1. Disruptive Technologies
Disruptive technologies introduce a very different package of product and service attributes compared to the product characteristics of the industry mainstream. Therefore, disruptive technologies tend to be valued and used first by innovative and open-minded customers. As a consequence, ‘disruptors’ develop entirely new markets with new product and service applications, thus reconfiguring an existing industry’s value chain activities (Bower & Christensen 1995). Once the disruptive architectures became established in the new markets, sustaining innovations improve the technology quickly so that the performance increasingly satisfies the needs of customers in the established markets. However, at the beginning of the product life-cycle, disruptive technologies look financially unattractive for most of the established market incumbents. Experience curve effects are low and appropriate suppliers are rare and, therefore, component purchase is expensive. The potential revenues look small, and unlikely to make a meaningful contribution to corporate growth (Bower & Christensen 1995). For the above-mentioned reasons, ‘industry disruptors’ are often international start-ups founded by an entrepreneur with passion and corresponding financial backup. Such entrepreneurs see opportunities rather than risks when entering new markets (Bessant & Tidd 2011).
Tesla serves as an excellent case of an ‘industry disruptor.’ The electric car start-up firm was founded in July 2003 by Silicon Valley multimillionaire entrepreneur Elon Musk in California, USA (Stringham, Miller, & Clark 2015). Tesla’s vision as stated by the founding entrepreneur:
Our goal when we created Tesla a decade ago was the same as it is today: to drive the world’s transition to electric mobility by bringing a full range of increasingly affordable electric cars to market – Elon Musk – CEO – (Evanson 2014: 4).
As of December 31, 2018, Tesla Inc. had 48,817 full-time employees which indicates a sharp increase during the last years (Tesla 2019a).
2. Mission and Vision
According to Tesla’s business mission, the firm designs, develops, manufactures and sells high-performance fully electric vehicles, as well as energy generation and storage systems, including installing and maintaining such systems. In addition, Tesla designs and sells solar electricity modules, which are installed on buildings. Tesla makes use of vertically integrated value-adding activities, ranging from research and development, solar electricity generation, electricity storage and electricity consumption through its Tesla cars (Tesla 2017). The core of an electric car is the battery, which Tesla is involved in manufacturing. The depth of the vertical integration makes Tesla very different from conventional car-makers. The organizational structure of Tesla, combining major business divisions with administrative functions, only partially illustrates the firm’s profound vertical integration. Tesla’s firm structure as of mid-2019 rather resembles a start-up than a multibillion dollar company (compare Figure 4.12).
Tesla serves as an industry pioneer mainly because it has penetrated the global markets with its electric cars more efficiently than any other firm during the last two decades. It successfully entered an industry, which has been dominated by petrol and diesel technology-driven industry incumbents such as Daimler, Volkswagen, BMW, Fiat, Toyota and others for more than 120 years. In regard to electric cars, in the year 2020 Tesla’s main competitors are Hyundai (with its bub-brand KIA), Nissan and Renault. Volkswagen is trying to escape from their software manipulating image (breach of law involving significantly higher emissions on the streets than in the laboratory) through launching electric cars named ‘ID’ in larger quantities from 2020 onwards (Hanley 2019). For sure, Tesla is ahead of time.
3. Vertical Integration
From Tesla’s move away from manufacturing electric cars towards self-driving capabilities to its software algorithms (with system updates made over the air), the firm’s development over the last years has been impressive. Tesla’s electric vehicle designs look similar to sports cars, but the firm’s engineering and value chain behind them is very different from traditional automakers (Fry 2018). To take just one example, the dashboard has no buttons compared to conventional vehicles. Instead, the driver has a large touchscreen available.
Since the firm’s foundation, Tesla Inc. has released four vehicle models onto the market (prices are for the USA, in comparison; unit prices in Germany are significantly higher): A USD 110,000 two-door sports car, the Tesla Roadster (2008-2012); a USD 70,000 sedan, the Tesla Model S (2012-today); a crossover Tesla Model X for 70,000 USD (2015-today); and a compact Tesla Model 3 at 35,000 USD targeting the mass consumer markets (2017-today). Tesla’s model 3 corresponds to the strategic goal of creating an affordable mass electric vehicle market (Chen & Perez, 2018). Tesla continues to offer new models such as a multi-purpose car for 2020 (model Y), followed by the new Tesla Roadster. In October 2019 Tesla introduced the ‘Cybertruck’ with a battery range of 500+ miles and an acceleration time of 0-60 miles per hour in less than 2.9 seconds. Within a couple of days, Tesla received more than 200,000 customer pre-orders (Tesla 2019c).
