Tesla: A Two-Step Plan to Transportation Takeover
By expanding its fleet and manufacturing capacity, Tesla can take the transportation industry by storm
In 2010, the transportation industry accounted for 14% of the world’s total greenhouse gas emissions.[1] This problem was particularly acute in the United States, where transportation ranked as the second largest source of greenhouse emissions (26%) behind only electricity (30%).[2]
To curb reliance on fossil fuels, the US government (through regulation) and citizens (through purchasing decisions) increasingly are seeking alternative means to power transportation. This growing demand for energy-efficient transportation poses an opportunity for Tesla, the United States’ most-hyped electric car manufacturer, but also challenges of scaling and fending off increased competition.
In 2008, when Tesla delivered its first car, the Tesla Roadster, there were no other battery-powered electric cars on the market. So while Tesla owned 100% of the battery-powered car market at this point, demand for such vehicles was incredibly small and effectively represented 0% of the total car market.[3] Fast forward to 2015 and battery-powered electric vehicles had grown to 0.4% of total US car sales but Tesla’s share of that market had dropped from 100% to 35%.[4] At this point, battery-powered electric cars still represented a modest fraction of the total market, but Tesla’s ownership of the category had been cut in third by new entrants offering cars for as little a fraction of a Tesla’s cost.
If the transportation industry is going to reduce its reliance on fossil fuels and consequently its carbon footprint, then demand for battery-powered electric vehicles needs to climb sharply in the years to come. Tesla’s challenge becomes how do they scale to meet that demand and increase their market share? To do this, Tesla must take a two-pronged approach.
In order to access more segments of the market, Tesla needs to offer greater model and price variation. For example, as of 2016, the price points for Tesla’s two cars were out of reach for many US consumers and misaligned with the largest segments of the market. Tesla’s sports car, the Model S, costs $75,000+ new, while the SUV, the Model X, costs $90,000+.[5] Those prices compare poorly to the average vehicle purchase price of $33,560 in 2015.[6] Beyond being too expensive, these models do not correspond to the most popular vehicle types. In 2015, SUVs represented only 7.2% of sales and luxury cars were 7.1% (14.3% combined) whereas sedans were 36.2% of the market and pickup trucks were 14.2% of the market (50.6% combined).[7]
To address this gap, Tesla is developing the Model 3, a low-cost sedan, priced at $35,000 and scheduled to ship in mid 2018.[8] In addition to the Model 3, however, Tesla should begin developing an affordable pickup truck. Besides opening an additional segment of the consumer market, developing a pickup truck would help Tesla in its stated goal to reduce perception of the brand as elitist.[9]
While developing a sedan and a pickup truck will increase Tesla’s consumer adoption in the short term, Tesla also has a long-term opportunity to break into the commercial transportation industry by developing a heavy-duty truck. Heavy duty trucks account for only 5% of vehicles on the road, but are responsible for 20% of transportation emissions due to the tremendous number of miles they cover.[10] Developing a commercial truck in the short term poses challenges for Tesla because of the range requirements in the shipping industry. While a 200-mile range covers most consumer use cases, truckers routinely drive over 700 miles in a day. The long-term payoff for a heavy truck would huge, however, because of the synergies it would create in the transportation system. If a significant portion of total miles are driven by Tesla vehicles, adoption of Tesla’s supercharginging stations would become ubiquitous, reinforcing their advantage over other manufacturers.
With anticipated major increases in models and total vehicle sales, Tesla will also need to increase its manufacturing capacity. Currently, Tesla has only one car manufacturing facility in Fremont, California. While that factory can produce up to 1M vehicles per year, Tesla needs to distribute its manufacturing capacity throughout the world to ensure that it maintains a low environmental footprint for the production of its vehicles in addition to their usage footprint.[11] If Tesla were to continue to producing all of its cars for the world in the US, it would give back many of the environmental savings it creates in transportation costs to the cars’ final destinations.
