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In this course we will discussthree cases in detail. You have to discuss, Tesla for this case have to submit a ½ page to one page document which is 1.5 to double spaced addressing the following question:Why do you think the company (or companies) discussed in the case has the right corporate strategy? & what makes the company profitable or not profitable? You can define profitable or the right corporate strategy by either looking at profits alone or the triple bottom concept (profits, corporate social responsibility, and environmental consciousness). It is important that you use financial data from the case to discuss your point of view. For instance, you need to provide the profit data from the case to back up your assertion that a company is profitable.You have to use only information reported in the case to answer to this question. Do notreport information from external sources (THIS IS FOR INDIVIDUAL WRITE UPS ONLY).The objective of the write-up is to show me that you have read and fully understood the case. You have to submit a printed copy of each case summary at the beginning of the class in which the case is going to be discussed. You do not have to submit an electronic copy of the document.Yet,please keep with you an electronic copy of each document, in case it is needed.
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1 2 5 9420477
R EV: March 12, 2015
FRA NK T. R O THA E RME L
DAVID R. KIN G
Tesla Motors, Inc.
January 1, 2015. Elon Musk, chief executive officer (CEO) of Tesla is taking it easy on this New Year’s
Day. While having his coffee, he scrolls through some recent issues of The Wall Street Journal on his iPad.
A headline from one current story jumps out at him, “Gasoline prices have declined for 88 consecutive
days, the longest streak of falling prices on record.”1 The slide in gas prices, which began in September
2014, also happened to coincide with the slide in Tesla Motors (TSLA) stock. With increasing oil, and
therefore gas, prices, people had an incentive for purchasing electric cars. Now with gas prices dropping, the incentive to buy would decrease, and the demand for the product would probably drop. This
was one of the challenges facing Musk on this New Year’s Day. Tesla was confronting increasing competition and economic headwinds that were likely going to lower the demand for electric cars. At the
same time, Tesla needed to ramp up production volume to drive down per-vehicle costs.
Musk is a serial entrepreneur longing to leave a legacy, and he believes that Tesla just might be the
company that will help him leave his mark. He has a large profile already and has been described as
“Henry Ford and Robert Oppenheimer in one person,” as well as “Tony Stark, the eccentric inventor
better known as Iron Man.”2, 3 (In fact, Musk made a cameo appearance in Iron Man 2.) But, with several pressing issues and the additional demands of running SolarCity and SpaceX, can he find a way
to make it all work?
As Musk attempts to prioritize all of the critical information that must be reviewed, he contemplates
the many obstacles in his path at Tesla Motors. Is Tesla the next great American car company? Can it
disrupt the market with electric vehicles just as Japanese and Korean car companies did in the past
with their high-quality, low-fuel-consumption combustion vehicles? What is the competition doing
to compete with Tesla, and how will Tesla need to change or adjust its strategy accordingly? Can an
electric-car company really gain a competitive advantage with a limited infrastructure? Is Tesla’s business model sustainable? Most importantly, can Tesla scale production to meet demand for the Model S
and its upcoming Model X, while also maintaining the same high quality and simultaneously driving
down costs? Should Musk consider instead selling to an established car company or partnering even
more closely with one that already has an equity stake in Tesla?
As Musk reads The Wall Street Journal article, he reaches for his cup of coffee and wonders, “What
will the next few years bring for this company, and what should I do to ensure its success?”
Professors Frank T. Rothaermel and David R. King prepared this case from public sources. We gratefully acknowledge Professor Erin Zimmer’s
contribution to an earlier version of this case, and Research Associate Michael McKay’s assistance in data collection. This case is developed for the
purpose of class discussion. It is not intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed, and all errors and omissions, are entirely the authors’. © by Rothaermel and King, 2015.
This document is authorized for use only by Huong Vu in Strategic Management- Spring 2018 taught by Farrokh Moshiri, California State University – Fullerton from January 2018 to July 2018.
For the exclusive use of H. Vu, 2018.
Tesla Motors, Inc.
Elon Musk: Engineer Entrepreneur Extraordinaire
In 1989, Elon Musk left his native South Africa at age 17 to avoid being conscripted into the army.
Says Musk, “I don’t have an issue with serving in the military per se, but serving in the South African
army suppressing black people just didn’t seem like a really good way to spend time.”4 He went to
Canada and subsequently enrolled in Queen’s University in 1990. After receiving a scholarship, Musk
transferred to the University of Pennsylvania. He graduated in 1995 with bachelor’s degrees in both
economics and physics and then moved to California to pursue a PhD in applied physics and material
sciences at Stanford University.5
After only two days, Musk left graduate school to found Zip2, an online provider of content publishing software for news organizations, with his brother, Kimbal Musk. Four years later, in 1999, computer-maker Compaq acquired Zip2 for $341 million (and was in turn acquired by HP in 2002).