Tesla also sells solar-photovoltaic modules, batteries and complete charging systems which differentiates Tesla from all its car competitors. In addition to own car manufacturing, Tesla sells powertrains and battery packs to other carmakers as a supplier to their electric vehicles. For example, Tesla and Daimler had a strategic alliance over battery packs and chargers for Smart Fortwo from 2008 to 2013, and developed powertrain systems for Toyota RAV4 from 2010 to 2014 (Chen & Perez 2018).
A further innovative product feature which differentiates Tesla from most of the market incumbents is its ‘over the field’ real-time information exchange, including software updates between the car and Tesla Inc. Customers are continuously connected via their car’s wireless connection and its touchscreen control panel, which sends usage data to the manufacturer in real time (Dyer, Gersen, & Furr 2015). On the one hand, Tesla is able to fix car performance issues via ‘overnight software downloads’ or make changes when noticed by the system, which contributes to far better customer satisfaction than in case of conventional cars. On the other hand, while a lot of people worry about Alibaba, Amazon, Facebook, Google and others because of their big (client) data collection and storage, Tesla, through their cars, has developed another powerful source for collecting data but this seems to be less critically recognized. Meanwhile, other carmakers are seeking to follow Tesla Inc. in terms of data collection and exchange through their operating vehicles on the streets.
4. Opportunities and Challenges for an Industry Newcomer
As a newcomer to the car industry, Tesla Inc. changed the conventional dealership network for vehicle distribution. It created a new multi-channel model for purchasing vehicles, which involved online stores and retail outlets. There is no need for the customer to go and visit the retailer to purchase a car. Customers can configure their car on the firm webpage. The Tesla car can be configured and ordered through a limited number of mouse clicks. (Pre-) orders can be made via Tesla’s webpage through credit card deposits which differentiates Tesla from industry incumbents so far (Tesla 2019b). Retail stores offer potential customers the chance to drive and test the car. Tesla’s price of vehicles is non-negotiable by the client (Chen & Perez 2018). Clients are allowed to return their newly purchased car for a full refund within 7 days or 1,000 miles, whichever comes first (Tesla 2019b). Tesla’s customer-oriented return car policy indicates a true novelty in the auto industry.
No doubt, Tesla’s customer relationship management sets high industry standards. Marketing clearly serves as the firm’s strength. However, as an industry newcomer with naturally limited experience curve assets, Tesla struggles with manufacturing output, process efficiency and product quality (e.g., Tesla 3 has paint problems and body gap issues due to its dimensions). Whereas the lifetime and maintenance costs of Tesla’s electric vehicles (fewer components, no exhaust systems, no engine oil, much less brake wear) are superior to conventional cars, customers still complain about poorly fitting trim and also body gap, glass and paint issues (Hawkins 2019). These quality-related issues, however, improved during 2019.
According to press media releases, Tesla’s strong efforts, boosted by the founding entrepreneur Elon Musk to overcome current efficiency and quality constraints, are neither easy nor comfortable for its employees. A recent Musk anecdote tells of when, after asking already overworked employees to continue putting in overtime before the launch of the Tesla Roadster, one employee said,
‘But we have not seen our family in weeks.’ Elon Musk’s response:
‘You will have plenty of time to see your family when we go bankrupt’ (Dyer et al. 2015).
Recruitment policy emphasizes employees’ demonstrated ability to ‘solve complex problems.’ Tesla deploys them in small teams seeking to find ‘immediate solutions’ related to cost savings, quality assurance, and efficiency. Such an approach differs from the mainstream in the automotive world which is rather known for its hierarchical organizations leading to long communication times and decision-making processes. Conventional carmakers have developed a certain ‘mental programming’ which makes it difficult to change the way of thinking from combustion engine technology; this has led the industry, for more than a century, towards electric car design and technology. According to von Holzhausen, chief designer of Tesla, the firm was able to design the award-winning Tesla S with a team of just three designers sitting next to their engineering counterparts. Market incumbents typically have 10 to 12 designers working on each new model (Dyer et al. 2015).
The cost of developing the Tesla Roadster was around USD 140 million and USD 650 million for the Model S, whereas General Motors spent USD 1 billion developing its first electric car, named the EV1, and USD 1.2 billion developing the Chevy Volt (Woodall, Lienert, & Klayman 2012). Nissan has spent USD 5.6 billion developing its Nissan Leaf (Evanson 2014; Gordon-Bloomfield 2001; Reed 2009; Stringham et al. 2015).
