Managerial Report Tesla Inc Analysis Review


Task 1-1: Structure and present your paper in the form of a Managerial Report, with a cover page, table of content, executive summary, main body, appendices. Expected length of Assignment 1: up to 6 pages APA format, excluding cover page, table of contents, and appendices

Task 1-2: What is Tesla’s business model? How is Tesla’s business model different from traditional car manufacturers?

Task 1-3: How was Tesla able to enter the automotive mass-market industry?

Task 1-4: In which stage of industry life cycle is the electric vehicle industry? What core competences are the most important at this stage of the industry life cycle?

Task 1-5: Evaluate Elon Musk’s “Master Plan, Part 2” and assess if Tesla can gain and sustain a competitive advantage.

Explanation & Answer length: 6 Pages.

For the exclusive use of K. Ouzaka, 2020. MHE-FTR-067 1 2 6026 1 28X R E VI S E D: MAR C H 7, 20 20 MH0067 FR ANK T. ROT H A E R ME L Tesla, Inc. When Henry Ford made cheap, reliable cars, people said, “Nah, what’s wrong with a horse?” That was a huge bet he made, and it worked. — Elon Musk1 January 7, 2020. Shanghai, China. Just one year after Elon Musk with a cadre of high-ranking Chinese officials broke ground on a dirt field near Shanghai China to commence the building of Gigafactory 3, Tesla’s CEO was now dancing on stage to celebrate the first deliveries of locally made Model 3s. Tesla’s stock market valuation crossed the $150 billion threshold.2 This made the electric vehicle startup more valuable than GM, Ford, and Chrysler combined and the second most valuable auto company globally, only behind Toyota Motor Corp.—but ahead of the Volkswagen Group, the world’s two largest car manufacturers.

To put Tesla’s stock market valuation in perspective, in 2019, GM and Ford combined made more than 10 million vehicles while Toyota and Volkswagen each made over 10 million. In comparison, Tesla made less than 370,000 cars. Just a few months earlier, in the summer of 2019, Tesla’s market cap hit a low point of $32 billion. Back then, as the company was trying to scale-up production of the Model 3 to meet demand, many had speculated that the company would soon run out of cash because it kept missing delivery deadlines and was mired in “production hell” (as CEO Elon Musk put it).3 After the raucous delivery party in Tesla’s brand-new Shanghai Gigafactory, Elon Musk sat back and relaxed as the private jet took off. As the Gulfstream G700 gained altitude, Elon was trying to catch up on his sleep, but a couple of things kept him awake. In particular, the Tesla CEO worried about how the company would continue to scale-up production profitably, while also launching several new models. Later in 2020, Tesla plans the delivery of its Model Y, a smaller compact sport utility vehicle (SUV).

And in 2021, Musk promises the first deliveries of the futuristic pickup truck—the Cybertruck. Although Elon Musk was happy that Tesla beat expectations in 2019 by delivering 367,500 vehicles (Exhibit 1), for 2020 he promises delivery of over 500,000 vehicles. Perhaps, even more important, Elon Musk worried about future demand in the company’s three key markets: the United States, China, and Europe. Even if Tesla succeeded to ramp up production, will there be sufficient Professor Frank T. Rothaermel prepared this case from public sources. Research assistance by Laura Zhang is gratefully acknowledged. This case is developed for the purpose of class discussion.

This case is not intended to be used for any kind of endorsement, source of data, or depiction of efcient or inefcient management. All opinions expressed, and all errors and omissions, are entirely the author’s. © Rothaermel, 2020. This document is authorized for use only by Khadija Ouzaka in BUS400 – Fall 2020 taught by MICHAEL ROBERTO, Bryant University from Aug 2020 to Jan 2021. For the exclusive use of K. Ouzaka, 2020. Tesla, Inc. demand? How could the electric vehicle (EV) company grow production by more than 35 percent while being profitable? Although Tesla had some profitable quarters in the recent past, on an annual basis, the company is yet to make a profit (Exhibit 2). Federal tax credits in the United States for Tesla vehicles have ended, while China is also reducing tax incentives for electric vehicles. In the meantime, his phone kept buzzing with reports of some kind of new coronavirus causing flu-like symptons and pneumonia, with adverse repercussions on Tesla’s supply chain and its new Gigafactory in Shanghai.

