SunDevil6_WrittenCase_Final

Tesla Motors Case
Sun Devil 6
Christina Ehrler, James Gillis,
Michael Huesemann, Marco
Sandoval, Leslie Turckes

Tesla Motors Case
Christina Ehrler, James Gillis, Michael Huesemann, Marco Sandoval, Leslie Turckes
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Tesla Motors
Since its inception in 2003, Tesla Motor’s has made breakthroughs in the Electric Vehicle
(EV) market with its proprietary power train technology. It has experienced significant success
with its initial Roadster model which boasts of a driving experience that is not at all different
from a traditional gas engine. However, as the production of the most recent Roadster model
winds down, Tesla is faced with a challenging situation that will determine the future direction of
the company, and ultimately its survival.1
Tesla is currently developing an EV
family sedan, the Model S (Exhibit 1),
that will be priced at the upper range of
the luxury vehicle market and is set to
start delivery in July of 2012.2 This
sedan represents Tesla's first foray into
the family segment and has large
growth potential for the company. Tesla
is currently taking only limited orders for the vehicles and expects the production run to be
completed over the next couple of years. This run should be a good introduction of Tesla's EV
capabilities to the public, and allay concerns about performance and reliability before its Model
X crossover is introduced in 2012.3 The Model X will not be ready for delivery until 2013 or
2014, but it will be the first midsized vehicle produced by Tesla. Between these two vehicles,
Tesla has an impressive product pipeline lineup that has the potential to appeal to middle class
consumers and expand Tesla’s current consumer base which is mainly comprised of high-net
worth early adopters. However, Tesla is not the only manufacturer looking to develop electric

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vehicles. Nearly all of the large, established automobile manufacturers have developed or are in
the process of developing their own electric vehicles with the Chevy Volt being the most well
known. Toyota as well, is developing an all-electric version of its RAV4 as part of a contract
with Tesla.4 Currently, Tesla's vehicles have greater range and offer better performance, but the
resources and capabilities of the major automakers represent a significant threat to the viability
of Tesla going forward as they continue to build and expand upon their existing capabilities.
Tesla faces a choice about how to move forward and in which direction. Tesla could
maintain its status as a niche manufacturer of high quality, high performance electric vehicles or
it can seek to leverage its first mover advantage and seek to gain market share with expanded,
affordable access to electric vehicles in the greater automobile market. Tesla is limited in its
ability to manufacture vehicles due to its size and access to resources which puts it at a
disadvantage in comparison to other automakers. However, if Tesla fails to act in a decisive way,
it risks losing its technological advantage and opens the door for other manufacturers to develop
their own EV models and crowd Tesla out of the lucrative automobile market. With choosing
either path, how will Tesla maintain its technological lead over its competitors? How will Tesla
facilitate the move from early adoption to the greater consumer market? How will it deal with the
lack of infrastructure to support these new vehicles? Finally, how will Tesla deal with the
environmental effects of more EVs on the road and will these effects ultimately conflict with its
founding principles?
These and many other issues face Tesla's management, and the current transition of the
company from a small startup to a mature organization only magnifies the importance of these
issues and the strategic decisions needed to address them.
CompanyHistory

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Tesla Motors, Inc., a Silicon Valley based company founded in 2003, designs,
manufactures and sells zero-emission electric cars and power-train parts, such as lithium ion
battery packs. These power-train components are then bought and used by other carmakers such
as Toyota.5 Tesla’s vision is to “create the most compelling car company of the 21st century by
driving the world’s transition to
electric vehicles.”6 Tesla’s
mission has three elements: to
build and sell their own electric
vehicles, to sell patented electric
power-train parts to other car
manufactures, and to serve as a
role model to speed the transition
to electric vehicles. So far, Tesla is
uniquely positioned to be the only company that sells “pure electric” vehicles.7 Their first model,
the Tesla Roadster sports car, has been on the market since 2008, with Tesla models S and X
sedans expected to become available in 2012 and 2013, respectively.8 Tesla has received
investments from Daimler ($76M), Toyota ($50M), Panasonic ($30M), and $464M in loans from
the U.S. Department of Energy.9 Following its initial public offering (IPO) on June 29, 2010,
Telsa raised $226 million in capital.10 Tesla currently has more than 1,200 employees, a new 5
million ft2 factory in Fremont, CA, and 18 showrooms in the U.S. and Europe.11 Third quarter
(2011) total revenues were $57.7M but net income (loss) was negative $65.1M.12
Key Leadership

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Since the creation of Tesla Motors there have been several individuals that have guided
the company through the design and production of its first vehicle and its expansion into the
larger automobile market. Some have been with the company since the beginning while others
have joined in later years. These individuals have played an important role in shaping the
strategic vision of the company.
Elon Musk – Chairman, Product Architect and CEO: As co-founder of Tesla Motors,
Musk has been a force to be reckoned with since the company’s inception. During the company’s
initial founding Musk was appointed Chairman and Product Architect (responsible for design
vision and execution) while Martin Erberhard become CEO and JB Straubel became CTO.
During his time as Chairman and Product Architect, Musk had a significant role in
designing the Tesla Roadster for which he won an Index and Global Green Award in 2008. In
addition to leading the development of the Tesla Roadster, Musk was also the initial controlling
investor in the company. He also worked to secure additional investments from a wide variety of
firms ranging from Google founders to Daimler. The first round of investments, after the
company went public, yielded a $226 million in capital. In regards to Daimler, Musk was able to
establish a strategic partnership in 2009 which included $50 million in investment monies. In
2008, Musk also took on the additional role of CEO. Musk has continued spearheading change
within the company’s products as he guides the development of the company’s newest vehicle,
the Model S sedan. Most recently, Musk was named Innovator of the Year in Technology by the
Wall Street Journal.13 Musk is also the CEO of SpaceX and Chairman of SolarCity.14
Deepak Ahuja – Chief Financial Officer: Ahuja became the CFO of Tesla in 2008. Then
CEO, Ze’ev Drori said “Deepak’s experience as CFO of multi-billion dollar business units with
global sourcing and manufacturing operations makes him the ideal person to lead our finance

