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sales galleries, service centers, and Supercharger locations—but was prevented from using its sales
galleries to take orders, conduct test drives, deliver cars, or discuss pricing with potential buyers. Buyers
in these states could place an order via the Internet, specify when would like the car to arrive, and then
either have it delivered to a nearby Tesla service center for pickup or have it delivered directly to their
home or business location. As of March 2018, the prevailing state restrictions on Tesla sales galleries
did not seem to be limiting Tesla’s sales in a meaningful way.
Tesla’s Supercharger Network: providing recharging services to owners on long-distance trips. Tesla’s
solution to providing owners with ample and convenient recharging opportunities was to establish an
extensive geographic network of recharging stations. Tesla’s Supercharger stations 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 quick
meal during the recharging process—about 90 percent of Model S and Model X buyers opted to have
their vehicle equipped with supercharging capability when they ordered their vehicle. All Model S and
Model X owners were entitled to free supercharging service at any of Tesla’s Supercharging stations;
Model 3 owners had to pay a recharging fee. In March 2018, Tesla announced price increases for its
Supercharging stations to about $0.25 per kwh. Tesla owners charged their vehicles at home more than
90 percent of the time and used Supercharger stations mainly for trips or when they needed extra range.
A 50 percent recharge took 20 minutes, an 80 percent recharge took 40 minutes, and a 100 percent
recharge took 75 minutes. As of year-end 2017, Tesla had a total of 1,128 Supercharger stations globally;
most Tesla stations had between 6 and 20 charging spaces, but newer stations in high-traffc corridors
had as many as 40 spaces, a customer lounge, and a café. About 300 new Supercharger locations were
planned for 2018.
Marketing strategy—From 2014 through 2017, Tesla’s principal marketing goals and functions were to:
• Generate demand for the company’s vehicles and drive sales leads to personnel in the Tesla’s
showrooms and sales galleries.
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Vehicle leasing program—Tesla, in partnership with various financial institutions, began leasing
vehicles to customers in 2014; the number and percentage of customers opting to lease Model S
vehicles increased substantially in 2015. By year-end 2015, Tesla was not only offering loans and leases
Selling 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
Tesla Energy—In 2015, Tesla formed Tesla Energy, a new subsidiary that would begin producing and
selling two energy storage products in 2016—Powerwall for homeowners and Powerpack for industrial,
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the late-night hours when rates were low. However, Powerwall home batteries could also be used as a
backup power source in case of unexpected power outages. Powerpack models were 100 kW lithium-
ion batteries that industrial, commercial, and utility enterprises could use for energy storage or backup
power.
When Solar Energy was merged into Tesla, the company arranged to lease a facility, called Gigafactory 2,
in Buffalo, New York, to produce (1) solar energy systems sold to residential and commercial customers
and (2) its freshly-developed Solar Roof, which used aesthetically pleasing and durable glass roofing
tiles designed to complement the architecture of homes and commercial buildings, to turn sunlight into
electricity that was being marketed in 2018 with distribution partners Home Depot and Lowe’s.
2. Which one of the five generic competitive strategies discussed in Chapter 5 most closely
approximates the competitive approach that Tesla is employing?
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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. In
our view, the strategy is
Bold
To stimulate class debate, you might ask some of the following questions:
Is the strategy risky? Too risky?
Is the market for electric-powered vehicles likely to become as big and as popular as Elon Musk
envisions? Will continued low gasoline prices cut into buyer demand for Tesla vehicles or will heightened
Are 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 2? Use
the financial ratio information in Table 4.1 of Chapter 4 to assist you in calculating a revealing
set of financial ratios and interpreting them.
Even a cursory look at the numbers in case Exhibit 2 make it clear that Tesla started having bottom-line
problems in 2014-2015. But we are strong believers in having students crunch some numbers and form an
analysis-based opinion (as opposed to letting them get by with an off-the-cuff opinion).
