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Five Competitive Forces Analysis For Tesla’s Gigafactory Strategy

Kuanze Ma, Shayla Hobbs, Corwin Holmes

Northwestern Pritzker School of Law

Northwestern Pritzker School of Law - 1 -

Background/Situation of the case

Tesla has been an electric vehicle manufacture since 2003. Since then they have quickly changed

and pushed innovation in the automobile industry. Being one of the first viable start-up

companies to pursue an all-electric vehicle, it has now introduced to the world its innovative idea

of the Gigafactory. Tesla plans on being its own supplier of batteries reducing outsourcing by

backwards integration. The below is the Five Competitive Forces Analysis (five forces) of Tesla

and how the Gigafactory fits into that framework.

Rivalry Basic analysis for current electric car industry:

Market Structure:

Currently, the electric vehicle (EV) industry consists of Hybrid Electric Vehicles (HEVs) and

Plug-in Electric Vehicles (PEVs). HEVs are vehicles with both combustion engines and limited-

range electric battery packs. PEVs are vehicles with only battery power. Tesla only produces

PEVs.

1.! Main Competitors in the plug-in market:

Nissan, Toyota, BMW, Fiat and Chevrolet. According to data from Inside EVs, we know the

market share (see Exhibit 1).

2.! As we see, from Exhibit 1, there are several competitors in the plug-in market. Meanwhile

Nissan, Toyota, BMW and Chevrolet are strong competitors who roughly have the equal size

and power in the plug-in car industry, making the current plug-in electric car industry an

intensely competitive market.

3.! Differentiation of the PEVs, regarding the price and miles per charge for main competitors’

products:

According to the data collected, the prices and miles per charge of the SEVs are shown in

Exhibit 2. As one can see in the PEVs industry, the low-end products have a smaller range

and have a lower price implying strong competition . For the middle tear PEV’s there is only

Tesla Model 3 and Chevrolet Bolt positioned a are direct competitor. Regarding the high-

end products with the greatest range, only Tesla’s Model S and Model X are in the market,

while Model X is PEV SUV, different from Model S.

4.! The industry growth is currently high.


At present, the EVs industry is growing fast (see Exhibit 3).

The reasons are for the high growth rate is as follows:

1)! From the producer perspective:

a)! With the development of the technology, batteries are becoming cheaper;

b)! With the decreasing price for solar panels, which are broadly used in the chargers, the

chargers cost become lower.

According to these factors, producers are more likely to generate more value through

producing PEVs.

2)! From the Customer perspective:

a)! Car range increases.

b)! The increasing safety of the PEVs. For example, recently, Tesla’s Model S was

rewarded the highest ever safety rating by NHTSA, while safety is one of the most

significant element to be considered for consumers while making a purchase

decision7.

c)! The combination of Tesla’s strategies brings more convenience to the consumers. For

example, the increasing number of free charging stations being built up coupled with

Tesla’s supercharger strategy make easier to own Tesla,

d)! While more and more people become aware of the importance of the environment,

people change may switch their consumption preferences away from traditional cars

to PEVs.

All the factors above promote the demands for PEVs.

As more producers and customers become more experienced with the PEVs, the marketing

will continue grow very fast. According to forecasting statistic from Scripted, in the coming

years, the PEV industry would grow tremendously at 37.4% compound annual growth rate

and would share 3% of all global vehicles market by 20208. According to this factor, with the

giant market increasing, the rivalry should increase.

5.! Whether or not the competitors of Tesla are highly committed to the PEVs business?

Tesla’s main competitors, Nissan, Toyota, BMW, Fiat and Chevrolet, are not currently

committed to the PEV industry, since they are still producing the traditional gas car making,

rivalry is not as high as it could be. However, Tesla’s aspiration to become the leader in the

industry may correspond to the tremendous increasing PEV’s market.


How would the Gigafactory influence the rivalry in the PEV industry?