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organization through the company’s next period of rapid growth.”15Ahuja has a rich experience
in the automotive industry ranging from composites engineering to finance. At Ford Motor
Company, Ahuja was the Controller of Small Cars Product Development in Michigan which had
the goal of bringing fuel efficient cars to North America. Previous to this role he was the CFO
for Ford in South Africa. Prior to joining Ford, where he worked for 15 years, he worked for
Kennaetal as a composites engineer.16
Since Ahuja joined Tesla, he has helped the company accumulate $660 million of cash
sources, acquire a new manufacturing facility in California, and guide the company’s financial
team as it gears up to produce 20,000 cars per year by 2013.17 Ahuja is also confident that the
company will be able to generate a net profit by 2013 once steady state production of 20,000
units has been achieved.18
JB Straubel - Chief Technology Officer: Straubel has been CTO of Tesla since its
inception. As a co-founder of the company, Straubel has been able to play a guiding role in the
company’s technical and product directions starting with the Tesla Roadster and now with the
Model S and Model X. He and a hand-picked team of engineers developed the Roadster to show
that electric vehicles can provide just as much power as a traditional high performance sports
car.19 He is involved from the preliminary design stages through vehicle systems testing, which
he manages directly. Straubel also evaluates new technologies for the company and technically
interfaces with key vendors to ensure the best products and technologies are integrated into
Tesla’s vehicles.
GeneralCompetitive Environment

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The following four primary factors in the general environment are of strategic
significance to Tesla Motors: Socio-cultural trends, political/legal trends, technological
developments, and changes in consumer demographics.
Concern for the environment, particularly in view of the looming threat of global climate
change, is strong, with about 32% of Americans believing that global warming will affect them
in their lifetime.20 As a result, environmentally conscious and increasingly educated consumers
will become more and more interested in environmentally friendly products. These products
include zero-carbon emission electric vehicles (EV) that can be recharged using electricity from
renewable sources such as wind and photovoltaics.21
Public concern over global climate change is likely to cause concomitant changes in
political and legal trends, such as government mandates to significantly decrease greenhouse gas
emissions. For example, the United States has pledged to reduce greenhouse gases by 28% by
2020, and Europe is planning to supply 20% of its energy via renewable sources by 2020.22
Furthermore, a number of countries have already enacted a carbon tax,23 and more are likely to
follow suit, which will give Tesla’s EVs a competitive advantage over fossil-fuel powered
automobiles. In addition, some countries, such as Japan, offer zero or low taxes and green
subsidies for electric vehicles, thereby increasing their appeal to consumers.24 The United States
government is providing a federal tax credit of $7,500 for any pure electric vehicles purchased in
and after 2010.25
Continuous and rapid improvements in lithium ion battery technology are also vital in
reducing the cost of EVs while increasing their driving range (per charge). It has been claimed
that lithium ion batteries will be the preferred choice for the 21st century.26 Recently, Stanford
University researchers achieved a 10-fold improvement in the life of a lithium ion battery.27

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Tesla Motors itself is not waiting for this technology to be developed either; the company is
actively involved via partnership with Panasonic to accelerate the development of high-
efficiency nickel-based lithium ion battery cells specifically designed for EVs.28
Global changes in consumer demographics are also likely to significantly increase the
demand for emission-neutral vehicles. Global population growth, particularly in India and China,
together with economic development (i.e., GDP growth), is fueling world-wide demand for
automobiles. The size of the world’s fleet of passenger vehicles has exhibited rapid growth, from
53 million in 1950 to 622 million in 2008, and is expected to continue.29 Furthermore, because of
the socio-cultural and political/legal trends mentioned earlier, the composition of the world’s
automobile fleet will change to include more emission-neutral EVs. These two factors,
population growth and a shift in consumer preference, will create a significant growth in the
global market for EVs.
Finally, global economic trends, particularly changes in currency exchange rates and free
trade agreements, while currently not of prime concern to Tesla Motors, will become more
important as the company expands its operation and sales into Europe, Asia, and elsewhere.
Key Suppliers and Customers
Like all other car manufactures, Tesla Motors depends on a large number of global
suppliers for automobile parts.30 Those companies which supply generic parts have little or
limited power since they constitute a widely dispersed industry, and substitute products are
readily available without incurring high switching costs.31 However, the situation is different for
those suppliers that provide components that are unique and critical to Tesla’s success such as
lithium-ion battery packs. In order to protect their proprietary battery technology while at the
same time outsourcing the mass-production of a battery pack consisting of 18,650 cells, Tesla

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formed a partnership with Panasonic to develop the next generation EV battery system.32
Panasonic invested $30 million for the collaboration in battery cell development.33 This
partnership is an example of backward vertical integration designed to reduce the risk of a
potential supply chain disruption for a critical component (i.e., the battery pack) that is needed
for the manufacture of all present and future Tesla models.
There are two types of buyers: individuals purchasing a Tesla EV and other automakers
procuring Tesla electric vehicle power-train components.
The power of individual customers depends on the Tesla product they intend to purchase.
If they are interested in a pure electric high performance sports car such as the Roadster for
which there is currently no equivalent or substitute, they have little choice but to pay the price
demanded by Tesla and thus have little power (Exhibit 2). However, if they are interested in a
Tesla Model S and X, and are open to purchasing a vehicle other than an electric their choices
are numerous. Their choices now include hybrids and traditional gasoline-powered vehicles.
Even if they limited their purview to electric or hybrid vehicles, many companies such as BMW,
Daimler, Lexus, and Cadillac have these options (Exhibit 2). Thus, the power of this type of
customer is greater since they can easily “defect” to the competition.
Tesla, playing also the role of an original equipment manufacturer, has entered into
partnerships with Daimler and Toyota to cooperate on the development of electric vehicle
components. Daimler has incorporated Tesla’s battery packs and chargers into Daimler’s electric
smart cars, while Toyota, investing $50 million in the collaborative partnership with Tesla to
develop electric vehicles, is planning to mass produce an electric version of the Toyota RAV4 in
2012.34 Both Daimler and Toyota, because of their potentially large future demand for Tesla EV
components and expertise, clearly have more buying power than individuals purchasing Tesla

