Tesla Inc SWOT Analysis Case Study I provided the guidelines attached the below. You can following the guideline to do case analysis and make own supportin

Tesla Inc SWOT Analysis Case Study I provided the guidelines attached the below. You can following the guideline to do case analysis and make own supporting exhibits (Financial Analysis, Value Chain Analysis, VIRO Analysis, SWOT, Competitive Forces and Factors Analysis, SPACE, Other) WRITTEN CASE GUIDELINES
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Tesla’s Entry into U.S. Auto Industry with Tesla Workbook (Excel Spreadsheet)
Note*
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See: Chapter 2, Exhibit 2.3: Case Scoring Rubric; Follow the rubric to do the case
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Business format: Concise, outline –use bullets where appropriate; 3 pages
maximum of text and 2 pages maximum of supporting exhibits (your situation
analysis), typed, 12-point font, 3rd person
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Assume I read the case – do not repeat case back to me; Assume that you are
writing to Elon Musk and Tesla’s Board of Directors
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Some recommended exhibits and info-graphs used to support your situational
analysis and case write-up are: Financial Analysis, Value Chain Analysis, VIRO
Analysis, SWOT, Competitive Forces and Factors Analysis, SPACE, Other
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Do not include any information/references past the date of the case
– August
2018 – you can bring new information from secondary sources into your case
analysis, but do not go beyond case date (outside the case additional information
is not required or necessary — there is more than sufficient information in the case
to conduct an depth case analysis
18-188
May 1, 2019
Tesla’s Entry into the U.S. Auto Industry
Donald Sull and Cate Reavis
In March 2016, CEO Elon Musk unveiled the company’s latest electric car, the Model 3, in front of an
audience of 800 Tesla owners and fans. Musk enthusiastically explained how Tesla’s earlier electric
vehicles (EVs) – the Roadster, Models S and X – had paved the way for the company to design and
manufacture an EV “for the masses.” The baseline $35,000 Model 3 could accelerate from 0 to 60 miles
per hour in six seconds, and its 75-kilowatt hour (kWh) battery had a range of 220 miles (the range
increased to 310 miles with a long-range battery option). Deliveries of the car would begin at the end
of 2017. Musk boasted to the audience that the company had already secured 115,000 pre-ordered cars
at $1,000 per car (a number that would grow to 500,000 pre-orders by 2018).1
By August 2018, Musk’s enthusiasm had turned to misery, laid bare in a New York Times article entitled
“Elon Musk Details ‘Excruciating’ Personal Toll of Tesla Turmoil.”2 Working up to 120 hours a week
and sleeping on the factory floor, Musk was closely supervising the production of the Model 3. He
described Tesla as being in a state of “production hell.” The company had paused production in late
February and again in April to work out bottlenecks in its highly automated factory, staffed with over
1,000 robots.3
During a call with equity analysts in May 2018, Musk’s misery was palpable. He became testy,
characterizing a question about the company’s capital requirements as “boring.”4 But it was a legitimate
question. In the second quarter of 2018, the company recorded a net loss of $743 million on revenue of
$4 billion. Analysts estimated that the company needed to produce at least 5,000 units a week to turn a
profit in 2018.5 Some wondered whether Tesla would run out of cash by the end of the year.6 (See the
Tesla Financials tab in the Tesla case workbook for additional financial data.)
This case was prepared by Senior Lecturer Donald Sull and Cate Reavis, Associate Director, Curriculum Development.
Copyright © 2019, Donald Sull. This work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative
Works 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a
letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California 94105, USA.
TESLA’S ENTRY INTO THE U.S. AUTO INDUSTRY
Donald Sull and Cate Reavis
In The New York Times article, Musk remarked, “The worst is over from a Tesla operational
standpoint.”7 The company was finally producing 5,000 Model 3s a week after missing the original
production goal by more than six months.8 As he worked to get production ramped up before the
company’s cash ran out, Musk admitted on Twitter to one mistake: “Yes, excessive automation at Tesla
was a mistake. To be precise, my mistake. Humans are underrated.”9
Investors and auto industry experts were split on Tesla’s future. Some believed that Tesla would create
value by disrupting the traditional automobile industry, all while achieving its stated mission to
accelerate the world’s transition to sustainable energy. Skeptics disagreed. “Tesla,” according to one
prominent investor, “without any doubt, is on the verge of bankruptcy.”10
The Traditional Automobile Industry
Industry Overview
The new passenger car marketa in the United States was worth about $270 billion at the retail level in
2016.11 While the industry experienced a sharp downturn during the 2008 Great Recession, sales had
rebounded by 2013 as the U.S. economy swung into recovery. With higher disposable incomes and
easier access to credit, Americans, including Millennials born after 1980, flocked to dealerships. By
2016, the market’s momentum had slowed. Sales (by value and volume) were expected to remain flat
until 2021 (Exhibits 1a and 1b). The average sales price of a new car was $35,500 (Exhibit 2).