1.! Tesla’s backwards-integrated Gigafactory, which would help Tesla’s products share more

differentiation, would decrease the rivalry.

2.! Tesla’s backwards-integrated Gigafactory would help Tesla’s products share more

differentiation, thereby decrease the rivalry.

1)! Cost-based analysis:

With the development of the Gigafactory, Tesla would

a)! Accumulate experience about how to produce more efficiently

b)! Access to supplies to produce batteries more cheaply than rivals due to its strong

buyer power

These factors would help Tesla lower their battery cost in the future. Furthermore, the

cost for producing the car would decrease. With regards to a lower cost, Tesla would be

able to improve profit margins. At the same time, more “B” would be able to be delivered

to the customer through lower the price.

2)! Differentiation-based analysis:

With the development of Gigafactory, Tesla would develop more and more new

technology to produce various kinds of batteries, further helping Tesla produce a variety

PEVs. For example, they would produce cars that have range-ability from 500 miles to

1000 miles in the future. With respect to greater differentiations, Tesla would be able to

increase profit margins by setting a higher price. At the same time, more “B” would be

able to be delivered to the customer through increasing their willingness to pay.

Considering both price-based analysis and quality-based analysis, Tesla would be able to

avoid the strong rivalry by designing their products differently from the competition affecting

both price and qualities.

3.! The competitor’s reaction would potentially increase the rivalry.

Since batteries are big business and would directly and significantly influence the PEV

industry, Tesla’s rival, Chevrolet is planning to beat Tesla through cooperating with LG

Chem, who has already produced more than a million batteries for GM. Such strong

aspirations from a competitor would increase the rivalry. However, based on our former

analysis, Chevrolet is not a company producing high-end PEV cars, while Tesla is now

concentrating on producing luxury PEVs. Although Chevrolet may compete with Tesla


Model 3, it’s easier for Tesla to differentiate its product after backward integrating the

battery industry. Meanwhile, to gain reputation in the luxury PEV industry, Chevrolet would

be required to expend money and time improving their brand which is difficult, limiting its

ability to compete directly with Tesla’s high-end products.

In summary, the Gigafactory would help Tesla gain the capacity to differentiate its products in

the future. Which would help Tesla mitigate the forces from rivals and allowing it to generate

more profits.

Bargaining power of suppliers Supplier power, the second force, puts pressure on profit margins. Currently, Tesla’s batteries are

supplied by third parties and they are estimated to account for at least 25% of the cars’s cost.

Some estimates put them about 50%9. However, this force can be mitigated if we 1) Negotiate

better prices charged for the batteries raw materials; 2) Control quality of the battery better; 3)

Reduce the possibility that a supplier would shift costs to the industry participants, that means we

weaken the supplier’s power.

Before the Gigafactory, the suppliers for Tesla were outsourcing battery production, while after

the Gigafactory, Tesla's could produce enough batteries for itself. The influence of Gigafactory

being fully owned by Tesla’s and their exclusive battery supplier on the electric car industry is as

follows:

1.! The Gigafactory would be a strong battery supplier in the future, potentially having

monopolistic market influence. Such a dominant producer of batteries would help

Gigafactory gain strong buyer bargaining power to negotiate with the lithium suppliers and

further reduce the material cost.

2.! With the closet factory’s position in Nevada, which is very near to the lithium supplier,

Gigafactory would reduce the lithium distribution cost easily.

3.! First mover advantage & Learning Curve & Economic of Scale. The more batteries

Gigafactory produces, the more experience they will get and the lower cost they will spend

for per battery.

4.! According to the history, Tesla has the ability to lead the electric car battery industry

standards. This would make it hard for other battery suppliers to compete on scale against the

Gigafactory.


5.! Better quality control means lower battery rejection rates and therefore lower battery

production costs.

Consequently, the cost for battery production would get lower allowing Tesla’s battery

production cost to be lower than a competitor.

