TESLA: Accelerating the Transition to Sustainable Transportation for the Masses

Can Tesla fight the impact of climate change by achieving its mission of a mass market, affordable car with the Model 3?

Ten years ago, on August 2, 2006, Elon Musk posted his first-ever blog post on Tesla’s website, titled “The Secret Tesla Motors Master Plan (just between you and me)[1].” The plan was a trilogy, based on the premise that in a rapidly changing world of climate change, it is incredibly important to accelerate the transition to sustainable transportation. His master plan was simple:

  1. Start small. As a small company with limited resources, create a low-volume, expensive electric car. Show the world you can make a great, high-performance electric car that surpasses all other gas-powered vehicles on the road.
  2. Use that money to create a mid-volume, less high-price car.
  3. Use that money to drive down to the mass market with a high-volume, low-price car.

Unlike most other companies that are reacting or adapting to climate change’s physical manifestations and / or regulation, Tesla’s business model is both benefitting from and proactively addressing climate change by creating a step-function change in the way the world moves, from gasoline-powered vehicles to electric vehicles for the masses. According to a study by NASA’s Goddard Institute for Space Studies, road transportation will be the greatest contributor to global warming for the next 50 years. This is due to the unique portfolio of greenhouse gas emissions emitted by motor vehicles that have a faster effect on warming the planet relative to timescales of other gases [2].

Tesla in Final Stages of Completion of Master Plan

With strikingly unbelievable accuracy, Tesla has almost achieved Elon’s master plan. Here’s how the trilogy has played out:

  1. In 2008, Tesla launched the Roadster, producing 500 units per year and selling each at a price of $100k. Though a low-volume car, the Roadster set a new standard for electric cars and had huge ripple effects in the auto industry – the Roadster is credited for the reason GM began its own electric vehicle program, the Chevy Bolt, and Nissan began its LEAF program [3].
  2. In 2012, Tesla launched the Model S. At $70k a piece, the sedan fits 7 people and was rated by Consumer Reports as performing better than any other car ever has [4]. Tesla later extended the line to Model X, an SUV-format.
  3. Revenue from the Model S and X were used to fund the next generation mass market, affordable car – in April 2016, Tesla announced its Model 3, a $35k car that is expected to be on the market by the end of 2017 [5].

Beyond the release of the Model 3 generation, Tesla is taking other steps to accelerate the advent of a sustainable energy world with the integration of solar energy generation into Tesla (believe it or not, this was also part of the original master plan that has been on Tesla’s website for 10 years). In June 2016, Tesla made an offer to acquire SolarCity, with the aim to bundling Tesla batteries with rooftop solar panels that would replace traditional roofs [6]. Under the merger, Tesla would manufacture and install solar panels that look better than traditional rooftops and are cheaper than traditional roof installations plus electric utility bills. The idea is that you can generate solar power from your roof, store it in a Tesla Powerwall battery, and use that electricity to power your home and car, vertically integrating Tesla’s supply chain by owning the energy generation source and representing a trifecta of three revolutionary clean-energy home products. Keep in mind, when electricity itself comes from renewable sources, all-electric vehicles produce zero emissions to drive.

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What Else Can Tesla Do?

Looking forward, Tesla needs to expand its retail distribution channel strategy to become truly mass market. Currently, Tesla has 215 retail locations globally located in high-foot traffic, high-visibility locations, through which it sells direct-to-consumer [7]. Through these locations, Tesla targets those consumers who have not yet made up their mind about car purchasing behavior and educates them about the all-electric driving experience. In my opinion, because the Model 3 will be the first time Tesla is truly competing with mass automobile distributors, Tesla needs to greatly expand its number of retail stores worldwide to clear consumer misconceptions and spur desire for the Model 3.

Second, Tesla should pursue an aggressive strategic partnership strategy to increase its Supercharger stations worldwide to support the Model 3. Superchargers charge the car for free within minutes, relative to destination charging that require hours. Tesla does the set-up and covers the cost of providing electricity [8]. While Tesla wants to control the product, it should instead sell charging stations to governmental authorities and other strategic partners (real-estate and infrastructure developers) to shift the cost of electrifying road transport and increase the pace of installing stations. These would be enabling steps for the Model 3 to become mass market in the near-term.

Word Count: 798

 

Sources:

[1] Elon Musk, “The Secret Tesla Motors Master Plan (just between you and me),” Tesla Motors (blog), August 2, 2006, https://www.tesla.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me, accessed November 2016.

[2] Adam Voiland, “Road Transportation Emerges as Key Driver of Warming,” NASA News & Feature Releases, February 18, 2010, http://www.giss.nasa.gov/research/news/20100218a/, accessed November 2016.

[3] Phil Plait, “Tesla, Elon Musk, and Climate Change,” Slate (blog), April 2, 2016, http://www.slate.com/blogs/bad_astronomy/2016/04/02/elon_musk_reveals_new_electric_car_calling_climate_change_his_motivation.html, accessed November 2016.