Americans were buying big cars. Of the nearly 7 million new cars sold in the United States in 2016,
60% were pickups and SUVs.12 However, industry analysts expected demand for small cars to comprise
20% of new car model launches by 2023, compared to 15% between 2008 and 2017 (Exhibit 3). Some
also predicted that by 2025 nearly 60% of new vehicles (trucks and buses included) sold in the United
States would offer some form of alternative propulsion (e.g., EVs, hybrids, and fuel cellb cars).13
Automakers
In 2018, three U.S. automakers accounted for nearly 46% of the U.S. car industry’s market share by
volume. General Motors (GM) led the market with a 17.9% share, followed by Ford with 14.7%, and
Chrysler with 12.9% (Exhibit 4).14 Toyota was the leading non-U.S. manufacturer with 13.5% by
volume. Tesla held a 0.2% market share. (See the Competitors tab in the Tesla case workbook for
additional financial data.) Automakers, who were sometimes referred to as original equipment
manufacturers or OEMs, had historically earned low returns on their investments. The operating
margins (operating income as a percentage of sales) of GM, Ford, and Chrysler were 7.4%, 6.4%, and
3.2%, respectively.
a
Passenger cars include sedans, hatchbacks, SUVs, 4x4s, and other related vehicles that have four wheels and have no more than eight seats
in addition to the driver’s seat.
b
A fuel cell car is a type of electric vehicle that uses a fuel cell instead of or together with a battery. A fuel cell uses hydrogen and oxygen
to produce electricity.
May 1, 2019
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OEMs faced significant barriers to exit. The automotive sector employed nearly 3 million people in the
United States – nearly 1 million in manufacturing and 2 million in retail – and politicians at the federal,
state, and local levels were keen to protect those jobs.15 The automakers’ resources, including factories
and brands, were highly specialized and could not be easily redeployed to other uses. Not one of the
“Big Three” U.S. manufacturers had left the market, even during the 2008 Great Recession when their
manufacturing capacity utilization fell below 33% (Exhibit 5). Both Chrysler and GM declared
bankruptcy in 2009. The federal government rescued GM, and Chrysler was acquired by Italy-based
Fiat. Within two years, GM had returned to profitability, although it continued to earn low returns on
investment.
Customers demonstrated little brand loyalty when it came to the cars they bought. Eighty percent
switched brands when trading in a car and buying a new one. Customers of Toyota’s luxury brand
Lexus were the most loyal; but even among Lexus owners, only 30% replaced their trade-in with
another Lexus. Replacement rates for other luxury brands were lower, considerably so for some:
Mercedes-Benz, 28%; BMW, 24%; Porsche, 22%; Audi, 16%; and Jaguar, 12%.16
Wall Street was not convinced that the traditional automotive OEMs were well positioned to respond
to significant industry shifts brought on by startups like Tesla and technology companies with deep
financial pockets like Google and Apple. New entrants were investing heavily in EVs, autonomous
driving, and mobility services – technologies and services that enabled goods and people to move
around more freely.17 As the industry moved from selling cars to providing mobility services, the
sources of industry revenues and profits were projected to shift (Exhibits 6a and 6b).18
New Entrants
The barriers to entering the auto industry were high. New entrants had to contend with creating brand
loyalty, building manufacturing capabilities and factories, developing a dealer network, and attaining
the capital requirements to develop and build a new car, which could be as much as $6 billion and take
up to six years.19 Research and development (R&D) expenditure for OEMs based in the United States
was about 5% of revenue. Six automakers were among the world’s most valuable brands, including
Toyota with an estimated brand value of $45 billion, Mercedes-Benz ($34 billion), BMW ($31 billion),
Honda ($26 billion), Audi ($14 billion), and Ford ($14 billion).20 Exhibit 7 shows how much the ten
largest OEMs spent on capital expenditure, R&D, and acquisitions between 2006 and 2016.
