American University

Kogod School of Business

Tesla’s Direct-To-Consumer Sales Model:

A Perfect Fit?

Margaret Moore

University Honors Program Capstone

Professor Parthiban David

Spring 2014

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Abstract

In the United States, the ubiquitous method by which automotive companies sell

cars and light trucks to consumers is via a franchise sales model. Recently, Tesla Motors

bucked this trend by offering its electric-powered automobiles through manufacturer-

owned retail stores, which elicited a substantial amount of legal pushback from some

states. This study investigates Tesla Motors’ business model through the framework of a

situational analysis to better understand the maverick. The report facet of the capstone

seeks to determine and explain that while Tesla is currently best suited to engage in a

direct-to-consumer sales model, as the company reaches the middle market and

establishes a strong consumer following it would do best to transition to a more

traditional franchise sales model.

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I. Introduction

Tesla Motors is well known for a variety of reasons, ranging from its luxury

electric automobiles to its founder and CEO, Elon Musk. While these famous attributes

of the company to most people frame their perception of Tesla positively, the recent press

surrounding Tesla’s legal battles regarding their direct-to-consumer sales model has been

explosive. With states blocking the sale of Tesla automobiles within its borders, Tesla

needs to find a way to operate and successfully ensure that consumers can easily purchase

a Tesla automobile should they desire to do so. This paper seeks to answer whether Tesla

Motors is right to engage in a direct-to-consumer sales model in the United States, and if

so, should the automobile manufacturer continue engaging in the aforementioned sales

model in the future or instead transition to the traditional franchise sales model?

This report seeks to answer this research question by first looking at the current

automotive sales environment in the United States. Next, the history of direct-to

consumer sales models in the United States is highlighted, touching upon Ford’s attempt

through the Ford Retail Network to sell directly to consumers as well as Fisker

Automotive’s failure in this space when using a franchise model. To determine why

these companies did not find the direct-to-consumer sales model successful and why

Tesla is facing opposition, the current legal landscape that protects the franchise model is

evaluated. After, the benefits of the direct-to-consumer sales model are examined in an

effort to convey why Tesla seeks to defend its current sales practices. Then the benefits

of the franchise model are evaluated to identify if this model would benefit Tesla now or

in the future. Finally strategic recommendations are made before the conclusion of the

report.

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II. Current Automotive Sales Environment

In 2012, the United States had 17,635 new-car franchised dealerships, up 95

franchised dealerships from the year prior (NADA). As can be seen in Figure 1, this

number has declined over the decades. The number of new cars being sold by each

automotive dealer has declined, on average, in recent years, even amidst the decline in

the total number of dealerships (Figure 2). Any automobiles sold directly from the

manufacturer, such as in Tesla’s sales model, would not be factored into this analysis;

however, after extensive research, Tesla appears to be the only well-publicized

automobile manufacturer engaging in direct sales in the United States in April 2014.

Figure 1

0"

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Num

ber'of'Franchised'New

3Car'Dealerships'

Source:'NADA'Industry'Analysis'

Number'of'Automotive'Dealerships'in'the'US'

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Figure 2

Important to note are the expenses incurred by new-car dealerships, as these are

expenses that Tesla Motors must incur when they establish and run their direct-to-

consumer sales operation. New-car dealerships in the United States had an average

annual payroll of $2.9 million, with the total payroll totaling $51.6 billion (NADA). The

new-car dealerships held substantial inventory in 2012 as compared to recent years,

totaling almost 3.8 million vehicles (Figure 3). Tesla would be able to avoid holding

much of the inventory that dealerships are required to hold, as Tesla employs a just-in-

time manufacturing model. This manufacturing model for Tesla means that the company

only produces vehicles after consumers have already purchased them, requiring virtually

no inventory. Now that the current automotive sales environment has been explored,

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automotive manufacturers’ attempts to engage in direct-to-consumer sales are next

discussed.

Figure 3

III. History of Direct-To-Consumer Sales Model

Tesla is not the first company to attempt to use a vertically integrated direct sales

model to sell to consumers. From 1997 until 2002 Ford implemented the Ford Retail

Network, in which the automotive manufacturer sold vehicles directly to consumers by

acquiring dealerships in Salt Lake City; Oklahoma City and Tulsa, Oklahoma; San

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Diego; and Rochester, New York (Klayman). Ford said they wanted to engage in the

retail business to learn more about it and potentially make the sale of their vehicles more

efficient (Box). Also, Ford wanted to block the larger automotive dealer networks from

further growing in size and obtaining too much leverage over the franchisor (Box).

Ford’s dealers, however, despised Ford’s approach and were concerned that Ford may

favor their factory-owned stores over their dealer-owned counterparts (Box). By

September 1999, the results were reported by CNW Marketing Research to be

disappointing (Mobile Register). Art Spinella, an analyst of the marketing research firm,

reported that, “There has never been an auto dealership owned by the factory that has

ever made a dime,” because automakers do not know how to sell cars (Mobile Register).

These poor results led the automaker in 1999 to begin to slow down the pace at which it

consolidated regional markets (Klayman). By 2000, many states established laws that

barred automobile manufacturers in response to Ford’s experiment (Harris). In 2002

Ford ultimately had to give up on the Ford Retail Network (Klayman). However, more

Ford incurred more costs with their experiment than the $200 million financial toll of

selling their retail stores (Bloomberg). The company lost an enormous amount of

goodwill with regards to its dealers (Harris).

