Strategic Analysis of Tesla Motors.

Author- | Posted- | Updated: October 14, 2020 |

An Introduction to Tesla’s Business

Tesla (NASDAQ: TSLA) is the leading manufacturer of electric vehicles based in the US and with a fast-growing global footprint. The company was founded in 2003, and its CEO is Elon Musk. During 2019, Tesla acquired rapid growth and experienced a sharp increase in its car sales. The company has also enjoyed sharp growth in popularity as well as market cap. Now, Tesla’s market cap is at around $400 billion.

Apart from sustainability, the company’s focus on technological innovation and passenger safety has also been driving its popularity and sales around the world. The US and China are currently the largest markets of Tesla Motors. Apart from electric cars, the company also makes energy generation and storage products and offers related services to its customers. Compared to the other leading automobile makers like VW, Toyota, or GM, Tesla has a limited footprint. Still, the sales and popularity of EVs have been picking up, which indicates a brighter future for the company.

The automobile industry is going through a  difficult phase. The pandemic has put the resilience of the supply and manufacturing chains of these companies to test. Demand has also declined heavily due to the pandemic since people have mostly remained confined indoors due to the lockdowns in various key market regions. Apart from that, the economic fluctuations caused by the pandemic have also had a negative impact on automobile demand worldwide. However, Tesla has proved to be more resilient than the other car brands, which showed in its sales in the Chinese market during June. With the largest market cap in the car industry, Tesla is not the most valuable automaker. 

Read more about Tesla in this strategic analysis:

External analysis of the automobile industry:

SWOT analysis of Tesla Motors:-

High Market Valuation:

The market valuation of Tesla has grown very fast in recent years. Its market cap has surged to around $400 billion in 2020, which is the highest of all the automobile brands globally.

Its shares climbed very fast in August 2020, making Tesla the seventh-largest US-based company for a short period. In the September- October period, the shares of Tesla declined again. However, the company is still a lot ahead of other major automakers like VW and Toyota in terms of market capitalization. 

Tesla may still not be the largest automobile company in the world regarding car production and sales. Still, the overall valuation of the company has grown much higher than its rivals. In the last few months only, Tesla stocks have climbed insanely and steadily.

Technological Innovation:

One of the main factors driving fast growth in popularity and sales of Tesla cars is the company’s focus on technological innovation. The automobile industry is marked by heavy competition, but Tesla belongs to a distinct class of automakers. It makes only Electrical vehicles and that too for the higher end market. Tesla cars are great in terms of product quality, design, performance, and passenger safety. The company spent around $1.34 billion on research and development in 2019. Apart from these things, Tesla cars are loaded with technology. These cars’ maintenance costs are very low because of the lower number of parts used inside them, which more than makes up for the one-time purchasing costs. Autodrive and other technologies make these cars safer and performance-wise superior to the other cars on the roads. The Model 3 earned the 2019 Top Safety Pick award from IIHS.  It achieved a good performance in all six IIHS crash tests. The award is an endorsement of Tesla’s safety systems that Elon Musk often touts in the media and on social media. Overall, Tesla cars offer a superior riding experience compared to most cars on the road, and therefore they easily stand out from the competition. It has resulted from the company’s consistent focus on technological innovation over time. The company also provides regular software updates for its cars. Tesla’s cars also offer a superior battery range compared to the rival EVs and hybrids on the roads.

Fast sales growth:

With the release of Model 3, Tesla sales have grown worldwide. The company has experienced a sharp increase in its vehicle sales in 2019, and despite the decline in demand due to the pandemic, it has retained a lot of its growth momentum. In 2019, the company delivered around 3,67000 units, which was a sharp rise from around 2,45000 in 2018. The pandemic has led to a sharp decline in automobile sales worldwide. However, despite the pressure in demand, Tesla has seen its sales in the second quarter of 2020 rise compared to the first. While overall sales in the first half of 2020 were lower than the previous year, Tesla has still proved itself a lot more resilient in the face of the pandemic than all the other automobile brands in the industry.

According to Statista, Tesla delivered around 90,650 vehicles between April and June in 2020, which was around 2250 units higher than the previous quarter. It is lower than in the same quarter in the previous year when the company had shipped more than 95,000 units. Still, considering that the automobile industry is passing through a challenging phase, Tesla’s performance counts as nothing less than rock solid. In the light of low automobile demand overall and shrinking sales of nearly all automobile brands, Tesla’s sales in the second quarter of 2020 can be seen as a big success. In the second quarter of 2020, Tesla delivered more than 80,000 of Model 3 and Model Y. Since Tesla introduced the Model 3 in the third quarter of 2017, its sales have continued to soar. However, in the third quarter of 2020, the company has experienced impressive sales growth. Its total sales for the third quarter of 2020 were around 40% higher than the sales during the same period in the previous year. According to sources, Tesla sold more than 64,000 units in the US in the third quarter of 2020 compared to around 52,000 units during the same period in the previous year. Given how automobile demand has crashed due to the pandemic, Tesla’s performance is nothing less than stellar.

Strong performance of Tesla Vehicles:

Based on overall performance, Tesla vehicles are classified among the best on the roads. Apart from zero-emission of their vehicles and their superior battery range, they are also among the safest and require nearly no maintenance than the other vehicles. Its model S can drive roughly 370 miles without stopping for a charge. This is more than 50% higher than the range that competing cars from brands like Chevrolet, Nissan, or Jaguar offer. Their cars can make up to 240 miles at best on a single charge, which is nothing compared to Tesla’s Model S. It marks a major difference for Tesla and is also the primary reason behind the superior demand for its SUVs. Tesla cars are also enjoying superior safety ratings overall. These cars use fewer parts overall compared to a regular car due to which the maintenance costs for the owner and technical complications are also lower. These factors have led to higher satisfaction for the Tesla car owners.