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cars. Strategic partnerships were created to stabilize the buyer-supplier relationship by creating
large benefits for both parties: Daimler and Toyota benefit by accelerating their electric vehicle
development and having a stable supply of proprietary EV components while Tesla benefits from
having two large corporate customers with potentially very large future growth potential.
Substitutes and New Entrants
According to Hoskisson et al. (2008), “Substitute products are goods or services from
outside an industry that perform similar or the same functions as a product that the industry
produces.”35 If we consider “industry” as all automobile manufacturers and “function” to be
transportation, there are many substitute products and services that provide personal mobility:
walking, bicycling, public transport by bus, subway, train, or ship, and flying by private or
commercial airplane. These substitute choices differ substantially from transport by personal
automobile in terms of convenience, cost, speed, range, and even social image, thereby posing
only a limited competitive threat at present time. However, if energy costs were to increase
significantly due to fossil fuel shortages (as in the 1970s), less expensive transportation choices
such as walking, bicycling, and public transit are likely to pose a large threat to the automotive
industry, including Tesla.
The threat of new entrants, such as other recently incorporated pure electric vehicle
manufacturers, is relatively low given the need for economies of scale, large capital requirements
(Tesla’s total assets exceeded $700 million in 3Q 2011, see Exhibit 1), clearly identifiable
product differentiation, and access to distribution channels. However, the threat of new entrants
into the electric vehicle (hybrid electric, plug-in hybrid, pure electric) market by other existing
conventional automobile manufacturers is large, given that Toyota, Chevrolet, Volkswagen,
Ford, Honda, Nissan, Lexus, BMW, Daimler, and others are all planning to enter, or have

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already entered, this space (Exhibit 2). The threat to Tesla by these well established automobile
companies is even more ominous given their extremely large economies of scale, their brand
equity, established customer loyalty, and excellent global sales and service distribution networks.
Tesla’s strategy so far has been to “neutralize” several strong competitors (e.g., Toyota and
Daimler) by forming cooperative partnerships (see above). However, the competitive threat of
other automobile manufacturers that did not enter into a partnership with Tesla is significant and
should not be ignored.
Competitor Analysis
Toyota Motor Company
Toyota Motor Company is a large multinational company based in Japan and currently is
the world’s largest automobile manufacturer based on sales and production volume.36 The
company also owns the luxury brand Lexus. Japan and North America account for the bulk of
Toyota’s sales with 26% and 28% of unit sales, respectively, and Asia and Europe accounting for
11% and 17%, respectively.37 While it is a global company, Toyota’s focal market is Japan
where its goal is to achieve 40% of market share every year.38 Toyota primarily seeks to
“localize global operations with targeted regional strategies; promote key initiatives globally;
diversify into automotive-related business sectors; maintain financial strength; and focus on
shareholder value.”39 The company has also sought to expand research and development,
increase efficiency, and focus on financing operations.40 Toyota has a consistently positive net
margin, the most recent year being 2.45%, and is typically the most profitable automobile
company based on net income.41
Toyota is currently in a contract with Tesla for Tesla to provide electric vehicle
powertrain components for its RAV4. The Toyota RAV4 will be one of Toyota’s first all

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electric vehicles along with another one based on its small IQ car model; both are expected to be
introduced in 2012.4243 These models, however, are designed for short commutes and have
limited ranges. Pricing for the RAV4 has not been announced, but the RAV4 is expected to only
have a range of 100 miles.44
General Motors
General Motors (GM) is the world’s second largest manufacturer by volume and is still
the largest automotive company in the United States.45 Its brands include Chevrolet, GMC,
Buick, and Cadillac after discontinuing or selling its Hummer, Pontiac, SAAB, and Saturn
brands.46 GM recently emerged from bankruptcy protection in 2009 after becoming insolvent
during the 2008 financial crisis. GM’s primary market is North America, however, it has seen
strong growth in China where it recently surpassed 2 million units sold.47 GM also expects to
see sales in South America to grow by 25% over the medium term48 and has seen significant
growth of 21% for 2011 in the Middle East as of October 2011.49 GM’s strengths tend to be in
trucks and SUVs and its broad range of brands and vehicles.
GM’s most recent offering for the EV market is the Chevy Volt. However, the Volt is
not a “pure electric” vehicle and is more of a Hybrid. Its battery range is only 35 miles, but has a
total range of 407 miles when its gas range is included50 and is priced starting at $31,645.51 GM
has had trouble meeting sales goals for the Volt and has recently come under investigation for
fires associated with the Volt’s battery.52 GM also plans to develop a pure electric vehicle as
part of a Chinese joint venture with the Shanghai Automotive Industry Corporation to take
advantage of its market position in China.53
Ford Motor Company

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Ford Motor Company is North America’s second largest vehicle manufacturer of cars and
trucks and produces many subcomponents for its own vehicles as well.54 Like GM, Ford’s
primary market is in the United States; however, its international business is not as large as
GM’s. Recently, Ford has been challenged by increasing competitive pressures, primarily from
Asian manufacturers.55 As a result, Ford has focused on trimming its product lines by focusing
more on its Ford and Lincoln brands while discontinuing or selling its controlling shares in
Mercury, Mazda, Land Rover, and Jaguar.56
Early in 2011, Ford unveiled plans for its first pure electric car, the Focus Electric. The
Focus Electric will be competitive in terms of range with the Nissan Leaf and the Chevy Volt
which would be in the range of 50 to 100 miles.57 It features a regenerative braking system and a
braking coach to maximize driving efficiency.58 It is also priced slightly higher than its
competitors at $39,990.59 Ford also has an all electric minivan, the C-MaxX, which has been
rolled out to market. By 2020, Ford expects that 25% of its fleet will be electric vehicles.60
Honda Motor Company
Honda is a large multinational company based in Japan and is a diversified manufacturer
of automobiles, motorcycles, and power products.61 Automobile sales accounted for 76% of
total sales with 79% of its net sales coming from outside Japan.62 Honda vehicles are known for
their efficiency and durability and have seen significant growth around the world with over 10%
of the U.S. vehicle market share.63
In late 2010, Honda introduced an electric vehicle concept based on its existing Fit
model.64 The Fit EV is expected to have a range of 100 miles and features a 3-mode electric
drive system that allows drivers to select between economic, sport and normal modes to adjust
the driving experience to allow for different levels of performance or conservation.65 The Fit EV