General Motors has attempted in the past to engage in direct-to-consumer sales

buy running its own dealerships through its independent subsidiary, General Motors

Retail Holdings (Associated Press). When GM publicized the plan in 1999, the company

projected that General Motors Retail holdings would purchase or partner with dealerships

in their largest US markets, with the goal of controlling 5-10 percent (or up to 800) of

GM’s dealerships in 10 years (Mobile Register). General Motors, like Ford, claimed to

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engage in the direct-to-consumer sales model, “…(to) improve market performance

where we lag, enhance our revenues, understand our customers better and look for ways

to reduce distribution costs and improve the customer’s buying experience,” according to

Roy Roberts, group VP of GM North American Vehicle Sales, Service, and Marketing

(Beran). General Motors ultimately eliminated General Motors Retail Holdings after

facing legal barriers to widespread implementation (Hyde).

Interesting to note, however, was that unlike its other Big 3 counterparts, Chrysler

never attempted to branch into direct-to-consumer sales. Chrysler’s president at the time

when Ford and GM started their forays into retail stores, James P. Holden, called the

direct-to-consumer sales model one of “those fad diets” and expressed his confidence in

private dealers (PRNewswire). Next, another electric vehicle (EV) manufacturer is

assessed, one that engages in a franchise model.

IV. Evaluation of EV Manufacturer Using Franchise Sales Model

In terms of smaller automobile manufacturers who only make electrically

powered automobiles, some of their failures may be attributed to unsold inventory, or not

properly exploiting the benefits of the direct-to-consumer sales model rather than their

demise being caused by using the aforementioned model in the first place. At Fisker

Automotive for instance, battery issues coupled with unsold automobiles are the factors

attributed to Fisker applying for Chapter 11 bankruptcy on November 23, 2013 (Keane).

These unsold automobiles are a result of the large inventory levels required when

employing the franchise sales model. Thus, once a wider consumer base exists for

electric automobiles and the general public accepts the safety and reliability of said

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vehicles, then economies of scale can be employed as opposed to the conservative

practice of engaging in just-in-time manufacturing because the risks to Tesla of becoming

the next Fisker Automotive drastically subside. Next, the legal landscape surrounding the

direct-to-consumer sales model is explored.

V. Legal Landscape of Direct-to-Consumer Sales Model

Since Tesla’s inception, the company has been required to defend its direct-to-

consumer sales model. As seen in Figure 4, Tesla Motors has faced direct opposition

from Arizona, New Jersey, Maryland, Virginia, and Texas under the guise of protecting

consumers. In those states, Tesla Motors cannot sell or discuss their pricing and terms

with potential customers in their retail showrooms (Farnham). Instead, interested

customers have to purchase their Tesla automobiles out of state, which is incredibly

burdensome (Wilhelm). Tesla is seeing some success in states such as Ohio, where they

were granted the right to directly sell their automobiles to consumers so long as each

retail location has a state-issued license (Kaiser). Also, both Texas and Arizona are

supposedly reconsidering their bans on the direct sale of Tesla automobiles in an effort to

potentially serve as the location of choice for Tesla’s Gigafactory for the batteries used in

their electric vehicles (Kaiser). However, those states have not altered their stances as of

April 2014. Ford attempted to challenge Texas in federal district court and lost that

lawsuit in 2001, highlighting Tesla is fighting a battle that Texas has already played and

won before, albeit under different circumstances as Tesla does not have any currently

established dealers upon whom the company is infringing (Harris). Ultimately, policy

analysts such as Paul Burka from Texas Monthly believe that for Tesla to be permitted to

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operate with its direct-to-consumer sales model in Texas, Tesla must shake hands and

“…play the game,” with state legislators (Wilson).

Figure 4

In April 2014, leading members the Federal Trade Commission including the

Director of the Office of Policy Planning, the Director of the Bureau of Competition, and

the Director of the Bureau of Economics supported Tesla’s direct-to-consumer sales

model (Seattlepi.com Staff). The group called state bans of the aforementioned model

“protectionist” (Fingas). A number of FTC officials blogged on the FTC site and went so

far as to say that archaic laws that prohibit the direct sale of new vehicles to consumers

are “bad policy,” as they are not useful, practical, or protecting the consumer but rather

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the automotive dealer (Poeter). The ruling does not have any clear “teeth” to change the

manner in which states handle Tesla and its relatively unique automotive sales model;

however, it does convey federal support for the company and its practices.

Because Tesla does not currently have any independent automotive dealers, the

state legislations that prohibit direct-to-consumer sales models are not being applied

correctly to the company. As the intention of current legislation is to ensure that small,

already existent automotive dealers are protected from aggressive pricing and offerings

from the manufacturer through the direct-to-consumer stores, there is no one to protect by

stopping Tesla from executing its relatively unique sales model. Thus, Tesla should have

the flexibility as a small, niche company to grow by means of a direct-to-consumer sales

model and avoid the aforementioned fate of Fisker Automotive through the employment

of just-in-time manufacturing, which is only possible through the direct-to-consumer

sales model. Next, a more thorough analysis of the benefits to manufacturers of selling

directly to consumers is conducted.

VI. Benefits of Direct-To-Consumer Sales Model

The direct-to-consumer sales model is theoretically efficient as it eliminates the

middleman, the auto dealer. Because the auto dealer needs an economic incentive in

order to sell the manufacturer’s vehicles, that profit the dealer makes by marking up the

vehicle is removed from the cost equation (McKnight). In 2012, total dealership net

profit before tax as a percent of sales was 2.2 percent, underscoring this idea of pricing in

some profit for the dealer (NADA 3).

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The direct-to-consumer sales model allows for the employment of just-in-time

manufacturing processes by the automaker. This especially benefits smaller automakers

who may not be able to hold large inventories of vehicles on their balance sheets or yet

have the sales volume and demand to take advantage of economies of scale. The smaller

automakers instead must ensure that buyers exist for the vehicles they assume the risk of

manufacturing (Bodisch). Also, the direct-to-consumer sales model is meant to drive

down distribution costs incurred by the auto manufacturer (Connelly). Instead of

transporting a multitude of vehicles to dealers that may or may not be able to satisfy

consumer demand or preferences, the direct-to-consumer sales model eliminates another

facet of the guessing game by consumers directly conveying through orders what they

want to the automotive manufacturer. Thus, by leveraging new technologies through the

Internet and manufacturing capacities, the direct-to-consumer sales model appears to

benefit smaller, more niche automobile manufactures. In the next section, the benefits of

the franchise sales model are evaluated.

