This paper presents a strategic analysis of Tesla Motors, examining the company's major challenges and competitive advantages as of 2015. The analysis addresses Tesla's cash flow problems, growing competition from larger automakers, and the need to expand in key markets such as the United States and China. Using Porter's Five Forces, an external environmental scan, and an internal value chain analysis, the paper identifies Tesla's superior battery technology, strong brand, and visionary leadership as its core strengths. The paper concludes with a recommendation that Tesla spin off its automotive operations into a strategic partnership with an established automaker while retaining its battery intellectual property and energy business, thereby addressing financial weaknesses while leveraging its most differentiated competitive assets.
Tesla Motors has a cash flow problem, which makes it vulnerable to the many larger competitors seeking entry into the electric vehicle business. The advantage Tesla holds lies in its battery technology, which is vastly superior to any competitor's, as well as in its brand name and leadership. Its in-house distribution model is unique to the industry, though it may be too early to determine whether this approach is helping or hurting the company. This paper examines how these elements function strategically, and offers a recommendation to leverage the company's strengths while addressing its weaknesses. Specifically, it is recommended that the automotive business be spun off into a strategic partnership with an established automaker, that Tesla retain its battery intellectual property and energy business, and that battery technology be licensed to the partner auto company.
Tesla Motors has a potentially promising future, but there are several hurdles the company must overcome for that future to materialize. First, the company has a cash flow problem. While revenues are increasing, so is the burn rate (MSN Moneycentral, 2015). The company is engaged in major projects that are years away from generating stable cash flow, placing it at financial risk in the interim. The creation of Tesla Energy may serve as a means of generating some short-term cash flow, though the economics of the product appear limited outside of Germany (Castelvecchi, 2015).
The cash flow issue hints at a related threat: competition. As the company notes in its latest annual report, a number of competitors are entering the electric car business. This is positive in some ways, as it will help improve the overall charging infrastructure — something that benefits Tesla as well. The critical factor is that the company currently holds a technological competitive advantage, and must maintain it to stay ahead of the competition. However, competitors are generally much larger and have far greater access to capital. If Tesla's cash flow issues erode its technological edge, the company may have little else to fall back on.
A third major strategic issue is the need to generate higher sales in the United States and China, the two largest auto markets in the world. While Tesla is a growing, successful company in Europe, it faces specific challenges in these markets. In the United States, sales have been relatively flat since the introduction of the Model S, due in part to production constraints and in part to concerns about charging infrastructure. Similar concerns about infrastructure are also hindering growth in China.
Porter's Five Forces model is a useful tool for understanding the profitability of an industry, and is particularly appropriate for analyzing Tesla — a company that has thus far struggled to generate a profit. The five forces are: the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, the threat of substitutes, and the intensity of rivalry.
The bargaining power of suppliers is not especially strong in this industry. Tesla is already a major buyer and is likely to grow, and the technologies underpinning its products are developed either in-house or through key strategic partners. The bargaining power of buyers is fairly high, given the level of competition across the broader automobile industry. That said, Tesla's technological superiority affords it a degree of pricing power in the electric car segment specifically. The true test of this dynamic will come when the Model X launches, as that vehicle targets a more mainstream market and will require Tesla to move out of its niche comfort zone.
The threat of new entrants is among the most significant threats the company faces. Most major automakers are entering the electric car industry and are better capitalized than Tesla, enabling them to outspend the company in research and development. There has long been concern that Tesla could become the next Blackberry — leading its industry in its early stages, only to be rendered irrelevant once larger, better-funded players arrive. The threat of substitutes, by contrast, is relatively low. Although Tesla has sought to position itself against mainstream luxury vehicles, the market for electric cars is somewhat distinct from the combustion engine market. Buyers considering a Tesla are generally oriented toward electric vehicles and are comparing it against other options in that category rather than against conventional cars.
The intensity of rivalry is currently low, because the electric vehicle industry is still small. However, rivalry will intensify as the industry grows and more companies enter it. Overall, the industry is marginally attractive at this stage. Buyers are, to an extent, price takers in the current niche market, but the mainstream market Tesla plans to enter will be considerably more competitive. The Five Forces framework also does not capture the issue of scale: automaking typically requires significant scale to achieve profitability, and Tesla does not yet operate at that scale.
There are substantial opportunities in electric cars. Even with relatively low gasoline prices, a broad social trend toward reducing carbon emissions is driving favorable consumer attitudes toward electric vehicles. The automobile market is one of the largest consumer products markets in the world, placing the overall revenue potential in the billions. Geographically, Europe is the most developed market for electric vehicles, largely due to high gasoline taxes that make electric cars more cost-competitive with conventional vehicles than they are in North America. Strong growth potential exists in most major global markets with reliable electric grids. The Model X is intended to tap the enormous potential of the mainstream electric car segment by demonstrating performance comparable to combustion engine vehicles.
Tesla has also identified its battery technology as superior to alternatives on the market and has begun entering the home energy market, launching initially in Germany before expanding further. Not much is yet known about the Tesla Energy subsidiary, which was newly announced at the time of writing, but the company clearly sees significant potential in this area.
Several threats are worth noting. Competition is probably the single greatest threat the company faces. While it is not yet intense, and Tesla has defended against it through technological leadership, the other major automakers are large, well-funded, and will aggressively pursue the electric vehicle market if it continues to grow. Tesla therefore needs not only to develop its own business but to formulate a plan for competing as the field becomes more crowded.
Other potential threats include new technologies, shifts in consumer sentiment, and government action. Government action is more likely to be favorable than unfavorable — Chinese government support for charging infrastructure, for example, would provide a significant boost in that market — but there are U.S. states where Tesla cannot sell vehicles due to restrictions on its direct-sales distribution model, which bypasses traditional dealerships. On balance, however, the opportunities facing Tesla outweigh the threats by a wide margin, which is one of the most compelling aspects of the company's strategic position.
The electric car industry is nascent and has yet to produce many clear success stories. Nevertheless, it is reasonable to conclude that a strong brand is essential for competing against major established players in the automotive industry, and Tesla is actively building that brand. Distribution channels are also critical — and for electric vehicles, this includes charging infrastructure. It is worth recalling that conventional automobiles did not achieve mass adoption until there were paved roads and fuel stations to support them; charging networks play a comparable role for electric vehicles.
Another key success factor will be overcoming the remaining technological challenges. Tesla is working to develop vehicles capable of traveling well in excess of 200 miles on a single charge. Limited range has been one of the primary barriers to electric vehicle adoption, alongside long charging times. The Supercharger network, which can replenish a Tesla's battery in approximately 15 minutes, is therefore a critical success factor. As range and charging speeds continue to improve, Tesla's products will become increasingly viable for mainstream consumers and better aligned with everyday driving needs.
"Battery tech, brand strength, and value chain review"
"Four options: sell, go niche, partner, or pivot to energy"
"Energy focus with automotive strategic partnership advised"
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