Another issue that troubled Musk, and which leads him to tweet often directly with disgruntled customers, is the perception that although Tesla styles itself as a luxury car brand, its delivery experience, and customer service is not up to par. Given a large number of deliveries of Model 3s in the United States during the second half of 2019, Tesla’s customer service bandwidth and capabilities had yet to catch up. The EV-company began to develop a reputation, at least in the United States, for launching innovative and paradigm-defining vehicles. Yet at the same time, many Tesla owners and observers considered its customer service inferior. As Musk grabbed a low-carb Monster energy drink from the fridge in his airplane suite, he booted up his Lenovo laptop, and began to organize his thoughts … Elon Musk: Engineer Entrepreneur Extraordinaire In 1989, at the age of 17, Elon Musk left his native South Africa to avoid being conscripted into the army.

Says Musk, “I don’t have an issue with serving in the military per se but serving in the South African army suppressing black people just didn’t seem like a really good way to spend time.”4 He went to Canada and subsequently enrolled at Queen’s University in 1990. After receiving a scholarship, Musk transferred to the University of Pennsylvania. He graduated in 1995 with bachelor’s degrees in both economics and physics, and he then moved to California to pursue a Ph.D. in applied physics and material sciences at Stanford University.5 After only two days, Musk left graduate school to start Zip2, an online provider of content publishing software for news organizations, with his brother, Kimbal Musk. Four years later, in 1999, computer-maker Compaq acquired Zip2 for $341 million (and was, in turn, acquired by HP in 2002).

Elon Musk then moved on to co-found PayPal, an online payment processor. In 2002, eBay acquired PayPal for $1.5 billion, netting Musk an estimated $160 million. Elon Musk is widely viewed as the world’s premier innovator, bringing computer science, engineering, and manufacturing together to solve some of today’s biggest problems such as sustainable energy and transport as well as affordable, multi-plenary living in order to avoid future human extinction. Musk describes himself as “an engineer and entrepreneur who builds and operates companies to solve environmental, social and economic challenges.”6 At one point, Elon Musk led three companies simultaneously that address the issues that are at the core of his identity and vision: Tesla (sustainable transport), SolarCity (decentralized and sustainable energy), and SpaceX (multi-planetary existence). Musk indeed has a larger than life profile and has been described as “Henry Ford and Robert Oppenheimer in one person,”7 as well as “Tony Stark, the eccentric inventor better known as Iron Man.”8 In fact, Musk made a cameo appearance in the Iron Man 2 movie.

In line with his movie avatar, the real-life Elon Musk plans to retire on Mars. Elon Musk’s larger-than-life personality frequently spills over into his Twitter feed. Musk is an avid tweeter and has had some run-ins with the Security and Exchange Commission (SEC) in the past, as some of his tweets led 2 Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction, distribution, or posting online without the prior written consent of McGraw-Hill Education. This document is authorized for use only by Khadija Ouzaka in BUS400 – Fall 2020 taught by MICHAEL ROBERTO, Bryant University from Aug 2020 to Jan 2021. For the exclusive use of K. Ouzaka, 2020. Telsa, Inc. to movements in Tesla stock.9 The SEC claims that some of his tweets contain material information that has no basis in fact, and thus crossed the line into securities fraud. The issue came to the fore when Musk tweeted in the summer of 2018:

“Am considering taking Tesla private at $420. Funding secured.” The day prior to Musk’s tweet, Tesla’s share price was $380. The SEC filed securities fraud charges against Musk claiming that his social media statements were false and misleading investors. In the spring of 2019, Musk settled with the SEC whom Musk called on Twitter the “Short seller Enrichment Committee”—referring to investors that short Tesla’s stock. Short-sellers are investors, who borrow shares, sell them, and then plan to buy them back at a lower price later to profit from the difference. Essentially, short-sellers are betting against a company, and through their short-selling activities put downward pressure on the company’s share price. Elon Musk and Tesla each had to pay a fine of $20 million to settle with the SEC, without admitting to wrongdoing. Moreover, Musk had to agree that any of his future social media statements needed to be reviewed internally by Tesla prior to posting. Musk also had to step down from the position as chairman of Tesla’s board of directors, but he was allowed to continue to serve as CEO.

Yet, the “taking Tesla private” tweet by Elon Musk in the summer of 2018 marked the beginning of one of the most challenging years in the company’s brief history. After missing production and delivery targets in the first two quarters of 2019, Tesla’s market cap hit a low of $32 billion, down from $65 billion a year earlier. And, the company was running low on cash. The short-sellers thought they had won, and Tesla would go bankrupt. Rather than going bankrupt, however, in early 2020, Tesla, Inc. employed about 50,000 people worldwide and boasted a market capitalization of $150 billion, an appreciation of more than 6,000 percent over its initial public offering in 2010. As a consequence, Tesla’s shares outperformed the broader market by a large margin. The difference in performance between Tesla and the broader stock market has been more pronounced since the fall of 2019 as Tesla began to exceed performance expectations in subsequent quarters (Exhibits 3 and 4). Brief History of Tesla, Inc. Tesla, Inc.