Leading position in the US and China EV markets:

Tesla is the leading EV brand in the world. However, its position is the strongest in the US and China markets. Even during the pandemic when the demand for automobiles has continued to fall around the world, the company is enjoying stronger sales and growth.

Tesla has quickly risen to the top in terms of EV sales in China since it started production in its Shanghai manufacturing facility. According to Counterpoint Research, Tesla accounted for around 23% of EV sales in China in June 2020. On the other hand, in the US, the company is enjoying even stronger sales in 2020 despite the slowdown due to the pandemic. While it sold fewer cars in the first and second quarters of 2020 compared to the previous year, sales surged again in the third quarter of 2020 compared to the same period in the previous year. In the third quarter of 2020, Tesla cars’ sales were at least 40% higher than in the same period in the previous year. While Tesla’s overall market share in the US automotive market was only around 1.3% in December 2019, the company enjoys an enormous market share in the US EV market. It is the market leader in battery-electric car sales in the United States. Its Model 3 enjoys a 60% share in the US Electric vehicles market.

Growing charger network:

Tesla’s sales worldwide also depend on its supercharger network since Tesla cars depend on superchargers mainly for charging. Therefore, the company has focused on growing its network of chargers by including the company’s superchargers as well as destination chargers. Tesla has established supercharger stations along well-traveled routes in the key areas where its products sell. The density of superchargers is especially very high in the North American region. The company has established 1971 supercharger stations with 17,467 superchargers. Tesla has also partnered with various other businesses including Hilton Hotels to establish its destination charger network throughout the United States and other markets. The destination charging network of tesla complements its supercharger network very well and offers an easy option for Tesla car owners to charge their vehicles. Charging a Tesla vehicle costs much less than gasoline. The costs of full charging a Tesla vehicle is around only $116 compared to $204, a person would have to spend if he was using a gasoline car.

Weaknesses:

Higher cost of revenues and operating expenses:

Despite the rapid growth in its market capitalization, Tesla is not as profitable as the other automobile brands, It has been running its business in losses for the past several years. In fiscal 2019, the net loss of the company was $862 million compared to $976 million in 2018 and $1,962 million in 2017. With growing production, the cost of revenues has also grown for Tesla. In 2017, its total cost of revenues stood at $9.5 billion and grew to $17.4 billion in 2018. During 2019, the costs of revenues of Tesla grew to $20.5 billion. Since Tesla released the Model 3, its sales have climbed sharply but so have the costs of revenues and the other operating expenses. For 2019, its operating expenses stood at $4.14 billion compared to $4.4 billion in 2018. The company has started generating some profits in 2020. However, it is still too low as compared to most automobile brands with a global presence. In the second quarter of 2020, the net income of Tesla attributable to common stockholders grew to $104 million compared to a net loss of $408 million during the same period last year.

Limited customer base:

Tesla cars are made mainly for the higher end of the market. Even the Tesla Model 3, which is the lowest priced car in the Tesla range, is priced at around $48,000. While Model 3 is the most affordable car made by Tesla, it is still out of reach for many middle-class consumers. Moreover, the world economy has slowed down due to the impact of the pandemic. Automobile demand has reduced overall. One key factor that has helped Tesla during this period is that the impact has been lower on the higher end market. So, while Tesla sales may have jumped in the third quarter of 2020, once sales again start picking up post-pandemic, shipments from other brands will also grow. Tesla will deal only in the higher end market. It limits the company’s customer base considerably against the other brands. This will also make achieving growth in the emerging markets like India difficult because of the high level of taxes there.

Low market presence compared to other leading players:

While the US and China are the leading markets for Tesla cars, its presence worldwide is limited compared to the other leading automobile brands. To expand its presence worldwide, apart from establishing Tesla stores in the emerging markets, the company will also need to expand its network of superchargers and destination chargers faster, which is essential for maintaining car sales in new regions. People will buy Tesla cars only if they have easy access to superchargers needed to charge their cars. While the company has grown its density of superchargers and destination chargers in its existing markets, it is also a key hurdle to finding new market growth. Unlike the other cars on the roads, these cars rely on Tesla’s own charging infrastructure, without which they cannot play on the roads.

Low manufacturing capacity:

Tesla seems to be lacking the manufacturing capacity it needs to produce everything it has promised till now. The company will need to expand its production capacity to meet popular demand. For example, when it unveiled semi-trucks in 2017, the company had promised that they will be available by 2019. However, only a few prototypes have been available by now and Tesla has pushed semi to low volume production by the end of 2020. It means while Semis may become available for sales by the end of 2020, they will not be available in large volumes yet. Tesla plans to produce Semi trucks in its upcoming plant in Austin, Texas. The case of the solar roofs Tesla had promised is also similar.

Opportunities:

Emerging Markets:

The emerging markets like India and Brazil present significant growth opportunities for the EV brand. A large base of upper middle class consumers in these regions is waiting eagerly for Tesla to set its stores there.  For the past several years, these countries have seen impressive economic growth. While the pandemic might have affected the economic performance of these regions, the higher end market has mostly remained less affected as compared to the lower end. Once the pandemic’s effect is over and economic activity revives again, these markets will again start seeing growth. So, strengthening its presence in these markets can help Tesla attract more sales and find growth faster.

Rising demand for EVs:

The demand for EVs has kept rising worldwide over the past few years. By 2025, EVs’ global market is projected to grow to above $567 billion, which is an attractive opportunity for Tesla. In the US, while Tesla’s overall share in the automotive market is only 1.3 percent, its share of the EV market has grown to above 60%.  Since the release of the Model 3, the company is enjoying higher sales in the global market. However, the pandemic also seems to have pushed the demand for EVs higher, which was evident in the growth of Tesla car sales during the third quarter of 2020. Its sales compared to the past year grew more than 40% during the third quarter.  It also indicates that tesla will see higher success in the coming years, driven mainly by the growth in demand for EVs. Other factors that have led to increasing EV demand worldwide include government subsidies and the zero environmental impact of these cars.