Not one to stand still, Elon Musk moved on to co-found PayPal, an online payment processor. In
2002, eBay acquired PayPal for $1.5 billion, netting Musk $175.5 million for his 11.7 percent share of the
company. Although it was financially lucrative, Musk still harbors resentment about this deal. He feels
that letting eBay acquire PayPal sold short the company’s potential, dooming it to a future as a niche
tool rather than a launch pad for a full-fledged, online financial institution.
Musk describes himself as an “engineer and entrepreneur who builds and operates companies to
solve environmental, social, and economic challenges.”6 He is now leading firms on three different
fronts: electric cars, renewable energy, and space exploration. Two of his three ventures—SolarCity and
SpaceX—seem to be doing well. SolarCity’s goal is to become the Walmart of solar-panel installations,
and in 2014 it installed 34 percent of solar panels in the United States.7 SpaceX aims to send satellites
into orbit at a quarter of the current cost. Since Musk took over engineering responsibilities, he has
managed to launch rockets that reach outer space successfully. In May 2012, SpaceX’s Dragon spacecraft attached to the International Space Station, exchanged cargo payloads, and returned safely to
Earth. Until then, only governments had accomplished this technically challenging feat. More recently,
SpaceX has taken over resupply missions to the International Space Station, has begun collaborating
with NASA on a mission to Mars, and is working with Boeing to develop a market for commercial
space passengers.8
Although crowned “2007 Entrepreneur of the Year” by Inc. magazine, Musk feels that his personal
ambitions have not yet been fulfilled. Many in California’s venture-capital and high-tech community
view Elon Musk as someone who has good ideas and breathes life into risky ventures but then fizzles
out on them. He aims to prove them wrong. As a result, Musk’s dreams for Tesla Motors, the Californiabased designer and manufacturer of electric vehicles, are big; he wants to leave a legacy through this
company. Thus, after firing three CEOs in the last few years, Musk is now leading the company himself.
A Brief History of Tesla Motors
Tesla Motors (TSLA) was founded in 2003 in San Carlos, California, as an automobile company dedicated to developing electric vehicles. Co-founder Elon Musk was also one of the first investors, putting
up $7 million initially, and later an additional $30 million.
2
This document is authorized for use only by Huong Vu in Strategic Management- Spring 2018 taught by Farrokh Moshiri, California State University – Fullerton from January 2018 to July 2018.
For the exclusive use of H. Vu, 2018.
Tesla Motors, Inc.
Tesla Motors held a design contest for the styling of its first product: the Roadster, code-named
“Dark Star.” Lotus Cars, a British manufacturer, won the contest and jointly engineered and manufactured the new vehicle. Lotus was a natural partner for this project because of its experience and expertise in building its own line of sports and racing cars. In fact, the Tesla Roadster was modeled using the
Lotus Elise as a template. The partners designed the Roadster’s chassis using Lotus software tools and
had it was manufactured by the same Norwegian company that built the Elise.
In December 2006, Time magazine hailed the Tesla Roadster as the best invention of the year in the
transportation category. In 2007, however, it became clear that sales were not enough to sustain business; the company was bleeding money. After combing through Tesla’s financial situation, Musk found
that Tesla was losing $50,000 on each car sold. As CEO, Martin Eberhard had led investors to believe
that the manufacturing of the Roadster cost only $65,000 per car, which appeared to justify the $92,000
sticker price. In reality, Musk found that it cost Tesla $140,000 just for the parts, subassemblies, and
supplies to make each vehicle, and that the Roadster could not even be built with Tesla’s current tools.
He also discovered major safety issues with the existing design. Completely taken aback by the messy
state of affairs, Musk commented, “We should have just sent a $50,000 check to each customer and not
bothered making the car.”9
Consequently, Musk fired Martin Eberhard and took over the engineering himself. Almost every
important system on the car, including the body, motor, power electronics, transmission, battery pack,
and HVAC, had to be redesigned, retooled, or switched to a new supplier. Such dramatic changes were
necessary to get the Roadster on the road at something close to the published performance and safety
specifications, as well as to cut costs to make the Roadster profitable.10
Tesla Motors launched a completely redesigned Roadster in 2008 at a base price of $109,000.11 By
December 31, 2009, Tesla had 514 employees and had sold 937 Roadster models in 18 countries around
the world. More than 1,200 additional people had put in deposits to reserve a Roadster, giving the company $70 million in interest-free loans. Three years later, on December 31, 2012, Tesla had sold more
than 2,450 Roadsters.12 The 2008 version of the Tesla Roadster had been discontinued and replaced
with a new model, the Tesla Roadster 2, with an improved electric powertrain performance and lower
production costs. The Roadster Sport, which accelerates from zero to 60 miles per hour in 3.7 seconds
(faster than a Porsche 911 GT), was the next vehicle added to the pipeline. By end 2012, Tesla Motors
discontinued production of the Roadster altogether.