VII. Benefits of Franchise Sales Model

Conversely, some argue that dealerships add value in the sales chain to both

consumers and automakers. The existence of a multitude of dealers gives consumers the

benefit of price competition, because dealers of the same automobile must compete on

price and terms when selling the same or similar car to a consumer. Also, when there is a

problem with one’s vehicle or an extensive recall is announced by the automaker,

consumers can take their vehicle to the dealership for servicing instead of being at the

mercy of the automaker to send someone out to take care of the vehicle. If the problem

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cannot be remedied at the house as is currently Tesla’s approach, then the car would have

to be taken potentially hundreds of miles away for servicing at a manufacturer’s location.

In terms of benefits to the manufacturer, some such as the National Automotive

Dealer Association (NADA) argue that the existence of auto dealers gives auto

manufacturers the ability to focus their resources and attention on their area of expertise:

making the vehicles (Casesa Shapiro Group, 2). Automakers do not have to be concerned

with all of the advertising or the management of sales personnel, sales inventory, the real

estate required to showcase, hold, and sell vehicles, or the technicians who conduct

maintenance and repair of the vehicles. The dealer assumes these risks at little cost to the

automaker, while also paying the manufacturer a franchise premium to sell their cars

(Bodisch). Also, the dealer is customarily the well-versed expert in the geographic

market where their dealership resides (Farnham). Thus, the franchise model makes sense

in certain instances, namely when significant sales volume exists. In the next section,

these findings are applied to Tesla in an attempt to determine whether the direct sales

model is in fact the correct approach for Tesla to take, and if so, for what stages of the

company’s growth.

VIII. Strategic Recommendations

The previous two sections detail the benefits of the direct-to-consumer sales

model as well as the widespread franchise model in the United States. The direct-to-

consumer sales model appears to function well when there are low levels of sales for

small, niche products. Once the sales volume exceeds a manageable level and substantial

resources are being diverted from manufacturing and research and development in order

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to sell and repair the vehicles for consumers, then Tesla should consider transitioning to a

franchise sales model. The CEO of Tesla Motors, Elon Musk, claims to have no

opposition to the franchise model once a small company “gets on its feet” or drastically

pumps up sales volume (Wilson).

Tesla’s situation is unique as compared to the players in the Big 3 of automobile

manufacturing because Tesla’s existent direct-to-consumer sales model is not competing

with any franchises, since Tesla solely has operated under the first model. Thus, the

company does not need to be wary of a loss of goodwill from any of its dealers due to

operating under a direct-to-consumer sales model because those dealers do not exist.

However, Tesla should ensure that in the future when their automobiles are receiving less

free press that running the retail stores themselves is the correct approach, and that the

company is not missing out on an opportunity to capture profits from dealers who are

experts at their trade like Ford saw happen through its aforementioned test of the Ford

Retail Network.

The best threshold to peg for Tesla to begin to transition from a direct-to-

consumer sales model to a franchise sales model stems from two factors: sales volume

and widespread consumer trust of the safety of electric automobiles. In terms of sales

volume, once their annual sales in the United States exceed approximately 30,000

vehicles, Tesla should evaluate the possibility of transitioning to a franchise sales model.

This figure can be estimated by looking at another luxury automobile manufacturer,

Porsche. In the United States, Porsche has seen success with the franchise model and

annual automobile sales ranging from about 35,000-40,000 units (Porsche). A large

difference between Tesla and Porsche exists, however, due to Porsche dealers’ ability to

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make a decent profit margin on their vehicles. Tesla, meanwhile, still relies on

government subsidies to keep down the price point of their vehicles. This potentially

leaves little opportunity for dealers to capture a profit and still ensure the price

competitiveness of Tesla’s automobiles.

A second condition must be met, however. Unlike Porsche, which creates

gasoline-powered automobiles, Tesla must be able to identify that they are at the point

where their electric-centered technologies are accepted by a widespread consumer base.

This can help Tesla Motors from meeting the same fate as Fisker Automotive, who

jumped into the franchise sales model while the public still questioned the technology

surrounding electrically powered vehicles. Consumer Reports, who granted Tesla’s

Model S top safety ratings, conducted their 2012 Car Brand Perception Survey and found

that 42 percent of respondents were worried that electric cars presented a real fire risk to

their homes while charging. In 2014, Tesla made great strides towards being viewed as

providing safe electric automobiles and ranked #5 in Best Overall Brand Perception from

the newer version of the survey (Figure 5). Thus, Tesla is headed in the right direction in

terms of consumer acceptance. In the next section, conclusions are drawn from these

findings and recommendations.

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Figure 5

Source: Consumer Reports 2014 Brand Perception Survey

IX. Conclusions

Direct-to-consumer sales model are not an innovation unique to Tesla and have

been tried for decades in the United States, even by large companies such as Ford and

General Motors. While aspects of Ford and General Motor’s experiments greatly differ

from Tesla’s situation in that they already have a strong network of private dealerships,

the idea that the dealer may be best suited to sell automobiles may be something for Tesla

to investigate.

Legislators are wary of the hype surrounding Tesla, and are ensuring the

application of protectionist measures that have origins from the time when Ford and

General Motors attempted to operate retail stores. These pieces of legislation were not

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crafted nor intended to be applied to Tesla’s situation in which no automotive dealers for

the company need to be protected from price undercutting by the manufacturer because

no dealers exist.