(TSLA) was founded in 2003 in San Carlos, California with the mission to design and manufacture all-electric automobiles. Indeed, the company was inspired by GM’s EV1 electric vehicle program in California in the late 1990s, which the Detroit automaker shut down in 2003. For a comparison between all-electric vehicles (EVs) and plug-in hybrid electric vehicles, see Exhibit 5. Tesla, Inc. is named after Nikola Tesla, the engineer and physicist who invented the induction motor and alternating-current (AC) power transmission for which he was granted a patent in 1888 by the U.S. Patent and Trademark Office. The Serbian-born inventor was a contemporary of Thomas Edison. Indeed, Edison, the prolific inventor of the light bulb, phonograph, and the moving picture (movies), was at one-point Tesla’s boss. The two geniuses fell out with one another and feuded for the rest of their lives.

Edison won the famous “War of Currents” in the 1880s (DC vs. AC) and captured most of the limelight. Because Nikola Tesla’s invention of the alternatingcurrent (AC) electric motor was neglected for much of the 20th century and he did not receive the recognition he deserved in his lifetime, Elon Musk is not just commercializing Tesla’s invention but also honoring Nikola Tesla with the name of his company. Tesla Inc.’s all-electric motors and powertrains build on Tesla’s original inventions. From day one, Elon Musk was also the controlling investor in the original company, Tesla Motors, Inc., providing $7 million from his personal funds to get the company started. Tesla confronted a major cash crunch in 2007, which put the future viability of the company into question. Musk stepped up and invested over $20 million in this round to keep the company afloat, and his dream of transition to sustainable transport alive. In total, Musk Copyright © 2020 McGraw-Hill Education. All rights reserved.

No reproduction, distribution, or posting online without the prior written consent of McGraw-Hill Education. 3 This document is authorized for use only by Khadija Ouzaka in BUS400 – Fall 2020 taught by MICHAEL ROBERTO, Bryant University from Aug 2020 to Jan 2021. For the exclusive use of K. Ouzaka, 2020. Tesla, Inc. provided $50 million from his own money to fund Tesla in its early days because finding any outside funding was next to impossible for a new car company during the global financial crisis.10 Tesla’s Secret Strategy (Part 1) In a blog entry on Tesla’s website in 2006, Elon Musk explained the startup’s initial master plan:11 1. Build a sports car. 2. Use that money to build an affordable car. 3. Use that money to build an even more affordable car. 4. While doing the above, also provide zero-emission electric power generation options. 5. Don’t tell anyone. To achieve Step 1, Tesla held a design contest for the styling of its first product—Roadster. Lotus Cars, a British manufacturer of sports and racing cars, won the contest.

Lotus Cars and Tesla Motors, as it was known then, jointly engineered and manufactured the new vehicle using the Lotus Elise platform. In 2006, Time magazine hailed the Tesla Roadster as the best invention of the year in the transportation category. In 2007, Musk was named “Entrepreneur of the Year” by Inc. magazine. In the same year, however, it became clear that the production of the Roadster was not scalable. After taking a closer look at Tesla’s financial situation, Musk found that Tesla was losing $50,000 on each car sold. Tesla’s CEO at the time, Martin Eberhard had led investors to believe that the manufacturing of the Roadster cost $65,000 per car, which appeared to justify the $92,000 sticker price. Musk found that it cost Tesla $140,000 just for the parts, subassemblies, and supplies to make each vehicle and that the Roadster could not even be built with Tesla’s current tools.

He also discovered major safety issues with the existing design. Completely taken aback by the messy state of affairs, Musk commented, “We should have just sent a $50,000 check to each customer and not bothered making the car.”12 In 2007, Elon Musk fired Martin Eberhard unceremoniously and took over the engineering himself. Almost every important system on the initial Roadster, including the body, motor, power electronics, transmission, battery pack, and HVAC, had to be redesigned, retooled or switched to a new supplier. Such dramatic changes were necessary to get the Roadster on the road at something close to the published performance and safety specifications, as well as to cut costs to make it profitable. By 2008, Tesla Motors was finally able to relaunch an improved version of its Roadster, and thus fulfill the first step of its initial strategy laid out two years earlier.