In March 2009, Tesla introduced to the public an early prototype of the Model S family sedan. By
year-end, Tesla had received approximately 2,000 customer reservations for the car, with a minimum
down payment of $5,000 each. The prototype had turned into a premium sedan and garnered approximately 12,000 reservations by June 2012.13 Tesla manufactures the Model S in the Fremont, California,
factory that it purchased from Toyota for $42 million in May 2010.14 The car seats five adults, goes from
zero to 60 in 4.4 seconds, and has a per-charge range of over 300 miles for the high-end version. As
Musk described the electric car’s efficiency and range on Tesla’s blog, “With the 85 kWh Model S battery we set a goal of delivering a range greater than 300 miles using the 2-cycle EPA test procedure that
we used with the Roadster. This is a goal that no electric vehicle (EV) in history had ever achieved. We
are thrilled to say that we exceeded this goal.”15 One University of Central Florida senior researcher
traveled more than 423 miles on a single charge in his Model S Signature model, which boasts the larger
85-kilowatt-hour battery.16
3
This document is authorized for use only by Huong Vu in Strategic Management- Spring 2018 taught by Farrokh Moshiri, California State University – Fullerton from January 2018 to July 2018.
For the exclusive use of H. Vu, 2018.
Tesla Motors, Inc.
Deliveries of the Model S began on June 22, 2012, and positive feedback followed. As of December
2012, there were over 20,000 reservations for the vehicle, and Tesla was producing some 500 cars a week
by the summer of 2013.17 The base price of the Model S has been $52,400 (after a $7,500 tax deduction)
since January 1, 2013.18 The automobile magazine Motor Trend gave the Model S glowing endorsements, stating, “By any measure, the Tesla Model S is a truly remarkable automobile.”19
In an attempt to build on its success with the Model S, Tesla has begun work on a newly designed
seven-seat electric vehicle, the Model X, which will combine the best features of an SUV with the benefits of a minivan. Following several delays, Tesla planned to deliver the first Model X in late 2015.20
In 2014, Telsa announced that after the Model S and Model X, the next car it will produce is the Model
3.21 With this new model, Tesla attempts to enter the mass market with a smaller vehicle that will cost
around $35,000 and has a range of 200 miles per battery charge. The Model 3 is slated to go sale in 2017.
Tesla completed its IPO on June 29, 2010, the first IPO by an American automaker since Ford in
1956. On the first day of trading, Tesla’s shares closed at $23.89 and generated $226.1 million for the
company.22 Despite this, in its first annual report, Tesla reported an operating loss of $146.8 million.23
Losses continued until the first quarter of 2013, when Tesla announced its first profitable quarter in 10
years, with a GAAP profit of $11 million (see Exhibit 1). Investors responded in kind to the black ink
in Tesla’s ledger, causing a surge in the stock price, and pushing Tesla’s stock up over $280 per share
in early September 2014 before starting to slide (see Exhibit 2). A compounding problem is that Tesla
has depended on $3 billion in convertible debt to finance capital investments, and Tesla stock needs
to appreciate around 160 percent over the next six years to avoid repayment or refinancing at higher
interest rates.24
The U.S. Automotive Industry
The Big Three automakers—GM, Ford, and Chrysler—have dominated the U.S. automotive industry for decades (see Exhibit 3). GM was once the leading U.S. carmaker, with a market share of over 50
percent in 1962. By 2009, GM’s market share had eroded to less than 20 percent, while the market share
of the Big Three combined dropped below 50 percent for the first time ever.25 GM and Chrysler filed for
bankruptcy, while Ford was fighting hard to become profitable again. What had caused their decline?
In the 1990s, the Big Three shifted resources away from mid-size and compact cars to lead the “SUV
craze.” They built their business models around the assumptions that gas prices would remain low for
the foreseeable future and that Americans would continue to prefer big trucks and SUVs. For as long
as these assumptions held true, the strategy was quite profitable; pickup trucks and SUVs provided the
highest margins of any vehicle class. In fact, the Ford F-150 pickup truck remains the most-sold vehicle
in the United States of all time. For a while, the Hummer 1 (with gas mileage of 7 mpg) was one of GM’s
most profitable vehicles.