Growing charger and manufacturing network:

Tesla has focused on growing its supercharger and destination charger network. Expanding its supercharger and destination charger network is critical to finding faster growth. Its supercharger network supports its sales of cars in all the leading markets. If the company wants to increase its footprint in the existing and new markets, it will need to grow its supercharger network in all the markets. While this will help the company grow its presence and create more demand, it will also help it beat other brands’ competitive pressure. As of now, the tesla supercharger network is robust in key regions and mainly North America. If Tesla can grow its supercharger infrastructure simultaneously in the other regions, its sales will grow even faster.

Technological innovation:

Technological innovation is critical to the growth of Tesla motors and sustaining the competitive advantage it has achieved. While the company has produced excellent results until now and is known as a highly innovative automobile company, it should maintain a consistent focus on innovation in the future and remain ahead of the competitors worldwide. In the automobile industry, technological innovation can be a major source of differentiation and faster growth. Apart from growing its existing product portfolio’s strength, the company can generate additional sources of competitive advantage through research and development. While according to the CEO, the company is planning to release additional services like Robotaxis, faster future growth of the company depends on its focus on innovation. If Tesla has achieved stronger brand recognition without spending a fortune on its marketing, it is mainly because of its focus on innovation.

Threats:

Pandemic impact on automobile demand:

The impact of the pandemic on the automobile industry has been the severest. It was one of the industries that felt the most adverse impact on the demand for its products caused by the economic slowdown that followed the pandemic. Several leading brands have felt a bitter impact of the pandemic on automobiles’ sales throughout the world. While Tesla has emerged as a comparatively resilient company during the pandemic, its sales declined during the first two quarters of the year compared to the previous year caused by the pandemic. In the third quarter, demand has started picking up, but for the impact of the pandemic to fully go, it will take some time. All brands have alike felt the impact of the pandemic on their manufacturing and supply chain networks.

Competitive pressure:

While Tesla is enjoying the lion’s share in the US and China EV markets, the competitive pressure on the company will continue to grow. More and more brands are working on their own fully electric models. While many brands have already introduced some efficient EV models, they are also working on improving their battery range. One significant competitor has emerged in the form of Polestar. Tesla’s advantage lies in its batteries. While Tesla has currently maintained its lead in the EV market, it is predicted that the company could lose its lead to VW, Renault, Nissan-Mitsubishi alliance, and China’s Geely by 2025. The competitive pressure is already mounting on Tesla, which can maintain its lead only if it can introduce a significantly lower-priced model for the emerging markets and gain sales at a very high level. However, this does not seem possible given the company likes to deal only in the higher-end segment.

Regulatory threats:

Tesla is a sustainable brand that makes fully electric cars. Due to that, it has some additional advantages compared to the other car brands in the world. Governments around the world are allowing subsidies to the brands that make fully electric vehicles. These subsidies helped Tesla gain ground in the Chinese and American markets against that other EV brands. However, the subsidies on Tesla’s Model 3 could be expiring soon, and that could cause a decline in sales. There are other types of regulatory pressures on automobile brands. Despite Tesla’s advantage because of its sustainable business model, taxes, and other regulatory threats like those related to self-driving car models will continue to trouble the brand.

Pestle analysis of Tesla Motors:

Operating in the international environment also brings a large set of challenges and the automobile industry which is highly regulated is facing several such challenges that exist in its microenvironment. These challenges can be understood through a PESTLE analysis that analyses six important factors affecting businesses internationally. Tesla operates in several leading markets including the two largest automobile markets China and the USA. From political to economic, and technological, all these factors have a direct impact on its business. In this PESTEL analysis, we will look at how deep the impact of these factors is on Tesla Motors.

Political:

Political factors have gained a central importance in the automobile industry which is regulated heavily worldwide. The political environment of a market region has a direct impact on the success of international automobile business in the given market.  Government policies as well as rules and regulations related to the automobile industry, all have a significant impact on the performance of automobile businesses operating in a specific market. For example the China market differs widely from the US market. Both in terms of demand and supply, China is the largest automobile market in the world. However, entry into the Chinese market for the foreign players is made difficult by the local laws and government regulation of the industry. The only leading factor that has helped Tesla achieve the kind of success it found in China is that it is a sustainable brand. However, most other foreign players have formed local alliances to gain a stronger footing in the Chinese market. 

China is strategically a very important market for Tesla. Here, the demand for Tesla cars has grown sharply mainly because of the growing popularity of EVs. While China is a rather complex automobile market, it has formed policies as well as rules and regulations that help EV companies grow their footprint in the market. The government offers a set of subsidies aimed at growing EV demand in China and it has also tasted a lot of success in this area. It offers direct subsidies to both the manufacturer and the consumers, apart from tax exemptions and support with growing the charging infrastructure in the country. In this area, the Chinese government’s actions and policies have played a significant role in helping Tesla gain ground in the Chinese market. Tesla has set a production facility in Shanghai to locally produce cars. This helped the company achieve significant cost advantages and sell profitably. IN several key market regions worldwide including the US, governments are offering similar subsidies and tax exemptions in order to help EV companies grow their footprint. Governments around the world are growing more and more conscious about their roles in terms of reducing environmental pollution and apart from curbs on polluting vehicles and heavier taxes, they are encouraging the use of electric and nonpolluting vehicles. The support from governments worldwide is going to play a key role in Tesla’s growth in the future.

Economic:

Economic factors are a key driving factor in terms of automobile sales worldwide. While higher economic activity has generally resulted in higher sales of automobiles, lower economic activity has mostly resulted in a corresponding sharp reduction in the sales of vehicles. Following the spread of the pandemic, economic activity reduced sharply in various markets. While China was the first market to be affected, it was also the first one to start on the path to recovery. So, sales again rose in the Chinese market sooner than other leading markets like the US, Japan, and India. Currently, the entire automobile industry is facing heavy pressure caused by the pandemic. Apart from a steep decline in sales, companies are also troubled by the disruption of their supply chains. 