The Roadster is a $115,000 sports coupé with faster acceleration than a Porsche or a Ferrari. Tesla’s first vehicle served as a prototype to demonstrate that electric vehicles can be more than mere golf carts. After selling some 2,500 Roadsters, Tesla discontinued its production in 2012. The initial Roadster manufacturing process was not scalable (with a maximum production rate of no more than two cars per day) because it was a handcrafted car put together at a former Ford dealership near the Stanford University campus.13 Tesla learned that it is better to build an electric vehicle from scratch rather than retrofit a given car platform created for internal combustion engines (ICE).

The Roadster 1 had no more than 7 percent of parts in common with the Lotus Elise. 4 Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction, distribution, or posting online without the prior written consent of McGraw-Hill Education. This document is authorized for use only by Khadija Ouzaka in BUS400 – Fall 2020 taught by MICHAEL ROBERTO, Bryant University from Aug 2020 to Jan 2021. For the exclusive use of K. Ouzaka, 2020. Telsa, Inc. As a side project, in 2017, Tesla unveiled Roadster 2, a sports coupé that set new records for a vehicle to be driven on public roads: It goes from 0–60 mph in 1.9 seconds and from 0–100 mph in 4.2 seconds, with top speeds of well above 250 mph. The base price of the new Roadster model is $200,000. First customer deliveries are expected in the second half of 2020. In Step 2, Tesla focused on its next car: the Model S.

This was a car that Tesla designed from scratch with the idea to create the best possible EV that is also scalable for mass production. The Model S is a four-door family sedan, with an initial base price of $73,500. Depending on the size of the battery pack (up to 100kWh), the range of the vehicle is between 210 and 330 miles. Unveiled in 2009, the Model S appeals to a much larger market than the Roadster, and thus allows for larger production runs to drive down unit costs. When deliveries began in 2012, the Model S received an outstanding market reception. It was awarded the 2013 Motor Trend Car of the Year and also received the highest score of any car ever tested by Consumer Reports (99/100). By the end of 2019, it had sold more than 300,000 of the Model S worldwide (Exhibits 1 and 5). In 2012, Tesla unveiled the Model X, a crossover between an SUV and a family van with futuristic falcon-wing doors for convenient access to second- and third-row seating.

The Model X has a similar range as the Model S, with between 250-330 miles per charge. Technical difficulties with its innovative doors, however, delayed its launch until the fall of 2015. The initial base price of the Model X was $80,000, with the signature premium line ranging from $132,000 to $144,000, thus limiting its mass-market appeal. By the end of 2019, it had sold more than 150,000 of the Model X worldwide (Exhibits 1 and 5). Tesla also completed Step 3 of its master plan. In 2016, the electric carmaker unveiled its first mass-market vehicle: the Model 3, an all-electric compact luxury sedan, with a starting price of $35,000 for the entry-level model with a range of 250 miles per charge.

Many want-to-be Tesla owners stood in line overnight, eagerly waiting for Tesla stores to open so that they could put down their $1,000 deposits in order to secure their spots on the waiting list for the Model 3—a car they had never even seen, let alone ever taken for a test drive. As a result of this consumer enthusiasm, Tesla received more than 500,000 preorders before the first delivery, and thus $500 million in interestfree loans. Despite initial difficulties in scaling-up production, deliveries of the Model 3 began in the fall of 2017. By the end of 2019, Tesla had delivered more than 450,000 of the Model 3 globally. Step 4 of Musk’s initial master plan for Tesla aims to provide zero-emission electric power generation options. To achieve this goal, Tesla acquired SolarCity, a solar energy company, for $2.6 billion in 2016. With the acquisition of SolarCity, to which Musk is also chairman and an early investor, Tesla, Inc. is the world’s first fully integrated clean-tech energy company, combining solar power, power storage, and transportation.

In the process, Tesla’s mission also changed from “to accelerate the advent of sustainable transportation” to “accelerate the advent of sustainable energy,” thereby capturing the vision of a fully integrated clean-tech energy company. Step 5: “Don’t tell anyone”—thus the cheeky title of Elon Musk’s original blog post: “Tesla’s Secret Strategy.” Tesla completed an initial public offering (IPO) on June 29, 2010, the first IPO by an American automaker since Ford in 1956. On the first day of trading, Tesla’s market capitalization stood at $2.2 billion; less than 10 years later, it stood at $150 billion. Despite significant future growth expectations reflected in Tesla’s stock price appreciation, the company is still losing a significant amount of money: $900 million in 2015; $675 million in 2016; almost $2 billion in 2017; close to $1 billion in 2018; and over $860 million in 2019. Tesla’s revenues in 2019 were $24.5 billion, up from $21.5 billion in 2018 and $11.8 billion in 2017. Exhibit 2 provides an overview of Tesla’s key financi…

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