After the Gigafactory becomes the huge battery supplier in the battery industry, there will several

benefits:

1.! For Tesla: Since the Gigafactory could produce enough batteries for Tesla itself, Tesla would

not need to negotiate with other battery suppliers. This strategy is considered a backwards

integration. By doing this, Tesla can get cheaper batteries and get them more efficiently. The

negotiation power of Tesla’s battery suppliers would diminish.

2.! For Tesla: This will help them gain strong bargaining power to negotiate with lithium

suppliers easily being able to reduce the lithium distribution cost. The Gigafactory is located

near a Nevada mining company in which they will license land from and collect a certain

amount of lithium for the production of their new car line. There is a positive correlation

between near-sites collections of lithium, which can be distributed to the Gigafactory in an

efficient timeframe.

3.! For competitors: Gigafactory may have a monopolistic position within the battery industry.

The factory would be able to produce the combined global capacity of 201510. Since the other

electric car companies are not as strong as Tesla, Tesla’s Gigafactory is more concentrated

compared to those small electric car companies. That means as a potential supplier for those

small car companies, Gigafactory has strong supplier power.

Tesla is practicing backwards integration by removing its outsourced battery supply a strategy

that directly mitigated the force of supplier buying power. By owning the Gigafactory, Tesla can

get cheaper batteries by producing them more efficiently, controlling cost and removing the need

to negotiate with battery suppliers. For a competitor's outlook the Gigafactory may have a

monopolistic position within the battery industry. Since the other electric car companies are not

as strong as Tesla, Tesla’s Gigafactory will allow cheaper cost when compared to the other

electric car companies.

In summary, the result of Gigafactory (battery supplier) will supplant the power of the battery

supplier.


Bargaining powers of buyers

Bargaining power of buyers, the third force, puts pressure on profit margins. If we can 1) avoid

the buyers forcing down the price; 2) control the quality and services provided which can

increase cost; 3) avoid being induced by the buyers at the expense of industry profitability, i.e.

we weaken the buyers’ power.

The buyer groups of Tesla’s electric cars are diversified and most of them are individuals. To get

the conclusion whether Gigafactory strategy will influence the buying power for electric car

industry, we are going to analyze the following details:

What’s the influence of Gigafactory on the electric car industry? After Gigafactory has become

the huge battery supplier in the battery industry, there are several benefits:

1.! With the development of the battery promoted by Gigafactory, Tesla would be able to

produce increasing amount of cars. Leveraging the Gigafactories 30% reduction in battery

production cost, Tesla would then be able lower the price of their cars11 by increasing sales.

This effectively minimize the power of single customer’s input becomes there many other

customers.

2.! Increasing the added value by strengthening to pay: The electric car potentially would

become more specific and differentiated after Gigafactory begins production. The

Gigafactory would be able to produce more powerful, durable and environmentally friendly

vehicles. As we know, human beings are pursuing for clean-energy for a long time and we

are seeking for clean-tech car, which can lasting a long time with strong power. With the

Gigafactory, all those pursuits would be achieved by producing high-quality batteries. With

the battery being produced by Gigafactory, electric cars would have increase power, greater

range and more environmentally friendly. This item would be able to further different Tesla’s

product from the competitors. So the customers’ willingness to pay would increase.

3.! Reputation for experienced goods would become increasingly important, which would

increase customers’ decreases their buying power. Car is exactly an experienced good.

Everyone would have a different feeling when he or she is driving it. While driving a car, the

stability and horsepower matter a lot for the drivers, which could be influenced by the energy

provider— batteries. The Gigafactory, which is owned by Tesla, could guarantee the quality

of the batteries produced, and increase battery performance. The consistent performance


would help Tesla’s brand image. After gradually having the sense that Tesla electric cars are

their best choice, customers would have a higer ‘B’ therby mitigate their buyer power

because they would just have to have one.

In summary, the battery buyer power in the electric car would decrease because a lower cost car

increases the customer base.