However, the impact of the pandemic has not been even and mostly remained focused at the lower end market. So, the highest decline was felt in the affordable passenger car segment. For example, in India, sales of passenger cars declined by around 58% in the month of June compared to the same period last year. In the third quarter of the year, sales picked up again after the reopening of the Indian economy. The case of the Us economy is also somewhat similar where sales picked up faster in the third quarter. Tesla also experienced sharper growth in sales in the third quarter as compared to the first and second when its sales remained lower than the previous year. As the US economy starts recovering from the impact of the pandemic, sales are expected to soar again. Tesla has proved itself the most resilient brand during the pandemic. However, with faster economic recovery it too could achieve more impressive sales like the other automobile brands. At least, in the case of the automobile brands, the impact of fluctuations in the world economy is more direct and severe as compared to the other industries. Tesla is not an exemption either.

Sociocultural:

Sociocultural factors have also gained importance in the context of international business. Companies cannot afford to ignore these factors anymore. Apart from the changing demographics of the world population, there are more sociocultural factors that affect business strategies as well as sales of specific brands. Local cultures and social changes have a clear impact on the sales of particular products and services. One example is the growing acceptance and use of digital technologies in societies worldwide. It is why companies are making sociocultural factors a central concern when formulating their annual business and marketing strategies.

Worldwide, societies are getting increasingly conscious about the social and environmental impact of businesses. It is showing in the form of growing sales and the popularity of sustainable businesses. Tesla’s growing popularity which is also evident in the form of the euphoria surrounding the brand on social media and in the public media arises mainly from its sustainable business model. Considering the growing role of sociocultural factors, it is now even important for businesses to maintain a clean and strong social image. The increasing environmental awareness worldwide is also an important concern for businesses since customers are concerned about how businesses affect the environment. Consumers like to buy from the brands with a low environmental impact. In this regard, Tesla has been able to outperform all the other brands in the automobile sector. Apart from having the image of clean and sustainable business, Tesla is also known worldwide as an innovative company. It has enabled the company to achieve faster growth in its popularity in several key markets.

Technological:

Technology is one of the core factors driving the growth of businesses worldwide. In the 21st century, most of the growth worldwide in various industry sectors including automobiles has been made possible through technological innovation. Tesla’s business model also rests on technological innovation fundamentally. It’s an innovative brand that makes fully electric cars as well as energy generation and storage products. However, the role of technology is not limited to just that since Tesla does not offer an ordinary driving experience, Instead, the company’s focus is on offering its customers worldwide safer and connected driving experience.

 There are several features inside a aTesla car that differentiate it from the other cars available worldwide. 

The Tesla cars include a large touchscreen that apart from driving related features also includes infotainment features. The 12.3 inch LCD display shows the car’s position on the road as well as the surrounding traffic, land markings and speed. The screen also displays the vehicles surrounding the car with high accuracy. Another standard feature called Autopilot is aso now available on Tesla models. However, customers need to pay a little extra to enjoy the full self driving features. It’s the company’s advanced driver assistance system that basically combines adaptive cruise control with lane guidance as well as takes care of speed, steering and braking. Drivers can also use the Tesla app to control their cars from outside. Tesla provides regular updates to the app. These technological features onboard Tesla cars are a major attraction for buyers. The company has also paid special attention to the safety features which make Teslas one of the safest cars in the world.

Environmental:

Environmental impact and sustainability are among the core concerns for the automobile brands worldwide. Apart from the growing awareness among customers worldwide, the growing governmental regulation of automobile businesses, is also a reason that  the car brands have to place extra focus on sustainability and their environmental impact. Tesla is already at an advantage in this regard since its sustainable business model of the company is an important source of competitive advantage for the brand. It makes and sells fully electric car models which have zero environmental impact. Because of its zero emissions cars, the company is able to generate extra emissions points that the company can sell to other businesses and generate extra profits. However, there are other major advantages of its sustainable business model as well. For example governments around the world have formed policies that help brands like Tesla grow their footprint. The company is enjoying impressive benefits including tax benefits and subsidies in the Chinese and the US markets. Other countries are also willing to allow Tesla the space and infrastructure it needs to grow its business there including Brazil and India. Having a low environmental impact makes Tesla the favorite of customers as well as governments. Worldwide governments have formed policies that help sustainable brands and punish the brands with a higher environmental impact. Overall, the situation has proved profitable for Tesla and in the past three years, the company has been able to find impressive growth. The pandemic has again brought the focus back on the environment. There has been a sharp increase in Tesla’s sales during the third quarter of 2020 which shows increasing popularity of Tesla cars amid the pandemic. The pandemic has made people and governments realize the importance of the environment and that is going to help brands like Tesla flourish in the world market.

Legal:

Legal factors have also taken center stage in the automobile industry as the web of laws and regulations related to the operations of the automobile brands worldwide in all the leading markets grows. Apart from the laws related to the environmental impact of  automobiles, there are more laws like those related to labor and product quality which also affect automobile businesses worldwide. Tesla has been able to avoid a large number of legal hassles because of its focus on technological innovation as well as sustainability. However, it does not mean the company is exempt from all laws. There are some laws related to passenger safety and product quality which still affect Tesla. For example, the self driving features of Tesla are an area that require continuous focus if the company wants to avoid a legal tussle. The company as well as its CEO are facing various legal issues according to the media reports. After its legal tussle with the SEC in 2019, the company faced fresh probes related to fatal crashes involving Tesla cars. NHTSA and NHTB that continuously watch Tesla cars for crashes started an investigation in March 2019 after a fatal crash involving a Tesla car. The company has also been involved in some internal legal tussles involving tesla employees. Since 2012, the Tesla owned solarcity has been subjected to several SEC investigations.

