Tesla Motors – Electrifying the Future

"Our goal when we created Tesla a decade ago was the same as it is today: to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible." – Elon Musk

Founded in 2003 Tesla Motors was created with the vision to accelerate the proliferation of clean transportation technologies. 12 years later Tesla Motors is composed of two distinct product segments that compromise automotive (Tesla Motors) and a nascent but burgeoning energy business (Tesla Energy) that combine for greater than $3bn in revenue in 2014.

Business Model

Tesla Motors business model is to design and manufacture best-in-class automobiles while accelerating the adoption of electric vehicles and the surrounding infrastructure. This business model is being executed in three stages denoted by three platforms of vehicles: Roadster, Model S/X, and Model III. Tesla’s first appearance to the market was a high-end electric sports car called Roadster using the Lotus frame. The second wave of entries on the market was Model S and recently Model X, premium sedan and cross-over utility vehicles. Finally, with profits reinvested from the previous platform Tesla plans to release their mass market Model III vehicle in 2017 at a $35,000 price point that will compete directly against the BMW 3 series. This part of the business model is predicated on continuous and disruptive innovation in technology and designing with a customer first perspective.

Model S (right), Model X (left)
Model S (right), Model X (left)

Tesla Energy, a new business for Tesla leverages their expertise in battery systems by selling standalone energy storage products. This business is both B2C through contracts with Solar City selling to residential consumers and B2B through selling to commercial & industrial (C&I), and utility customers.

 

Tesla Energy Powerwall for resedential applications
Tesla Energy Powerwall for residential applications

One last piece of their business model is selling Zero Emissions Vehicle (ZEV) credits to other automotive OEM’s. In 2014 this was $216M or 6.7% of revenue.

Operating Model 

Tesla’s operating model strongly reinforces their business model. Automotive OEM’s have long thought to be laggards in industry but Tesla has maintained the ability to retain its nimbleness and iterate quickly. From a hiring point of view many of Tesla’s early employees were from various Silicon Valley consumer electronic companies that were use to quick design cycles and disruptive technologies.

Tesla currently has a manufacturing facility that only using roughly 20% of the square footage. In 2014 there was a single line for Model S, in 2015 a second was added for Model X, and the majority of the capacity is for anticipated production growth for their future Model III platform.

Tesla’s operating model has challenged the status quo in ways outside of its Silicon Valley roots and human capital. The Model S/X can only be purchased through direct sales from its online website or through company owned Tesla showrooms. This model effectively removes the dealership to maintain control over brand equity and to provide the customer the best possible experience. Furthermore, the use of of showrooms allows the company to maintain low inventory and reduce overhead costs and expenses from dealerships. Similarly, Tesla also provides its own service and maintenance.

In terms of product development Tesla has unparalleled vertical integration when compared to competitors. Automotive OEM’s have historically used “Tier 1” suppliers to design and manufacture many of the subsystems in the car. Tesla has hired engineering teams to do this in house allowing them to iterate quickly and even have first movers advantage with disruptive technologies such as autonomous driving. Since Tesla only produces a model and not specific years of vehicles, throughout the year new features and hardware can be rolled out to vehicles.

In house developed power train (Drive Inverter and battery management system)
In house developed power train (drive inverter and battery management system)

Tesla has also built charging infrastructure throughout the U.S. and parts of the world to support customers of their Model S/X. These Superchargers are free of cost to Tesla owners and can provide roughly half of a full charge in 30 min.

Supercharger network - 2015
Supercharger network – 2015

As a final pillar of vertical integration Tesla is also building a “Gigafactory” in Nevada as a method of improving the supply chain and acquiring economies of scale for batteries. In its essence the Gigafactory will mass produce lithium ion batteries to meet the demand for its vehicles and energy storage products (50GWh) in 2020.  This benefits both Tesla automotive and Tesla Energy products as batteries are the single largest cost in both.

Gigfactory
Gigfactory

 

Conclusion

Overall, Tesla’s operating model has allowed for the success of its disruptive business model. Elon Musk has publicly stated a goal to ship 500,000 by 2020 which means both models will continue to evolve in a harmonious fashion to ensure the success of Model III and the growing energy storage business.

Sources:

[1] https://www.teslamotors.com/powerwall

[2] https://www.teslamotors.com/supercharger

[3] https://www.teslamotors.com/blog/mission-tesla

[4] https://www.youtube.com/watch?v=7quu551ehc0

[5] https://www.teslamotors.com/gigafactory

[6] http://www.cnbc.com/2015/10/14/tesla-rolls-out-autopilot-technology.html

[7] http://ir.teslamotors.com/sec.cfm?DocType=Annual&Year=&FormatFilter=

[8] http://vrworld.com/2015/09/05/132000-tesla-model-x-arrives-september-29th-2015/

 

 

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10 thoughts on “Tesla Motors – Electrifying the Future

