Tesla and the Global Market

Global Company Report: Tesla, Inc.
Introduction: Summary of the Business and Its Industry
Tesla, Inc. was launched in 2003 in California as a niche market luxury carmaker that specialized in electric vehicles (EV). The Tesla Roadster was its first product. The Roadster was a high-end EV and not a mass market car. Today, Tesla offers the much more affordable Tesla Model 3, which is a mass-market EV designed for the common man. Its other products include the Tesla Model S and the Tesla Model X. Tesla sells its cars in North America, Europe and in Asia. It has recently obtained financing to build cars in China, where its vehicles are already being sold, and is currently poised to enter Japan’s market. Tesla’s focus on sustainability and its CEO Elon Musk’s use of social media has made Tesla a favorite among investors who view sustainability as the future and Musk’s innovative leadership as a major factor in Tesla’s growth. Baumgartner (2014) has shown that sustainability is a major factor in the corporate social responsibility policies of companies, and Tesla’s is vital to its success. Its vision for the future of technology and energy has made Tesla the leader in the EV market around the world.
Tesla is also involved in green energy through its SolarCity subsidiary. Tesla produces the Powerwall which is supposed to harness solar power for residential homes. By having this business, Tesla has shown to consumers and investors that it is serious about the green energy revolution. However, SolarCity is buried under a mountain of debt and Tesla’s purchase of SolarCity was questionable among many as the company was actually owned by a relative of Elon Musk’s. While green energy is the latest trend among tech companies, Tesla has been able to capitalize on the trend so far by merging green energy technology with luxury car manufacturing. However, competition is heating up in the industry, and Tesla will need to move more vehicles to keep ahead of competitors.
The industry overall is still heavily involved in producing cars that rely on fossil fuels. This means that Tesla is still very much a unique manufacturer. Nonetheless, the industry has taken notice of Tesla’s appeal among consumers. Hybrids have already come to market, but Tesla offers something different—a fully electric car—and companies have begun to design their own to compete with Tesla. Nissan, BMW, Jaguar, Audi, Ford, Infiniti and many others are working on EVs now.
Still the car industry overall may be in decline as recent reports indicate stagnant sales (Gardner, 2018). As Gardner (2018) notes, in many parts of the world borrowing is becoming more expensive as central banks raise interest rate levels, which means that taking out a loan to buy a new car is not as affordable as it once was. Rates are rising in the U.S. and in China, which is a major market for the auto industry. In order for Chinese consumers to buy new cars, they need good low-cost loans—and rising rates will put a damper on the auto market in China and kill the growth story there. As Ferris (2019) reports, auto sales in China have fallen for the first time in two decades with a 3% drop in sales in 2018, and there is likely to be an even further drop for 2019. This could mean that the industry overall is in for a world of hurt.
External Environment
PESTEL
Political factors include the current trade war between China and the U.S. as well as government tax incentives in North America and Europe that help to increase sales of EVs. The trade war could be detrimental to Tesla, as Tesla is based in America, though it does sell in China. China is looking to promote domestic brands over international ones, however, and this means Tesla faces significant pressure from China.
Economic factors include the loss of tax incentives in Europe and North America to get consumers to buy. Interest rates are also rising in North America and in China where Tesla needs to see sales improve. The higher rates go, the lower sales will go as buyers judge rates too costly to purchase a new car.
Social factors include Tesla’s ability to promote itself under the direction of Elon Musk, who has enjoyed celebrity and cult-status thanks to his vision, charm and personality. However, lately he has seemed too unhinged even for many of his followers and his social status has lost some of its luster. Society is still in love with green energy all over the world and this is in Telsa’s favor.
Technological factors include the fact that Tesla is no longer in possession of unique resources when it comes to the EV. Other manufacturers are developing batteries and technology that can give their cars as much torque and distance as the Tesla. Technological competition is thus going to be stiff going forward.