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is expected to launch in 201266 and is expected to be priced lower than the Nissan Leaf at around
$29,900.67
Nissan Motor Company
Nissan is a Japanese based auto manufacturer that has experienced significant growth
over the last decade. Recently it launched a global initiative called “Nissan Power 88” that calls
for “accelerated growth across new markets and segments” over the next six years.68 By 2017
Nissan is aiming to have a global market share of 8% with a sustainable operating profit of 8%.69
The company expects to have a global portfolio of 66 vehicles that cover 92% of all markets.70
Currently, Japan, North America and Europe account for 15%, 33%, and 17% of unit sales
respectively and overall sales were up 23%.71
The company has begun to increase its focus on electric vehicles and expects to sell 1.5
million electric vehicles by 2017.72 Recently, Nissan introduced its first electric vehicle the
Leaf. The Leaf has performed well by selling roughly 20,000 units and also recently won the
Vehicle of the Year award in Japan.73 The Leaf features a range of 100 miles, seats 5 people,
and is priced at roughly $33,000.74 Nissan has an ongoing partnership with Renault to continue
the development of electric vehicles and looks to be aggressively pursuing the electric vehicle
segment.75
Other Motor Companies
The automobile market is highly competitive and has many other auto manufacturers that
have a significant presence in the United States and abroad. However, companies such as
Hyundai and Daimler have yet to field an electric vehicle, but have announced plans to do so
over the next few years. Many manufacturers are introducing hybrid vehicles, but these
companies look to be late entrants into the electric vehicle segment and will come to compete in

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the segment in the coming years. Electric vehicles seem to be widely accepted as having a place
in the market, and most companies have plans or already have a presence in the EV segment.
Over the next decade, Tesla will see a significant increase in high quality competitors that will be
competing directly with Tesla’s own electric models.
InternalAnalysis
Tesla’s core competency is their comprehensive, integrated, proprietary electric power
train technology (Exhibit 3), consisting of lithium-ion cells with a unique chemistry makeup and
high energy density, an actively cooled battery pack, a compact set of software-controlled power
electronics, a highly efficient A/C induction motor, and a high rpm single gear, gear box. Both
the motor and gear box are manufactured in-house. These power-train technologies are highly
integrated to provide superior performance, and together create a synergy that is difficult to
replicate. Tesla’s electric power train technology core competencies are leading to a distinct
competitive advantage since they are (a) valuable (i.e., they create value for customers desiring
pure electric high performance vehicles); (b) rare (i.e., no competitor has similar pure electric
vehicle core competencies); (c) difficult to imitate (i.e., Tesla has over 40 patents awarded and
over 200 patent applications pending76), and (d) non-substitutable (i.e., there are currently no
substitute technologies for high performance, premium pure electric vehicles today. However
several models by Audi and Mercedes-Benz will be entering the completion in the next several
years.
Tesla’s competitive advantage is evident considering their EV leadership position in
terms of range and cost (Exhibit 4). The range of the Tesla Model S and the Tesla Roadster are
300 and 245 miles, respectively, much greater than the ranges of competitors, i.e., Ford Focus
EV (100 miles), Nissan Leaf (73 miles), and Chevy Volt (35 miles). Furthermore, Tesla leads

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also in battery cost, with the Tesla Model S battery back costing only about $400 per kWh, much
less than the $650+/kWh of competing batteries (Exhibit 4).
A key intangible resource leading to competitive advantage is Tesla’s superior
management team (Exhibit 5). Most senior executives have had prior experience with other
automakers, thus providing Tesla with instant and relevant management expertise: Deepak
Ahuja, CFO, came from Ford; Franz von Holzhausen, Chief Designer, had previously designed
cars for Mazda, Volkswagen, Audi, and GM; Gilbert Passin, VP Manufacturing, had previously
worked at Toyota; Peter Rawlinson, VP and Chief Engineer, came from Jaguar; and John
Walker, VP North American Sales, was previously employed by BMW, Audi, and GM.
Furthermore, Tesla’s technical staff has accumulated many years of experience and unique
“know-how” related to EV technologies, another intangible asset leading to competitive
advantage.
Despite these unique core competencies and competitive advantages, Tesla has to deal
with a number of competitive disadvantages relative to other established automobile
manufacturers. The automobile industry is a mature industry whose companies have achieved
significant economies of scale and scope. The companies also have vast resources that can be
brought to bear on a project that include design, engineering, marketing and financial resources.
The large automakers access to financial resources may be the most significant advantage they
have over smaller companies like Tesla as they not only have significant cash reserves, but also
because they can leverage their positions to issue debt and raise more cash. Another
disadvantage is that Tesla has a very limited distribution and service network at present.77 Most
manufacturers have extensive dealership networks that also serve as service centers for their
vehicles. This takes significant time and cost to develop for a company like Tesla, and until they