  1. Awesome post Brandon! I think Tesla is fascinating (Elon Musk is definitely a genius) and had no idea they had these other streams of revenue through carbon credits and Tesla Energy. They are becoming a leader in battery technology and I wouldn’t be surprised if we see them in cell phone batteries and other consumer products soon. Cell phone market is huge and people would pay top dollar for an iPhone that could last a full week without a charge versus what we have now. The auto and energy industry is quite mature and ready for disruption. Tesla is doing a great job of developing a new business and operating model to disrupt both industries. Direct distribution is brilliant, however, as we learned in the Ford case, there is a lot of regulation in the auto industry. Do you think the old laws that were put in place decades ago will change anytime soon? I think Tesla might need to do some lobbying to get them changed, otherwise this could be a big threat to their business. For example, Tesla can’t legally sell in New Jersey at all!
    http://www.engadget.com/2014/07/17/tesla-motors-us-sales/

    1. Nupur – I do agree the battery business will be huge and I am curious to see where it goes. The requirements for cellphone vs. automotive batteries are quite different but having a phone battery with much greater density would solve a huge pain point.

      I also agree they nee a stronger presence in Washington but this may be part of their growing pains. Texas is another state that has push back for the direct sales model. I do know Tesla has been trying to use future SpaceX sites, and future factories as leverage to persuade some of these states.

  2. Great post Brandon! It’s insane to think that Tesla has established such a huge super-charging network, which is offered at no cost to its customers. Any idea if these charging stations have connections that are compatible with other e-powered automotive brands?

    Establishing such a network must have been associated with a huge capex cost that other auto manufacturers definitely didn’t need to spend on. Besides the operating efficiencies that you mentioned, what else do you think they’ve done to allow them to make such a large investment?

    1. Tesla uses the SAE JAE1772 standard which is widely adopted (Ford, Nissan, Toyota, Honda, etc.) Theoretically others could use the supercharger stations if there cars were designed for it but currently none but Tesla support the fast 400V DC charging. In the future I do expect other OEM’s to get on board.

  3. Really enjoyed your post Brandon, great job laying out all the operating model implications! I had no idea Tesla was developing auto-pilot. I wonder what the impact of the rise of self-driving cars will be on a company like Tesla. It seems like it fundamentally changes the concept of what a car is and perhaps helps some of the diffusion issues with electric cars. People view them as too different and worry about battery safety, range etc. With the added disruption of the self-driving feature perhaps it allows for greater acceptance of a new propulsion technology as well.

    1. Tesla’s auto-pilot team is pretty incredible. They have been able to accomplish so much in such a short period of time. There are also google articles that detail how large the team has grown to.

      For autopilots roll out there have have been several OTA’s with upgrades to the autopilot functionality. Tesla’s belief has to been put the hardware in the cars and roll out software updates to initiate the functionality.

      I feel the larger barriers to EV’s are the price point and lack of charging infrastructure, both of which I hope will be solved for Tesla’s Model III which they forecast 500,000 cars by the end of this decade.

  4. Really interesting model, Brandon! The company is really thinking about the future, not only because they use electric cars but also because they are developing disruptive technology such as the auto-pilot car. My only concern is the profitability of the company. Founded more than 12 years ago, the company still doesn’t make profits. I know they are thinking about the future, but investors can be a bit impatient in the short run. It would be interesting to discuss if there are some changes in the operating model that could increase profitability in the short-term without compromising the long-term objectives of the company.

    1. Profitability, what is that?! This is a silicon valley company we are talking about. 🙂

      I actually believe investors care about scale more than a short term probability of a few million dollars. Tesla’s first goal should be to hit delivery targets as their value today has lots of future growth baked in. I am of the camp that any dollars today should be reinvested for future growth for Model III and their energy storage business. With that being said profitability is a possibility next year. Automotive companies are thought to need to achieve a scale of a 100ku run-rate to achieve sufficient economies of scale and Tesla is on track to hit that next year.

  5. Love it! I wonder to what extent Tesla’s business model (their goal for it anyway) has put pressure on their operating model. To produce “compelling mass market vehicles,” you’ve got to hit that $35k price range. I know this is a real challenge. You can imagine how much more challenging it would be if they had to build in a margin for dealerships, and a margin for up-stream suppliers. In essence, what I wonder is if vertical integration and a direct-to-consumer marketing strategy are products of necessity rather than pure innovation. That’s not to say there is something wrong with this model for innovation. After all, “necessity is the mother of innovation.” It does suggest, however, suggest that Elon didn’t look at the world and decide these elements of the current industry were necessarily broken, though it is hard to imagine how they aren’t. Perhaps necessity is indeed sometimes a prereq.

    1. That is an interesting point. I wonder if Elon had this foresight at the time of the choice. My belief on the birth of the direct sales model was out of necessity. Early on Tesla’s vehicles were made to order and Tesla did not have the capital or manufacturing run-rate capacity to build up the inventory needed for dealerships.

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