Environmental factors include the fact that the world’s leaders want to turn to green energy thanks to the Paris Accord. EVs are thus likely to have a long life and a bigger market in the coming years. This bodes well for Tesla as its focus is on sustainable, renewable energy.
Legal factors include the fact that Tesla’s CEO is unable to stay out of trouble with the SEC. The company is also being investigated in the U.S. for several deadly crashes (Reuters, 2019). This means Tesla could end up being forced to do a large scale recall in North America and could be sued by consumers for selling a dangerous vehicle.
In terms of threats and opportunities, there are several for Tesla. Competitors are heating up and entering the EV market. However, Tesla still has brand appeal and technological superiority. It needs to find a way to leverage its brand appeal and buy time with consumers and investors to fix what is wrong with the Model 3 so as to stay ahead of the pack. Tesla does not need to dominate in Asia for this strategy to work.
As Wright (1987) notes, “Porter reasons that firms which compete through differentiation and focus strategies would observe higher returns on investment with smaller market shares” (p. 95). Because of competitive forces, Porter suggests numerous avenues to profitability that relate to pricing: (a) the low-cost pricing strategy—the lowest cost competitor wins the market; (b) the differentiation strategy which is currently Tesla’s—i.e., the company that provides a product or service that is unique wins the attention; and (c) the focus strategy—i.e., the company that focuses on the specific target demographic while forgetting the rest of the market wins the niche. Tesla could also occupy this space to beat competitors and thus protect its margins. However, it will need to demonstrate that consumers are willing to pay more for the Tesla Brand, without tax credits.
Internal Analysis
VRIO Analysis
Value
Tesla’s value was mainly in its mission and vision statements. It appealed to environmentally-concerned consumers who wanted to buy from and be loyal to a company that cared about the environment and that held the same values they did. Tesla aimed to be a sustainable company and to help make the green energy the focus of the future. Plus, in Elon Musk Tesla had a CEO who was widely considered a visionary and who could relate to the average young person. Musk was innovative and seen as the man who made Tesla cars so unique and technologically impressive. Now that Musk is under fire and may be suspended as CEO by the SEC, Tesla could be without its main value driver. It does not help either that political conditions are changing or that Tesla’s tax break incentive is being phased out. Additionally, the demand for the Model 3, which Musk identified as the car that would make or break Tesla (Crothers, 2018), is drying up (Engle, 2019). Tesla delivered nearly 30,000 EVs in Q1 of 2018. It needs to do even better in 2019 to maintain its value. As Yuying and Qingrun (2018) note, “while a majority of Tesla’s revenues are generated in the United States (up to 60% in 2016, according to Thomson Reuters), its domestic market, the company has renewed efforts to expand internationally, aiming to tap a rising transnational demand for electric vehicles (EVs).” If Tesla can do this, its value will rise exponentially.
Rarity
When Tesla first got into the car business, there was no EV market. EV’s were not deemed reliable as there was no infrastructure to support them. Tesla developed that infrastructure for its line of EVs and since then so too have other companies. What was once rare, therefore, is no longer. Tesla had a rare advantage over other car makers because it had a contract with Panasonic for lithium batteries and charging stations around the world to allow drivers to charge their vehicles. Now with European and Asian car makers also creating EVs and installing their own charging stations, the rare resources that Tesla once commanded are now possessed by competitors.
Imitability
For a time, Tesla had first mover market advantage. That time is now over as other big name competitors are set to enter the EV space. Chevrolet, Volkswagen, BMW, Jaguar, Toyota, and virtually every other car company is now working on or already has an EV model on the market. The resources and capability that were once unique to Tesla are now gone. Tesla now is relying on brand name and reputation, and both are rapidly declining. Consumer Reports has dropped its Tesla recommendation because of unhappy user reports from consumers (Olsen, 2019). This shows that Tesla’s brand is suffering at a time when other companies are imitating its EV idea and are preparing to take Tesla’s market share.