As the market leader for electric cars, Tesla has the opportunity to reduce the transportation industry’s environmental footprint significantly while maximizing its market share. In order to accomplish this, however, Tesla needs to develop a vehicle fleet with market-wide appeal and expand their manufacturing capabilities in an environmentally sensitive way.
Word count: 791
[1] Climate Change in 2016: Implications for Business Page 14, Exhibit 4
[2] Ibid, Page 7
[3] http://electricdrive.org/index.php?ht=d/sp/i/20952/pid/20952;
[4] Ibid, http://evobsession.com/us-electric-car-sales-20-2016/
[6]http://www.usatoday.com/story/money/cars/2015/05/04/new-car-transaction-price-3-kbb-kelley-blue-book/26690191/
[7] http://www.autoalliance.org/auto-marketplace/popular-vehicles
[8] https://www.tesla.com/model3
[9]http://www.forbes.com/sites/brookecrothers/2015/08/05/tesla-executive-pushes-back-at-critics-characterizing-it-as-elitist-report/#4b8764e0691e
[10] http://www.eesi.org/papers/view/fact-sheet-vehicle-efficiency-and-emissions-standards#Tables
[11]http://www.forbes.com/sites/chuckjones/2016/06/07/how-many-plant-sites-will-tesla-need/#6d7de7eb57fd
Your assessment of Tesla’s market challenges make a lot of sense. In particular, given Elon Musks’s aggressive rhetoric in the last few years about trying to actively promote more competition in the all-electric vehicle space, one must wonder whether with a 2/3 drop in market share they were really ready for the competition they asked for. I also agree that distributing production more globally will be essential for Tesla to both meet its environmental goals and reduce costs. In particular, Tesla should reconsider its production and sales strategy with respect to China. China is now the world’s largest electric car market and rising incomes has made it a boom market for luxury cars. However, Tesla is increasingly facing competition from local EV manufacturers. Locating more production in China is a critical step both to reducing the firm’s cost and footprint to serve Chinese customers, and also to gain government favor (an essential piece of any China market strategy) by creating jobs there as well.
While building manufacturing capacity is essential to growth, gaining government support is most critical and fundamental to making Tesla’s vehicles more mainstream, especially in China. Hong Kong is an excellent example of this – the city alone accounted for ~10% of Tesla’s overseas sales last year, compared to 12% from the entirety of mainland China. In just two years of launching in Hong Kong, Tesla sales have more than quadrupled and account for over 80% of the electric vehicles in the city. Musk attributed much of the success to the Hong Kong government’s role in public education for early adoption and setting up required charging infrastructure. Hong Kong also offers tax waivers (non-electric cars have a 100% environment tax, which makes means Tesla cars, despite higher retail prices, end up being cheaper than other comparable luxury vehicles. In contrast, purchasing a Tesla is much more expensive in mainland China because of the lack of subsidies, and 25% import duty on foreign cars. Local production will certainly help by circumventing the 25% import duty, but that alone won’t be enough. To stimulate demand for electric vehicles and truly break into the Chinese market, Tesla will need to convince the government to set up better-aligned incentives such as attractive tax incentives and increased development of charging facilities for consumers.
While I agree it is important for Tesla to further introduce models that are more affordable (Model 3) and functional (trucks), it is also imperative that Tesla focus on developing their charging infrastructure (supercharging stations). Your post seem to imply that with the adoption of Tesla cars would drive the ubiquity of supercharging stations. I would argue that the ubiquity of supercharging stations is very much a prerequisite to more widespread adoption of electric cars. The current demand for EV charging stations is currently outpacing the actual supply. While this may indicate that the availability of charging stations is not currently a primary concern for EV owners, it can quickly escalate to be a primary bottleneck that inhibits the demand for EVs. As such, I believe the importance developing the EV charging infrastructure to be just as important, if not more, to Tesla than introducing additional models to their product line.