- Tesla has shown exceptional breakthrough in 2019 but remained a risky investment due to its illiquid cash flows
- Elon Musk has dived into the auto-taxi development and solution towards the battery degradation, the electric car manufacturer is going to disrupt ride-share and auto economy if his declaration has come true
- The electric market in the West has fallen behind by the lack of investment within the industry, Tesla stayed as a micro-monopoly which discouraged innovations for public goods.
Tesla, a company with the mission is to accelerate the world’s transition to sustainable energy. Besides a company, Tesla sees themselves as a change-maker who wants to replace all tradition vehicles that consume diesel and gas with their electric cars. Elon Musk, the Chief Executive of the company has decided to make it’s motor patent available to the public in order to courage competitions and partnerships.
Within over 16 years of innovations, the company has been through litigation crisis, major stakeholders dispute, public negative sentiments, and expansionary difficulties. Despite all the hardships, Tesla has made his way out by implementing the first-principle problem-solving regimes on strategic attempts — Improvise, Adapt, and Overcome.
Today, Tesla has established 5 models (Roadster, Model S, Model X, Model Y, Model 3). Through plenty of cost-savings strategies, the electronics manufacturer was able to outsell most traditional vehicle market players such as Mercedes-Benz, Audi, Acura, Infiniti, etc.
Tesla has a very challenging long-term business plan that will make an unparalleled effect on the world population. Before all that, we have figured out what is the biggest barrier to getting the general public to replace traditional cars with their electronic cars — Cost, Cost, and Cost! Therefore, they have done plenty of work to reduce the selling price as I would categorize them into 4 segments.
In order to succeed in developing a business, you are gonna have to develop the right products, complete in the right industry, and grow at the right time. The electric car market is a great example of that because the electric car’s objectives align with our sustainability concerns, the electric car is so fresh to the monotonous vehicles market (5-year-old) and governments are now subsidizing carbon-reducing activities (i.e additional $5500 in Tax Write-offs) — Exactly what electric cars are built for.
In the meantime, Tesla is surprisingly fortunate to complete in the American and European market because there aren’t many competitions within the space, due to the capital risk and brand diversification problems. In contrast, the auto tech giant has only the 11th largest market share in China which is concerned among the Americans. Anyways, this competitive environment is beneficial for Tesla to maintain a monopoly states in the West but it might not be the best case for electric cars development.
All these factors have positioned Tesla to be the top priority for Americans when they want to purchase electric cars, the cost has been diluted by governmental tax incentives, large upfront depreciation, and low financing interest deal terms.
Tesla’s S3XY aspiration to create a sustainable future has differentiated themselves with other auto companies who share a similar culture. Before every vehicle announcement, Elon has organized several ‘test-drive’, ‘insider gatherings’ activities which had attracted tech experts and famous YouTubers to attend. This has generated massive media exposure and ultimately inform the general public about its vehicle indirectly.
Tesla has an excellent product mix where they have great available options with a relatively high price range. They penetrated the affordable electric car market Model 3, Model X, and sold Roadsters to people who wanted a race car with state of the art functionality and design. Model Y and S were created to fulfill family needs and the Pickup Truck was also introduced to fulfill business owners purposes.
One of the biggest disadvantages of electric cars is the mileage limit, where currently Tesla’s cars have an average of 130 miles per charge limit. Therefore, the availability of charging stations have become an issue for Americans and Canadians, who typically drive in longer ranges. Tesla has resolved that issue by growing the quantities of supercharging stations in North America from 200 stations twelves months ago to 1533 stations today. It resolves the issue and furthermore reflects Tesla’s responsiveness to public concerns.
On the other hand, Tesla has also invested over 900 million capital into research and development, other to recreating better designs they have developed auto-pilot feature. It is such a big deal because auto-pilot feature will disrupt the transportation service industry, where taxi and even Uber would be taken out from the competitions.
Tesla’s operation is more or less the same as Apple — The Giant Verticals.
What does it mean by verticals? Vertical means the practice of synergies, through bringing previously outsourced operation in the house would ultimately reduce the cost of goods sold by avoiding the mark-up between different manufacturers. As a result, the company would be able to generate a greater margin to generate extra profit against its competitors — maintain a sustainable advantage over its competitors. This is also one of the reasons why Merger & Acquisitions happen so frequent between mid-large size technology companies and start-ups.