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are able to adequately replicate their larger competitor networks, there will remain a significant
advantage for the large multinational automakers. The sheer size and ability of the mature,
multinational companies is a great challenge for Tesla and as well as others looking to enter
automobile industry.
BusinessLevelStrategy
Tesla has formulated a series of strategies aimed to transfer the many perceived
disadvantages relative to the established auto giants and turn them into strengths that
differentiate the firm as a smart, Silicon Valley-esque auto manufacturer. The primary goal of
the firm is to increase the number and variety of EVs available to mainstream consumers in three
ways: by selling its own vehicles in a growing number of company-owned showrooms and
online; selling its patented electric powertrain components to other automakers so that they may
get their own EVs to customers sooner; and serving as a catalyst and positive example to other
automakers, demonstrating that there is pent-up consumer demand for vehicles that are both fun
to drive and socially responsible.78 These goals are implemented in a two-pronged strategy by 1)
leveraging its technology to cover operating costs and creating a dependent relationship on
traditional car manufacturers and the company’s technology. And 2) concurrently moving
forward with its personal car-building objectives so that, eventually, it can become a BMW of
EVs -- with the same whopping (if occasional) 15 percent profit margins.79 To accomplish these
goals Tesla initiated a business level strategy of focused differentiation with the development
and release of the Roadster model. The Roadster is a record breaking EV by every measure.
Performance: 0-60 in 3.7 seconds, Range: 245 miles, Development cost: $125M, and Time:
launched 3 models in 2 years.80 The Roadster serves the niche high performance, electric vehicle
market which is comprised of high net worth consumers. This has allowed the firm to begin

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eroding the substantial barriers of entry to the traditional automotive industry. The Tesla
Roadster has a base price of $89,000, prompting criticism in the media that the company is
catering exclusively to affluent consumers. Tesla’s goal is to sell EVs to mainstream consumers
at more affordable prices, but Tesla purposely aimed its first production vehicle at “early
adopters” so that the company could optimize the technology before cascading it down to less
expensive vehicles. (The company’s subsequent car, the Model S sedan, is anticipated to begin
production for the 2012 model year with a base price of $49,900 after tax credits,81 roughly half
that of the Roadster.) This approach is a well known business strategy in Silicon Valley and the
global technology industry, where prices for cellular phones, laptop computers and flat-screen
televisions drop dramatically every product cycle. However, this approach has been rare in the
global auto industry, where the prevailing business model has been one of mass production in
assembly plants optimized to build hundreds of thousands of vehicles per year with
comparatively low sticker prices.82 With the introduction of the Model S sedan, Tesla intends to
begin making a strategic shift from a focused differentiator into a more pure differentiation
strategy with offerings to the broader market. The Model S sedan is in a class of its own.
Features: more cargo room than any other sedan, 5 star crash rating, 17” touchscreen computer,
and 4G wireless connectivity. Performance: Up to 300 miles per charge, 45 min quick charge,
rapid 1 min battery swap, 0-60 mph in under 6 seconds, and exceptional handling.83 Tesla
already has more than 6,000 orders for the all electric sedan that will sell for between $57,400
and $77,400 depending on the range and trim level you buy.84 The differentiation strategy will
continue as additional offerings are planned using the Model S platform. Accompanying this
strategic shift, Tesla will be looking to further differentiate itself from the established auto
makers by revamping the traditional business model in several areas. The modern business

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model employed by the firm is an ambitious effort to take control of its own sales and service
operations and capture the revenue and customer feedback that traditional auto manufacturers
cede to a network of dealers.85 Musk claims that Tesla's "DNA" is closer to an Apple or a
Google than to a GM or Ford. In his words, "There will not be anyone who brings technology to
market faster."86
Value Chain
Outbound Logistics
Tesla has driven much of its differentiating innovation into its value chain. One example
is the outbound logistics modernization using more of a storefront approach to automotive sales
and delivery versus the more traditional dealer network. The Tesla distribution system gives the
firm a definite competitive advantage. In Musk's view, the current automotive distribution
system is extremely inefficient -- it puts dealers at odds with the OEMs regarding service and
inventory. Instead of having tens of thousands of cars on dealer lots, Tesla uses a Just-in-Time
delivery system with cars being made to order.87 Due to the fact that there is no need to carry a
large inventory, the stores don't have to be large or include extensive floor space. That is a major
departure from the traditional model.88 While this revolutionary approach has many advantages,
it does not come without risks. Legal challenges lie ahead for Tesla’s distribution model of
selling its own vehicles at stores (rather than through franchised dealerships) and over the
internet. As Tesla notes, “many states have laws that may be interpreted to prohibit internet sales
by manufacturers to residents of the state or to impose other limitations on this sales model,
including laws that prohibit manufacturers from selling vehicles directly to consumers without
the use of an independent dealership or without a physical presence in the state.” As a result,

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Tesla may have to change its sales model for at least some states or find itself shut out of whole
swaths of the U.S. market.89
Marketing and Sales
Another value creating primary activity of the value chain where Tesla stands out is its
approach to marketing and sales. Tesla is seeking to create an experience that is similar to the
retail strategy used by Apple with its storefronts. To accomplish this, the firm hired George
Blankenship, who was the architect of the Apple retail model, to fill their VP of Sales and
Ownership Experience position. Tesla's mission is to reinvent the way people buy cars.
Breaking from the traditional dealership model, Tesla stores entice, inform, and engage
prospective customers with innovative touch-screen interfaces, knowledgeable product
specialists, and a virtual design studio where they can customize their own premium Model S
sedans.90 "Tesla stores are designed to let people explore and learn about Tesla's technology for
themselves," said VP of Sales and Ownership Experience George Blankenship. "You'll never see
a 'Don't Touch' sign in a Tesla store. We want everyone -- from kindergartners to grandparents --
to come in and see for themselves why driving electric is the future."91
A key enabler in achieving this store experience is Tesla’s use of cutting edge software
integrated into the many touch screens located around the sales floor. Design Studio is a
software tool that allows consumers to customize, view and share their own Tesla electric
vehicles on the web, on their smartphones and iPads, and at Tesla stores. Using HTML5 for
cross-platform compatibility, the Design Studio makes the buying experience flexible, engaging
and interactive.92 "The Design Studio's goal is to personalize the Tesla experience," said George
Blankenship, Tesla's VP of Sales and Ownership Experience. "It's the most advanced
configuration any automaker has come up with, letting you choose exactly what you want, look