Five Forces Analysis of Tesla Motors:

There are several forces in the automobile industry that affect the market position of businesses and their competitive strength. One of the simplest tools used throughout the industry and in academic circles for analyzing the competitive position of firms and the level of competition in a particular industry is the Porter’s five forces model. This analytical model was named after Michael E Porter.

There are several forces in the tech industry that affect the market position of businesses and their competitive strength. One of the simplest tools used throughout the industry and in academic circles for analyzing the competitive position of firms and the level of competition in a particular industry is the Porter’s five forces model. This analytical model was named after Michael E Porter.

Harvard Business School.

In a 1979 article titled How Competitive Forces Shape Strategy, published in the Harvard Business Review, Michael E Porter noted regarding his five forces model that it is the collective strength of these forces that ultimately determines the profit potential of any industry and it can range from intense to mild. The profit potential grows with the weakening of these forces. In each and every industry, a different force may grow more prominent than the others. Porter offers three examples in his HBR article. In the ocean-going tankers industry, the buyers are the most important force whereas, in the tires industry, it is the powerful OEM buyers coupled with tough competitors. On the other hand, in the steel industry, foreign competitors and substitutes are the most prominent forces.

In Porter’s words,

“Every industry has an underlying structure, or a set of fundamental economic and technical characteristics, that gives rise to these competitive forces. The strategist, wanting to position his or her company to cope best with its industry environment or to influence that environment in the company’s favor, must learn what makes the environment tick.”

Michael E Porter in his HBR article, How Competitive Forces Shape Strategy.

Let us take a look at how these forces work in the automobile industry and how Tesla can cope best with the level of competition in its industry environment.

Bargaining power of suppliers:

The bargaining power of suppliers in the automobile industry overall is moderate which is mainly because of the high number of suppliers in the industry. Apart from that, the threat of forward integration from the suppliers is also low. There are some moore factors that reduce the bargaining power of the suppliers like the dependence of the suppliers on buyers. The suppliers in the automobile industry are mostly smaller firms that depend heavily on the larger buyers for business. 

Tesla’s scase is somewhat different from the other automobile manufacturers that need thousands of parts from various suppliers to manufacture their cars. According to the company, its drivetrain has only 17 moving parts compared to the 200 moving parts in the typical drivetrain for  an internal combustion engine. So, while the traditional cars including their engines are a lot more complex than an electric car, they also need a lot of parts for assembly. However, tesla’s task is comparatively simpler. Another important factor that has helped the company reduce its dependence on the suppliers is the ability of backward integration. In partnership with Panasonic, the company manufactures batteries in its Nevada Gigafactory. The company sources batteries from suppliers so that it can exclusively focus on building cars. However, there can slo be a shortage of batteries which are one of the most critical components that Tesla needs. It is why the overall bargaining power of the suppliers of tesla is moderate.

Bargaining power of buyers:

The bargaining power of buyers is moderate in Tesla’s case which is for several reasons. First of all, the bargaining power of buyers becomes higher when the number of suppliers is high and there are multiple substitutes available in the market. However, in the case of Tesla, while there is a shortage of substitutes, the number of sellers that mek fully electric cars like Tesla is also very low. Tesla’s products are highly differentiated and that also grants the company some extra bargaining power. Its car models are superior in terms of performance as compared to the rivals Electric vehicles in the market. These cars are more attractive than the rival cars  in terms of overall dric=ving experience and come equipped with technologies that are not available on all cars like the self driving technology and the user interface. While these factors grow the attractiveness of the Tesla car models, the company also benefits from its sustainable brand image and superior technologies. However, Tesla cars are made for the high end market and therefore each unit sales matters. The overall bargaining power of buyers in case of Tesla is moderate. 

Threat of substitute products:

The threat of substitute products in case of Tesla is moderate since there are few manufacturers whose electric vehicles can compete with Tesla cars. While the competitors are also focusing on technological innovation to bring superior electrical vehicles to the maret, Tesla cars are far ahead in terms of battery range and overall performance as well as passenger safety. This is why Tesla rules the EV market in both China and  the United States. In the United States Tesla holds at least 60% of the market share in the electric car market. Its performance in China is also strong where it is leading among the EV brands. Till now, there is hardly a brand whose performance overall compares with that of Tesla. However, there are also a large number of hybrids and electric vehicles in the market that compete with Tesla. Tesla’s performance, design of products as well as focus on technological innovation helps the company reduce the threat of substitute products. Overall, substitute products and brands are not a major threat for Tesla motors. Tesla’s cars belong to a distinct class of their own. The only car that has emerged as a tough competitor for Tesla’s model 3 is the Polestar by Volvo. However, the high level popularity of Tesla’s Model 3 still leaves very little space for substitute products.

Threat of New Entrants:

The threat of new entrants in the automobile industry and especially the electric car segment is very low. There are several major barriers to entry in the automobile sector.  Apart from the large capital required for entry in the automobile sector, companies will also need to invest in technological knowhow as well as human resources. There is also a large investment required in marketing and for creating brand recognition. Any new player cannot gain market share overnight even if it invests a large capital to develop the required infrastructure as well as in marketing. The regulatory barriers are also very high which deter any new players from entering the market. 

Moreover, the incumbent players are quite aggressive about maintaining their market share and position in the industry. They invest large sums each year in research and development to improve their existing models as well as bring new models that increase the attractiveness of their product portfolio. Apart from that, these brands also focus on marketing to retain the demand of their products and sales level. Overall, entry of new players is very difficult and the overall threat of new entrants for Tesla is very low.