Threats to Entry Threats to Entry, the fourth force consists of five factors: 1) Supply-side economies of scale; 2)

Demand-side benefits 3) Capital requirement 4) Incumbency advantage independent of size 4)

Unequal access to distribution channels 5) Restrictive government policy.

1.! Supply-side economies of scale is an important barrier to entry. This barrier requires a

potential car company to enter with a large enough scale to compete or face losses per car

when the market value is less than what they can produce. Tesla has chosen the latter. In

2014 Tesla sold the standard Model S for $71,100. This could be considered a luxury price

range within reach of a mid-income American. Even though considered a luxury car priced in

the premium car range, Tesla still claimed $4000 dollar loss per car1 on its 2014 taxes.

However, after building up the Gigafactory, Tesla would save a large amount of cost through

reducing the battery cost. Along with the capacity to produce larger number of cars by 2020,

it would be harder for new entrants to compete with Tesla, since new entrants may be

exposed to the same situation Tesla faced to in 2014.

2.! Demand-side benefit would also be promoted in the future. As we discussed in the rivalry

part, Tesla’s Gigafactory would help Tesla differentiate its PEVs through both costs and

qualities. That would help Tesla attract different groups of consumers. All Tesla’s car are

using the same chargers, that means the more customers driving the same car, the easier they

would be able to find a charger station and the more economical incentive there is to develop

charging infrastructure. This network benefit would be a significant benefit for the

customers.

3.! Customer switching costs is another important factor. Besides the most prevalent switching

costs—money, psychological, effort-based and time-based switching costs should also be

considered. One of the most noticeable switching cost comes from recharging (refueling).

According to the network benefits analyzed before, Tesla would be able to provide more


supercharger station. At the same time, consonance of the development of charging

technology and battery technology would increase the charging efficiency. Currently, Tesla

has started investing in the charging infrastructure to support the charging of their car by

building Tesla owned rapid charging stations and methods to swap a car’s battery in 90s3.

Together with that, Gigafactory would develop not only batteries themselves, but also

promote the charging technology. If a customer convers over to Tesla, recharging locations

and time would be a significant problem for the customers due to the limited amount of

stations and less developed charging technology. Meanwhile, as discussed in the Bargaining

Power of buyers, cars are more like an experienced good, so after more customers get used to

Tesla’s car and their charging service, they would be exposed to higher effort and

psychological switching cost. All the problems discussed above would take customers a long

time to deal with, so the switching cost would increase due to the increasing network benefits

and technology based benefits brought by Gigafactory.

4.! Cars are heavily engineered and regulated items, requiring large capital investment to make.

Costs to build charging station, labor to engineer and build, construction of the Gigafactory

and assembly plants all require huge amounts of upfront costs valued in the billions of

dollars. Tesla is manufacturing cars, so it has revenue from funding and prior to this stage

had money from the billionaire owner and investors. In the automotive industry new models

cars require ‘retooling’ or reconfiguring a plant so that it is built to make that car. This is the

case with the Gigafactory costing and estimated $5 billion5. Even with all this capital, Tesla

operated 2014 at loss losing $294 millions4. So the barrier to competitors becomes higher due

to the large amount of investment in Gigafactory.

5.! Unequal Access to Distribution Channels, incumbent advantage and Government Policy

when evaluating Tesla with the barrier-to-entry force analysis: The current model for selling

new cars is the franchised dealership model where the car companies licensed dealers to sell

their new cars to customers and not manufactures directly. Typically, there is a legislative act

that bars this and from lobbying from the incumbents. For example, prior to March 18th, 2015

New Jersey did not allow cars manufactures to sell directly to customers 6. Tesla’s

distribution method has been showrooms located in high-end places of commerce with the

transaction taking place via the Internet. As Gigafactory would become one of the strongest

battery suppliers, Tesla would have the negotiation power to seek for cooperation with the


regulatory agency to set the industry standard, with Tesla’s cutting-edge technology, which

would make it much harder for new entrants to follow.

