Tesla's financial performance and strategic management analysis

Tesla's Strategic Management Analysis

Overview of Tesla Motors

Tesla Motors Inc. is an American automobile company established by a group of innovative and brilliant Silicon Valley engineers in 2003. Tesla is the first company in the United States and globally to design, develop, manufacture and commercialize high performance and advance electric vehicles. Typically, Tesla engineers prove to the world that electric vehicles can be a substitute to the traditional gasoline cars. Apart from designing electric cars for commercial production, Tesla also delivers advance components of electric power train vehicles to other automakers that include Toyota and Daimler. Headquarter located in Palo Alto, California, the company has more than 2000 employees with 31 service locations and stores spread globally. In 2012, the company entered the Canadian market by opening its first store in Toronto. The goal of Tesla is to produce an affordable, electrically powered and high- performance vehicle to consumer. The company gained a widespread recognition when it produced the Roadster, which was sole electric powered car in 2008. Few years after, Tesla expanded its innovative and technological advantages by developing Model S, a sustainable, zero emission luxury sedan introduced into the auto-market in 2012. (Mangram, 2012). Despite Tesla's technological strides in the auto industry, the company is still relatively young compared to many 150-year-old gasoline and combustive vehicle automakers. Not surprisingly, the research and literatures that focus on the auto-electric industry is limited. This study attempts to fill the gap in the literatures for the auto-electric industry focusing on the Tesla's strategic management analysis.

Current Financial performance

Tesla is a publicly traded company listed on the NASDAQ stock market. The Table 1 reveals the company annual revenue between 2012 and 2014. The data reveal that Tesla has recorded a net loss between 2012 and 2014. The company recorded a significant loss because it invested close to $709.2 million in cash operations in 2012. In the same year, the company recorded a net loss of $396 Million. In 2013, Tesla's net loss reduced to $74 Million. However, at the end of 2014 fiscal year, the net loss of Tesla increases to $294 million. (Tesla, 2014). As being revealed in the table 1, the company gross profits increase yearly; however, the company still records a net loss between 2012 and 2014. Major reason that makes Tesla recording losses is a constant increase in the operating expenses. The total operating expenses increased from $424 million in 2012 to $1.06 billion at the end of 2014 fiscal year. Typically, the company is facing challenges in reducing its operating expenses, which makes Tesla to record a net loss yearly.

Table 1: Tesla Motors Inc. Income Statement ($ Million)

2014

2013

% change

2012

% change

Revenues

Automotive sales

$3,193

$1,998

$59.81

$385.7

$417.96

Development services

5.6

15.7

(64.14)

27.6

(42.99)

Total revenues

3,198

2,013

58.84

Cost of revenues

Automotive sales

2,31

1,544

49.62

Development services

6.7

13.4

(50.02)

11.5

15.82

Total cost of revenues

2,317

1,557

48.76

Gross profit

93.23

30.1

Operating expenses

Research & development

(15.33)

General, Selling, & administrative

89.9

Total operating expenses

1,068

21.96

Loss from operations

(186.7)

(61.3)

(204.63)

(394.3)

84.45

Interest income

1.1

0.2

0.3

(34.37)

Interest expense

(100.9)

(32.9)

(0.3)

Net Other income (expense)

1.8

22.6

(91.97)

(1.8)

Loss before taxes (income)

(284.6)

(71.4)

(298.5)

(396.1)

81.96

Provision for taxes (income)

(9.4)

(2.6)

(0.1)

Net loss

(294.0)

(74.0)

(297.27)

(396.2)

81.31

Table 2: Key Financial Ratio

TTM

2014

2013

2012

2011

2010

2009

Net Margin (%)

-9.19

-9.19

-3.68

-95.88

-124.5

-132

-49.7

Asset Turnover (Average)

0.77

0.77

1.14

0.45

0.37

0.45

1.23

Return on Assets (%)

-7.11

-7.11

-4.19

-43.36

-46.28

-59.7

-61.2

Financial Leverage

6.42

6.42

3.62

8.94

3.18

1.86

Return on Equity ( %)

-37.2

-37.2

-18.6

-227.2

-118.0

Return on Invested Capital %

-8.41

-8.41

-4.53

-72.28

-64.90

Gross Margin (%)

27.6

27.6

22.7

7.3

30.2

26.3

8.5

Operating Margin (%)

-5.8

-5.8

-3.0

-95.4

-123.1

-126

-46.4

EBT Margin

-8.90

-8.90

-3.55

-95.84

-124.3

-132

-49.7

As being revealed in Table 2, Tesla recorded negative performances in all its financial ratios in the last 6 years. Apart from gross margin and asset turnover where company has recorded positive performances, Tesla has recorded negative performances in all the key financial ratios. (Appendix 1 reveals a Tesla's comprehensive financial data).