Tesla has become a well-known company, but some critics argue that Tesla lives off government support rather than creating a true value-added product. Including USD 280 million in tax benefits for consumers who purchased Tesla electric cars, USD 520 million in Tesla’s sale of regulatory credits, and USD 1.3 billion in future tax incentives – mostly tax breaks for building Tesla’s first gigafactory for battery manufacturing, which opened in 2016, in Nevada, USA – Tesla has received a total of more than USD two billion in subsidies (Stringham et al. 2015). Meanwhile, Tesla operates its gigafactory 2 in Buffalo, New York, USA (since 2017) and a gigafactory 3 in Shanghai, China (since 2018). Gigafactory 4 is supposed to be established in the village of ‘Gruenheide’ located in the south of the German capital Berlin. Battery and car manufacturing (e.g., model Y) in Germany is planned to launch in 2021.
Critics may become louder when reviewing that Tesla Inc. has never been able to record an annual profit during the period from 2012 to 2018 (compare Figure 4.13).
There is no question that Tesla’s entering the automotive market as a newcomer introducing electric cars has caused substantial financial investments. The turnaround from current losses towards annual profits requires a long breath. Consequently, the growth during recent years comes along with a sharp rise in liabilities. Tesla’s liabilities increased from around USD one billion in 2012 to USD 23 billion by the end of 2018. Nevertheless, Tesla’s firm equity during that period increased from USD 125 million (2012) to USD six billion (2018) (compare Figure 4.14). Even as liabilities sharply increased, the debt-to-equity ratio decreased from 7.9 in 2012 to 3.7 in 2018.
Elon Musk holds the majority of the Tesla’s company shares (around 40 percent), followed by large institutional investors such as Baillie Gifford & Co. Limited (13 percent), Capital World Investors (10 percent), Capital Research and Management Company (9 percent) and Vanguard Group Inc. (8 percent), BlackRock Inc. (6 percent), Public Investment Fund (8 percent) and others (6 percent) (Morningstar 2019; Nasdaq 2019) (compare Figure 4.15).
5. And the Future (is Bright)?
Since 2014, battery research and assembly has been jointly done with Panasonic (Japan). Panasonic delivers the battery cells for battery assembly. The battery pack and battery cells are the main cost components in an electric vehicle, according to research by IHS Markit. As stated by Elon Musk, Tesla has been ‘battery- constrained’ in the past. The lack of batteries limits Tesla’s production and sales of electric vehicles and energy storage systems. Making its own battery cells, not only assembling them, would also fit with Musk’s general ambition to make Tesla ‘as vertically integrated as possible’, which means developing, manufacturing and selling ‘everything it can’ – even its own enterprise software (Kolodny 2019). Last but not least, having its own cell production would reduce its dependency on Panasonic. However, complete self-sufficiency may remain just a wish because a certain degree of ‘dependence’ is still given in terms of battery-cell manufacturing. This requires, similar to many other electronics components, natural resources such as ‘rare earth’ of which China and Brazil hold a major part.
As a part of their vertical integration strategy – ranging from research and development to battery, solar- photovoltaic, and car manufacturing and distribution – Tesla Inc. has launched their company’s unique ‘supercharger’ system in North America, Europe and Asia, aimed at fast charging for convenient long-distance driving (Tesla 2017). Through the ‘Tesla supercharge’ system, which serves as a part of Tesla’s distribution system, Tesla is permanently mentally present in its customers’ minds. Petrol and diesel car owners take their cars to ESSO, BP, Shell or other gas stations which operate completely independently from their car brands. Since 2019 Tesla has been operating about 11,852 superchargers at 1,426 stations around the world, aiming to soon significantly increase that number to 18,000. In Europe all larger cities are to be covered with charging stations by 2020 (Lambert 2018).
There is no guarantee, however, that Tesla will be the winner of the electric car technology competition. Major competitors such as Honda, BMW, Daimler, Jaguar, and Volkswagen (with its sub-brands Porsche, Audi, Seat and Skoda) are now investing heavily in the same technologies. Moreover, current market incumbents make use of economies and scales, and through their ongoing manufacturing and sales of conventional vehicles, including hybrid cars for a certain period of time, they are able to generate cash which can be re-invested in research and development for electric cars. In many cases large-scale competitors use the same component suppliers as Tesla, for example in terms of semi-conductors, displays, wheels and batteries. On the other hand, Tesla Inc. open-sourced all its patents in 2014, reducing any advantage the company may otherwise have claimed for proprietary inventions (Downes & Nunes 2017).
There is no doubt: Tesla has shown through its strategic concepts that a Silicon Valley startup can enter one of the most established industries. Being confronted with large global market shares of incumbent firms from Germany, US, France, Italy and Japan, Tesla is incrementally changing market structures and the value of existing firms (Stringham et al. 2015).
Source: Glowik Mario (2020), Market entry strategies: Internationalization theories, concepts and cases, De Gruyter Oldenbourg; 3rd edition.