15 Tesla, Inc. In 2018 | Course Paper

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In 2018, Tesla was one of the most talked about com–

panies in the world. What had started as an unlikely

and risky venture to produce an all-electric luxury

sports car had grown into a company with almost

$12 billion in annual revenues that produced multiple

car models, owned Solar City (a solar panel leasing

company), and produced energy storage systems (e.g.,

Powerwall) and solar roofs (see select items and seg-

ment data in Table 1, and full financials in Exhibits 1

and 2). Though it was not yet posting profits, it had

a market capitalization of over $47 billion. Most im-

portantly, it looked like it might survive—perhaps

even thrive. This was astonishing, because there had

been no other successful auto manufacturing startup

in the United States since the 1920s.

The road leading up to Tesla’s position in 2018 had

been anything but smooth, and many were still betting

against the company. In fact, as of August 2018, the

company had over $13 billion worth of shares sold

short (i.e., shares that investors borrow to sell, betting

that the price will drop so that they can buy shares to

replace those borrowed at a lower price).1

In 2017, Tesla delivered 103,020 cars (see Table 2),

a 35-percent rise over its 2016 figures. In the first

quarter of 2018, Tesla delivered 29,980 cars, of

which almost one-third were its newest model, the

Model 3. The company also had a growing waiting

list for all three cars, highlighting both a strength

and a weakness of the company: People were en–

thusiastic about the cars, and demand was high, but

Tesla was having trouble ramping up production to

meet that demand.

Some of the production capacity for its earlier

models, Model S and Model X, had been reallocated

to production of the new Model 3, and getting the

new model’s production up and running had been

rougher than expected. The company’s CEO, Elon

Musk, had forecasted producing 5,000 Model 3 cars

15

Tesla, Inc. In 2018

This case was prepared by Melissa A. Schilling

of the School of Business, New York University.

Items from Income Statement

Automotive Sales 8,534,752

Automotive Leasing 1,106,548

Total Automotive Revenues 9,641,300

Energy Generation and Storage 1,001,185

Services and other 1,116,266

Total Revenues 11,758,751

Cost of Revenue 9,536,24

Gross Proﬁt 2,222,487

R&D Expense 1,278,073

Sales, General and Admin. 2,476,500

Operating Income (1,632,086)

Table 1 Select Items from Tesla Income

Statement, in $US Thousands

Source: Tesla 2018 10K.

Tono Balaguer/holbox/Shutterstock.com

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Case 15 Tesla, Inc. in 2018

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a sports car that would be environmentally friendly–

he had concerns about global warming and U.S. de-

pendence on the Middle East for oil. When he didn’t

find the car of his dreams on the market, he began

contemplating building one himself, even though he

had zero experience in the auto industry. Eberhard

noticed that many of the driveways that had a Toyota

Prius hybrid electric vehicle (or “dorkmobile” as he

called it) also had expensive sports cars in them, mak-

ing him speculate that there could be a market for a

high-performance, environmentally friendly car. As

Eberhard explained: “It was clear that people weren’t

buying a Prius to save money on gas. Gas was sell-

ing close to ination-adjusted all-time lows. They

were buying them to make a statement about the

environment.”2

Eberhard began to consider a range of alterna-

tive fuel options for his car: hydrogen fuel cells, natu-

ral gas, diesel. However, he soon concluded that the

highest efficiency and performance would come from

an entirely electric vehicle. Luckily for Eberhard,

Al Cocconi (founder of AC Propulsion and one

of the original engineers for GM’s ill-fated EV-1)

had concluded the same thing and produced a car

called the tzero. The tzero could go from zero to

60 miles per hour in 4.1 seconds, but it was powered

with extremely heavy lead-acid batteries, limiting its

range to about 60 miles between charges. Eberhard

approached Cocconi with the idea of using lighter,

lithium ion batteries, which offered six times more en-

ergy per pound. Cocconi was eager to try out the idea

(he had, in fact, been experimenting with lithium ion

batteries), and the resulting lithium ion powered tzero

accelerated to 60 miles per hour in 3.6 seconds and

could travel more than 300 miles. Eberhard licensed

the electric-drive-train technology from AC Propul-

sion, and founded his company, Tesla Motors (named

after Nikola Tesla, a late 19th- and early 20th-century

inventor who developed, among other things, the AC

electrical system used in the United States today).3

Meanwhile, another entrepreneur–one with much

deeper pockets–was also interested in developing

electric vehicles based on the tzero: Elon Musk. In

2002, Musk was a 31-year-old South African living

in California, who had founded a company that ulti-

mately became PayPal. After selling PayPal to eBay

in 2002 for $1.5 billion, he started a company called

SpaceX with the ambitious goal of developing cheap,

consumer space travel. (SpaceX’s Dragon spacecraft

a week by the end of the first quarter of 2018, but

instead production was closer to 1,000 cars a week by

the end of the first quarter, triggering an onslaught of

criticism by analysts.

