 10 percent” stake in Tesla.8 On October 6, 2010, Tesla entered into a Phase 1 Contract Services Agreement with Toyota Motor Corporation for the development of a validated power train system, including a battery, power electronics module, motor, gearbox, and associated software, which will be integrated into an electric vehicle version of the RAV4 for which Tesla received US$60 million.9

In May 2010, Tesla purchased the former NUMMI factory in Fremont, California, one of the largest, most advanced and cleanest automotive production plants in the world, where it will build the Model S sedan and future Tesla vehicles.10 Additionally, Toyota invested US$50 million in Tesla and together the two companies will cooperate on the development of electric vehicles, parts, and production system and engineering support.11

Strategic Direction

Tesla desires to develop alternative energy electric vehicles for people who love to drive. While most car companies are developing small, compact electric cars, Tesla has focused on a high-priced, high-performance electric vehicle that competes against traditional performance cars such as those offered by BMW and Porsche. The company has also devoted many resources to research and development in an effort to produce an electric power train that has both long mileage between recharges and the high performance that car enthusiast’s desire.

Tesla’s main objectives are to achieve both growth in sales and profits, provide technological leadership in the field of electric vehicles, and foster sustainability and social responsibility. The company desires for growth are served with its development and sale of the Model S vehicle that is expected to retail for almost half of the Roadster price and thus create higher demand and revenue. The company further strives for growth through its strategic partnerships with Toyota and Daimler to supply electric power trains to those companies for use in their electric vehicle designs.

The company’s objectives of sustainability and social responsibility are shown through its desire to develop automobiles that are not powered by petroleum products and produce very little carbon emissions. The company won the Globe Sustainability Innovation Award 2009.

Tesla’s Competition

Tesla’s products participate in the automotive market based on its power train technology. It currently competes with a number of vehicles in the non-petroleum powered (alternative fuel) automobile segment from companies such as Mitsubishi, Nissan, General Motors (Chevy), Toyota, BMW, and Honda to name a few. Within this market segment, there are four primary means of power train propulsion that differentiate the various competitors in this market:

Electric Vehicles (EVs) are vehicles powered completely by a single onboard energy storage system (battery pack or fuel cell) which is refueled directly from an electricity source. Both the Tesla Roadster and the Model S are examples of electric vehicles.
Plug-in Hybrid Vehicles (PHEV) are vehicles powered by both a battery pack with an electric motor and an internal combustion engine that can be refueled both with traditional petroleum fuels for the engine and electricity for the battery pack. The internal combustion engine can either work in parallel with the electric motor to power the wheels, such as in a parallel plug-in hybrid vehicle, or be used only to recharge the battery, such as in a series plug-in hybrid vehicle like the Chevrolet Volt.
Hybrid Electric Vehicles (HEV) are vehicles powered by both a battery pack with an electric motor and an internal combustion engine but which can only be refueled with traditional petroleum fuels as the battery pack is charged via regenerative braking, such as used in a hybrid electric vehicle like the Toyota Prius.12
Hydrogen Vehicles are vehicles powered by liquefied hydrogen fuel cells. The power plants of such vehicles convert the chemical energy of hydrogen to mechanical energy either by burning hydrogen in an internal combustion engine or by reacting hydrogen with oxygen in a fuel cell to run electric motors.13 These vehicles are required to refuel their hydrogen fuel cells at special refueling stations. Examples of these types of vehicles are the BMW Hydrogen 7 and the Honda Clarity.

Proprietary Technology

As electric vehicles are a newer technology, Tesla’s innovation has led it to have some unique resources in technology and intellectual property over its competitors. Tesla’s proprietary technology includes cooling systems, safety systems, charge balancing systems, battery engineering for vibration and environmental durability, customized motor design and the software and electronics management systems necessary to manage battery and vehicle performance under demanding real-life driving conditions. These technology innovations have resulted in an extensive intellectual property portfolio—as of February 3, 2011, the company had 35 issued patents and approximately 280 pending patent applications with the United States Patent and Trademark Office and internationally in a broad range of areas.40 These patents and innovations are not easily duplicated by competitors.

A second unique resource that a company developing electric vehicles would require would be its battery cell design. Tesla’s current battery strategy incorporates proprietary packaging using cells from multiple battery suppliers.41 This allows the company to limit the power of its battery supply chain. The company also has announced a partnership with Panasonic to jointly collaborate on next-generation battery development.

Inherent to the requirements for an electric automobile company is the knowledge and skills of the workforce. Tesla believes that its roots in Silicon Valley have enabled it to recruit engineers with strong skills in electrical engineering, power electronics, and software engineering to aid it in the development of its electric vehicles and components.42 Being one of the first to market with a high-performance EV also gives the company a first-mover advantage in experience and branding.