Tesla Motors is still a small-scale automobile manufacturer, so the direct-to-

consumer sales model works for them. Looking into the future, Tesla may need to

consider transitioning to a franchise sales model once they establish a widespread

consumer base and can achieve economies of scale in their production manufacturing,

allowing them to be able to absorb any variances in sales demand.

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Bodisch, Gerald R. "Economic Effects of State Bans on Direct Manufacturer Sales to Car

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Connelly, Mary. "It's Official: FRN Is Ford Policy, Not Just a Test." Automotive News.

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Farnham, Alan. "Will Tesla Forfeit Its Direct Sales Model?" ABC News. ABC News

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Fingas, Jon. "FTC: State Bans on Tesla's Direct Sales Model Are Hurting Competition."

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"FTC Officials Side with Tesla on Debate over Car Dealerships." Seattle Post-

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Green, Catherine. "Tesla Fans Petition U.S. to Allow Direct Sales; Petitioners Say Some

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Mar. 2014.

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Dealerships." Automotive News. N.p., 19 Nov. 1999. Web. 14 Mar. 2014.

Margaret'Moore'Honors'Capstone'Project'

Situa4on'Analysis'Tesla'Motors,'Inc.'

Situa4on'Analysis'•  1.'Execu4ve'Summary:'Key'Issues'&'Recommenda4ons''

•  2.'Strategy'Descrip4on'•  3.'External'Analysis'•  4.'Internal'Analysis'•  5.'Business'Models'•  6.'Implementa4on'Analysis:'Levers'of'Control,'Change'Management'

•  7.'Quan4ta4ve'Analysis'•  8.'Preliminary'Strategic'Op4ons'•  9.'List'of'references'

1.'Execu4ve'Summary:''•  Key'Issues'–  High'cost'of'electricallyUpowered'automobiles'–  Dependence'on'government'tax'breaks'–  Lack'of'charging'sta4ons'

•  Recommenda4ons'–  Ensure'entrance'of'direct'sales'stores'in'all'high'sales'volume'areas'

–  Lower'the'Cost'of'Goods'Sold'(further'refine'electric'power'technology)'

–  Lower'the's4cker'price'of'the'cars'to'compe44vely'price'them,'as'the'COGS'declines'

–  Establish'many'more'charging'sta4ons'in'the'United'States'–  Create'a'more'“portable”'charging'solu4on'

2.'Strategy'Descrip4on'

2.1.'Goals'U'“where”'are'you'headed?'

•  Goal'–'“To'accelerate'the'advent'of'sustainable'transport'by'bringing'compelling'mass'market'electric'cars'as'soon'as'possible”'

•  Overarching'Goal'–'Transi4on'from'a'hydrocarbon'economy'to'a'solar'economy'(become'environmentally'neutral)'

•  Scope'related:''–  Mass'market'electronicallyUpowered'vehicles'in'the'U.S.'and'China'

•  Financial'–  Raise'sales'volume'to'scale'produc4on'

•  ShortUterm'–  Establish'a'mul4tude'of'charging'plants'in'the'United'States'–  Successfully'enter'the'Chinese'automo4ve'market'

•  LongUterm'–  Become'selfUsufficient'(thrive'without'government'assistance)'–  Further'penetrate'the'market'–  Overcome'legal'barriers'to'enter'Texas,'Arizona,'and'New'Jersey'

2.2.'Scope'•  Scope'–'develop'and'sell'electric'automobiles'on'a'large'scale'to'ensure'

they'permeate'the'U.S.'and'Chinese'automo4ve'markets'''•  Future:'con4nued'global'expansion'and'market'penetra4on;'create'electric'

SUVs'as'well'•  Products:'

–  Model'S'(electric'car)'–  Model'X'(electric'SUV'to'be'released'in'2014)'–  Strong,'heavily'desired'automobile'bakery'(lasts'7'years'&'holds'53'kWh)'

•  Value'Chain:'R&D'is'essen4al;'Marke4ng'is'happening'primarily'through'free'press'(lots'of'hype'on'the'company)'

•  Interna4onal'presence:''–  Entering'China'–  Opera4ng'in'U.S.,'Denmark,'France,'Germany,'Hong'Kong,'Italy,'Japan,'

Netherlands,'Norway,'Singapore,'Switzerland,'U.K.,'Monaco,'Belgium,'Austria,'and'Sweden'

•  Alliance:'SolarCity'so'customers'can'charge'their'vehicles'

2.3.'Compe44ve'Advantage'''•  Compe44ve'Advantage'–'currently,'government'

subsidies'and'Elon'Musk’s'financial'backing'and'vision'•  Value'proposi4on'–  Differen4a4onU'premium'electric'automobiles'

•  Unique'–  One'of'the'first'successful'movers'in'the'electric'automobile'market'

–  Ability'to'receive'heavy'government'subsidies'•  FitU'taking'advantage'of'govt.'subsidies'and'demand'by'other'automo4ve'companies'for'strong'rechargeable'automobile'bakeries'

•  TradeoffsU'price'of'electric'technology'puts'the'vehicle'outside'of'the'realis4c'affordability'range'of'many'consumers;'electric'technology'dictates'the'need'for'accessible'charging'sta4ons'

2.4.'Economic'Logic'–'“why”'•  To'achieve'their'goal'of'switching'drivers'from'environmentally'harmful'cars'to'environmentally'friendly'ones'

•  Premium'PriceU'currently'opera4ng'at'this'level'

•  Lower'costU'to'sa4sfy'goal'and'mission,'costs'and's4cker'price'need'to'decline'considerably'– Combina4on'of'bothU'can'offer'a'cheaper,'less'luxurious'business'division'(even'under'a'different'name)'to'sa4sfy'demand'from'consumers'with'a'smaller'wallet;'higher'sales'volume'to'drive'down'produc4on'costs'of'bakery'can'make'this'a'reality'