Situation Analysis

Tesla develops designs and manufactures high performance and advanced electric vehicles. The company also sells Lithium-ion battery packs. Tesla produced Roadster in 2008, which was an electric sport vehicle that used lithium-ion battery. Typically, the vehicle is able to accelerate from 0 to 60 mph within four seconds. (Tesla Motor, 2014). The company also produces Model S. sedan with a price of between $42,500 and $55,250. Unlike other automobile makers that sell their vehicles through franchises, Tesla sells its vehicles through the internet and sales stores scattered around the globe. Moreover, the company has established a network of service centers and sales to accelerate the adoption of electric vehicles across the United States and globally. (Eberhard, & Tarpenning, 2006).

Despite the innovative stride that Tesla has adopted in the development of BEVs (battery electric vehicles), the company is facing challenges in keeping the costs of battery down. Typically, the high costs of battery are one of problems that Tesla is facing. The cost of battery replacement is estimated to be approximately $15,000. Despite the innovative breakthrough in the BEV, the costs of battery replacement are still very expensive. (Ramsey, 2010).

Current Business Strategy

Tesla's current strategy is by focusing on product differentiation, and presently, the company has assumed a leadership position in electric vehicle power technology. Competencies in software, electronic engineering and control have assisted the company to dominate the market of electric powered vehicles. The competitive market advantages that Tesla has assumed in electric vehicles make Tesla to focus on the U.S. domestic market, however, the company is gradually expanding into global markets. (Hardester, 2010).

Tesla corporate strategy is by forming strategic alliance with many firms for the development of innovative products. For example, the company forms a partnership with Panasonic to develop an efficient battery pack for its various brands. The agreement is that Panasonic will supply 1.8 billion lithium-ions between 2014 and 2014. Moreover, Tesla forms a strategic alliance with Toyota in order to source for engineering expertise and parts for the Model S. More importantly, Tesla forms an alliance with Daimler to supply vehicles' parts. (Aden & Barray, 2008). Tesla has also formed partnerships with dozens of suppliers in order to supply various parts that include carbon fiber panels manufactured by Sotira.

Product design strategy is another core competency of Tesla. In the contemporary competitive business environment, efficient product design is an effective method that an organization can employ to differentiate its position in a competitive business environment. (Kotler, & Keller, 2009). The Tesla's Model S. is a ground breaking electric vehicle in terms of technology and design. The Model S. is designed with seats that occupy 7 people and their luggage. Typically, the car is extremely functional, environmental friendly and attractive. (Holzhausen, 2009). Model S. delivers a zero emission and the vehicle is integrated with the 17-inch touch screen technology. A fully charged battery can accelerate the vehicle for up to 300 miles before it is recharged, and the battery useful life can last for 7 years.

Sales Strategy

Tesla departs itself from the tradition auto maker sales strategies by selling directly to customer in order to reduce price of the vehicles. Tesla offers its vehicles for sale online, over the telephone and in-person at the company headquarter. Tesla locates all its stores at highly outlets across the cities in the United States, which include Chicago, Los Angeles, New York, and Miami. The company also opened its retail outlets in other countries in Asia and Europe. Tesla has also opened show rooms that feature free coffee bars, snacks, and high-speed internet access.

Mission Statement

To accelerate the development of sustainable transport by bringing a mass market electric vehicles to consumer.

Tesla's goal is to accelerate the global transition from combustive vehicles to affordable electric vehicle. Tesla also aims to improve its battery technologies by developing more stations across the world.

Industry Environment

Porter five Forces

This section uses Porter's five forces to analyze the industry environment that Tesla operates.

Power of Suppliers

The bargaining of suppliers for electric vehicles parts is high. The electric vehicles are innovative technology that currently has few suppliers. Although, Tesla management claims that they have over 350 suppliers that provide parts for the electric vehicles, however, in reality, Tesla can only boast of 33 major suppliers that are ready to invest in Tesla Model. In essence, electric vehicles production requires dependable suppliers that are technological innovative. Scarcity of required suppliers who can meet specific demand of the company can make the suppliers to set prices to satisfy their advantages without considering Tesla's financial interests.