Tesla has an agreement with the automobile manufacturer Lotus for the supply of its Roadster vehicle bodies. The company entered into a supply agreement in 2005 with Lotus that requires Tesla to purchase a certain number of vehicle chassis and any additional chassis will require a new contract of redesign to a new supplier.43 This places a large dependence on Lotus to both fulfil the existing contract and also gives them significant power in the event that Tesla requires additional Roadster units.

Tesla is dependent on its single battery cell supplier. The company designed the Roadster to be able to use cells produced by various vendors, but to date there has only been one supplier for the cells fully qualified. The same is also true for the battery cells used for battery packs that Tesla supplies to other OEMs.44 Any disruption in the supply of battery cells from its vendors could disrupt production of the Roadster or future vehicles and the battery packs produced for other automobile manufacturers.45

External Opportunities and Threats

Electric vehicle companies may be able to take advantage of many of the opportunities with the continuous shift toward green energy. President Barack Obama has publicly committed to funding “green” or alternative energy initiatives through various vehicles.46 In his 2011 State of the Union Address, the President set a goal of getting one million electric cars on the road by 2015.47 Within the United States, various federal and state governmental agencies are currently supporting loan programs through the likes of the Department of Energy and the California Zero-Emission Vehicle (ZEV) program. The tragic Louisiana BP oil spill that took place from April to May 2010 intensified the focus on decreasing U.S. dependence on petroleum products. It also highlighted the fact that while alternative energy is currently more expensive to produce than conventional energy, there are hidden environmental and human costs that must be taken into consideration when making this comparison. This increased focus on alternative energy has been beneficial for the EV industry, benefiting both Tesla and its competitors. Due in part to this increase in funding, Tesla is competing in an industry that is expanding, making its absolute market share less relevant than how fast it is growing its market share.

Despite the new dawn of interest and pledges for funding alternative energy, many plans for funding will never come to fruition. Currently in the United States, there is a massive budget deficit, and members of the Republican Party have focused their demands for budget cuts in the “discretionary spending” arena, which is where alternative energy funding falls. Notably, some of the cuts proposed would seriously affect programs funding energy efficiency, renewable energy, and the DOE Loan Guarantee Authority.48 The EV industry has very few lobbyists compared to the traditional car and petroleum industry, and so is more vulnerable to being targeted in budget cuts. These cuts represent a serious threat to the continued development of the alternative energy and electric car industry. For EVs to come into widespread use, the United States must develop an EV-charging infrastructure, and this will need the support of both state and federal governments in the form of both funding and regulation.

Not only is the federal government facing budget cuts, but the state of California is also dealing with massive shortfalls and reductions in services and funding. This is especially important to Tesla since it operates its manufacturing in California, and one of its largest target markets is California, due to the strict emissions regulation and traditional green focus of Californians.

There are also many regulations to which companies developing electric vehicles are subjected. A topic of current interest is the upcoming change in how the range of electric vehicles is calculated—a regulation determined by the EPA. It is thought that the new calculation will result in a lower advertised range for all electric vehicles, which may make their superiority over traditional petroleum-based vehicles less prevalent. There are also numerous safety requirements that EVs must adhere to, governed by the National Highway Traffic Safety Administration. Companies that produce less than 5000 cars for sale and have three product lines or less can qualify for a gradual phase-in regulation for advanced airbag systems and other safety requirements. Similarly, in Europe, smaller companies are currently exempt from many of the safety testing regulations, and are currently allowed to operate under the “Small Series Whole Vehicle Type Approval.”

Additionally, battery safety and testing are regulated by the Pipeline and Hazardous Materials Safety Administration, which is based on UN guidelines regarding the safe transport of hazardous materials. These guidelines ensure that the batteries will perform or travel safely when undergoing changes in altitude, temperature, vibrations, shocks, external short-circuiting, and overcharging.

Other regulatory issues include automobile manufacturer and dealer regulations, which are set on a state-by-state basis. In some United States states, such as Texas, it is not legal for the dealer and manufacturer to be owned by the same company. Therefore, these regulations would impact the market penetration levels that a company wishing to utilize a distribution model based on being able to both manufacture and sell its cars through its own wholly owned dealerships would be able to reach in certain states.

An interesting, though potentially costly, the new regulation is the minimum noise requirements, mandated by the Pedestrian Safety Enhancement Act of 2010 signed in January 2011. There have been concerns that since electric cars are so much quieter than their combustion-engine counterparts that their design must be somehow altered to increase the amount of noise they generate in order to make them easier to hear by people with impaired vision. These regulations are likely to take effect by 2013 and could alter electric vehicle designs.

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What are the external environment: opportunities and threats?

What are the international environments: Strengths and weaknesses?

identify the problems or situations?

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