Intensity of rivalry among existing players:

The intensity of competitive rivalry among the existing players in the automobile industry is very high. Apart from there being a large number of global players in the industry, the increased demand for automobiles has also shaped the level of competition in the industry. Tesla makes only electric cars but it also competes with the premium brands in the market. There are various hybrid models made by premium brands which also compete with Tesla cars. While there are various factors that have helped Tesla beat the competitive pressure and emerge as the electric car brand of the world, the company still faces a lot of competition from rival brands. Volvo has released Polestar which matches Tesla’s performance in some areas and is seen as an attractive and tough competitor in the EV segment. The main factors that have helped Tesla beat the competitive pressure and stand out from the crowd is the attractiveness of its product portfolio, focus on technological innovation, driving experience and the zero environmental impact of tesla cars.

Value Chain Analysis of Tesla Motors:

Michael E Porter introduced the concept of the value chain in 1985. The idea of the value chain has gained immense popularity since then.  For more than 30 years, business managers have used the value chain model for strategy formulation and strengthening their competitive advantage.  

“The value chain is a powerful tool for disaggregating a company into its strategically relevant activities in order to focus on the sources of competitive advantage, that is, the specific activities that result in higher prices or lower costs.”

Institute for Strategy & Competitiveness. HBS.edu

According to Michael E Porter, a firm’s value chain is typically the part of a more extensive value system, including companies either upstream (suppliers) or downstream (distributors), or both. This perspective of value creation forces the managers to consider each of the steps involved in the value chain as a crucial step that adds an increment of value to the final product or service and not as a cost.

There are four key concepts involved in the value chain – activities, competitive advantage, and set of choices. The value chain itself is a set of activities involved in delivering value to customers. The activities, including the entire value chain in which they are embedded, are the basic units of competitive advantage. The firm’s strategy is reflected in the set of choices about how the activities in the value chain are configured and interlinked.

The value chain includes two types of activities – primary and support activities. The primary activities are the set of activities related directly to value creation. On the other hand, the support activities are secondary activities that lend support to the primary activities in the value chain.

Primary Activities:

The primary activities in Porter’s value chain bear a direct relationship with the creation of products or services.

Inbound logistics:

Inbound logistics refers to the inward flow of goods into business which includes transport, storage, and delivery. Tesla has a large number of warehouses located in the United States (one in Taiwan), most of which are leased facilities. The principal manufacturing facility of Tesla which is owned by the company is located at Fremont, California, United States. This facility is used for warehousing as well as manufacturing. The approximate size of this facility is 5.5 million square feet apart from the other warehouses which the company uses for storage as well as delivery are located at the following locations:

  • Livermore California.
  • Lathrop, California
  • Sparks Nevada
  • Taipei City, Taiwan.
  • Elkridge, Maryland and
  • Bethlehem, Pennsylvania.

Tesla uses these facilities for storage as well as distribution.

The warehouse in Taipei City, Taiwan is used for storage as well as administration and service. The company has also leased several other facilities and warehouses in other corners of the world including North America, Asia, and Europe.

Operations :

Tesla was founded in 2003 by a group of engineers who dreamt of making electric mobility possible for everyone. In 2008, Tesla launched its Roadster and then later Model S. The company has its headquarters in Palo Alto, California, United States. However, the company has expanded its operations as well as manufacturing, sales, and supply chain network to various corners of the globe. Its European headquarters are located at Amsterdam in Netherlands, Europe. Tesla also has a manufacturing facility at Tilburg, where its operations include final assembly testing and quality control for Model S and Model X delivered to the European Union. Tesla’s Gigafactory 1 is located outside of Reno, Nevada. The company uses the battery packs manufactured at Giga factory 1 in its vehicles and energy storage products. It also manufacturers model 3 drive units at Gigafactory 1. Gigafactory 2 is a 1.2 million square foot facility in Buffalo, New York. Giga factory 3 is located in Shanghai, China. The latest Gigafactory that Tesla has opened at Berlin- Brandenburg is its most advanced Gigafactory. It is the most advanced high volume electric vehicle production plant in the world.

Tesla also has administrative offices in other corners of the world including North America, Europe, and Asia.

Outbound logistics:

Gigafactory one outside of Reno, Nevada is a leading manufacturing facility in Tesla’s manufacturing network. The Fremont, California facility of Tesla Motors contains several manufacturing operations including final vehicle assembly and end of line testing. Operation in Tilburg includes a parts distribution house for the company’s European service centers. The company has several warehouses in the United States, many of which are leased facilities where the company stores or ships parts and completed vehicles from. Production has begun at Gigafactory 3 in Shanghai, China as well from where Tesla ships completed Model 3 cars to its Chinese customers.

Marketing and sales:

The automobile industry is marked by heavy competition. Most companies use several marketing channels including both traditional and digital channels of marketing for the promotion of their products and brand. However, compared to the other leading automobile brands in the industry, Tesla invests a lot less in marketing. The company uses its website as well as other digital channels for marketing and promotion. Elon Musk also uses social media ( Twitter) to engage Tesla fans and followers from all over the world.

Tesla has established a large network of company-owned stores and galleries. These stores are used for marketing as well as sales and service. While on the one hand, these stores help the company promote and strengthen the Tesla brand, on the other they enable it to obtain customer feedback faster. These stores and galleries are premium outlets located in major metropolitan markets where they enjoy higher visibility. Many of the stores combine retail sales with after Sales Service.

Moreover, the company is growing its network of service centers since it was found that opening a new one in a new geographic area could increase demand. Tesla has also established a large network of superchargers and destination-chargers. The company continues to grow this network throughout North America, Europe, and Asia. By focusing on product innovation and after-sales service, the company has maintained a strong image in the global market. It has always maintained a strong focus upon building the image of a customer-oriented and innovative brand that sells high-quality products and invests in maximizing customer satisfaction. China is a leading market of Tesla products and the company has established several retail outlets there in the metropolitan cities including Beijing, Shenzhen, Guangzhou, Nanjing, and Shanghai. In the United States, Tesla has established an extensive network of company-owned stores and galleries. California, Florida, and Texas have the highest number of Tesla stores.