Power of Buyers

Power of buyers is low for consumer interested in buying electric vehicles since Tesla is the only electric vehicle manufacturer in the United States. Moreover, Tesla is the only company that possesses an advance in technology to produce luxury and high priced electric vehicle.

Threat of Entry

Threat of entry is high for a new entrant. Typically, producing an electric vehicles require high capital investments and sophisticated technology. Moreover, a new entrant should be able to produce an innovative battery that can powered the vehicle and at the same time enhancing consumer safety. All these requirements make the threat of entry to be very high for a new entrant into the electric vehicle production.

Threats of Substitute

Threat of substitute is high because there are still many makers of gasoline vehicles that can serve as substitute to the Tesla's electric vehicle. Nevertheless, Tesla is still the only electric vehicle manufacturer, and the company will continue to enjoy high market demand from environmental friendly consumer.

Industry Rivalry

Industry rivalry is high despite that Tesla is the only producer of electric vehicle. Typically, many consumers still prefer gasoline vehicles to electric vehicles. Major reason includes the cost of combustive vehicle, which is comparatively cheaper than electric vehicle. Moreover, many car manufacturers are gradually investing in electric vehicles to catch up with the trend.

"Tesla will continue to experience direct competition from other BEV entrants, indirect competition from existing and emerging plug-in hybrid vehicle manufacturers and competition from BEV 'substitutes' including gasoline hybrid and gasoline powered vehicles." (Mangram, 2012 p 299).

External Environment

This section summarizes the external environment that Tesla is operating.

Economic Segment

Millions of Americans are still feeling the impact of 2008 and 2009 global recession that makes many Americans to be homeless. Moreover, the rate of employment opportunities is still low and the overall economic issues have made people to be conservative in their spending. By consequence, the demand of luxury cars has declined in the last few years. Interestingly, the increase the price of gasoline still makes the market opportunities for electric powered vehicles more appealing.

Legal / Political Segment

The goal to enhance environmental sustainability has made increasing number of governments globally to encourage the production of electric vehicles. Policies include government subsidies for makers of electric vehicles and consumer price incentives. Government positive support towards electric vehicles has motivated manufacturers to embark on R&D (Research and Development) in order to produce electric vehicles at affordable prices. For example, the California government issued a zero emission vehicles mandate in 1990, and the policy required all the car manufacturers to abide with the mandate. The mandate has stimulated many car manufacturers to build electric and hybrid cars to enhance environmental sustainability. (Kampen, 2014).

Demographic Segment

Tesla targets upper middle class. The company believes this group of income class will be able to afford the Tesla vehicles. The company does not focus on some emerging market and markets in developing countries because Tesla believes that large percentages of population of these countries may not be able to afford its cars.

Technological Environment

Tesla has been able to take advantages of the U.S. sophisticated technological environment to develop innovative electric vehicles for consumer. Typically, the United States is one of the top technologically developed countries in the world. Yearly, the government provides free money to individuals and organizations to enhance technological development. Tesla has taken the advantages of the U.S. technological environment to develop innovative electric vehicles. However, the company is still carrying out the R & D. To improve on the battery technology to reduce the costs of the electric vehicles offered to consumer.

Social-cultural Segment

The climate change and global warming are the top environmental concerns of many governments around the world. Typically, fuel emission has been identified as one of the major causes of global warming. Since 1980s, automakers have implemented different strategies to design vehicles that emit low gas, and the trends of vehicles design gradually change to enhance environmental sustainability. Thus, Tesla being influenced by the socio-cultural environment has embarked on the design and production of electric cars that deliver zero emission.

Internal environment

Tangible and Intangible Resources

Tesla has access to huge financial resources than can make the company to achieve competitive market advantages. The company total assets are $5.8 billion at the end of 2014 fiscal year. Moreover, Tesla composes of skilled and talented management who have accumulated knowledge in a superior and innovative technology.

Core Competencies and Capabilities

The company has a superior technology in developing a lithium-ion battery that can provide power to the vehicle. Tesla can also boast of 40 patents awards coupled with 200 patents pending awards.

SWOT ANALYSIS

This section provides summary of the opportunities and threats that the company is facing within an industry environment. The study also discusses strength and weakness of Tesla within a competitive market environment.

