Tesla Lights Fire Under Automobile Industry
Tesla Motors fires warning shots at automakers, and they can鈥檛 help but pay attention.
Tesla is the world鈥檚 only all-electric automaker capable of delivering a driving experience comparable to gasoline-powered cars. Its mission? 鈥淭o accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible鈥�. To do this, Tesla (a) creates unparalleled value for customers and (b) effectively aligns its business and operating models.
Business Model
Tesla builds the Model S, a luxury sedan powered by a 85kWh battery which offers a single-charge range 265 miles, double that of any competitor.[1] The vehicles also come with the world鈥檚 first fully-integrated autopilot system and over-the-air updates technology.[2]
Tesla sells through self-owned stores. It charges between $70,000-$100,000+ for the Model S. Customers can 鈥渞efuel鈥� their vehicles using Tesla鈥檚 Wall Connectors or at pay-per-use charging stations with an adaptor, but also have complimentary access to Tesla鈥檚 worldwide solar-powered Supercharger network. [3]
It is critical to note that this is only a small part 鈥� the setup 鈥� of Tesla鈥檚 business model. In line with its mission to universalize zero-emission transportation, its plan is to generate sufficient revenue, expertise, and brand buzz to ensure the success of a third $35,000 鈥渕ainstream鈥� model (the upcoming Model X and Model 3), and yet more economical models thereafter. The company also manufactures and sells electric powertrain systems to other automakers and energy storage products for home and commercial use. While the company is still unprofitable, it鈥檚 building toward an ecosystem and a full-sized portfolio of affordable electric vehicles (EVs) that will dilute the fixed costs of its enormous capital investments.
Tesla creates value by using its competitive advantages
1. superior batteries
2. superior technology
3. superior support system and
4. superior brand perception
鈥� to deliver on two customer promises:
Range and convenience: Environmental benefits without trade-offs in speed or convenience. Tesla removes two prohibitive pain-points of EV drivers 鈥� poor charging infrastructure and driving range
Design and experience: Cars that 鈥渨ow鈥�. Tesla is associated more with fashion and a luxury experience than with energy efficiency, making its target demographic broader than 鈥渢ree-huggers鈥�
Tesla鈥檚 operating model both creates and sustains its competitive advantages above. The four pillars of this model are its design and manufacturing processes, ecosystem development, technology infrastructure and supply chain centralization.
Design and Manufacturing Process
Impacts: batteries, technology, brand perception
Tesla鈥檚 design and manufacturing process diverges from competitors鈥� in two major ways.
First, it is built for the strategy of designing cars from the ground up, and of designing cars around their batteries, and not vice versa
Second, it is built to focus on perfecting one model at a time, rather than many
Tesla鈥檚 speed and range, two of its most critical differentiators, could not be achieved if it didn鈥檛 boast much larger batteries than its EV counterparts (85 vs. 42 kWh). This, in turn, could not be achieved had Tesla adhered to manufacturing based on conventional gas-fueled engine and transmission platforms. The floor of the Model S, for example, is a flat slab which supports larger batteries without forgoing interior space, a feat impossible in a traditional vehicle.[4] Unlike Nissan and Chevrolet with their Leafs and Bolts, as an automaker with an exclusive focus on EVs, Tesla developed its cars from scratch. It was free to create manufacturing systems dedicated to maximizing its battery advantages.
Tesla also manufactures one model at a time, despite having the plant and charging capacity to support simultaneous production of multiple models. Its Fremont, California factory lies 80% idle [5], a reflection of Tesla鈥檚 commitment to completing its learning curve on the Model S before introducing additional production complexities for Models X and 3. This ensures Tesla is able to fully digest feedback from customers on the Model S and translate them into feature updates for both the S and future models. A staggered production ramp sharpens Tesla鈥檚 competitive edge in technology and design. In addition, it ensures the higher quality essential to maintaining equity as a premium brand (2013 owner satisfaction was 99/100) [6].
Ecosystem Development
Impacts: batteries, support system, brand perception
Tesla uses its free-for-use and soon-to-be open-platform Supercharger network and its powertrain/energy storage products to render the trend toward EVs permanent and sustainable.
Even with its best-in-class batteries, Tesla cars cannot promise unlimited range without its celebrated (and free) Supercharger network. Although CEO Elon Musk has stated that 鈥減eople drive long distance a lot less than they think they do鈥�, indicating modest short-term demand, Tesla has moved extremely quickly to build out charging infrastructure that will cover 98% of the US population by end of 2015. [7] This not only reassures existing Tesla customers that wherever they go, they will not be stranded, but also serves to signal EVs鈥� user-friendliness and Tesla鈥檚 market dominance to potential customers.
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Tesla will also release its Supercharge technology to all EVs, but on the condition that other automakers conform both to its power level and to its cost structure (customers don鈥檛 pay for charge). [8] This gives a tremendous boost to the entire EV industry, moving it closer to the incumbent system where gas stations are agnostic to customers鈥� car-brands. By making itself the universal standard for EVs, while also selling competitors its energy storage products, Tesla kills two birds with one stone: it reduces technological competition, while increasing the convenience and attractiveness of EVs overall. As the poster-child of EVs, it will stand to benefit the most from an increase in the size of the industry pie.
Technology Infrastructure
Impacts: technology, brand perception
Tesla鈥檚 boasts state-of-the-art technology, such as speed-limit detection and remote control. However, what will drive its success is its method of managing and delivering technology and its analytics infrastructure.