2.5.'Implementa4on'•  Beliefs'– Core'values:'Environment'

•  Boundaries'– Limita4on'of'charging'sta4ons'– S4cker'price'– Cost'to'manufacture'electricallyUpowered'vehicles'

2.5'Implementa4on'•  Diagnos4c'

1.'Performance'goals:'raise'sales'volume'2.'Roles/Responsibility'

'U'create'sales'targets'for'each'direct'sale'store'3.'Incen4ves ''

'U'recogni4on'of'top'stores'in'terms'of'sales'&'improvement'–  Structure,'Balanced'scorecard'

•  Interac4ve'–  Process'for'ongoing'strategy'discussion'

3.1.1'External'Analysis:'Buyers'•  Affluent'environmentallyUconscious'automobile'drivers'

•  Seasonal'sales'(mostly'spring/summer)'•  Discre4onary'purchase'in'terms'of'choosing'more'expensive'electric'op4on'

•  Buyers'have'myriad'of'choices'(gas,'diesel,'hybrid'vehicles)'

•  Differen4a4on'–  ElectricUpowered'premiumUperformance'automobiles'– Associa4on'with'visionary'Elon'Musk'(trendy)'–  Switching'costs'of'house'power'sta4ons'

3.1.2'External'Analysis:'Suppliers'•  All suppliers:

– Automobile brakes manufacturers – Automobile electronics manufacturing – Automobile engine & parts manufacturing – Automobile interior manufacturing – Automobile metal stamping – Automobile steering & suspension manufacturing – Automobile transmission manufacturing – Banks –  Investors

3.1.2'External'Analysis:'Suppliers'

•  Suppliers power – and opportunity – Concentrated –  Limited ability to switch suppliers, very niche,

mostly one supplier for each part – Vertical integration of battery manufacturing with

creation of new battery plant

3.1.3.'External'Analysis:'Compe4tors,'entrants,'subs4tutes'

•  Competitors: large automotive manufacturers (especially electric automobile manufacturers) such as Toyota (and Lexus), Chevrolet, Ford (and Lincoln), Nissan, Honda, BMW, and Hyundai –  Lexus (ES 300h and RX 450h) and Lincoln (MKZ Hybrid) also offer

upscale environmentally-conscious vehicles –  BMW i3 all-electric city and i8 plug-in hybrid cars are direct competitors

•  Scale economies- certainly true of this market •  Switching costs (customers, suppliers)- difficult to transition •  Capital requirements- high barriers to entry, very capital-intensive •  Incumbency advantages

–  Experience in the space, brand recognition and positioning •  Government Policy- supportive of new technology but most states against

the direct sales model •  Partnering with SolarCity to create solar panels for Tesla owners’ houses to

charge electric vehicles •  Strong differentiation due to unique luxury electric automobile product

3.1.4.'External'Analysis:'complements'

•  Partnering'opportuni4es'–  EnvironmentallyUfriendly'homebuilders'

–  Environmental'advocacy'groups'

–  EnvironmentallyUconscious'celebri4es'

–  Natural'parks'and'beau4fica4on'projects'

3.2'External'Analysis:'PEST'•  Poli4cal'

–  Direct'sales'model'not'wellUreceived'by'Texas'and'other'states'–  Societal'normsU'interested'but'many'people'are'taking'a'waitUandUsee'

approach'to'electric'cars''–  Environmental'advocacy'support'–  Government'subsidies'

•  Economic'–  Recovery'puts'consumers'in'a'situa4on'to'be'able'to'afford'new'

vehicles;'8.4%'growth'in'domes4c'light'vehicle'sales'2013'YTD'October'–  Drivers:'consumer'spending,'world'price'of'crude'oil,'world'price'of'

steel,'tradeUweighted'index,'and'interest'rates'•  Social:'recep4ve'but'wary'of'reliability,'cost,'and'accessibility'of'

charging'sta4ons'•  Technological'

–  Powertrain,'vehicle'engineering,'and'innova4ve'manufacturing'

4.'Internal'Analysis:'

•  ~6000'employees'in'2014'•  Founded'2003'•  Over'100'retail'loca4ons'globally'

4.1'Internal'Analysis:'•  Legal:'safety'hazard'(hot'metal'spill)'in'manufacturing'plant;'considered'one'of'the'world’s'safest'brands'by'the'Na4onal'Highway'Traffic'Safety'Administra4on'

•  R&D:'development'of'new'parts'(especially'bakery)'to'reduce'cost'and'increase'efficiency;'stress'secrecy'to'ensure'that'manufacturing'process'cannot'be'replicated'

•  HR:'hires'highUranking'souware'strategists'from'Apple'and'Google'as'well'as'expert'souware'developers,'electrical'and'mechanical'engineers,'and'industrial'designers;'operate'in'small'teams'with'minimal'structure'

Internal'Analysis:'•  Opera4ons:''–  Produc4on'efficiencyU'Model'S'made'in'3U5'days''–  Electricity:''

•  emphasis'with'SolarCity'on'solar'electricity'•  akempt'to'create'more'efficient'bakeries'in'new'“gigafactory”'

–  Produc4vity'–  Industrial'scaleU'having'difficulty'scaling'their'opera4ons''

•  Finance:'–  Cash'without'banksU'funding'from'venture'capital'investors'and'CEO'Elon'Musk'

–  InvestorsU'in'love'with'the'stock,'trading'at'>$200''–  TaxU'vehicles'qualify'for'government'tax'subsidies;'funding'from'California'Public'U4li4es'Commission''

Internal'Analysis'•  Marke4ng:'

–  PriceU'expensive'(Model'S'star4ng'$69.9k),'even'with'government'subsidy'of'~$7.5k'

–  ProductU'Model'S'base'and'performance'models;'Model'X'to'begin'produc4on'in'2015;'bakery'for'Toyota'Rav4'EV'

