TESLA'S Case Study

THE SECRET TESLA MOTORS’ MASTER PLAN

Background

Electric cars have been manufactured for as long as the internal combustion cars, but the dominant method of propulsion has been the internal combustion engine. Moreover, for the past 100 years the electric car has not been reimaged. Consequently the electric car has been designed, manufactured and retailed in the same way as the internal combustion engine car. However, in 2006 Elon Musk’s ideation (master plan) for the electric car was put forward. Musk, the founder of Tesla Motors, reimagined almost all aspects of how an electric car was designed, manufactured and retailed. The “secret master plan” of Tesla was to enter the high end of the electric car market, where customers would be willing to pay a premium price. The aim was to produce higher unit volumes and reduce the unit price of each successive model. Elon Musk explained the master plan of Tesla briefly as follows:

1. Build a sports car.

2. Use the money earned to build an affordable car.

3. Use that money to build an even more affordable car.

4. While doing the above, also to provide zero emission electric power generation options.

However, in 2006, Tesla was a start-up company that did not possess the bundles of resources and capabilities to create a mass market electric car at the first attempt. The goal was simply impossible to reach, because the company had never built an electric car, had one technology iteration and no economies of scale. Elon Musk realised that its first product was “R going to be expensive no matter what it looked like”, so they decided to build a sports car, because it would probably have the best chance of competing successfully with its gasoline alternatives.

Executing the master plan

To bring the first compelling electric sports car to market required that a long list of initiatives be deployed. These initiatives included: engineering a custom car and manufacturing process; setting up a factory to assemble the car; designing a new battery system; performing several iterations of safety tests and subsequently making changes to the battery system; developing software algorithms for the transmission; developing a new chassis and a new body, and ensuring that every single part would meet legal safety requirements; performing safety testing; creating infrastructure (service centres) for customers; sourcing spares for every replaceable part; obtaining licenses to transport, manufacture and sell cars and subassemblies; staffing an entire company; and creating the necessary infrastructure to do all of the above. While implementing the above master plan, planning had to be done for the second model.

The second model was priced at half the price point of the Tesla roadster and the third model was even more affordable. Most of the cash generated was reinvested in research and development to drive down costs and to bring the following models to market as fast as possible. Therefore, when a customer buys a Tesla car, it helps to pay for the development of the low-cost family car.

Yet, for all of Tesla’s successes in introducing new models, with the number of cars that Tesla produced it was unlikely to make a dent in the consumption of oil and the number of internal combustion cars that were produced by mainstream car manufacturers. Less than 1% of all cars manufactured were electric. To move closer to achieving Tesla’s overarching strategic goal of sustainable transport called for every aspect of electric car manufacturing and retailing to be re-imagined. Tesla’s strategy was thus not the “business as usual” of mainstream carmakers. Tesla’s strategic initiatives focused on moving beyond the past 100 years of entrenched ways of car manufacturing and retailing. These initiatives included: reimaging what the electric car could be; designing an electric car from the ground up; reimagining the retail experience of buying an electric car; reimagining customer service; creating a network of “electric highways”; venturing into battery manufacturing; and accelerating the manufacturing of electric cars by sharing patents and creating partnerships.

Design process

In 2006, Elon Musk reimagined what the electric car could be. Moreover, Elon Musk envisioned that the future of the car would be electric. This vision and belief in what the electric car could be was very different from main stream car manufacturers’ beliefs. This belief in the future of the electric car also strongly influenced the design process at Tesla. Elon Musk wrote in the Tesla blog:

Not too long from now, most cars will be electric. Why? Two reasons: because electric cars are far more efficient than any other kind of car, and because they are the ultimate multifuel cars. Sound bold, maybe crazy?

Therefore to truly benefit from electric efficiency, Tesla started the design process of an electric car from the ground up. By following the ground-up design approach the restrictions imposed by traditional combustion car design were not experienced. As a result, the Model S design showed superior aerodynamics and remarkable torsion rigidity. Safety tests showed it had the lowest probability of injury of any car ever tested by the US government.

In 2011, Tesla chief designer Franz von Holzhausen made the following comments during an interview on the design philosophy and approach to designing the Model S:

Model S is a revolutionary vehicle not only due to its electric propulsion, but also in that its engineering and design go hand in hand. We have designed Model S from the ground up as an EV. The unique powertrain integration allows for an unprecedented package that is both rigid and incredibly safe. We set out to redefine the electric car, but with room for seven passengers and more functional storage space than any sedan on the market, Model S will set a new bar for the premium sedan as well.

Retail experience

In reimagining the experience of buying an electric car, Tesla started to recruit talented individuals who wanted to be more innovative, create something different and leave the world a better place. John Walker, recruited for his retail track record at Audi, made the following comment:

It is really because of Tesla that the automotive industry has turned so quickly to embrace development of electric vehicles, and I feel confident that Tesla will continue to be at the forefront of innovation. Joining the company now is a once-in-a-lifetime opportunity to help create something different, change the world for the better and have fun in the process.

