Tesla$$s Entry into the U$.$S$.$ Auto Industry

Donald Sull and Cate ReavisTesla$$s Entry into the U$.$S$.$ Auto Industry

Donald Sull and Capany$$s latest electric car, the Model $3,$ in front of an

audience of $800$ Tesla owners and fans. Musk enthusiastically explained how Tesla$$s earlier electric

vehicles $($EVs$)$ the Roadster, Models S and X $$ had paved the way for the company to design and

manufacture an EV $$for the masses.$$ The baseline $$35,000$ Model $3$ could accelerate from $0$ to $60$ miles

per hour in six seconds, and its $75-$kilowatt hour $($kWh$)$ battery had a range of $220$ miles $($the range

increased to $310$ miles with a long$-$range battery option$).$ Deliveries of the car would begin at the end

of $2017.$ Musk boasted to the audience that the company had already secured $115,000$ pre$-$ordered cars

at $$1,000$ per car $($a number that would grow to $500,000$ pre$-$orders by $2018).$

$1$

By August $2018,$ Musk$$s enthusiasm had turned to misery, laid bare in a New York Times article entitled

$$Elon Musk Details $$Excruciating$$ Personal Toll of Tesla Turmoil.$2$ Working up to $120$ hours a week

and sleeping on the factory floor, Musk was closely supervising the production of the Model $3.$ He

described Tesla as being in a state of $$production hell.$$ The company had paused production in late

February and again in April to work out bottlenecks in its highly automated factory, staffed with over

$1,000$ robots.

$3$

During a call with equity analysts in May $2018,$ Musk$$s misery was palpable. He became testy,

characterizing a question about the company$$s capital requirements as $$boring$.4$ But it was a legitimate

question. In the second quarter of $2018,$ the company recorded a net loss of $$743$ million on revenue of

$$4$ billion. Analysts estimated that the company needed to produce at least $5,000$ units a week to turn a

profit in $2018\mathrm{.}5$ Some wondered whether Tesla would run out of cash by the end of the year$\mathrm{.}6($See the

Tesla Financials tab in the Tesla case workbook for additional financial data.$)$

TESLA$$S ENTRY INTO THE U$.$S$.$ AUTO INDUSTRY

Donald Sull and Cate Reavis

May $1,20192$

In The New York Times article, Musk remarked, $$The worst is over from a Tesla operational

standpoint.$7$ The company was finally producing $5,000$ Model $3$s a week after missing the original

production goal by more than six months$\mathrm{.}8$ As he worked to get production ramped up before the

company$$s cash ran out, Musk admitted on Twitter to one mistake: $$Yes$,$ excessive automation at Tesla

was a mistake. To be precise, my mistake. Humans are underrated.$9$

Investors and auto industry experts were split on Tesla$$s future. Some believed that Tesla would create

value by disrupting the traditional automobile industry, all while achieving its stated mission to

accelerate the world$$s transition to sustainable energy. Skeptics disagreed. $$Tesla$,$ according to one

prominent investor, $$without any doubt, is on the verge of bankruptcy.$10$

The Traditional Automobile Industry

Industry Overview

The new passenger car marketa in the United States was worth about $$270$ billion at the retail level in

$2016\mathrm{.}11$ While the industry experienced a sharp downturn during the $2008$ Great Recession, sales had

rebounded by $2013$ as the U$.$S$.$ economy swung into recovery. With higher disposable incomes and

easier access to credit, Americans, including Millennials born after $1980,$ flocked to dealerships. By

$2016,$ the market$$s momentum had slowed. Sales $($by value and volume$)$ were expected to remain flat

until $2021($Exhibits $1$a and $1$b$).$ The average sales price of a new car was $$35,500($Exhibit $2).$

Americans were buying big cars. Of the nearly $7$ million new cars sold in the United States in $2016,$

$60\%$ were pickups and SUVs$\mathrm{.}12$ However, industry analysts expected demand for small cars to comprise

$20\%$ of new car model launches by $2023,$ compared to $15\%$ between $2008$ and $2017($Exhibit $3).$ Some

also predicted that by $2025$ nearly $60\%$ of new vehicles $($trucks and buses included$)$ sold in the United

States would offer some form of alternative propulsion $($e$.$g$.,$ EVs, hybrids, and fuel cellb cars$).$

$13$

Automakers

In $2018,$ three U$.$S$.$ automakers accounted for nearly $46\%$ of the U$.$S$.$ car industry$$s market share by

volume. General Motors $($GM$)$ led the market with a $17\mathrm{.}9\%$ share, followed by Ford with $14\mathrm{.}7\%,$ and

Chrysler with $12\mathrm{.}9\%($Exhibit $4)\mathrm{.}14$ Toyota was the leading non$-$U$.$S$.$ manufacturer with $13\mathrm{.}5\%$ by

volume. Tesla held a $0\mathrm{.}2\%$ market share. $($See the Competitors tab in the Tesla case workbook for

additional financial data.$)$ Automakers, who were sometimes referred to as original equipment

manufacturers or OEMs, had historically earned low returns on their investments. The operating

margins $($operating income as a perca. Determine the size$/$potential of the target market in dollars. Show your calculations. Use data from the case only. $(15$ marks$)$a$.$ Determine the size$/$potential of the target market in dollars. Show your calculations. Use data from the case only. $(15$ marks$)$