Here is what some modest number-crunching reveals:
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As indicated in the text of the case, Tesla’s sales of ZEV, GHG, and CAFE credits produced revenues
of $2.7 million in 2011, $40.5 million in 2012, $194.4 million in 2013, $216.3 million in 2014, $168.7
million in 2015, $302,3 million in 2016, and $360.3 million in 2017. Without these revenues (which
So the conclusion about Tesla’s recent financial performance has to be a very cautious “so far, so good” in
light of all that the company is undertaking.
Obviously, there is ample reason to be concerned about Tesla’s mounting losses. In 2017, Tesla reported
a net loss of $2.24 billion on sales of 103,154 vehicles—equal to a loss of $21,721 per car. In 2016, Tesla
reported a net loss of $773 million on its sales of 76,230 Model S and Model X vehicles—equal to a loss
of $10,140 per car. In 2015, Tesla reported a net loss of $888.7 million on its sales of 50,332 Model S
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5. What do we learn from the data in case Exhibit 3 and the accompanying discussion of the
electric vehicle segment of the global automotive industry?
The data in case Exhibit 3 reveals the growing sales of electric vehicles in the U.S. and across the world. This
growth seems likely to continue, and may even accelerate as more electric vehicles models hit the market
and more governments put added pressure on for consumers to switch from gasoline-powered vehicles to
electric-powered vehicles.
6. What are the issues/problems that Elon Musk and other members of Tesla’s top management
team need to address as of mid-2018?
Students ought to come up with a “worry list” of issues/problems that includes most all of the following:
How fast to boost production capabilities for the Model 3?
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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 fully aware of.
Tesla management can be expected to address these issues and be proactive in making strategy adjustments.
For example, investing in additional production capacity to get more Model 3s into the marketplace quickly
and fill customer orders for the Model 3 as rapidly as is feasible is certainly going to be a front-burner issue
at Tesla.
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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:
How many vehicles would you estimate that Tesla is likely to sell in 2020?
Over the course of the next five years, is Tesla likely to become an attractively profitable company with
a rising stock price (that as of December 2018 was about $345)?
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Epilogue
In October 2018, Tesla released its third quarter 2018 results. Highlights included the following:
In Q3, Tesla delivered 56,065 Model 3s to customers and a total of almost 70,000 vehicles (including
the Models S and X).
The Model 3 was the best-selling car in the U.S. in terms of revenue and the 5th best-selling car in terms
of volume. The Q3 starting price of a Model 3 was $49,000
Average weekly Model 3 production during Q3 (excluding planned shutdowns) was ~4,300 units per
week.
Automotive revenue in Q3 increased by 82% sequentially over Q2.
In Q3, Tesla recorded $52M in ZEV credit sales compared to zero in Q2.
The company reported GAAP net income of $312M and, non-GAAP net income of $516M.
The company also reported operating income of $417M and operating margin of 6.1%.
In order to significantly increase the affordability of Model 3, Tesla decided to accelerate its
manufacturing timeline in China, aiming to bring portions of Model 3 production to China during
2019 and to progressively increase the level of localization through local sourcing and manufacturing.
Production in China was to be designated only for local customers.
During Q3, Tesla opened four new store and service locations, resulting in 351 locations worldwide at
the end of the quarter. The company’s electrified Mobile Service eet grew to more than 373 service
vehicles on the road at the end of Q3. Since body repairs were one of the major customer problems,
Tesla started to open its own body shops in the U.S., chiey in the highest density areas and planned to
open dozens more in the next few quarters.
It also opened 44 new Supercharger locations, giving it a total of 1,352 Supercharger stations.
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As of the end of November 2018, average production rates of the Model 3 at the Tesla Factory for the months of
October and November were in the range of 4,200 to 4,400 units; the company had yet not been able to sustain
a production rate of 5,000 units per week, much less approach a production run rate of 10,000 per week (a target
set by Elon Musk in early 2018).
After China imposed a 25% tariff on imported vehicles in September 2018 (as part of its trade war dispute with
the United States), Tesla cut its prices for the Model S and Model X in China by 25% to make its cars “more
affordable” for Chinese buyers; nonetheless, sales of Tesla vehicles in China in October 2018 reportedly declined
by 70% to only 211 units.