[4] Mark Rechtin, “Tesla Model S P85D Earns Top Road Test Score,” Consumer Reports, October 20, 2015, http://www.consumerreports.org/cro/cars/tesla-model-s-p85d-earns-top-road-test-score, accessed November 2016.

[5] Phil Plait, “Tesla, Elon Musk, and Climate Change,” Slate (blog), April 2, 2016, http://www.slate.com/blogs/bad_astronomy/2016/04/02/elon_musk_reveals_new_electric_car_calling_climate_change_his_motivation.html, accessed November 2016.

[6] Mike Ramsey and Cassandra Sweet, “Tesla and SolarCity Agree to $2.6 Billion Deal,” Wall Street Journal, August 1, 2016, http://www.wsj.com/articles/tesla-and-solarcity-agree-to-2-6-billion-merger-deal-1470050724, accessed November 2016.

[7] Phil Plait, “Tesla, Elon Musk, and Climate Change,” Slate (blog), April 2, 2016, http://www.slate.com/blogs/bad_astronomy/2016/04/02/elon_musk_reveals_new_electric_car_calling_climate_change_his_motivation.html, accessed November 2016.

[8] Darrell Etherington, “Inside Tesla’s Supercharger Partner Program: The Costs And Commitments Of Electrifying Road Transport,” Tech Crunch (blog), July 26, 2013, https://techcrunch.com/2013/07/26/inside-teslas-supercharger-partner-program-the-costs-and-commitments-of-electrifying-road-transport/, accessed November 2016.

 

Exhibit Sources:

Cover Image: Tesla, https://www.tesla.com/, accessed November 2016.

Image 1: Tesla, https://www.tesla.com/, accessed November 2016.

Video 1: Tesla, “Tesla’s Sexy Solar, Massive Batteries, and Fast Cars.,” Bloomberg, published October 31, 2016, https://www.bloomberg.com/news/articles/2016-10-31/no-one-saw-tesla-s-solar-roof-coming, accessed November 2016.

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8 thoughts on “TESLA: Accelerating the Transition to Sustainable Transportation for the Masses

  1. Great post Pallavi. When it comes to Tesla, I think most people including myself have mixed feelings. Musk has been nothing short of magical in executing the first two parts of his masterplan. A lot of innovative companies have tried and failed what he set out to do. The third piece, going to mass public, is the most critical to his plan, which I remain skeptical. Tesla was successful because it positioned itself differently from other car companies. Tesla is not a car company but a tech company. This has supported their valuation, their operation and people’s perception of the company. The company has also built its core competence around technology and design. By offering mass affordable electric cars, Tesla has to become a car company where margin is much lower. It requires a completely different set of skills such as operational efficiency, channels as you pointed out, and other tedious tasks that the company may not be well prepared. Finger crossed!

  2. This post is well-structured, well-supported and makes a compelling argument. As Tesla goes into the mass automobile market, it will start competing directly with such giants as VW, GM, Toyota and Ford. Will it manage to compete with them by itself? There is no doubt that Tesla has a unique expertise when it comes to batteries, electric engines and software. However, that’s just one side of car manufacturing. Managing supply chains to build 10 million vehicles a year (instead of the fewer than 500,000 Tesla plans to build in the medium term) demands a completely new expertise. It seems to me that Tesla’s travails have only just begun!

  3. Paul, your comment reminded me of our case on Fabritek. A company needs to make a decision on what will be its value proposition to be able to define its business model, develop operating capabilities and expertise. A transition from a high-end, differentiated brand to mass market one will require Tesla develop Cost Leadership skills, which are indeed very different from the ones it has today. On the other hand, I agree with Pallavi that, if the company’s mission is to compete in the mass market, high volume segment, shouldn’t it pursue this change, even though they might need to deal with some pain from growth? How much impact can they really generate if they continue to be a niche brand?

  4. Pallavi, this is a great take on Tesla and on Musk’s vision! Being a fan-boy of Musk, I would love to see them succeed, but have a few concerns. Firstly, the grand vision would succeed only if every step in the process chain is generating energy sustainably. For instance, the cost to produce a solar panel is immense – it can take decades for solar cells to generate enough energy to make up for the amount that is required to produce a cell! Secondly, I see immense costs and regulatory bottlenecks for the model to succeed in developing markets – which account for a vast portion of the global population. And lastly, I’m a bit confused by Musk’s philosophy of balancing the visions and funding needs of SolarCity, Tesla and SpaceX at the same time, and how things align in Musk’s world to “save the planet and humanity, simultaneously”.
    Would love to get your thoughts on these!

  5. Pallavi, thanks for your insightful post on Tesla! Tesla is indeed a role model for all technology and environmental businesses and there is a lot to learn from them on how to make environmental consciousness look ‘cool’. Very few companies have been able to drive home the fact that speed and sustainability can coexist. We have also seen the rise of Formula E racing concept which was conceived in 2012 and has already garnered quite a fan base (https://en.wikipedia.org/wiki/Formula_E). What is even more exciting is that Tesla’s Elon Musk is moving beyond automobiles and is also trying to come up with Hyperloop which is planned to be high speed transportation of passengers and goods in partially evacuated tubes, that uses clean energy as its primary source which may change the future of the transportation industry. Companies such as these give me hope that we may be able to mitigate or even reverse the effects of global warming.