Tesla has followed this strategy since 2010, after manufacturing the 1st generation of Roadster, they realized outsourcing their manufacturing process was costly and inflexible. In late 2010, Tesla has moved into its first factory in California jointly operated by Tesla, Toyota, and General Motor. Shortly after establishing Model S and Model X Elon has funded themselves by issuing bonds to build its Gigafactory in China.
With Gigafactory, Tesla is able to introduce variation in terms of interior designs, wheel types, motor power. On the other hand, they were able to do more testings with their models, due to Tesla caught on fire accident in Seattle. Ultimately they are able to create from the exterior design to the electronic motor core, which saved hundreds of millions in cost synergies. The “everything in-house feature” has also enabled Tesla to be communicative and responsiveness to an internal arrangement, in addition to the strong work ethic culture. Tesla is able to create astounding progress within months.
Take a look of the website of Tesla and you would it really different from the other Auto companies because of Tesla’s minimalism and it’s a simple business model. There are no marketing campaigns or events listed on the website and every vehicle has its own demonstration video. The user experience gives an image of futuristic, simple and convenience.
Speaking of the purchase experience, 100% of its purchases are through pre-order and there are only 3 types of financing with 1,2,3 years. With the options of range choices, exterior color, interior color, auto-pilot installment, customers are able to customize their car and save money by avoiding the costly optional upgrade. What stood out was the financing part, in addition to the financing part, there’s a part named as cost after estimated savings. Estimated savings include 6 years of gas savings, carbon tax benefits, depreciation tax shield, etc, it gives the true cost of the vehicle for buyers to consider.
Unlike most auto companies, Tesla markets themselves through media exposure instead of authorizing dealership. The cost saved from contracts with dealership and fees from salesman can greater reallocate to capital expenditure and lower selling price. Which tends to be the future of most businesses strategy.
Back into 2010 when Roadster was introduced and Tesla began its production, during that time the electric car industry was criticized by the Wall Streets and economists as a bearish industry, the physical limit of mileage were never going to be resolved in any circumstances. After then, Tesla has manufactured the Model X and it made its moves to the public market in the New York Stock Exchange.
Tesla had constantly received public sentiments on its performance, first they are super illiquid and then their production capacity is unable to fulfill the demand of its products. Then, Tesla demonstrated its market value by outperforming in sales and astounding technology advancement.
Tesla has been to the edge of litigation for a few times and it was managed to survive due to the grants from the US Government Energy Initiatives, Toyota’s fund, Chinese tech giant Tecant, and Elon’s personal savings. These histories had held investors back from investing in Tesla despite its upscale potentials.
Today Tesla’s position in the market has changed since there are more Tesla vehicles on the road and more supercharging stations. Tesla has received a lot of data from them and it aided Tesla to assess risk and seek partnership with other companies. The size of the economy (in terms of manufacturing capability) allows them to extend their operation from Business to Consumers to B2B as well where they can sell components of vehicles such as the engine, motor, software system, etc.
More recently, they have announced an acquisition in mid-May 2019, with a well-known battery company — Maxwell Technologies Inc for $218 million through stock. The rationale behind this acquisition was not simply a cost synergy attempt but ultimately to improve its durability, capacity, weight. Battery degradation has remained a problem since the very first model and the solution seemed to be resolved by applying Maxwell’s Dry Battery Electrode technology into Tesla batteries.
Dry Battery Electrode (DBE) could increase the battery energy density milestone of 300 Wh/g compared to the 250 Wh/g before which makes the electric motor to be powered more efficient, more importantly, DBE without losing its longevity. This could ultimately save over 20% from its current battery cost and improved durability twice as much.
Last April when Elon announced the 2nd generation of Roadster, he said next year he would start focusing on the solar panel development and it would be interesting to look at how Tesla is going to market those products to business owners and individuals.
It is still unpromising that the electric car market has remained a single space for Tesla as a micro-monopoly. I think that once when China has established a profound level of electric car reputation, making sales across the Pacific Ocean makes sense for those businesses in the future.
Elon Musk, as the Chief Executive and the owner of SpaceX, Tesla, Paypal, and The Boring Company. I think it is really stressful for him to take all these responsibilities on him, withstanding criticism from NASA on his SpaceX project, complaints from Tesla shareholders due to the stock-based dilutive acquisition, lack of supporters for the tunnel constructions and stunted growth in Paypal, etc. I certainly hope that there will be somebody who can help him to make Earth a better place to live.
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