However, when SUV sales peaked in 2004 and started to decline, the Big Three were slow to detect
and adapt to the shift in customer purchase patterns. Then, in the wake of the 2008 financial crisis, U.S.
car sales hit a historic low of some 11 million vehicles, down from 18 million in 2000. While the price
of a gallon of gas rose to over $4 in the summer of 2008, up from about $2 in 2005, there was a dramatic reduction in demand for new vehicles with trucks and SUVs particularly hit hard. However, by
December 2014, gas prices had fallen to below $2 a gallon on average in the United States (see Exhibit
4) contributing to people buying trucks again.26
4
This document is authorized for use only by Huong Vu in Strategic Management- Spring 2018 taught by Farrokh Moshiri, California State University – Fullerton from January 2018 to July 2018.
For the exclusive use of H. Vu, 2018.
Tesla Motors, Inc.
GM
The Big Three found it particularly difficult to compete in this leaner financial environment due to
their higher cost structure. Unlike their foreign counterparts, U.S. companies had to cover long-term
legacy costs for employee health care and pensions. GM was particularly vulnerable in this regard. At
one point, GM paid the full cost of health insurance premiums for all of its employees and their dependents, as well as GM retirees and survivors. When U.S. health care costs rose precipitously in the latter
part of the 20th century, most of these legacy plans ended up chronically underfunded. Taking steps
such as providing retirement packages to older workers and negotiating agreements with unions to
transfer pension dues to an independent trust helped, but they fell far short of solving GM’s financial
woes.
Compounding the company’s financial situation further, GM had also made large concessions to
the United Auto Workers (UAW) union, driving up hourly wages and benefits. For example, laid-off
autoworkers could await re-employment while enjoying almost full wages at so-called job banks. GM
was caught in a classic catch-22. Given the costs of unionized labor, GM was unable to make money
on small, fuel-efficient cars without heavy government subsidies through tax incentives.27 Yet because
the UAW had a monopoly over GM’s labor force, GM could not take appropriate actions to reduce its
labor expenses, either by laying off workers or by negotiating more competitive wages. Bankruptcy
was inevitable.
The GM that reemerged 60 days after the bankruptcy filing had a significantly restructured balance
sheet and four fewer brands (Hummer, Pontiac, Saab, and Saturn). In order to “bail out” the firm, the
U.S. government provided close to $58 billion under the Troubled Asset Relief Program (TARP), making it the de facto owner of the company. In December 2012, GM announced that it was going to spend
$5.5 billion to buy back a large portion of its stock that was being held by the U.S. Treasury, and the
U.S. government sold the last of its shares in December 2013.28 Overall, the U.S. government lost about
$10.5 billion on its 49.5 billion dollar investment in GM.29 Meanwhile, in 2014, GM announced a record
number or automobile recalls, including ignition switches attributed to several deaths.30
CHRYSLER
In 1998, German car manufacturer Daimler paid $36 billion to acquire a troubled Chrysler
Corporation. Touted by some as a “merger of equals,” the true nature of the deal became apparent
when several senior U.S. managers either left or were fired and then replaced by Daimler managers.
Their decision to retire the Plymouth brand fueled the brewing mistrust even more.31 Theoretically, the
acquisition gave Chrysler entry into European markets, created a larger, complementary product line
(Chrysler sold SUVs, minivans, and mass-market cars, while Daimler specialized in luxury sedans and
sports cars), and provided both companies with increased market power.
However, the management cultures of the two companies clashed, and DaimlerChrysler never
achieved the anticipated synergies.32 Ultimately deciding it was better off on its own, Daimler sold 80.1
percent of Chrysler to Cerberus Capital for $7.4 billion in August 2007. Cerberus took Chrysler private
in a leveraged buyout, hoping to restructure the company away from the pressure of public financial
reporting. Unfortunately, Chrysler’s problems were too big for even Cerberus to fix, and the company
declared Chapter 11 bankruptcy on April 30, 2009.
5
This document is authorized for use only by Huong Vu in Strategic Management- Spring 2018 taught by Farrokh Moshiri, California State University – Fullerton from January 2018 to July 2018.
For the exclusive use of H. Vu, 2018.
Tesla Motors, Inc.
At this point, the federal government intervened, paying $6.6 billion to finance the company’s
restructuring into the “New Chrysler.” Of that amount, 55 percent was owned by a pension fund and
25 percent by the Italian carmaker Fiat, with the U.S. and Canadian governments holding minority
stakes.33,34 Subsequent restructuring reached an …
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