–  PlaceU'sold'in'North'America'(55'loca4ons),'Europe'(24'loca4ons),'and'Asia'(1'loca4on);'direct'sales'stores'in'malls'with'heavy'foot'traffic'

–  Promo4onU'tons'of'free'press,'recipient'of'Motor%Trend%Car'of'the'Year'2013'and'99/100'on'Consumer'Report'evalua4on,'strategic'Twee4ng'by'CEO'Musk'

–  Product'StrategyU'lower'cost,'establish'more'charging'sta4ons'by'2015'

–  AmbienceU'very'small'stores,'clean'“green”'look,'luxury'feel''–  CrossUpromo4on'of'bakeries'with'SolarCity'–  Experience'and'test'drive'events'throughout'US'and'Canada'–  CoUop'with'Solar'City'(another'Elon'Musk'venture)'

Internal'Analysis'•  Sales'Model'– Direct'sales'model'as'opposed'to'franchise'model''–  Ra4onale:'remove'the'“premium”'akached'by'a'car'dealer'to'keep'car'prices'compe44ve'

– Arizona,'Texas,'and'New'Jersey'have'refused'to'allow'Tesla'to'operate'in'the'state'due'to'this'innova4on'

•  Servicing'Approach'–  Consumer:'rou4ne'souware'updates'–  Car'alerts'Tesla'if'issues'arise;'many'resolved'remotely'– Annual'inspec4on'op4ons:'

•  Tesla'Service'Center'•  Tesla'Ranger'visit'•  Valet'service'with'a'complimentary'loaner'vehicle'

Charging'Sta4on'Expansion'•  50%'of'bakery'pack'recharged'in'20'mins'•  February'19,'2014U'90'supercharger'sta4ons'in'US'and'Europe'•  Looking'to'expand'sta4ons'in'aforemen4oned'areas'and'Asia'

5.'Business'Models'

5.'Business'Models'

•  Blue'ocean'strategy'modeling'– Akributes:'price,'quality,'variety,'ambience,'loca4ons,'convenience'

•  Analogies'–  Spirits'and'wines'(tas4ng,'tours,'contests),'tobacco,'tea/coffee'

– Other'countries'where'legal'–  IP'protec4on'lessons'from'agriculture'(monsanto,'basma4,'wine)'

•  Other'techniques'

Porter’s'5'Forces'Threat'of'New'Entrants'

Low:'due'to'its'capital'–intensive'nature'

Bargaining'Power'of'Buyers'Low:'only'Tesla'

sells'Tesla'automobiles'and'bakeries%

'

Rivalry'Among'Exis4ng'Compe4tors'Middle:'some'(Mercedes'and'

Toyota)'working''with'Tesla'to'ouxit'their'vehicles'with'Tesla'bakeries%

Threat'of'Subs4tute'Products'High:'many'subs4tute'products'

(hybrids)'available'

Bargaining'Power'of'Suppliers'

High:'most'of'the'300+'suppliers'are'Tesla’s'sole'suppliers'of'a'specific'part'or'parts;'have'not'found'qualified'alterna4ve'sources'thus'far''

Business'Model'Tradi1onal%Luxury%

Automobile%Company%(Lexus,%Mercedes,%Audi)%

%%

Tesla%Motors%

Sell'highUperformance'luxury'vehicles'

Customer'Value'Proposi4on'

Sell'highUperformance'luxury'vehicles'(with'top'ra4ngs)'that'are'also'electricallyUpowered'

High'margins,'low'inventory'turnover'

Profit'Formula' Low'margins,'tax'incen4ves,'low'inventory'turnover'

Franchise'sales'model'approach'

Key'Resources'and'Processes'

Direct'sales'model,'contracted'to'supply'bakeries'to'compe4tors,''R&D'

Business'Model:'Sustaining/Disrup4ve'

Sustain%(Luxury%line)%Model%S%

Disrupt%(Future%mainstream%line)%Gen%III%

Performance'Akributes' “Bigger,'beker,'faster”'in'terms'of'automobile’s'performance'(0U60'in'about'4.2'seconds),'electronicallyUpowered'with'a'range'of'265'miles'on'a'single'charge''

“Smaller,'worse,'slower”'but'more'costUfriendly'to'middle'class'customer'

ResourcesUProcessesUValues'

Higher'margins' Lower'margins,'poten4ally'higher'sales'volume'

Strategy'Elements' Current'upperUclass'customers,'single'suppliers,'distribu4on,'growth'

Different'middleUclass'customers,'variety'of'suppliers'(drive'down'cost),'more'distribu4on,'growth'

AnalogyU'iTunes'Store'

•  Direct'sales'•  No'large'brickUandUmortar'footprint'needed'

•  Technological'development'to'circumvent'middleman'(music'stores)'

Business'Model:'Blue'Ocean'Canvas'

High%%%%%%%%%%%%%%%%%%%%%%%%%%%Low%

Tesla'

Luxury'Automobiles'

Business'Model:'Moneyball'

•  Akributes'that'impact'performance:''•  OnUbase:'performance'of'automobiles'matches'those'of'gasUconsuming'automobile'compe4tors;'reliability'matches'compe4tors;'bakery'range'matches'fuel'tank'range'

•  Homerun:'performance'of'cars'exceeds'market'compe4tors;'reliability'and'servicing'experience'exceeds'that'of'compe4tors;'price'point'of'Gen'III'lower'than'compe4tors;'supercharger'sta4ons'ubiquitous''

Business'Model:'Ansoff'Matrix'Exis1ng%Products% New%Products%

Exis4ng'Markets' Market'Penetra4on:'Currently'succeeding'in'capturing'market'share'in'the'luxury'automobile'space.''