Products and services:

Tesla introduced its first product, Roadster in 2008 which was followed by the launch of Model S. The company launched model X in 2015 and then Model 3 in 2016. The products and services portfolio of Tesla includes the following products – Model S, Model 3, Model X, Model Y, Cyber truck, and Roadster as well as energy products. The Cybertruck is a newly released truck model from the house of Tesla which looks a lot like a Sci-Fi vehicle. The truck is powerful, environmentally safe, and made for a safer driving experience. Tesla is planning to start manufacturing Cyber Trucks by the end of 2020. Tesla also offers a large range of power products including storage products and solar tiles among others. The company offers after-sales service through its large network of retail stores and service stations located in various corners of the world.

Support activities:

Primary activities in Porter’s value chain are linked to support activities. The support activities improve the effectiveness or efficiency of the primary activities.

Technology:

Worldwide, the automobile industry is experiencing intense competition. The market for alternative fuel vehicles has also evolved a lot. Several of Tesla’s competitors including BMW have brought fully electric cars to the market and plan to expand the range of fully electric and hybrid vehicles. Technology is the main source of differentiation in the global automobile industry. Autonomous driving technology and electric mobility are currently the hottest technological areas in the auto industry. Tesla is one of the leading firms at the helm of research and development in both of these areas. In fiscal 2018, the company invested $1.46 billion in research and development. Compared to the previous year, the R&D expenses of Tesla increased by $82.3 billion million or six percent. Investing in technology has helped Tesla continuously improve its products and grow its attractiveness in the global market.

Infrastructure

Tesla is organized into two main divisions based on product categories. They are the automobile segment and the energy product segment. The administrative structure of Tesla is different. Elon Musk is at the top as the leading decision-maker. Tesla’s chief financial officer (CFO) is Zachary J Kirkhorn who leads the accounting, finance, and other related areas. Tesla also has vice-presidents to lead the other several divisions including production, engineering, sales, finance, etc.

HRM:

As of 2019, Tesla employed 48,016 people full time. The company depends upon thousands of its talented employees for running the organization and maintaining high operational efficiency. HR management has emerged as an important area of focus for most technology organizations since it is important to attract and retain talented employees to stay competitive. Tesla is now placing a higher focus on HR management to find faster growth and to increase its competitive strength.

Procurement:

The vehicles manufactured by Tesla use thousands of parts that the company sources from thousands of suppliers worldwide. Tesla has developed strong relationships with several key suppliers. There are some important parts like cells and other key system parts for whose procurement, the company has built close relationships with their suppliers. While Tesla has several suppliers of some raw materials, for many others, it depends on single sources. Panasonic is one of the leading Tesla suppliers. It has been a long term supplier of battery cells for Tesla vehicles.

VRIO Analysis of Tesla Motors:

The resources and capabilities of a company are its drivers of competitive advantage. Nearly all that a business owns can be classified as a resource or capability. By understanding the resources and capabilities of different enterprises, one can understand why overall performance differs from one business to another. To achieve a competitive advantage, the resource or capability that a  company owns needs to be valuable, rare, inimitable, and organized. 

The VRIO framework comes to the help of managers when analyzing the company’s resources and capabilities. VRIO is an acronym that stands for Valuable, Rare, Inimitable, and Organized. These four bricks of VRIO represent the four properties of the resources and capabilities that lead to sustainable competitive advantage. When the resource or capability satisfies all the four requirements, the competitive advantage it generates will be sustainable, whereas, when it meets fewer standards, the competitive advantage will be temporary. 

Moreover, a sustainable competitive advantage comes from core competencies that arise from resources and capabilities.

Tesla Motors VRIO Table:

Core competenciesValuableRareInimitableOrganizedAdvantage
Brand ImageYesYesYesYesCompetitive advantage
InnovationYesYesYesYesCompetitive advantage
Customer experienceYesYesYesYesCompetitive advantage
Product RangeYesNoYesYesTemporary advantage
Market PositionYesYesYesYesCompetitive advantage
HRMYesNoNOYesCompetitive advantage

Brand Image:

Tesla’s brand image is one of its core sources of competitive advantage. It is also one of the main differentiators for the brand that sets it apart from the world’s crowd of automobile brands. While several auto brands are there in the industry, including those making EVs and hybrids, Tesla has acquired a very distinct image. Tesla’s sustainable business model and its focus on innovation have helped it acquire the image of a transformation leader in the world of mobility. Brand image affects several things in the automobile industry, including its popularity and overall sales and revenue. It is why companies in the automobile sector focus on managing a strong image.

While an automobile company’s products play a leading role in terms of brand image and its vehicles’ performance affects how the customers perceive the brand, the company’s marketing strategy also affects the brand image and sales overall. Tesla has proved itself outstanding in all these areas, and apart from product quality and innovation, the company’s marketing strategy does not employ heavy promotions. It has achieved strong brand recognition and word of mouth and publicity through consistent focus on innovation and customer experience. Overall, its strong brand image has helped it generate a sustainable competitive advantage for the brand. 

Technological innovation:

Technological innovation is also an important source of competitive advantage for businesses in the automobile sector. To maintain their market position and market share, they must focus on research and development for automobile businesses. The competition level in the automobile industry has grown, and every business needs to innovate to maintain its market share. Tesla is renowned for its focus on innovation and for bringing high-quality products equipped with the latest technologies. Apart from self-driving technology onboard and the large touchscreen that allows the car owner to manage his driving experience with higher convenience, the company also provides a Tesla app that allows drivers to control their cars from the outside.

Apart from the advanced batteries that Tesla uses, the types of technologies used inside these cars increase Tesla’s car models’ attractiveness. The battery range of Tesla cars is higher than any other car in the entire market’s EV category. Overall, innovation has helped the company bring advanced products that none of its competitors has created. Its technological features also make Tesla a superior car brand in terms of passenger safety. This has helped the company achieve a major advantage, which seems impossible for Tesla competitors to match in the near term.

