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•Tesla was aggressively expanding its network of sales galleries and service centers to broaden its
However, there was a lurking problem with Tesla’s strategy to bypass distributing through
franchised Tesla dealers and sell directly to consumers. Going back many years, franchised
automobile dealers in the United States had feared that automotive manufacturers might one day
decide to integrate forward into selling and servicing the vehicles they produced. To foreclose any
attempts by manufacturers to compete directly against their franchised dealers, automobile dealers
As sales of the Model S rose briskly in 2013 and Tesla continued opening more sales galleries
and service centers, both franchised dealers and statewide dealer associations became increasingly
anxious about “the Tesla problem” and what actions might need to be taken. Dealers and dealer
nTesla offered a prepaid maintenance program to Model S buyers, which included plans covering
nBeing prompt and aggressive in correcting any safety problems or unexpected performance deficiencies
for the Model S at the company’s expense rather than having the owners of Tesla vehicles pay to have
these problems corrected. This acts to boost customer confidence in purchasing/leasing a Tesla vehicle
nProviding periodic software updates to the owners of the Model S (and forthcoming models as well) that
nTesla’s solution to providing owners with ample and convenient recharging opportunities was to
establish an extensive geographic network of recharging stations. Superchargers were strategically
placed along major highways connecting city centers, usually at locations with such nearby amenities
as roadside diners, cafes and shopping centers that enabled owners to have a brief rest stop or get a
In 2013 Tesla began offering Model S owners the option of pulling into a Supercharging station and
nMarketing strategy—As of 2014, extensive media coverage, glowing praise from both new Model S
owners and admiring car enthusiasts (which effectively enlarged Tesla’s sales force at zero cost), and the
decisions of many green-minded afuent individuals to help lead the movement away from gasoline-
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However, Tesla did make use of pay-per-click advertisements on websites and mobile applications
relevant to its target clientele. It also displayed and demonstrated its vehicles at such widely attended
nAn innovative resale guarantee program for new vehicle purchases—Starting in the second quarter of
2013, Tesla partnered with Wells Fargo Bank and US Bank to offer Model S customers were unique
financing terms that had three important features:
1. US Bank and Wells Fargo provided 10 percent down financing and loan terms of up to 72 months
2. Depending on the total cost of the Model S vehicle being purchased, Model S buyers could recoup
most or all of the 10 percent down payment via Federal and state tax credits. All Model S buyers
were eligible for a Federal tax credit of $7,500, and 6 states (California, Colorado, Georgia, Illinois,
Utah, and West Virginia) offered their residents tax credits ranging from $600 to $7,500 on electric
3. Model S customers were given the option of selling their vehicle back to Tesla within a window of
36 to 39 months after delivery for a guaranteed 50 percent of the base vehicle selling price and 43
percent of the price of any vehicle options. In the event the guaranteed buyback value of 50 percent
Tesla’s offer to buy back Model S cars from customers using its lease-buyback financing option had
nSelling regulatory credits to other automotive manufacturers—Because Tesla’s electric vehicles had no
tailpipe emissions of greenhouse gases or other pollutants, Tesla earned zero emission vehicle (ZEV) and
greenhouse gas (GHG) credits on each vehicle sold in the United States. It also earned corporate average
fuel economy (CAFE) credits on its sales of vehicles because of their high equivalent miles per gallon
nStrategic partnerships—Tesla had entered into long-term strategic partnerships with Panasonic Corp.
(to develop battery cells for its vehicles), Daimler AG (to provide certain research and development
nThe gigafactory to produce battery packs—On February 26, 2014, Tesla announced that it and unnamed
partners (one of which ended up being Panasonic) would invest $4–5 billion through 2020 in a
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“gigafactory” capable of producing enough lithium-ion batteries to make battery packs for 500,000
Tesla indicated the new gigafactory would reduce the company’s battery pack cost by more than 30
nFinancing strategy—During its early years, Tesla financed its startup costs and capital expenditures via
a number of issues of common stock, a $450 million loan from the U.S. Department of Energy in 2009
(which was repaid in 2013), and the issue of $660 million of convertible senior notes.