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at it from every angle, and see it in the wild."93 All of this technology not only impacts
customers, but Tesla product specialists too as they are equipped with iPads to walk prospective
customers through the process and explore their options. Tesla's new Santana Row showroom
also offers the capability for customers to 'throw' their design to a large screen at the back of the
store with a swipe of their hand.94 Not only has Tesla moved to alter the experience inside the
store from the traditional dealership, but they have pushed this progressive model out to the
exterior appearance and location as well.
Since opening its first American showroom in Santa Monica, Calif., in 2008, Tesla has
targeted high foot-traffic retail locations across the country to better acquaint casual shoppers
with its electric cars.95 Tesla’s retail locations are more like galleries, rather than stores, and are
not dealerships in the traditional sense. They will all have a Model S prototype and hands-on
exhibits highlighting what Tesla has to offer. A kind of place where a wealthy customer
shopping the likes of Tiffany and Gucci will wander in and get a taste of what Tesla is all
about.96 The firm currently operates 16 U.S. stores, 2 in Canada, 13 in Europe, and 3 in
Asia/Pacific with an ambitious expansion targeting a 50 showroom global network coinciding
with the launch of the Model S sedan in 2012.97
By combining the synergy of outbound logistics, marketing, and sales in this way the
Tesla retail strategy is designed to promote efficiency. With this tactic, Tesla believes that they
will be better “able to better control costs of inventory, manage warranty service and pricing,
maintain and strengthen the Tesla brand, and obtain rapid customer feedback."98
Service
An example of customer feedback driving additional value into Tesla’s value chain is the
mobile service concept that the firm has adopted. Tesla relied on customer feedback when

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putting together its service strategy and studied companies like online shoe retailer Zappos.com
and the Best Buy computer repair service “Geek Squad” while creating it. Similar to the Best
Buy concept, the Tesla retail stores serve as the service hub for mobile service rangers that
provide house calls performing services including annual inspections and firmware upgrades.99
The service costs $1 per mile each way, with a $100 minimum. The fee won’t cover its
expenses, but Tesla says eating the loss is cheaper than building more service centers.100
By adopting this model Tesla believes they “will avoid the conflict of interest in the
traditional dealership structure inherent to most incumbent automobile manufacturers where the
sale of warranty parts and repairs by a dealer are a key source of revenue and profit for the dealer
but often are an expense for the vehicle manufacturer."101 Once again Tesla is intending to
capture more value that has been leaking downstream to the dealerships in the traditional
automobile industry models.
Technological Development
At this point in time Tesla’s technological development has been leveraged to bring its
sole offering, the Roadster, to market and push the edge of technology. These innovations have
been driven into the firm’s development of the Model S sedan and additionally the company has
looked to capture value in supporting activities of the value stream by looking to use a common
platform for the development of subsequent model offerings. The Model S is "a platform" for a
broader market opportunity. From the Model S chassis, Telsa will launch a number of other cars
ranging from sedans, cabriolets, vans, crossovers and SUVs due to its adaptable common
powertrain. Building each one will take little investment since Tesla is building each from the
Model S platform.102
Human Resource Management/Firm Infrastructure

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Another important support activity of Tesla’s value stream has been building the
corporate culture through firm infrastructure and human resource management. The culture
Tesla is striving to create emanates from the front page of the career section on its website. "Do
you question tradition and constantly think of ways to improve status quo? Do you thrive in
environments where brilliance is common and challenge is the norm?" the website asks. "Are
you excited by challenge because you're among the best in your field? If so, you'd be in good
company at Tesla Motors."103 For the task of building this entrepreneurial startup-like culture the
firm turned to Arnnon Geshuri who had success building a similar culture at Google. Geshuri,
42, has a track record for assembling great teams and putting people to work. His reputation as a
Silicon Valley legend in the realm of staffing and recruiting was cemented at Google,where he
oversaw a recruiting staff of 900 that fielded 2.5 million job applications in one year.104 The
brand of creative energy and drive for innovation created at Tesla is something that comes
natural to firms in the Silicon Valley and sets Tesla apart from the established competition in
Detroit and elsewhere. Focus is the key and the energy is palpable on the second floor where
most of the staff works at the Mountain View headquarters. The manufacturing area, still used
for production of the Roadster and R&D for the Model S and the future Model X, is on the first
floor. There are no walls as in most Silicon Valley companies in order to foster a creative,
cooperative and idea driven environment. The fast pace environment is a competitive advantage
for Tesla.105
MarketingApproach
Tesla’s business level strategies and value chain are aligned to deliver a brand for the
company that is closely aligned with other mainstream giants located in the Silicon Valley. It
promotes a brand image that is considered innovative, smart, and cool. Tesla wants a brand that

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is a status symbol that consumers that consumer seek out. As such, Tesla sees itself as a Silicon
Valley company focused on technology disruption, leading the technological revolution in the
automobile industry. Tesla’s found Elon Musk considers Tesla to be more aligned “to an Apple,
or Google, than a GM or Ford," further describing Tesla as a "technology velociraptor."106 What
Tesla is doing, Musk continues, “is mind-blowing for the car business, but par for the course in
Silicon Valley.”107 This vibrant image of an innovative technological revolutionary is what is
promoted by the Tesla brand, and separates Tesla from the status quo of traditional automobile
manufacturers.
Tesla Financials
Due to Tesla’s current state of development and the high costs associated with the
research and development of electric power trains and vehicle designs, Tesla has realized
significant losses since its inception in 2003. From inception to September 30, 2011, Tesla has
spent $418 million in cash for operations and currently has $278.4 million left in cash and cash
equivalents.108 A significant note about the offering was the purchase of nearly 3 million shares
by Toyota motors, or $50 million dollars worth, which makes Toyota one of the largest single
shareholders of Tesla stock.109 In the summer of 2010, Tesla entered into a loan facility from the
Department of Energy (DOE) program designed for Advanced Technology Vehicles
Manufacturing (ATVM), in the amount of roughly $465 million.110 Since then Tesla has had
consistent draw downs (Exhibit 7) from the facility to cover operations and as of September 30,
2011, $240 million was available for loans at low interest rates.111 Between cash on hand and
the loan facility Tesla has access to enough capital to sustain operations for some time, included
the expected drop off in cash flow in early 2012 before the Model S sedan begins delivery in
July.112