  6. Thanks for this super interesting post! I love what Tesla is doing. As Aayesha pointed out, there are very few companies that have been able to marry speed, luxury, functionality and sustainability the way Tesla has. Your point about the need for additional supercharger stations is a really important one as well. As we try to move towards a lower-carbon and more sustainable future with vehicles, infrastructure will present a significant challenge. Our current infrastructure system supports a high-carbon transportation model (and intentionally so). I believe the public and private sector will need to work together to adapt our infrastructure to support a more sustainable transportation model in the future. Companies like Tesla may be able to use their expertise and leverage to influence this kind of transition.

    As a separate question, I would also love to hear your thoughts on what Tesla is doing internally to enhance its sustainability? I assume car manufacturing can be energy intensive, and there may be challenges with battery production and waste. How is Tesla getting innovative in its manufacturing and supply chain as well?

  7. The number of comments on Tesla has clearly “trumped” that of my post on BMW i-series. So I guess this must have proven that Tesla still grabs the majority of attention in the world of EVs–and I guess that the fact that Im commenting here shows it grabs mine as well. Needless to say, as the first mover in EV industry with very limited product diversification, Tesla has been assuming enormous financial risks since day one. It didn’t come to me as a surprise when it reported the 13th straight quarterly loss in this past August, as a rise in sales of its Model S and Model X electric cars failed to make up for the huge cost of ramping up production.

    That being said, it is very exciting to read from this intriguing post about Tesla’s endeavor in the solar power storage for e-mobility. What I did not see being pointed out in my post is actually what I would like take some space below your post and point out here: technically, Electric cars ≠ Sustainability. This unequilibrium is backed by the fact that in California, which has one of the highest proportions of clean electricity in America, the electric vehicle would produce only 100g/mile, half that of the hybrid. Whereas in the midwest and south where coal fuels the bulk of electricity generation, a hybrid produces less carbon dioxide than an all-electric car. In fossil fuel–dependent Minnesota, an electric car would actually emit 300g/mile of greenhouse gases! If we stretch our map a bit further to Asia: driving an electric car in China, where coal is by far the largest power plant fuel, is a catastrophe for climate change.Thus EVs are great for eliminating oil from transportation, because very little U.S. electricity is generated by burning petroleum. Yet electric cars may or may not help the world combat climate change, because it all depends on where the electricity comes from.

    Coming back to Tesla’s currently operating model, I still consider it quite debatable if the company is successful, and it is even more of a miracle that it has become one of the centers of attention in corporate America where, we the elite bschool MBAs are taught to be driven by the maximization of shareholder’s value. Apparently, the current Tesla is burning its shareholder’s money. No one knows if it were not shareholders who have been pouring money into Tesla by good faith instead of good logic, Tesla would still sustain, not to mention its value proposition of “sustainability”. While you talked about its plan to go “mass market”, I see its main challenge to go “mass profitability” remains product diversification, whose root cause was lagged infrastructure development. In 2014, I saw Tesla’s smart move to go open source, i.e. Musk decided to open all its electric car patents to outside use. With EVs only taking up about 1% of all vehicle sales at conventional car manufacturers, this move seemed to be feasible to achieve “mass market” by the whole auto industry in order to push the government endevour in infrastructure development. Toyota then followed Tesla, made its hydrogen fuel cell technology open source. The upset thing here is Tesla were losing time during the whole process. As conventional car makers kick in who have sufficient capital and more diversified product lines, it is becoming increasingly challenging for Tesla to be profitable. Today, both North American and European conventional car makers are entering the market at a fast pace, and in China, domestic manufactures are gaining advantages in developing government relationships to popularize power charging system specially tailored for their products. I am seeing Tesla has been losing its most valuable thing -the time to lead ahead –as it continues to stay at the top of the stream to develop the most innovative technologies.

    This is why I am leaning towards the formation of strategic partnerships between conventional car makers and Tesla. I see this as a win-win situation for both in future.

  8. I really enjoyed reading your post and I agree that a third-party firm should take ownership of the supercharger stations. I believe the fact that Elon Musk has released all of Tesla’s patents online for the public, demonstrates that achieving mass-market status of electric vehicles is the #1 priority for the firm (https://www.tesla.com/blog/all-our-patent-are-belong-you). As long as the superchargers are compatible with Tesla’s cars and are fully vetted by the firm’s engineering teams, I would be surprised if Musk is not eager to relinquish his control of the charging side of the business so that he can focus on transforming more of his creative ideas into reality.

    I agree that Tesla stands to lose some of the early-adapters who enjoyed the elite status that came with being some of the first to own the novelty cars. However, as electric vehicle technology becomes more widely adopted, there will be opportunities to shift focus back to developing more high-end, differentiated models – if Tesla wishes to do so.

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