While there had been no domestic entrants at scale in the United States since the 1920s, there had been
entry by non-US manufacturers. Japanese (Toyota, Honda) followed by Korean (Hyundai, Kia)
automakers entered at the lower end of the market in price starting in the early 1980s and moved up to
higher-end brands (e.g., Lexus) once they had established a firm foothold. In 2018, OEMs
headquartered outside the United States were producing more cars in the United States than GM, Ford,
and Chrysler combined.21 Companies like Toyota, Daimler, BMW, and Nissan were building and
May 1, 2019
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Donald Sull and Cate Reavis
expanding factories and workforces across the southern and southwestern regions of the United States.
Daimler was investing $1 billion in its Alabama-based plant, which produced 286,000 cars in 2017,
and BMW was spending $600 million to expand its South Carolina plant, which produced 370,000
cars.22 Toyota’s four U.S. factories, which together produced nearly 2 million cars in 2017, were about
to become five after the company announced in January 2018 that it would be building a $1.6 billion
shared factory with Mazda in Alabama, which would result in 4,000 new jobs.23
Suppliers
Globally, over 11,000 companies supplied automobile manufacturers with parts (tires, batteries) and
systems (braking, electrical). These suppliers ran 60,000 production facilities and employed 7 million
people worldwide. The $2.2 trillion global automotive supply business was highly fragmented. The top
five players – Robert Bosch, Continental, Magna, Denso, and ZF Friedrichshafen – accounted for 8.1%
of revenue.24 (See the Suppliers tab in the Tesla case workbook for additional data on suppliers.)
There were three tiers of suppliers. Tier 1 suppliers (e.g., Robert Bosch) sold components and subsystems that integrated multiple parts, such as a steering system, directly to OEMs.25 Tier 1 suppliers
had deep technical capabilities that allowed them to diversify beyond the automotive industry.26 More
than 40% of Bosch’s revenue, for example, came from the company’s non-automotive business. The
company sold solutions that integrated smoke detectors, climate control, and appliances into what it
called a “smart home” system.
Tier 2 suppliers sold parts such as interior trim, bumpers, wires, and cables to Tier 1 suppliers. Like
their Tier 1 counterparts, many Tier 2 suppliers sold to customers in multiple industries.27 Tier 3
suppliers sold undifferentiated raw materials such as steel or rubber to OEMs and to Tier 1 and Tier 2
suppliers. On average, a car manufacturer had hundreds of suppliers. Ford, for example, purchased 80%
of its parts from 100 suppliers.28 Automotive suppliers were typically more profitable than automakers
(Exhibit 8).
Tier 1 suppliers were investing in new technologies in preparation for a future dominated by electric
vehicles, which would require far fewer parts. An internal combustion car consisted of up to 30,000
discrete parts while an EV had about one-third as many components.29 This contrast was clearly evident
when comparing the engines. An internal combustion engine (ICE) required hundreds of moving parts
while the induction engine used in EVs had only a few. ICE cars had anywhere from six to 10 gears
while EVs had one.30
Tier 1 suppliers were expected to capture a larger portion of a vehicle’s value by selling subsystems,
such as advanced driver assistance systems and infotainment systems that enhanced safety and the
driver’s experience. 31 Suppliers of new technology and software were predicted to capture 11% of
profits by 2030, up from 4% in 2015.32 In addition, because they provided the majority of fuel-saving
technology in R&D and production capacity, Tier 1 suppliers were reaping the benefits of new fuel
May 1, 2019
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TESLA’S ENTRY INTO THE U.S. AUTO INDUSTRY
Donald Sull and Cate Reavis
economy standards and renewable fuel standards. One industry analyst predicted that between 2014
and 2025, automakers would spend $110 billion on fuel-saving technology, of which $90 billion would
be paid to suppliers. 33
Customers
Car Buyers
In 2018, there were 113 million registered passenger cars in the United States.34
Average vehicle retention was at an all-time high of 11.6 years.35 Most of these cars spent 95% of their
time parked. Approximately 75% of workers in the United States commuted alone by car.36
Millennials, a generation of 75 million people, had a lower rate of car ownership than previous
generations at their age. One study found that 92% of 20–24 year-olds had a driver’s license in 1983, a
rate that had dropped to 77% by 2014.37 While the 2008 Great Recession delayed their entrance into
the car-buying market, Millennials were the fastest-growing segment of car buyers, and J.D. Powers
predicted that by 2020 they would make up 40% of new car purchases. Compact cars and some
crossovers were their cars of choice. Before entering a dealership, they spent significant time on the
internet researching makes and models, and conferring with acquaintances on social media.38
According to a study by Autotrader, they spent an average of 17 hours researching vehicles before