Organization
Tesla appears to be facing many challenges currently in terms of organization. It recently had to pay back approximately $1 billion in debt as notes came due in March. Now Tesla is facing a severe cash crunch. It has announced the closing of all its brick and mortar retail locations in the U.S. in what analysts have called an effort to cut costs. However, the lease terms for these retail locations will still need to be paid and cost approximately another $1.6 billion (Durden, 2019). This will destroy Tesla’s cash flow and potentially lead to a death spiral for the company.
As the CEO of Tesla, Elon Musk has also come under fire from the SEC for violating rules regarding giving false information to investors among other things. He claimed via Twitter that he would take the company private at $420 per share at a time when the stock was still in the $300-value range. The stock pumped on the news and dumped on the realization that Musk actually had no such ability to take the company private. He was fined and put on probation, which the SEC has since claimed he has violated. He is regarded among supporters of the firm as the genius driving force behind the company’s innovation and rise to fame. However, his business decisions of late have been viewed skeptically by analysts who believe Tesla’s days may be numbered because of Musk’s mismanagement of the company. Musk’s days as CEO of Tesla may be coming to an end.
The demand for Model 3’s appears to be drying up as tax credit incentives disappear and competitors get into the market with their own EV versions. Tesla has been laying off workers rapidly in recent weeks and months, which indicates further signs of stress, and Musk issued guidance that upcoming quarters were likely not going to be profitable. For a company that seemed to have rounded the corner last year and had its first profitable quarters, this guidance looks like a big step backwards. Its recent stock declines suggest that investors might be pulling out, which will make it hard for Tesla to raise capital going forward (Langlois, 2019).
Where the Firm Can Create a Sustainable Competitive Advantage
Tesla can create sustainable competitive advantage by continuing to leverage its brand appeal as the leader in green energy tech. Elon Musk’s appeal was an advantage in the past, but that advantage may now be a disadvantage. Tesla needs business sense now more than anything. It needs to create sustainable competitive advantage by fixing the problems with the Model 3 and building out charging stations and service stations around the world to support consumers.
Resources and Capabilities for Which This Advantage is Missing
Tesla currently has a cash flow problem and the infrastructure for building out the grid for charging stations is not yet there. Tesla is especially a problem in cold weather climates, where consumers want something more dependable. Tesla needs to find a way to make its products more reliable in all climates. It has solid sales in North America but not in every region because its infrastructure build-out has limited its footprint in colder climates. Tesla is still a trendy brand among West Coast elites, and it needs to be more Main Street.
Strategies (Plans of Action) the CEO Should Adopt
Short Term (1-5 years)
Short term, Tesla needs to get an improved Model 3 to market. It also needs to work with governments in North America, Europe and Asia to reintroduce tax incentives for consumers who buy an EV. This will continue to help sales at a time when Tesla needs to see positive cash flow to keep investors from bailing on the firm. It should also rethink the plan to close its retail stores, as the company is bound by contract to honor its lease agreements anyway. It should find ways to cut costs in the short term in other ways that are less wasteful.
Long Term (5+ years)
Tesla has a competitive edge among other EV producers and that is thanks to Musk’s bold design and ambitious visions—but in order to maintain its quality and its image, the company has to make good on at least some of its promises to consumers, and that begins with getting the Model 3 issues fixed and restoring the company’s image for ingenuity and advanced technology. In order to get people interested in Tesla again, the CEO should step down or step back and allow the company to be run by someone else.
Long term Tesla has to focus on rejuvenating its image and strengthening its brand, which has taken a hit over the past year. If Tesla can restore its image and get an improved Model 3 to market along with the EV semi-truck it has been promoting, it could continue to lead the revolution in green energy auto manufacturing. Its long term focus should remain on innovation and research and design.
