When technology visionary Elon Musk launched Tesla Motors a little over a decade ago, many believed that he was undertaking an impossible challenge. In seeking to disrupt the automotive sector by founding an electric car company, Musk was taking on an established, capital-intensive industry with deep-pocketed incumbents. Silicon Valley was not, most believed, in the business of making cars. The last successful startup car company in America was founded in 1925: Chrysler. For close to a century, very little had changed about the way that the U.S. auto industry did business.
In the span of a few short years, Tesla has completely reconceptualized what it means to be a car company and has forced every major auto manufacturer to adapt in response. Its share price has jumped from $17 at its 2010 IPO to $225 today. The Tesla Model S was rated by Consumer Reports magazine as, literally, the best car ever made (the publication had to recalibrate its entire rating system after giving the Model S an unprecedented score of 103 out of 100). Tesla is steadily advancing its ultimate mission of reducing mankind’s dependence on fossil fuels by making electric vehicles widespread. The company’s phenomenal success and bright future stem in large part from the tight alignment between its unconventional business model and innovative operating model.
Tesla’s Business Model
A few key elements of Tesla’s business model enable it to create and capture massive value—all of which involve challenging deeply-held conceptions in the auto industry.
- “Insanely high-quality” product and upscale branding: Before Tesla, electric cars were ordinary-looking in design, with a marketing focus on functionality and environmental impact. Tesla took a completely different approach, positioning its first models as high-end luxury vehicles that directly compete with brands like Mercedes-Benz and Porsche (see Figure A). Tesla’s first two cars, the Roadster and Model S, were both priced above $100K, and customer demand at this price continues to outpace the company’s ability to even manufacture the cars. Tesla justifies this high price point through unparalleled engineering and product quality. The Model S is the fastest 4-door sedan in history, going from 0 to 60 mph in 2.8 seconds. It received the highest NHTSA safety rating of any car ever tested by the U.S. government. It is the industry’s most aerodynamic car. Tesla, in short, turned on its head the accepted notion that electric vehicles were inferior in performance quality to gas cars; in doing so, it has generated enviable margins for itself.
- Direct-to-consumer sales: Another element of the car industry that Tesla has re-envisioned is distribution. Unlike other auto manufacturers, which sell cars through franchised dealerships, Tesla is unique in selling directly to customers. The company has established an international network of company-owned showrooms and created a streamlined process for customers to order cars online. By cutting out the middleman of dealerships—previously accepted as an indispensable part of the car sales process—Tesla significantly boosts its profits. Perhaps more importantly, it gives the company complete control over the customer buying experience (an approach that many compare to Apple’s wildly successful brick-and-mortar stores).
- Nationwide “Supercharger” network: Perhaps the single biggest barrier to electric vehicles’ success and widespread adoption is range—their ability to go long distances before running out of electricity. Tesla has taken it upon itself to directly address this concern by building a nationwide network of “Supercharger” stations—locations where drivers of electric vehicles can charge their cars. Tesla has aggressively executed on this ambitious infrastructure project: it has already built 561 Supercharger stations (see Figure B) and is opening a new one on average every 24 hours. To give a sense of these charging stations’ accessibility, in California a driver is now never more than 42 miles away from a station. By going beyond the mere production of automobiles and focusing instead on optimizing the entire product experience, Tesla has created massive value for its customers.
Tesla’s Operating Model
Tesla’s operating model directly links to and supports its business model, making possible the company’s compelling value proposition.
- Technology-centric approach to engineering: Tesla’s website describes the Model S as an “app on four wheels.” This reflects the company’s philosophy of placing technology at the center of its engineering process as it reimagines what a car should be from the ground up. In contrast to the primitive user interfaces in many cars, Tesla cars are controlled by a state-of-the-art touch screen in the front seat (see Figure C). When the company’s engineers come up with additional functionalities for the cars, they can automatically push these out to customers’ vehicles as software updates over the Internet. For instance, one morning in October, Tesla Model S owners woke up to find that their cars had a new, fully operational “self-driving” mode. Tesla technicians can often service and fix customers’ cars remotely over the Internet without ever having to touch the car, saving Tesla drivers considerable time and inconvenience. As these examples show, taking a technology-centric approach to its engineering operations has enabled Tesla to rapidly innovate in a product class that had remained largely static for decades. In turn, as discussed above, this allows the company to offer superior-quality vehicles to its customers and to capture much of the resulting value through premium pricing. Unsurprisingly, its competitors have been forced to respond defensively: both GM and Ford have reportedly been hiring software engineers by the hundreds recently.
- Verticalization and integration: Tesla has verticalized as much of the car production process as it can, choosing to manufacture components in-house rather than to rely on modularized suppliers. Almost every part of its cars, all the way down to the seats, is produced in-house in the company-owned factory in Fremont, California. The most prominent example of this integrated approach is the $5B Gigafactory that Tesla is currently building in Nevada. When complete, this massive factory will produce all the batteries for Tesla’s cars (the most important component of an electric vehicle), eliminating the company’s reliance on the vast, complicated international supply chain for battery manufacturing and distribution. This verticalization in production has direct parallels in Tesla’s direct-to-consumer distribution model and its Supercharger infrastructure, discussed above. By owning the entire end-to-end value-creation process—from manufacture through sales to vehicle servicing and infrastructure—Tesla has complete control over the product experience, allowing it to ensure superior quality for its customers.
Overreliance on fossil fuels is, many believe, one of the greatest challenges mankind will face in the coming century. By placing electric vehicles squarely at the center of the transportation industry’s future—where they had not been a decade ago—Tesla is at the forefront of addressing this challenge. Its success can be largely attributed to its innovative and highly cohesive business and operating models.