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.
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.
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.
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.
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.
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.
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.
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.