making a purchase.39 As one industry observer noted: “Millennials buy cars more pragmatically. Maybe
they missed that moment when you deeply fall in love with cars, or a car, or personal autonomous
transportation. And they are forever going to be more on the pragmatic car-as-commodity, car-asappliance part of the equation.”40
Millennials’ parents were also starting to think differently about car ownership. According to a 2015
Zipcar study, Baby Boomers – those born between 1946 and 1964 – were moving to the city in large
numbers to take advantage of shorter commutes and the cultural experiences urban life offered.41 Eighty
seven percent of the study’s respondents said that having a shorter commute was an important part of
urban life while 65% said that getting around without a car was a key attribute of urban living.42 Many
relied on ride-hailing services as customers as well as a source of income. A 2015 Uber study
determined that 39% of its drivers who drove over 30 hours per week were 50 years and older.43
In making purchasing decisions, a survey of over 2,000 car buyers ages 18–64 found that safety, fuel
efficiency, and high quality were the most important buying factors, whereas spaciousness, price, and
brand were ranked least important (Exhibit 9). For Millennials, the top five desired features when
looking for a car were navigation systems, satellite radio, Bluetooth, MP3 players, and mobile
integration.44
Dealerships
In 2018, there were over 18,000 new car dealerships in the United States, down from
nearly 22,000 in 2007.45 Sales of new cars accounted for roughly 30% of a dealership’s profits (dealers
earned approximately 2% of the purchase price of a new car in profit).46 Dealerships made between
45% and 60% of their profits through servicing cars and supplying replacement parts, although those
May 1, 2019
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profits were expected to decrease significantly with EVs that required less service and fewer repairs.47
A 2016 study found that dealers steered customers away from EVs by not displaying them
prominently, not having an EV available for a test drive, not mentioning available tax credits and
rebates, or not having basic knowledge about EVs.48
Dealers were losing their allure with car buyers. The majority of American car buyers disliked going
to the dealer and having to negotiate price with well-trained salespeople. A survey of 100,000 car
consumers by Accenture found that 75% would consider buying their car online, thereby bypassing the
dealer altogether.49 Cox Automotive, an automotive industry marketer and research provider, predicted
that up to 10% of cars would be purchased online in 2019.50 Millennials were being credited with
moving the car-buying process online.51 In addition to their reluctance to buy a car from a dealership,
Millennials were also reluctant to work at one because of long hours, unstable pay, and the haggling
with consumers that was required – auto dealers experienced a 50% annual turnover among their
Millennial employees.52
The Changing Face of Mobility
In 2018, several changes were fundamentally reshaping the automobile industry. These trends included
a shift toward EVs due to climate change concerns; a growing number of people moving to cities and
choosing to be carless; the rapid growth of autonomous driving; and the rise of alternative
transportation, including car-sharing and car-hailing services (Zipcar, Uber, Lyft), urban bike rentals
(Zagster, Lime), and electric scooter-sharing services (Bird, Lime). Some consumers viewed a car less
as a mode of transportation, and more as a “computer on wheels.”53 Automakers, in response, were
attempting to recast themselves as software-fueled “experience providers.”54
Electrification In 2017, roughly 200,000 EVs were sold in the United States, a 25% increase over
2016 sales, putting the total number on the road at roughly 760,000.55 The Nissan LEAF was the first
mass-market electric vehicle to be sold in the United States. It debuted in late 2010 with a price tag of
$32,780, or $25,280 after a $7,500 federal income tax credit. The car’s 24-kilowatt hour (kWh) battery
had a range of 100 miles. The LEAF experienced a bumpy rollout, and missed sales projections – 2012
sales were half of the projected 20,000 units56 – which led Nissan to lower prices to boost sales.
Government subsidies to consumers were helping to drive EV adoption, which provided the scale
required for EVs to become economically viable for manufacturers. 57 Buyers of EVs were entitled to a
$7,500 federal tax credit up until December 31, 2018. Between January 1 and June 30, 2019, the credit
would decrease to $3,750 and then to $1,875 until December 2019. A number of states offered
additional tax credits or rebates to EV buyers, including California ($2,500), Connecticut ($3,000), and
New York ($500 for EVs over $60,000 and $2,000 for those under $60,000).58
The most expensive part of an EV is the lithium-ion battery. The battery pack on Chevrolet’s Bolt EV
cost $10,000–$12,000, accounting for 33% of the final price of the car.59 Fortunately for EV
May 1, 2019
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TESLA’S ENTRY INTO THE U.S. AUTO INDUSTRY
Donald Sull and …
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