To make matters worse, the company’s rapid ex-

pansion of production capacity meant that it would

likely require additional capital within the year, caus-

ing stockholders to worry about dilution of their

shares. Tesla had made bold moves and impressive

progress, but there were lingering concerns over its vi-

ability. Would it be able to turn a sustainable profit

on its automaking operations? In the niche market

of luxury automobiles for the “eco-wealthy,” it had

a privileged position with customers who were rela-

tively price-insensitive and were seeking a stylish,

high-performance car that made an environmental

statement. To compete for the mass market, the car

would have to compete on value and efficiency with

larger, more established rivals.

CI5-1 HISTory of TeSla

In 2003, an engineer named Martin Eberhard was

looking for his next big project. A tall, slim man

with a mop of gray hair, Eberhard was a serial en-

trepreneur who had launched a number of startups,

including NuvoMedia, which he sold to Gemstar in

a $187-million deal. Eberhard was also looking for

Table 2 Tesla deliveries in 2017 and 2018

Model S Model X Model 3 Total

2017

Q1 13,450 11,550 25,000

Q2 12,000 10,000 22,000

Q3 14,065 11,865 220 26,150

Q4 15,200 13,120 1,550 29,870

Total 54,715 46,535 1,770 103,020

2018

Q1 11,730 10,070 8,180 29,980

Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Case 15 Tesla, Inc. in 2018

power the car, they connected nearly 7,000 small,

cylindrical 18650 lithium-batteries together into a

pack. 18650 batteries are the type used in many con-

sumer devices, including laptops, and over a billion a

year are manufactured. This meant that the Roadster

was using a battery that had been thoroughly

“debugged,” that already had a good ratio of energy

capacity to price, and for which there was already large

production capacity.

While the men worked well together at first, per–

sonality clashes soon emerged. Both were technically

savvy and vigorously addressed problems within the

company. As described by Laurie Yoler, Eberhard

was “just brilliant, and he has this tenacity that is

unbelievable . . . He is the guy you want around in

those early days when you have naysayers all around.”

However, Eberhard could also be abrasive and criti–

cal. Musk, in turn, was not content to just finan–

cially back the company. He began to get intimately

involved in decisions about the car’s design and the

operation of the company. Soon Musk and Eberhard

were at odds over decision making. Eberhard pre–

ferred to stick with the fiberglass body panels used

in the original Elise; Musk wanted to use the lighter,

stronger–and more expensive–carbon fiber. Eberhard

had approved the hiring of PR professionals to build

publicity for the car before its launch; Musk fired them,

believing his own involvement and the car itself

would generate enough publicity. Eberhard wanted to

reap the cost savings of sticking with the Elise’s origi–

nal crash-tested, off-the-rack chassis; Musk wanted

to lower the doorsills by two inches to make the car

easier to enter and exit. Musk also wanted to rede–

sign the headlights and door latches, and replace the

Elise’s seats with more comfortable–and again, more

expensive–custom seats.7

In each case, Musk prevailed. He insisted that

“you can’t sell a $100,000 car that looks like crap.”

Musk’s views were hard to ignore given that, by 2007,

he had put $55 million of his own money into the

company and had also raised money from wealthy

friends, including eBay’s second employee, Jeff Skoll,

and Google founders Sergey Brin and Larry Page.

Musk’s insistence on the best materials and parts,

however, combined with Eberhard’s inexperience as

the manager of a major firm, resulted in delays and

runaway costs. At a staff meeting in June 2007, Tom

Colson, head of manufacturing, revealed a cost anal-

ysis suggesting that the average cost of the cars would

ultimately made history in May 2012 by becoming

the first commercial vehicle to launch and dock at the

International Space Station.4) Musk’s assertive style

and astonishing record of high-tech entrepreneurship

made him one of the inspirations for the Tony Stark

character in Jon Favreau’s Iron Man movies.

Like Eberhard, Musk thought electric cars were

the key to the United States achieving energy indepen–

dence, and he approached Cocconi about buying the

tzero. Tom Gage, who was then AC Propulsion’s CEO,

suggested that Musk collaborate with Eberhard. After

a two-hour meeting in February 2004, Musk agreed

to fund Eberhard’s plan with $6.3 million. He would

be the company’s chairman; Eberhard would serve

as CEO.

cI5-1a The Roadster

The first Tesla prototype, the Roadster, was based

on the $45,000 Lotus Elise, a fast, light sports car

that seemed perfect for the creation of Eberhard and

Musk’s grand idea (see Figure 1). The car would have

400 volts of electric potential, liquid-cooled, lithium

ion batteries, and a series of silicon transistors that

would give the car acceleration so powerful the driver

would be pressed back against the seat.5 It would be

nearly as fast as a Porsche 911 Turbo, would not cre-

ate a single emission, and would get about 220 miles

on a single charge from the kind of outlet you would

use to power a washing machine.6 Furthermore,

rather than creating new large-format batteries to

figure 1 The roadster

Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.