Customer experience:

The overall riding experience that Tesla offers is vastly different and a lot superior to the rival cars. Due to this factor, Tesla cars have achieved much higher popularity than the other EV models. Tesla’s premium EV models are superior in terms of design as well as performance and looks. While they are also safer than the rival car models, they are equally attractive from the outside. Another plus point for Tesla cars is their zero carbon footprint. Now, people are looking for cars that are fuel-efficient as well as environment friendly. The growing presence of Tesla in the US and China is a key factor that indicates that people are now gravitating towards environment-friendly car models.

Apart from that, Tesla cars do not cost a fortune in terms of maintenance, either. The maintenance-related expenses on tesla cars are also much lower than regular cars with internal combustion engines. This is a major plus point since the buyer has to spend money upfront once he purchases the car, and after that, he cannot enjoy his ride in peace. Overall, there are several benefits of owning a Tesla, and that’s why the company has gained more than 60% share in the US EV market. Overall, by creating a superior riding experience, the company has been able to gain a significant advantage over competing brands. Tesla cars provide a matchless driving experience, which continues to drive their popularity higher.

Product range:

Tesla has brought an attractive product range to the market. While its product range is much limited as compared to the other brands like BMW or VW, but still its product range efficiently caters to the higher end market that it targets to serve. Its cheapest car model is Model 3, and following the release of Model 3, the company has gained a significant market share, and its popularity apart from sales has also soared worldwide. The company will need to add to its manufacturing capacity in order to cater to popular demand. Apart from the Model 3, the company has also brought Model S, Model X, and Model Y to the market, which are higher priced as compared to the Model 3.

The company has also brought a nice range of power generation and storage products for customers that want to use renewable energy. Model S, X and Y are the higher priced car models of Tesla. While the company has mainly targeted the higher end market, it has also been able to increase its penetration in the middle class and upper middle class of consumers with the Model 3. Tesla products stand out easily from the crowd of competitors due to their efficiency and design. Overall, they are an important but temporary source of competitive advantage for the brand since competitors are also building cars that are comparable in terms of style and can match Tesla’s performance in some aspects.

Market Position:

Tesla has been able to build a superior market position in the automobile industry and in the EV market. Its market position and its clear edge over its competitors are a source of sustainable advantage for the brand. Its nearest competitors are having a much smaller market share compared to Tesla. The company’s market position continues to strengthen because of its higher focus on innovation and superior performance of Tesla cars. Overall, it has gained very strong brand recognition in the market and the result is higher sales and overall popularity globally. There are various factors that will continue to strengthen its market position in the coming years. Apart from the rising demand for EVs worldwide, the healthier image of Tesla is also an important supporting factor. Challenging the market position of Tesla will not be easy for any competing brand. Apart from the technological know-how, gaining the same efficiency as Tesla cars in terms of battery performance and driver safety will take the rival brands years. Overall, the market position of Tesla is an important source of sustainable competitive advantage for the brand. 

HRM:

The human resources of any technology company is a critical driver of competitive advantage for the brand. More than an automobile brand, Tesla is a technology company. Its focus on technological innovation makes it different from any competing automobile brand. However, the company is also innovative in terms of HR management, which has helped it grow its edge in the EV industry. Apart from attracting qualified and talented people, the company also focuses on engaging employees well. It has established an organizational culture that drives innovation and creativity. Sustaining the competitive advantage that the company has achieved also requires a consistent focus on managing its human capital strategically. The company pays its employees well and has also introduced training and career development programs that help its employees find faster career growth.  Overall, HR management is a critical source of competitive advantage for the brand but not a source of sustainable competitive advantage since the rival brands also invest heavily in managing their human resources strategically.

Financial performance of Tesla Motors: 

Tesla has been operating in losses for the past several years. However, the company has experienced growth in sales and profitability since it released the Model 3. It was able to acquire a larger customer base from the middle class and upper-middle-class customer segments. While the remaining models released by Tesla target the higher end of the market, the company expanded its customer base with Model 3, which has proved key to market expansion and revenue growth. Until 2019, the company has been incurring net losses. However, in 2020, the company has been able to generate positive net income. Its net income in the first quarter of 2020 remained only $68 million but grew to $129 million in the second quarter. In the first quarter of 2019, the company had earned a net loss of $668 million.  During the first half of the latest fiscal, the company has generated a net income of $197 million. Compared to that, Tesla had incurred a net loss of $1.1 billion during the same period in the previous year.

The company’s gross profit has also climbed $1.3 billion in the second quarter of 2020 compared to $921 million during the same period last year. For the first half of the latest fiscal, the gross profit of Tesla Motors jumped by $1 billion compared to the same period during the same period in the previous year. The gross profit of Tesla jumped to $25 billion for the first half of 2020 compared to $1.5 billion in the first half of 2019.  Overall, the company is expected to start generating profits from this year. Tesla Motors has also experienced impressive growth in sales in the third quarter of 2020, which indicates that the company could see impressive growth in revenue and net income in the second half of the year.

Conclusion:

Tesla has experienced robust growth in sales since the company released the Model 3. The company has been running in losses for several years, and the loss run is expected to end from this year. Its position in the US and China continues to strengthen. The company has successfully grabbed a market share of more than 60% in the US market alone. However, to grow its profits and net income, the company will first need to expand its production capacity. Considering the demand level, Tesla’s production capacity is still deficient and will need to be scaled to meet demand efficiently. Apart from its German plant, the company needs to establish more plants to produce Model 3 and Semis in larger numbers and grow its sales worldwide. The company’s operating expenses are very high and cannot cut back to grow its profits. To increase its profitability, the company will have to grow its manufacturing exclusively. Reducing the research and development expenses can hurt its sales and revenue in the future.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.