Strengths: The strength of Tesla lies in its resources and capabilities, which are the core foundation of its competitive market advantages. Tesla is the first mover of electric vehicles and the company has used superior technologies and innovation to design and develop battery technology, power train technology, and electric vehicle. The technologies have assisted the company to develop superior products that have exceptional performance. Moreover, Tesla has been able to develop a good reputation from customer, which assisted the company to develop a solid brand. Additional strength is its innovative and unique sales distribution networks. Its strong access to financial capital from private, public, and government organizations is also part of its strengths Although, Tesla is facing an indirect competition from other brands such as Jaguar, BMW, and Mercedes Benz, nevertheless, the company has been able to enjoy competitive market advantages through loyal customer bases and aggressive marketing strategies that have assisted the company to dominate market of electric vehicles.

Weaknesses

Tesla primary weakness with relative to the manufacturing of electric vehicle is that the company has been unable to cut the cost of operations. Within the last 5 years, the operating expenses continue to increase, which has made Tesla to record a net loss. Although, Tesla can boast of sales increase yearly, nevertheless, increase in the operating expenses has made Tesla to face challenges in recording profits. In essence, the high costs structure has been attributed to lack of economies of scale because the company has not yet taken advantages of mass production to reduce the costs of production.

Opportunities

Numerous changes have occurred in the external environment that has led to the development of BEV market opportunities, and the changes occur within political, economic, technological and socio-cultural environment. For example, increasing number of governments is creating a conducive environment for the development of electric vehicles in order to create sustainable and clean environment. The positive initiative towards a clean environment has enhanced market opportunities for the production of electric vehicles, and the opportunities will continue to increase in next coming years. Moreover, a significant barrier to enter the industry is high because of the innovative battery technologies that require high technical skills. Typically, the development of electric battery requires significant technical skills to develop. Rising of consumer awareness in favor of electric vehicles has been the other opportunities that Tesla is enjoying. (Binkiewicz & Czubakowski, 2008). Moreover, a substantial rise in the price of gasoline has made increasing number of consumers to search for alternative vehicles that will reduce costs of vehicle management. Rising anxiety about environmental concerns that include global warming, pollution and regulation has favored the market opportunities for electric vehicles in the United States and other countries that Tesla is operating. (Google 2011).

Threats

Tesla is still facing competition from other automakers despite its superior market advantages in electric vehicles. Increasing number of buyers still prefer gasoline vehicle which has made Tesla to face stiff competitions from other auto manufacturers. Moreover, Tesla is facing competitions from makers of natural gas vehicles, gasoline-powered hybrids, plug-in hybrids, and ethanol-fueled vehicles. Typically, a possible technological break- through from other competitors can diminish the competitive market advantages that Tesla is currently enjoying. For example, some competitors are investing in the R&D in the hydrogen power vehicles. In the last few years, Toyota and GM have invested over $1 billion in electric and hybrid vehicle programs. A breakthrough in this line of business can reduce the price of non-gasoline vehicles and encourage market availability for BEVs.

Strategic Challenges

Tesla faces strategic challenges in satisfying the demand for the BEV's battery, and a sharp increase in demand for the BEVs can be jeopardized by the shortage of battery. Typically, the high technology and technical skills involved in the designing and manufacturing of Bev's battery can hinder a supply of battery. In the last few years, Tesla has recorded a sharp increase in the sales of BEVs and in the next 10 years, consumer will start demanding for the replacement of battery and if Tesla is unable to offer supply that will meet the demand, the issue can jeopardize Tesla's business model. Thus, Tesla's future expansion might be hindered with the shortage of battery. Major factor responsible to a shortage of battery supply include the shortage of lithium-ion cells and rare metals used to manufacture the battery.

Panasonic that has been the major battery provider of Tesla and the company has faced challenges in meeting the battery demand because of the shortage of materials needed to manufacture the battery pack. Typically, there is a shortage of materials that include nickel, cobalt and manganese. Essentially, Tesla is aiming to produce more than 4,000 cars annually and the company should produce the required amount of battery to meet the global demand. If the shortage of materials continues, the issue can hinder the production of battery pack for the BEVs.

The battery cost is another strategic challenge that Tesla is facing in the production of electric vehicles. At present, the costs of battery are $15,000 which makes the price of the electric car to be higher than the price of gasoline vehicles. A constant supply of battery is very critical to support the production of electric vehicles. Typically, Tesla has not been able to reduce costs of battery which is very critical for running of electric vehicles. Level of employment opportunities in the United States and other countries that Tesla is operating is likely to affect the demand of electric vehicle. Consumers are likely to be price conscious when choosing the type of cars they intend to buy, and potential customers may be unwilling to use their credits to purchase high price vehicles. More importantly, it will still take time before customer is accustomed with the electric vehicles.