Product'Development:'Gen'III'delivers'Tesla’s'alterna4ve'energy'automobile'at'a'lower'price'point'

Emerging'Markets' Market'Development:'Makes'Tesla'the'first'highUend'electricallyUpowered'automobile'maker,'gran4ng'them'a'firstUmover'advantage'and'allowing'them'to'capture'momentum'during'this'trend'to'sustainability'

Diversifica4on:'Gen'III'ensures'that'Tesla'can'operate'in'the'massUmarket,'highUvolume'space'of'the'middle'market,'allowing'them'to'create'economies'of'scale'to'drive'down'costs''

6.'Implementa4on'Analysis:'•  Beliefs'–  Core'values'–'Save'the'environment'

•  Boundaries'–  Pricing'issues'–  Limita4on'based'upon'lack'of'charging'sta4ons'–  Inability'to'operate'(directly'sell'cars)'in'certain'states'

•  Diagnos4c'–  Balanced'scorecard'

•  Customer,'internal'efficiency,'learning,'financial'•  Incen4ves'alignment'•  Roles'and'responsibili4es'

•  Interac4ve'–  Process'for'ongoing'strategy'discussion'

Beliefs'

•  Values:'Save'the'environment'•  Purpose:'Provide'a'sustainable'method'of'transporta4on'to'phase'out'the'use'of'fossil'fuels'in'vehicles'

•  Mission:'“…to'accelerate'the'advent'of'sustainable'transport'by'bringing'compelling'mass'market'electric'cars'as'soon'as'possible”'

Boundaries'

•  Business'conduct'–  Ethical,'environmentallyUfriendly'ac4ons'

•  Implementa4on'– Decisive,'swiu'ac4on'when'a'breach'of'conduct'occurs'

•  Strategic'boundaries'–  Red'space:'anything'related'to'fossil'fuels'or'seemingly'environmentallyUunfriendly'areas'

– Green'space:'electricallyUpowered'vehicles;'anything'needing'a'sustainable,'powerful,'electric'bakery'

Diagnos4c'Control'System'Diagnos4c'Control' Measurable'Variable:'Sales'Volume'

Implement'the'System'

Input:'the'recording'of'all'sales'of'Tesla'products,'including'automobiles'and'bakeries'Process:'the'physical'count'Output:'data'on'sales'volume'leads'to'an'accurate'reflec4on'of'ability'to'act'on'opportuni4es'to'exploit'economies'of'scale'and''

Addressing'the'Problem'

The'Problem:'Currently,'there’s'an'inability'to'create'economies'of'scale'for'Tesla'to'drive'down'the'produc4on'costs'of'their'bakeries'and'automobiles,'making'it'difficult'for'them'to'enter'into'the'middle'mass'market'of'automobiles.''Also,'the'further'they'can'drive'down'the'cost'of'their'bakeries,'the'more'marketable'they'can'make'said'bakeries'to'other'automobile'makers'and'products'needing'highUcapacity'bakeries.''Their'lowerUcost'offering'also'solidifies'their'posi4on'in'the'space'and'can'differen4ate'them'from'new'entrants.'

Balanced'Scorecard''Financial'

•  Broaden'Revenue'Mix:'rollout'middle'market'vehicle'and'push'bakery'sales'

•  Monitor'Cost'Structure:'look'for'mul4ple'suppliers'(^'compe44on)'and'economies'of'scale'

'Customer'•  Further'push'free'press/

hype'•  Maintain'reliability'in'the'

midst'of'new'technological'developments'and'offerings'

•  Akrac4ng'foot'traffic'

'Business'Processes'•  Create'online'storefront'•  Establish'customer'loyalty'

program'•  Ensure'client'knowledge'of'

consulta4on'services'

Strategy'

'Learning'&'Growth'•  Pump'R&D'into'bakery'capacity'and'

manufacturing'•  Dive'into'Chinese'and'other'interna4onal'

markets'

Interac4ve'

•  Con4nue'to'push'free'press'and'marke4ng,'which'can'help'drive'sales'volume'

•  Roll'out'Gen'III'as'soon'as'the'model'is'at'a'low'price'point'and'does'not'sacrifice'reliability'to'meet'said'price'point'

•  Seek'more'alliances'in'which'Tesla'sells'bakery'to'other'companies,'helping'propel'their'sales'volume'

7.'Quan4ta4ve'Analysis:'''•  1.'Financial'ra4os'analysisU'firm’s'P/E'

•  2.'Financial'valua4on'of'the'organiza4onU'FCFE'model''– Net'Loss'2013'($74.2M)'– Revenue'2013'$2,013.5M'

•  3.'Breakeven'analysis'/'fixed'versus'variable'costs'– Fixed'costs'for'Tesla'may'be'higher'in'terms'of'real'estate'as'compared'to'firms'of'their'size'because'of'their'directUtoUconsumer'sales'stores;'however,'less'inventory'costs'due'to'justUinU4me'manufacturing'

Quan4ta4ve'Analysis'

•  4.'Rela4ve'price/cost'analysisU'look'at'other'electric'automobiles'as'well'as'other'luxury'automobilesU'Tesla'on'high'end'for'offerings'

•  5.'Compe4tor’s'responsesU'have'been'outsourcing'the'bakery'produc4on'for'their'electric'vehicles'to'Tesla'ex.'Toyota'Rav4''

•  6.'Calcula4on'of'likely'synergiesU'would'arise'from'the'R&D'from'bakeryUproducing'segment'of'Tesla'that'both'benefits'the'company’s'vehicles'as'well'as'the'sale'of'said'bakeries'to'third'par4es'and'compe4tors'

Quan4ta4ve'Analysis'

•  7.'Es4ma4on'of'the'size'of'poten4al'marketU'en4re'automobile'dealer'industry'makes'$2T+'annually'in'revenue;'projected'12.46'million'new'vehicle'registra4ons'in'2013'and'14.68MM'in'2014'con4nuing'at'about'a'16%'growth'rate'

