In 2010, the transportation industry accounted for 14% of the world’s total greenhouse gas emissions. 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%).
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. 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%. 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+. Those prices compare poorly to the average vehicle purchase price of $33,560 in 2015. 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).
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. 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.
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. 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. 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.
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 Climate Change in 2016: Implications for Business Page 14, Exhibit 4
 Ibid, Page 7