Tesla: Internationalization from Singapore to China

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TESLA: INTERNATIONALIZATION FROM SINGAPORE TO CHINA

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1        TESLA’S STRATEGY AND BUSINESS MODEL

TESLA’S STRATEGY

Tesla’s vision statement is “to create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles.” while its mission is “to accelerate advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible” (this has been changed to “to accelerate the world’s transition to sustainable energy”). The company’s strategic focus was on renewable energy, and it approached its goal by mixing advanced technology in its electric automobiles and related products. Nevertheless, the “car company” element of the vision statement dwells on Tesla’s efforts on designing and manufacturing cars.

In 2006, CEO of Tesla Motors, Elon Musk, was asked about the company’s strategy and he responded: “The starting point is a high performance sports car, but the long term vision is to build cars of all kinds, including low cost family vehicles”. Considering that the bankruptcy rate of car company startups was high, and the high risk of failure particularly for an electric car company, Tesla designed a simple strategy around its business – build an expensive low-volume car and sell to high-income earning customers, use the money to build a less expensive medium-volume car and sell to middle to upper-middle class customers, and then use the money to build an affordable high-volume car and sell to the low-income earners. To complement the three steps described above and further accelerate the advent of sustainable energy, the company decided to provide solar power.

In line with its strategy, Tesla to enter the EV market by producing a high-end sports car – the Roadster model. The Roadster combined appealing design, an acceleration rate that outperformed most sports cars (an acceleration capability of zero to 97 kilometers per hour in 3.7 seconds) and was targeted at affluent car enthusiasts and early-adopters who were more susceptible to accept a few revisions and updates required for optimizing technology. The Roadster also sold at $109,000.

Subsequently, the Model S sedan was introduced to the market and aimed at middle to upper-middle class consumers. They were offered an equally beautifully-designed car with a lower cost of ownership compared to other sedans that were available at the time. Also, the Model S was sold at a lower price than the Tesla Roadster (between $52,400 - $72,400 depending on battery-pack options). But it still had a high acceleration capability of zero to 97 kilometers per hour in 4.4 seconds. In building the Model S, the company also created a system of adjustable platform architecture and electric powertrains to be used for newer Tesla models. The plan was to minimize the cost of new models and the time needed for developing them, as well as accelerate the development of a mass market for profitable EVs.

In a nutshell, it is clear that Tesla’s strategy was to combine ingenious innovation and technology in offering its customers highly-differentiated and high-performing products at the lowest-possible cost.

TESLA’S BUSINESS MODEL

Tesla Motors designs, manufactures and sells electric cars with appealing design and the best in class performance with regards to acceleration and safety combined. Tesla electric vehicles were simply objects of desire.

Tesla drives technology within the vehicle itself, and other technologies that are separate to the product. The company built a small range of high-end cars with fully electric powertrains and sold or leased them to consumers who are ready to pay for innovative technology packaged in a car. Tesla also sold the powertrain systems to other automotive firms.

Aside the electric cars, Tesla also provides a network of charging stations for its customers, with navigation technology in the vehicles to help customers find these stations. The company also provides a system where their customers could swap batteries in their vehicles for instant ‘refueling’.

Instead of selling its cars through the traditional dealership network, Tesla sells them directly to consumers over the Internet. The business model includes other complementary aspects like customer lists, finance products and intellectual property.

Tesla’s Customers

In Tesla’s business model, its customers fall into two key classes:

• Individuals who wish to purchase innovative and green vehicles
• Original Equipment Manufacturers (OEM’s), e.g. Toyota and Mercedes who need the electric powertrain technology Tesla offers for sale

Tesla’s Value Proposition

Tesla has designed an eco-friendly car with higher performance than its competitors. It was able to achieve this by taking a higher risk approach when designing the battery pack.

The main benefits to customers include the following:

• Low cost recharging (re-fueling). Customers could also recharge while at home
• Innovative high-technology brand
• Very high acceleration – better than a Ferrari
• Possibility of Government grants for purchase
• Potential owners were offered tax charges/tax incentives, free road toll charges, and were allowed to drive in the car pool lane/bus lanes, significantly reducing traveling time.
• Enhanced social status from owning a Tesla that is unique, an ‘innovation leader’ and ‘eco-consciencious’
• Purchase the car online, instead of buying through a dealership
• The fitment of navigation technology in the car is useful for finding recharging stations

The important benefits to car companies like Toyota and Mercedes include:

• Costs savings on R&D investment due to availability of ready-to-go technology
• Speed to market for state-of-the-art electric vehicle technology
• Ability to work with the market leader, capture knowledge and understand better the technology
• A risk-free, reliable technology in the market
• A supplier they can hold liable for potential brand damage if the technology failed in service
• Improved return on investment since they are shareholders

Delivery - The Value Chain

Tesla’s customers order a car on the company’s website. They can also inspect the car and book a test-drive from a small number of showrooms. Customer experience is managed and consistent because Tesla closely controls the sales process. A new Tesla comes with a complete with integrated electric vehicle technology that gives the product leading performance for any production electric car, and delivers superior performance to many of its class competitors. Buying a Model S qualifies one to enjoy free recharging at any of its fast recharge stations, for the entire lifetime of the vehicle. It also comes with a universal mobile charger that enables customers charge the vehicles while they are away from home.

Tesla also guarantees a buy-back price for used Tesla EVs. The emotional value of owning a Tesla must also be stressed, since this is a well-designed car known to be radical and innovative, there is status value from owning the car, even when it is not being driven.

For car companies that buy their technology, Tesla works with them to co-develop technology for the customer vehicle, to ensure it is fit for purpose in its new application. Once the systems are validated through testing the new vehicle application, detailed supply contracts will be put in place to ensure production parts are delivered to the customer’s final assembly plant. The car companies will then be able to sell complete vehicles with Tesla’s technology integrated in order to enter this emerging EV market using state-of-the-art technology that will ensure they can sell more product at a higher price and add eco credentials to their brand.

Monetization – Value Capture

Depending on the US state, tax credits for purchasing an EV ranged from US$7500 to US$15000.

Tesla had several revenue streams:

• Sales of cars to customers
• Sales of powertrain systems to other automotive OEM’s (Tier1 supplier to Toyota and Daimler).
• Sales of solar energy from their supercharging station back into the power grid.
• Interest from finance packages offered
• Rental fees from the leasing of cars

2.        TESLA’S CURRENT STRATEGIC CHALLENGES IN THE INDUSTRY

Tesla’s strategic industry challenges include the following:

A        Unfavorable Government legislation

Tesla faced serious challenges with some government legislations that were opposed to their business model. For instance, forty-eight states in the United States of America had a legislation that barred car manufacturers from owning their dealerships. This made Tesla to devise an innovative solution by selling their cars online. Also in Singapore, the government declared that they did not meet the requirements to qualify for tax incentives which would have significantly reduced the selling prices of the EVs making them more competitive and viable.