•  8.'Performance'measurement'systemU'growth'in'single'store'sales'(good'because'then'can'focus'on'areas'where'the'company'has'strong'infrastructure'and'presence)'

Quan4ta4ve'Analysis'

•  While'Tesla'hopes'to'become'a'domina4ng'force'in'the'automobile'industry,'for'now'the'company'is'so'small'it'is'usually'included'in'the'category'of'“other;”'it'will'take'some'4me'and'heavy'investment'in'charging'sta4on'infrastructure'before'Tesla'can'be'a'heavy'hiker'in'the'space'

•  Value'drivers'–  Compound'Annual'Growth'Rate'– Driving'down'COGS'through'R&D'can'help'boost'sales,'margins''

Quan4ta4ve'AnalysisU'Comparable'Valua4on'

8.'Preliminary'strategic'op4ons''

8.'Preliminary'strategic'op4ons''

–  Industry'Associa4on/alliance'•  Con4nue'partnership'with'Toyota'as'bakery'supplier'and'seek'other'partnerships'of'similar'nature'

•  Legally,'con4nue'to'bakle'in'AZ,'TX,'NJ,'etc.'with'the'goal'to'ensure'the'directUtoUconsumer'sales'model'can'exist'in'those'areas.'

– Strategic'Posi4on'Business'level'–'differen4a4on'through'nature'as'luxury'electric'vehicle'with'strong,'reliable,'bakery'•  SurvivalU>posi4on'for'future'growth'

Preliminary'Strategic'Op4ons'

•  Develop'marke4ng'plan'to'be'put'into'effect'once'free'publicity'fizzles'out'

•  Lower'price'point'to'reach'mass'market'•  Corporate:'poten4ally'find'other'uses'for'strong,'reliable'bakery'(other'vehicles,'another'different'tool?)'

•  Crea4ve'ways'to'tap'investors'for'growth'

New'Business'Models'

•  Shiu'to'being'known'as'a'producer'of'affordable'automobiles'

•  Gain'a'substan4al'share'of'the'middle'market'of'automobiles'

•  Develop'a'way'to'navigate'legal'landscape'in'Arizona,'New'Jersey,'and'Texas'to'sell'vehicles'there'without'fully'compromising'direct'sales'model'

Business'Level'Strategy'

•  Con4nue'to'establish'charging'sta4ons'throughout'the'United'States'

•  Ensure'the'retail'stores'offer'an'experience'for'customers'unrivaled'by'dealerships'

Func4onal'Strategy'

•  Ensure'the'servicing'of'Tesla'vehicles'at'consumers’'homes'is'spectacular'(give'consumers'faith'in'model)'

•  Drive'up'sales'volume'in'retail'stores'

Corporate'Level'Strategy'

•  Con4nue'to'fund'heavy'R&D'to'drive'down'COGS'and'reduce'the'price'point''

•  Hit'the'sweet'spot:'middle'market''– Helps'sa4sfy'Tesla’s'mission'“…to'accelerate'the'advent'of'sustainable'transport'by'bringing'compelling'mass'market'electric'cars'as'soon'as'possible”'

Implementa4on'Plan'•  Con4nue'to'invest'in'R&D'to'poten4ally'drive'down'COGS'–  Then'can'reach'mass'market'

•  Develop'infrastructure'for'all'Americans'to'have'Teslas''– Need'lots'of'charging'sta4ons'throughout'the'US'– More'retail'stores'–  Create'more'portable'bakery'charging'solu4on'in'the'interim'

•  Con4nue'to'get'the'word'out'about'Tesla'–  Even'auer'the'free'press'has'resided'

9.'Works'Cited'•  hkp://www.teslamotors.com/blog/missionUtesla''•  ValueLine'Automo4ve'Report'November'22,'2013'•  Consumer'ReportsU'New'Hybrid/EV'Ra4ngs'&'reliability'•  IBISWorld'Industry'Report'33611a'•  Mergent'First'Research'•  S&P'NetAdvantage'•  Hoovers'Database'•  hkp://musically.com/wpUcontent/uploads/2014/03/itunes_logo.png'

•  hkp://www.teslamotors.com/about/press/releases/teslaUmotorsUhiresUseniorUgoogleUrecruiterUworld%E2%80%99sUleadingUelectricUvehicleUman'

Works'Cited'•  hkp://www.edmunds.com/autoobserverUarchive/2010/10/teslaUopensUrdUlabsUandUtestU

shopsUtoUreportersUunveilsUmodelUssUflatUbakery.html'•  hkp://www.sfgate.com/bayarea/ar4cle/3UworkersUburnedUatUTeslaUplantU4980999.php'•  hkp://www.torquenews.com/1083/toyotaUdominatesUconsumerUreportsUsurveyUteslaU

stealsUshow'•  hkp://files.shareholder.com/downloads/

ABEAU4CW8X0/2895786596x0x720221/5647bed2U1c27U4b40Uabd3Udd11f8bc474e/Investor%20Presenta4on%20U%20Jan%202014.pdf'

•  Tesla'Motors'FY2013'10K'•  hkp://www.forbes.com/sites/dalebuss/2014/02/07/bmwUolympicsUspotUlaunchesUteslaU

figh4ngUiUsubUbrand/''•  Halliday,'Jean.'"Tesla'Motors."'Adver4sing'Age'80.39'(2009):'17.'Communica0on%Source.'

Web.'22'Apr.'2014.'•  Capital'requirementsU'Mergent'FirstResearch'•  hkp://www.forbes.com/sites/dalebuss/2014/02/07/bmwUolympicsUspotUlaunchesUteslaU

figh4ngUiUsubUbrand/''•  hkp://understory.ran.org/wpUcontent/uploads/2012/06/sefaUsolar.jpg'•  Bloomberg'Terminal'