The Gigafactory will help tesla compete on scale. They will be able to manufacture more

leveraging economies of scale driving their costs down, improving margins. This will also give

them complete control over their battery supply.

Threat of Substitutes Threat of Substitutes is the last force to be considered. A car is a means of travel. Some

substitutes are close substitutes like buying a gas car, taking a taxi or being a member of Zipcar.

Some are more distant substitute, like taking a train or flying. Buying a gas car is the closest

substitute and for this reason is important for this particular force’s analysis. The gas car industry

is a mature industry and already established. For this reason, the cost to switch from a PEV to a

gas is less than that of gas car to PEV. This of course doesn’t take sunk costs like car cost

(partially recoverable), maintenance, and personal infrastructure investment. Since Tesla will

make its batteries, they will not have to compete for finished batteries like a competitor will.

Furthermore, Gigafactory would help PEVs gain lasting and strong power and promote PEVs

performance. PEVs would get even better performance than any other substitutes. Along with the

increasing willingness to buy environmentally friendly products, customers would be less likely

to switch to other substitutes, so the threat of substitutes would be lower due to the Gigafactory

strategy.

Summary

In conclusion, there are several point to be drawn from the Five-Force analysis: 1) The Giga

Factory would help Tesla gain the capacity to differentiate its products in the future, helping

Tesla avoid strong rivalry and be able to generate more profits; 2) The battery supplier

(Gigafactory) power in the whole electric car would increase and Tesla would not need to

negotiate with other battery suppliers; 3) The PEVs buyers power in the electric car would

decrease because of Tesla’s increasing supplier power; 4) The Giga Factory would help Tesla

compete on scale of economics. All these factors will help PEV industry gain more margins, and

Tesla would be the biggest winner. According to our Five Forces Analysis, Tesla’s Gigafactory

is a good strategy.


EXHIBITS

Exhibit 1 U.S. plug-in market – January-April 2015

Exhibit 2 Miles and Price for different PEVs

Tesla&Motors20%

Nissan17%

Ford16%

Chevrolet13%

BMW11%

Flat8%

Toyota5%

Others10%

PEVS&MARKET&SHARE

0

50

100

150

200

250

300

Miles+and+Price+for+different+PEVs

Miles+(per+charge) Price+($K)


Exhibit 3 Number of Electric Passenger Cars in The World


Appendix

(1) http://www.reuters.com/article/us-teslamotors-cash-insight-idUSKCN0QE0DC20150810#7Jp0EFhWp2zruKs5.97 (2) https://www.cars.com/articles/2013/11/how-quickly-does-the-tesla-model-s-battery-charge/ (3) http://www.caranddriver.com/features/how-tesla-and-elon-musk-are-building-an-ev-infrastructure-feature (4) http://www.cbc.ca/news/business/tesla-motors-ends-2014-with-a-loss-after-building-35-000-electric-cars-1.2954866 (5) http://www.forbes.com/sites/greatspeculations/2014/03/11/gigafactory-will-cost-tesla-5-billion-but-offers-significant-cost-reductions/ (6)http://www.slate.com/blogs/business_insider/2015/03/18/tesla_bypasses_dealers_in_new_jersey_governor_chris_christie_signs_bill.html (7) http://www.safercar.gov/Vehicle+Shoppers/5-Star+Safety+Ratings/2011-Newer+Vehicles/Vehicle-Detail?vehicleId=8787 (8) https://scripted.com/cpt_experts/the-electric-car-race-and-what-it-means/ (9) http://www.technologyreview.com/news/516961/how-tesla-is-driving-electric-car-innovation/ (10) https://www.teslamotors.com/sites/default/files/blog_attachments/gigafactory.pdf (11) https://www.teslamotors.com/sites/default/files/blog_attachments/gigafactory.pdf

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