The recruitment of employees with specific talents ensured that customers’ retail experience at Tesla would be unlike their retail experience at other typical car dealerships. Tesla Motors opened stores in shopping malls where customers could examine a floor model, learn about the design and engineering processes involved, and schedule a test drive. Purchasing happens online, directly from Tesla, which means that there are no intermediaries that add costs. Furthermore, by cutting them out of the value chain, intermediaries lose the leverage they had for decades over car manufacturers and customers.

Enhancing the customer experience

In reimaging the customer experience, Tesla first set the goal to deliver the highest possible level of ownership satisfaction in every way. Tesla measured customer satisfaction using a survey that customers were asked to complete after each service. Almost 90% of customers’ rated Tesla’s service at 9 or better on a 10-point scale, where 10 is best and 1 is worst. Tesla also made several improvements to the Model S through software updates and added small but important features, such as power folding mirrors and parking sensors. These efforts were validated by an owner satisfaction survey, which gave Model S a score of 99 out of 100, the highest satisfaction score achieved for any car in the world. The next highest score was 95.

Electric highways

In April 2014, Tesla announced it had opened 100 charging stations (86 Supercharger stations in North America, 14 in Europe and 1 in China) as part of its initiative to create “electric highways” that would make long distance driving possible. The “electric highways” initiative made it convenient to travel long distances in an electric car and addressed the practicality of growing the number electric cars on roads. Charging stations were also an important component in creating a carbon-free lifestyle for customers, enabling customers to combine other renewable energy options with all electric cars. The network of charging stations was part of a partnership with SolarCity and Rabobank aimed at creating a corridor of fast charging stations between San Francisco and Los Angeles.

Battery manufacturing

In 2014, Tesla announced it would build the world’s largest and most advanced battery factory in Nevada. This initiative would allow Tesla to achieve a major reduction in the cost of battery packs and to accelerate the pace of battery innovation. Working in partnership with suppliers, Tesla planned to integrate precursor material, cell, module and pack production into one facility. With this facility, Tesla would possess another capability, namely to create a compelling and affordable electric car in a shorter timeframe. This capability would make it possible for Tesla to address the solar power industry’s need for a massive volume of stationary battery packs.

Patents and open structures

In 2014, Elon Musk decided to join the open source movement by making the patents of Tesla available to anyone who wanted to use them in good faith. Initially Tesla felt that competitors would copy Tesla technology and therefore they felt compelled to create patents. Elon Musk admitted that this assumption was wrong. Tesla rather found that competitors were not copying Tesla’s technology, nor were they using their resources and capabilities to overtake Tesla. The true state affairs was that less than 1% of cars sold by major car companies were electric cars and trying to protect patents in reality slowed down the advent of sustainable transport. Tesla’s new logic assumed that patents were of more value if shared across a large number of stakeholders interested in manufacturing electric cars. Elon Musk wrote the following on Tesla’s open patent initiative to accelerate the advent of sustainable transport:

At Tesla, however, we felt compelled to create patents out of concern that the big car companies would copy our technology and then use their massive manufacturing, sales and marketing power to overwhelm Tesla. We couldn’t have been more wrong. The unfortunate reality is the opposite: electric car programs (or programs for any vehicle that doesn’t burn hydrocarbons) at the major manufacturers are small to non-existent, constituting an average of far less than 1% of their total vehicle sales.

At best, the large automakers are producing electric cars with limited range in limited volume. Some produce no zero emission cars at all.

Given that annual new vehicle production is approaching 100 million per year and the global fleet is approximately 2 billion cars, it is impossible for Tesla to build electric cars fast enough to address the carbon crisis. By the same token, it means the market is enormous. Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day.

We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform.

Technology leadership is not defined by patents, which history has repeatedly shown to be small protection indeed against a determined competitor, but rather by the ability of a company to attract and motivate the world’s most talented engineers. We believe that applying the open source philosophy to our patents will strengthen rather than diminish Tesla’s position in this regard.

Conclusion

The strategic initiatives undertaken by Tesla look beyond the present and 100 years of entrenched ways of car manufacturing and retailing. Tesla’s strategic goal to accelerate the advent of sustainable transport by bringing electric cars into the market as soon as possible is big, bold and risky. Yet, Tesla’s ability to execute strategy reveals that strategic change is not about trying to predict change. It is rather about creating change.

Sources:

Adapted from http://www.teslamotors.com/blog-and-press-releases, accessed September 2014.

Adapted from http://www.wired.com/2014/03/tesla-banned-ensure-process-buying-car-keeps-sucking/, accessed September 2014.