Shortly after its gigafactory announcement, Tesla announced that it had sold $920 million of convertible
2. Which one of the five generic competitive strategies discussed in Chapter 5 most
closely approximates the competitive approach that Tesla is employing?
We think Tesla’s strategy is one of focused differentiation (because the Model S and the Model X are
aimed at the luxury segment of the automotive industry and because Tesla vehicles are equipped totally
with electric powertrains). However, plans call for the strategy to evolve more toward broad differentiation
You might want to point out to the class that Tesla’s electric vehicles have been deliberately designed
to incorporate a disruptive technology and thereby revolutionize the worldwide market for motorized
3. Are you impressed by the strategy Elon Musk has crafted for Tesla? Why or why not?
Class members are likely to be highly impressed by Elon Musk and the strategy he has crafted for Tesla
Motors. In our view, the strategy is
nBold
nExceptionally innovative
nWell-conceived and well thought out
The pieces fit together very, very nicely. And, so far, it seems to be working beautifully. We see very little to
criticize or second guess. Of course, there are substantial risks—and this may/should worry students. But, if
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nAre the odds of the strategy failing overly high?
nWhat do you believe the buyers of Tesla’s common stock and the buyers of the company’s recently
nAre the buyers of Tesla’s common stock and the buyers of the recently-issued senior convertible notes
investing in Elon Musk or in the expectation of the bright future for Tesla vehicles or both?
4. What is your assessment of Tesla’s financial performance as shown in case Exhibit 1?
Use the financial ratio information in Table 4.1 of Chapter 4 (pages 81–83) to assist you
in calculating a revealing set of financial ratios and interpreting them.
Even a cursory look at the numbers in case Exhibit 1 make it clear that Tesla Motors is beginning to perform
well. But we are strong believers in having students crunch some numbers and form an analysis-based
nSales of vehicles, options and accessories, vehicle service, and regulatory credits have (not surprisingly)
nTotal revenues from all sources climbed from $116.7 million 2010 to $2.01 billion in 2013, a CAGR of
158.4%.
nGross profit is up from $30.7 million in 2010 to $456.3 million in 2013, a CAGR of 145.9%.
5. What do we learn from the data in case Exhibit 2? Does the data provide additional
valuable information? Why or why not?
We contend the data in case Exhibit 2 provides valuable information because it reveals the effect of leasing
(and lease accounting) on Tesla’s financial performance—which otherwise is hidden in a GAAP-only
financial performance presentation. Hence, providing investors with a comparison of GAAP versus non-
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Note: In discussing the GAAP versus non-GAAP data, students need to be aware that for GAAP purposes,
revenue on vehicles leased via Tesla’s banking partners was deferred and recognized over the lease term, but
Further it is important that students should recognize that (1) Tesla’s leasing program offers advantages that
many customers will find attractive and (2) GAAP-based lease accounting tends to make Tesla’s financial
Furthermore, the non-GAAP data reveals the impact of non-cash, stock-based compensation expenses on
a company’s GAAP-based financial performance. In Tesla’s case, Exhibit 2 clearly displays stock-based
With these things in mind, inspection of the data in case Exhibit 2 reveals:
nTesla’s non-GAAP quarterly revenues are rising—from $561.8 million in Q1 2013 to $713.0 million in
Q1 2014, a quarterly CAGR of 6.1%.
To provoke debate, you might ask the class:
Does the GAAP versus non-GAAP presentation enhance investor understanding of the impacts of
lease accounting and stock compensation on Tesla’s financial performance or not?
6. What are the issues/problems that Elon Musk and other members of Tesla’s top
management team need to address?
Students ought to come up with a “worry list” of issues/problems that includes most all of the following:
nWhether to expand the network of recharging stations in the United States, Western Europe, and China
nAre there any further actions the company can take to bring down production costs for the Model 3, so
nWill buyer demand for Tesla’s electric-powered vehicles remain robust over time? Can Tesla withstand
nWhat happens to buyer demand for electric-powered vehicles if gasoline prices fall below $3.00 per
nWill the demand for Tesla’s electric vehicles in China prove to be strong and sustainable?