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Tesla’s most recent quarter saw net losses of about $65 million or $0.63 per share which
brought the total year to date loss to $173 million or $1.75 a share.113 It is expected that these
losses will continue through next year as development of the Model X crossover enters into a
more intense phase of development. The delivery of the Model S however, should help offset
some losses as Tesla begins to take payments on the vehicle.
Tesla also has significant cash flows coming from a developmental contract with Toyota
for electric powertrains for an electric version of the Toyota RAV4. The total contract is worth
$60 million of which Tesla has received $35.5 million through September 30, 2011.114 The rest
of the contract will be paid as the contract nears completion and will serve as a source of cash
flow over the next year. For the second phase of the agreement, Tesla expects to receive roughly
$100 million from Toyota between 2012 and 2014 based on delivery of powertrain
components.115 Between this contract and sales of the Model S, Tesla has the potential to
experience significant growth in sales over that timeframe.
Tesla’s sales to date have been heavily concentrated in North America and Europe
(Exhibit 6). Tesla, however, has begun to see some growth in sales to Asia. Still, North America
and Europe account for 54% and 41% of sales to date for 2011, respectively, with Asia sales just
under 5% (Exhibit 6). This would seem to be in line with the phase of development electric
vehicles are in and the high price Tesla’s Roadsters demanded as these are the wealthiest markets
globally. Also, environmentally conscious consumers are heavily concentrated in these markets
and are the most likely areas for early adopters to reside in. Tesla has recently announced that it
is opening three new retail outlets in the United States,116 so sales in North America may see a
rise in total share of geographic share. However, overall sales are expected to see a drop prior to

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the launch of the Model S in July 2012 as the last of the Tesla Roadsters are manufactured in
January 2012 and inventory of the Roadster is depleted through the rest of the year.117
It is difficult to compare Tesla to the other large auto manufacturers given the point of
development the company is currently in. For instance, Tesla’s net margin of -99.8% is the
lowest within the industry (Exhibit 8).118 Coinciding with this is Tesla’s days of sales in
inventory of 165.6 days which are the highest in the industry.119 This is to be expected given the
specialty nature of Tesla’s product and its relative immaturity amongst its peers. However, there
are encouraging signs as total revenues for the three months ending September 30, 2011 were
85% higher than for the three months ending September 30, 2010.120
Also, revenue growth for year over year ending March 2011 was a strong 29.6% and
gross margin for the same period was 36.8% (Exhibit 6).121 These figures indicate strong growth
potential and are confirmed by the company’s stock experiencing a 44% 3 month return.122 In
comparison, Ford and GM experience -2.2% and -8.3% returns respectively.123
Strategic Challenges
Tesla Motors, Inc. is uniquely positioned in the automobile industry as the only producer
of a fully electric vehicle. It has enjoyed first mover advantage with the Tesla Roadster sports
car, and hopes to enjoy future success with the Tesla Models S sedan and Model X crossover.
These two vehicles will allow Tesla to gain a new customer base beyond the more affluent
individuals who were targeted for the Roadster. With environmental concerns and the rising
price of gasoline, an electric car does fulfill the needs of a niche market looking for a quality,
environmentally friendly car. As Tesla continues to compete in the industry, it faces the
challenge of competing with the gas vehicles. Tesla competes against a large number of
automobile makers who have access to a much larger resource pool and market share. Tesla’s

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greater range and better performance of its EV may not be enough to compete successfully.
While trying to compete, it must also protect its proprietary knowledge as more automobile
companies develop their own electric cars. The Chevy Volt, Toyota’s future RAV4, and Nissan
Leaf are all major competitors in this arena.
With a commitment to developing a car that is better for the environment, Tesla must also
face the question of how the lithium-ion batteries will affect the environment over time and if it
will conflict with one of its founding principles. The public concern over global climate change
is likely to lead to more government mandates concerning carbon emissions. This would
potentially lead Tesla to have an advantage over other automobile makers in the industry. The
partnership with Panasonic to develop high-efficiency nickel-based lithium ion battery cells will
definitely provide Tesla with a competitive advantage. By providing Tesla EV parts to
companies such as Daimler and Toyota, Tesla has a large future growth potential. Being an
immature company trying to mature and compete against larger, already mature companies may
force Tesla to make some hard decisions regarding its product and whether it should diversify its
portfolio. The threat of new entrants into the EV market is high, especially since established
automobile makers Toyota, Chevrolet, Ford, Honda, Nissan, and Daimler, to name a few, are
already entering or planning to enter the EV market. Tesla would not have the economies of
scale to compete, not to mention the resources to do so in comparison to the vast resources these
companies can bring to any development project.
Tesla has financed much of its business through debt. This leaves the company operating
with a continued negative net income. A high sales volume will be needed to make a profit and
pay down some of the debt. It is a concern whether Tesla is capable of creating a profit and
lowering its debt. Overall, demand for the fully electric car is relatively low. Tesla faces the

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challenge of increasing the demand for its cars over the cars of the larger rival automobile
companies. To create demand, Tesla must demonstrate its cars compare favorably on
performance, driving range, price, safety, and durability. A more strategic marketing campaign
may be something Tesla needs to consider at this point in time.
There are other pressing issues that Tesla needs to address as well. Should Tesla continue
to compete in the automobile market, or should they allow themselves to be bought out? As it
stands, Toyota already owns a significant amount of the firm’s shares. If it does choose to
compete, would an expanded differentiated strategy provide the company with a better market
share and position within the industry, as compared to a focused differentiated strategy? Should
Tesla expand its focus to include trucks and SUVs, or stick to just high performance or luxury
cars? What market segments should it pursue? And to combat the debt and increase sales, how
should Tesla pursue its expansion on the retail side of things? Is complete control of the stores
better than franchising to dealerships? Another issue the key decision makers, such as CEO Elon
Musk, face is how to address the maintenance of the cars, and the network it would require, and
how that fits in with the firm’s strategy. Should Telsa maintain control of its dealerships or
should it franchise them out to established dealer networks?
Tesla’s future direction and ultimately success or failure hinge on how management
answers these questions over these pivotal next few years.