Business Strategy
Tesla’s current business strategy is to continue expansion in Asia and to continue production of the Model 3 while simultaneously changing its business model to be an all-online firm without retail stores. This change is what has caused worry among many, as it indicates that Tesla needs to preserve cash. Unfortunately, this change to its business model reflects a diminishment to its internal capabilities. It also does not bode well in terms of meeting external threats and opportunities. Tesla needs to be a company that is visible, that people can see on the street. People still want to test drive cars and kick the tires before making a purchase. Closing its retail shops will not help them do that.
Additionally, the Model 3 was rushed into production and now faces serious scrutiny from consumers who have found it to be lacking. Production hiccups and challenges are to be expected but resources are stretched thin for the company and if numbers do not begin to improve, investors may pull up and start heading for the exits—and recent declines in the value of the stock show this may already be the case. If Tesla’s stock continues to decline, it would negatively impact Tesla’s brand appeal (indicating a loss of confidence in the company and tarnishing its reputation) and lead to more decline among consumers as they begin to reject the company’s EVs for a more affordable and available product already on the market—one that is approved of by Consumer Reports. Tesla has to recommit to its core and to its core consumers and get the Model 3 issues resolved so that it can be a recommended car by Consumer Reports once more. The longer it stays off this list, the longer its reputation will be tarnished.
Corporate Strategy
Tesla’s corporate strategy is to continue to build out its production facility in China even though sales are crashing in China. The company continues to support Elon Musk as CEO, even though the SEC is pushing for his removal from that role. Its corporate strategy aimed at vertical integration, but this has turned out to be more costly than the company can afford, as the current cash crunch becomes more and more evident. Tesla’s attempts at diversification have also come up short. It acquired SolarCity with the intention of getting into solar panels and green energy for residential homes—but SolarCity continues to be a drain on Tesla’s resources as it is basically a big pile of debt that Tesla must cover. SolarCity also gives Tesla no competitive advantage and should be shed if at all possible. Tesla is also looking to diversify in terms of geographic markets, but the Japanese do not show much interest in the Model 3 (there is little demand for it there) and the Chinese have their own national EV maker. Plus, the trade war between China and the U.S. is not going to be in Tesla’s benefit.
Future Recommendations
Tesla needs to overhaul its corporate strategy and abandon for now its vertical integration plans. It needs to begin outsourcing jobs and cutting costs. While it has prided itself on being the only wholly American car producer in the world, that goal is not a viable way forward. While geographical diversification may sound like a good corporate strategy, it does not align with its internal capabilities at this point: Tesla is out of cash and notes are coming due. It is going to have to shrink just to stay solvent. It should abandon China for the time being—especially as the auto market in China is in decline with rates rising there. No manufacturers are going to prosper in China for the time being, and that means Tesla can refocus on Europe and North America.
If Tesla were to be outstripped by a competitor like the Nissan LEAF or the Chevy Volt/Bolt or the BMW i3, its brand image would become seriously tarnished. Tesla is respected because it is considered a leader in the EV market and that means it has to maintain its position as the leader no matter what. In 2015, it was only beating Nissan by a few thousand vehicles in sales, and if it is not careful, it will stop being a leader. Tesla needs to focus on rebuilding its image in Europe and North America by getting an improved Model 3 to market. Rates are still low in Europe, which means people will be more willing to buy there, so Tesla should double down in Europe before manufacturers like BMW and Audi cut into market share. In order to succeed, Tesla needs to renew its commitment to the Model 3 production, improve the design and engineering so that it is more reliable in all weather climates, and get these cars to market. Tesla has to manage its brand just as much as it manages its innovative scale of products. The problems with the Model 3 that caused Consumer Reports to drop the car from its recommendations have to be fixed so that Tesla can stay competitive in the market as newer EVs from other companies come on line. Tesla needs to ramp up sales in Europe and secure market share there before competitors take over.
Musk must be replaced as CEO. He was initially the visionary—but today he is a liability. He routinely over-promises to the point where consumers and investors now no longer can expect anything he says to be true or even possible. To compete in the coming EV market, Tesla needs a CEO who knows how to run a business. That is not Musk and the recent events over the past year have shown as much.


References
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