A SWOT analysis of Tesla Motors for 2020
In this post, we will present a swot analysis of Tesla motors, the leading manufacturer of electric vehicles based in the United States.
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.
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.
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.
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 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.
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.
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.
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.
A few last words:
Tesla’s position has strengthened fast in recent years, and the company, apart from increased sales and profits, is enjoying swift growth in its market capitalization. After having incurred operating losses for the past several years now, it is seeing positive operating income. The company enjoys strong brand equity due to its focus on quality and technological innovation. Due to its sustainable business model, the company also enjoys some special privileges in various markets, including the US, China, and others. Its focus on technological innovation has mainly driven tesla’s growth. During the pandemic, Tesla’s performance remained much better than rival brands. Other automobile businesses are also aggressively pursuing an EV strategy since the demand for EVs has grown worldwide and is expected to grow faster after the pandemic. Changing consumer preferences and growing government support for environment-friendly vehicles are driving both the premium and nonpremium automobile brands towards electric mobility. However, while Tesla continues to grow its foothold in the leading automobile markets stronger, there are also some challenges ahead. The company will need to improve its manufacturing capability to cater to popular demand in the leading markets successfully. Apart from that, the company will also have to extend its supercharger network to find faster market growth. The future is full of opportunities for Tesla, and the company must see a sharp growth in profitability in the coming years.