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| Fig. 1: Tesla Roadster. (Source: Wikimedia Commons). |
Tesla, named after an electrical engineer Nikolai Tesla, is a very disruptive mission-driven company. [1] Its goal has always been to change the auto industry by steadily increasing the number of electric vehicles (EVs) used in the world. To facilitate this process and in efforts to promote the production of EVs Elon Musk even decided to share technology patents with other visionary people of good will. As expected of a mission-driven company, Tesla has also vowed to never make profits from servicing the cars it had sold.
Tesla is undergoing the three step strategy (from Tesla Roadster through Model S to Model X and Model 3) where each new type is developed and paid for through the sales of its predecessors. It is a very well thought through evolutionary plan gradually moving from the small volume production of high-price cars to the large volume manufacturing of low-price vehicles. Tesla is currently in the middle of this process, looking forward to introducing the affordable EV priced at $35,000 to the world. Although mission-driven companies are more interested in long-term development and their impact on the world, their investors evaluate such companies looking at profits as well. [2] And Tesla has reported net losses every year since its IPO in 2010. One possible explanation could be that Tesla is plowing most of its revenues back into business, focusing on the company's development rather than short-term gains. There are pros and cons of this strategy but my goal is to figure out how to best accommodate both parties (profit-oriented investors and the mission-driven company). It also has to be noted that Tesla's current market capitalization is $28 billion which only shows how much trust the investors place in the company. Therefore, I will try to propose the next steps that Tesla should take in order to make the transition from merely a world-changing company to not only a world-improving but a profitable one as well.
Business is as much about creating a valuable product as it is about marketing it to the right people. Tesla showrooms in frequently visited shopping malls serve as a great way to inspire the society about the mission of helping the Planet Earth thrive. The goal of those stores is not to sell cars (it is actually not even possible to purchase a car in a retail store; customers have to go online and order a Tesla) but to educate people on what Tesla is and what electric cars are. It goes without saying that raising awareness among potential customers, consequently generating demand for Tesla cars, will eventually drive Tesla profits up as well.
What is very interesting about Tesla's business model is that it only allows sales directly to the customer, skipping any intermediaries like independently owned dealerships that other auto companies sell through. This approach lets customers save an 8% commission typically charged by dealers. Since people are usually very price-sensitive this business model might give Tesla a competitive advantage over other auto companies that produce EVs. It is intuitive to assume that when the new $35,000 Tesla gets introduced to the world, it will be able to quickly steal market share from competitors.
On the other hand, the question that still remains to be answered is how long it will take Tesla to match the supply of its cars with the demand for them. The $5 billion Gigafactory Tesla is currently building in Nevada is the right step to eventually let supply meet demand, with an estimated 500,000 Tesla cars being sold annually by 2020.
Looking from the perspective of a stockholder, I would want Tesla to concentrate more closely on the more streamlined model 3. What is actually a little worrying is Elon Musk's largely fragmented focus. On one hand he brings Tesla cars to the market but, on the other hand, he puts his attention to the development of Tesla Hyperloop as well as building the new product line: battery products for homes and businesses to store solar energy. [3,4] Before entering these new markets Tesla should first achieve its mission of accelerating the world's transition to sustainable transportation. There is already a lot of positive vibes spread about Tesla cars around the world and now it is time to start executing. The time has come to shift focus to flooding the world with Tesla vehicles.
The second area to focus on is the Supercharging Stations Network. To bring up some numbers, there are currently 121,446 gas stations in the US. The number of Tesla supercharging Stations is much smaller. We can estimate the number in the United States by multiplying the total number US sales compared to the global sales: 550 × (55,000/90,000) = 336. To be fair we would have to add the number of private charging stations at Tesla owners' houses (around 55,000 Model S Teslas sold in US through September 2015) and the so-called charging destinations at various hotels and restaurants (currently around 900 in total in the US). Assuming 90% of Tesla owners have charging stations at home we have the total of 0.9 × 55,000 + 900 + 336 = 50,736 Tesla charging stations in the US. The number (50,736) is a huge overestimation because 97.5% of the total are individual Tesla owners' home chargers which cannot really be treated as actual stations if Tesla wants to one day become the dominant car on US roads. Therefore, for now there are only around 336 Supercharging Stations in the US versus 121,446 gas stations. The sizable gap between these numbers indicates how big of a journey awaits Tesla Motors.
At the same time, it is relevant to mention a huge advantage Tesla Supercharger Stations have over gas stations: Tesla does not charge its users any money; in the long run it will definitely lure people to purchase Tesla but before that happens Tesla Supercharging Stations have to become much more prevalent than they are now. What should also be noted is that Tesla does not have to create this big supercharger network just on its own; it should seek partnerships with other electric cars' producers to reduce costs. Another point to mention is that it currently takes about 40 minutes to charge the first 80% of the battery, while the last 20% takes additional 35 minutes due to the need to decrease the charging current. Again, it seems intuitive to realize that Tesla's focus should be on continuously shortening the recharging time to be able to compete against the gas stations' service.
The third point I want to make is that, as important as it is to grow domestically in the US, Tesla has to take advantage of international opportunities. Placing emphasis on Europe, because of its geography and dense population, and China, because of its inevitable need to reduce the pollution, should come first. Tesla is already very popular in Nordic countries. In regards to China there are many regulations to go around in order to price the car at affordable rates. The potential solution would be for Elon Musk to find a national partner in China to produce cars domestically which would help start selling Tesla cars on a massive scale in China. If that happens and the Supercharging Stations Network follows, it should not surprise anyone if China becomes Tesla's biggest market in the long run.
On a final note, I want to quote John Sun who wrote in his 2010 paper on car battery efficiencies: "If these hurdles [convenience, price] can be overcome, the electric car has the potential to compete, and potentially even replace gasoline cars altogether." [5] This confirms that flooding the markets with Model 3 is the correct step to have Tesla fulfill its promise of helping the environment.
© Maciej Romanowicz. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] S. Nam, "The Tesla Turbine," Physics 240, Stanford University, Fall 2012.
[2] "Form 10-K (Annual Report)," Tesla Motors Inc., 26 Feb 15.
[3] N. Davis, "Tesla Hyperloop," Physics 240, Stanford University, Fall 2014.
[4] B. Chappell, "Tesla CEO Elon Musk Unveils Home Battery; Is $3,000 Cheap Enough?" National Public Radio, 6 May 15.
[5] J. Sun, "Car Battery Efficiencies," Physics 240, Stanford University, Fall 2010.