Tesla鈥檚 technology is built on its own operating system, which gives the company maximum security, flexibility and standardization. It has also made as much of its technology transmittable over-the-air as possible. As a result of an advanced remote technology infrastructure, Tesla can upgrade all cars to new operating systems at once, and generate software updates on a daily basis. This dramatically reduces time-cycles needed for enhancements [9] and guarantees a convenient, and equally importantly, a 鈥渃ool鈥� experience for drivers, two of Tesla鈥檚 selling-points.
In addition, Tesla has developed 鈥渇leet learning technology,鈥� which deploys machine-learning to connect its fleet and facilitate information transfer among networked cars so they automatically improve with each extra mile driven or charge made. Combining Big Data feedback with infrastructure capacity to apply uniform changes fleetwide within minutes gives Tesla the knowledge to get a head-start over competitors in innovating its technology, and a distinct lead in delivering an always-evolving experience to satisfy customers.
Supply Chain Centralization
Impacts: batteries, technology, support systems
Tesla鈥檚 supply chain is maintained entirely in-house to reinforce its core strength in batteries. Battery construction generally entails a time-consuming and costly global process: sourcing minerals from South America, shipping to North America for refining, then to Asia for further assembly, and finally back to North America for installment. Tesla鈥檚 plan to build a $5 billion 鈥淕iga Factory鈥� will eliminate the labor, time, and transport inefficiencies in this process, and is expected to cut the cost of producing batteries by 30%, which will be passed down to customers in Tesla鈥檚 upcoming 鈥渆conomic鈥� models. [10]
Tying back to its design, ecosystem, and technology systems, Tesla鈥檚 control over its own supply chain offers freedom to quickly define and change its custom manufacturing processes, prevent loss of its industry-leading patents, and increase speed of innovation and speed-to-market, both of which have helped it gain first-mover advantage for its batteries and Superchargers.
Going forward, Tesla must be aware of the complexity posed by its inevitable expansion into more models. Although most of its competitive advantages will only grow with its scale and market share, it may suffer from diluted focus on improving each model and ability to tailor manufacturing accordingly. Separating production plants by model may be a way forward, and Tesla must leverage its cutting-edge fleet learning technology to make learnings from each model actionable for others.
Works Cited
[1] 2014 10-K form. Retrieved from http://quote.morningstar.com/stock-filing/Annual-Report/2014/12/31/t.aspx?t=:TSLA&ft=10-K&d=9339cdc620dd76cd0556368ac795f321
[2] Sparks, Daniel. 鈥淭esla Motors, Inc. Flexes Fleet Learning Technology and Over-The-Air Updates鈥�. (2015, October), http://www.fool.com/investing/general/2015/10/15/tesla-motors-inc-flexes-fleet-learning-technology.aspx
[3] Shahan, Zachary. 鈥淭esla鈥檚 3 Huge Competitive Advantages.鈥� (2015, May), http://cleantechnica.com/2015/05/03/teslas-3-huge-competitive-advantages/
[4] Ottaway, Luke. 鈥淲hat makes Tesla鈥檚 batteries so great?鈥� (2014, October), http://www.torquenews.com/2250/what-makes-tesla-s-batteries-so-great
[5] Trefis Team. 鈥淭esla’s Business Model Highlights What The Shift To Electric Means For The Auto Industry鈥�. (2015, September),
http://www.forbes.com/sites/greatspeculations/2015/09/01/teslas-business-model-highlights-what-the-shift-to-electric-means-for-the-auto-industry/
[6] DeMorro, Christopher. 鈥淭esla Adds First Driver Assist Features To Model S鈥�. (2014, October), http://cleantechnica.com/2014/10/02/tesla-adds-first-driver-assist-features-model-s/
[7][9][10] Buvat, Jeremy. 鈥淭esla Motors 鈥� A Silicon Valley Version of the Automotive Business Model鈥� (2014), (https://www.capgemini-consulting.com/resource-file-access/resource/pdf/tesla_motors.pdf
[8] Hruska, Joel. 鈥淭esla reveals plan to share Supercharger network with other electric car makers鈥�. (2014, June), http://www.extremetech.com/extreme/184141-tesla-reveals-plan-to-share-supercharger-network-with-other-electric-car-makers
The Tesla ecosystem is truly unique among auto OEMs and I like how you characterized its features. On the protection of Tesla’s innovative patents, Tesla has made its patents open-source (). This move shows Tesla’s mission-driven focus on converting the auto transportation industry to EVs, but it also shows how EVs rely upon network effects (for charging stations, as you pointed out) and also in shaping driving habits.
It’s really interesting that because Tesla did not have legacy/historical designs in place already, they weren’t limited to existing car bodies and were able to come up with a new body that was designed to maximize battery capacity. Even their interior controls have reduced buttons and levers, using a touchscreen instead because they weren’t bound to what a traditional car should look like.
Its strategy of releasing its Supercharge technology to everyone is an interesting move. On the one hand the technology may be a competitive advantage for them against other EV vehicles (if they keep the technology in-house), but at the same time they still have to remember that their main competition still is traditional combustion engine cars. By spreading the Supercharge technology they are unifying the EV industry and spreading the ease of use/charging for EV cars. Since the Supercharging station will be free of charge, I wonder how companies will split costs if say a Ford car charges at a Tesla Supercharge station or vice versa.