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Appendix
Exhibit 1: The Model S Sedan124

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Exhibit 2 : Tesla’s Unique Market Position125
Exhibit 3: Tesla’s Core Competencies126

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Exhibit 4: Tesla’s Electric Vehicle Leadership on Range and Cost127

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Exhibit 5: Tesla’s Superior Management Team128

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Exhibit 6: Balance Sheet129
Tesla Motors, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
September 30,
2011
December 31,
2010
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 213,328 $ 99,558
Short-term marketable securities 65,060 —
Restricted cash 55,305 73,597
Accounts receivable 18,250 6,710
Inventory 49,216 45,182
Prepaid expenses and other current assets 10,962 10,839
Total current assets 412,121 235,886
Operating lease vehicles, net 11,672 7,963
Property, plant and equipment, net 248,122 114,636
Restricted cash 5,754 4,867
Other assets 22,581 22,730
Total assets $ 700,250 $ 386,082
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $ 53,627 $ 28,951
Accrued liabilities 32,685 20,945
Deferred revenue 2,266 4,635
Capital lease obligations, current portion 388 279
Reservation payments 65,215 30,755
Total current liabilities 154,181 85,565
Common stockwarrant liability 8,189 6,088
Capital lease obligations, less current portion 661 496
Deferred revenue, less current portion 3,536 2,783
Long-term debt 225,000 71,828
Other long-term liabilities 14,565 12,274
Total liabilities 406,132 179,034
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock; $0.001 par value; 221,903,982 shares authorized; no shares
issued and outstanding — —
Common stock; $0.001 par value; 2,000,000,000 shares authorized as of
September 30, 2011 and December 31, 2010; 104,188,831 and
94,908,370 shares issued and outstanding as of September 30, 2011 and
December 31, 2010, respectively 104 95
Additional paid-in capital 881,941 621,935
Accumulated other comprehensive loss (24) —
Accumulated deficit (587,903) (414,982)
Total stockholders’ equity 294,118 207,048
Total liabilities and stockholders’equity $ 700,250 $ 386,082

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Exhibit 7: Income Statement130
Tesla Motors, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2011 2010 2011 2010
Revenues
Automotive sales $ 43,235 $ 23,350 $ 115,891 $ 67,906
Development services 14,431 7,891 48,976 12,552
Total revenues 57,666 31,241 164,867 80,458
Cost of revenues
Automotive sales 32,752 19,457 90,241 56,581
Development services 7,690 2,488 20,866 4,467
Total cost of revenues 40,442 21,945 111,107 61,048
Gross profit 17,224 9,296 53,760 19,410
Operating expenses
Research and development 54,083 26,698 147,776 55,379
Selling, general and administrative 27,618 20,432 76,545 59,224
Total operating expenses 81,701 47,130 224,321 114,603
Loss from operations (64,477) (37,834) (170,561) (95,193)
Interest income 80 100 166 195
Interest expense — (298) — (992)
Other income (expense), net (594) 3,180 (2,150) (6,770)
Loss before income taxes (64,991) (34,852) (172,545) (102,760)
Provision for income taxes 87 83 377 210
Net loss $ (65,078) $ (34,935) $ (172,922) $ (102,970)
Net loss per share of common stock,
basic and diluted $ (0.63) $ (0.38) $ (1.75) $ (2.86)
Weighted average shares used in
computing net loss per share of
common stock, basic and diluted 104,076,830 92,270,721 99,039,709 36,051,610
Exhibit 8: Revenues by Region131
Revenues
Three Months Ended
September 30,
Nine Months Ended
September 30,
2011 2010 2011 2010
North America $ 31,357 $ 8,586 $ 89,282 $ 28,105
Europe 24,619 21,317 67,766 49,936
Asia 1,690 1,338 7,819 2,417
Total $ 57,666 $ 31,241 $ 164,867 $ 80,458

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Exhibit 9: Department ofEnergy Loan Facility132
Our DOE Loan Facility draw-downs were as follows (in thousands):
Loan Facility Available
for Future Draw-downs Interest rates
Beginning Balance, January, 2010 $ 465,048
Draw-downs received during the three months ended
March 31, 2010 (29,920) 2.9% - 3.4%
Draw-downs received during the three months ended June 30,
2010 (15,499) 2.5% - 3.4%
September 30, 2010 (11,138) 1.7% - 2.6%
December 31, 2010 (15,271) 1.7% - 2.8%
Remaining Balance, December 31, 2010 393,220
March 31, 2011 (30,656) 2.1% - 3.0%
Draw-downs received during the three months ended June 30,
2011 (31,693) 1.8% - 2.7%
September 30, 2011 (90,822) 1.0% - 1.4%
Remaining Balance, September 30, 2011 $ 240,049
Exhibit 10: Financial Ratios133
Revenue GrowthForyearoveryear ending03/11 29.60%
Gross Margin For trailing4 Quartersending03/11 36.80%
Returnon Equity For trailing4Quarters ending3/11 -167.30%
NetMargin For trailing4 Quartersending03/11 -99.80%
CurrentRatio 2.7
Debt-to-Capital Fortrailing4Quartersending12/10 25.90%
InterestFundingFortrailing4Quartersending12/10 -0.80%
InterestCoverage Fortrailing4Quartersending9/10 -116
Days SalesinInv.For periodending12/10 165.6
Days SalesinRec.For periodending12/10 15.9

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1>.
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maybe>

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1>
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1>
1>
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125 Source: Tesla Motors Company Overview, Summer 2011, “Uniquely Positioned in Large Market,”
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128 Tesla Motors Company Overview, Summer 2011, “World Class Applied Tech & Auto Experience,”

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