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nAs Tesla begins to sell more and more vehicles annually in the United States, will traditional automobile
dealers start to clamor loudly for strict enforcement of state laws prohibiting automobile manufacturers
from selling direct to motor vehicle buyers (consumers), thus forcing a major change in Tesla’s
7. What, if any, changes/adjustments in Tesla’s strategy would you recommend that Elon
Musk consider?
There’s really nothing on the above worry list that Elon Musk and Tesla management are not likely to be fully
aware of. Clearly, Tesla management is trying address many of these issues and willing/able to be proactive in
making strategy adjustments should market and competitive conditions shift and new internal circumstances
arise. For example, it is easy enough to accelerate or reduce the number of battery recharging stations as the
market need for adjustments in this or that location arises. The company definitely seems to understand the
The point here is that students will likely have a hard time suggesting new/different actions that Tesla
management should consider. Many class members are likely to conclude that Tesla should continue with
8. What is your outlook for Tesla’s future performance and its prospects for revolutionizing
the global automotive industry’s use of gasoline-powered engines versus battery-
powered engines?
Without question, the views of class members can differ considerably on Tesla’s outlook and prospects for
actually revolutionizing the global automotive industry with its technologically disruptive electric-powered
vehicles. Here are some suggested questions you can pose to the class to spark debate pro and con:
nHow many vehicles would you estimate that Tesla is likely to sell in 2020?
nOver the course of the next five years, is Tesla likely to become an attractively profitable company with
a rising stock price?
nWould you expect Tesla’s stock price in 2018 to be above or below $300 per share (unadjusted for
splits)—the price in 2014 ranged from a low of $150 to a high of $290?
nWhat is your forecast for production activity in 2020 at Tesla’s “Gigafactory” that is scheduled to
produce lithium ion batteries—would you speculate that production will be well below full capacity,
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nWill Tesla still be in business in 2020? If your answer is no, will it be because Tesla went bankrupt or
nIn 2020, will battery-powered electric vehicles be rapidly growing in popularity across the world, such
Epilogue
In November 2014, Tesla released its third quarter 2014 results. Highlights included the following:
nTesla achieved its highest ever quarterly deliveries (7,785 vehicles), despite a month-long factory shutdown
in July.
nIt also achieved its highest ever peak deliveries in a single day (907 vehicles).
nThe majority of Q3 deliveries were in North America; Q3 sales in North America were up 65% over the third
quarter of 2013.
nThe introduction of Dual Motor all-wheel drive and Autopilot further accelerated Model S demand during
Q3.
nModel S orders and deliveries alone expected to increase by 50% in 2015.
nInvesting to increase production to 2,000+ vehicles per week by end of 2015.
nReductions in the number of Model S options and powertrain combinations, in order to ramp production
faster.
nNon-GAAP revenue was $932 million for the quarter, up 55% from a year ago, while GAAP revenue was
$852 million.
nThe GAAP-based net loss for Q3 2014 was $71.0 million and the net loss for the first three quarters of 2014
totaled $186.4 million ($1.32 per diluted share); non-GAAP net income for Q3 2014 was $3.1 million and
non-GAAP net income for the first nine months of 2014 was $36.3 million ($0.26 per diluted share).
nCash ow from operations was a negative $27.9 million in Q3 2014, but was a positive $29.1 million for the
first nine months of 2014.
nCompared to Q2, the average selling price of Model S declined slightly due to the stronger dollar.
nAutomotive revenue for Q3 included $31 million of powertrain sales primarily to Daimler for the Mercedes-
Benz B Class Electric Drive. It also included $93 million of regulatory credits, including $76 million of
Zero Emission Vehicle (ZEV) credits. ZEV credit revenue was much higher than expected due to closing
additional contracts with several OEMs.
nWork was continuing on the finalization of Model X with the testing of Alpha prototypes and initial builds
of the first Beta prototypes.
nFull-year production was expected to be about 35,000 vehicles, with deliveries of about 33,000 vehicles.
nPlans called for spending about $350 million on capital improvements in Q4 in order to add more production
capacity, accelerate the pace of Gigafactory construction, continue vehicle development, and expand
globally.
For the very latest information on developments at Tesla Motors, we urge that you check the press releases and
the investor relations sections at www.teslamotors.com.