tesla.pdf

F R A N K T. RO T H A E R M E L

MHE-FTR-067
1 2 6 0 2 6 1 2 8 X

R E V I S E D : M A R C H 7, 2 0 2 0

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Professor Frank T. Rothaermel prepared this case from public sources. Research assistance by Laura Zhang is gratefully acknowledged. This case is developed for
the purpose of class discussion. This case is not intended to be used for any kind of endorsement, source of data, or depiction of efcient or inefcient management.
All opinions expressed, and all errors and omissions, are entirely the author’s. © Rothaermel, 2020.

Tesla, Inc.

When Henry Ford made cheap, reliable cars, people said, “Nah, what’s wrong with a horse?”
That was a huge bet he made, and it worked.

— Elon Musk1

January 7, 2020. Shanghai, China. Just one year after Elon Musk with a cadre of high-ranking Chinese officials
broke ground on a dirt field near Shanghai China to commence the building of Gigafactory 3, Tesla’s CEO was now
dancing on stage to celebrate the first deliveries of locally made Model 3s.

Tesla’s stock market valuation crossed the $150 billion threshold.2 This made the electric vehicle startup more
valuable than GM, Ford, and Chrysler combined and the second most valuable auto company globally, only behind
Toyota Motor Corp.—but ahead of the Volkswagen Group, the world’s two largest car manufacturers. To put Tesla’s
stock market valuation in perspective, in 2019, GM and Ford combined made more than 10 million vehicles while
Toyota and Volkswagen each made over 10 million. In comparison, Tesla made less than 370,000 cars.

Just a few months earlier, in the summer of 2019, Tesla’s market cap hit a low point of $32 billion. Back then,
as the company was trying to scale-up production of the Model 3 to meet demand, many had speculated that the
company would soon run out of cash because it kept missing delivery deadlines and was mired in “production hell”
(as CEO Elon Musk put it).3

After the raucous delivery party in Tesla’s brand-new Shanghai Gigafactory, Elon Musk sat back and relaxed
as the private jet took off. As the Gulfstream G700 gained altitude, Elon was trying to catch up on his sleep, but a
couple of things kept him awake. In particular, the Tesla CEO worried about how the company would continue to
scale-up production profitably, while also launching several new models. Later in 2020, Tesla plans the delivery of
its Model Y, a smaller compact sport utility vehicle (SUV). And in 2021, Musk promises the first deliveries of the
futuristic pickup truck—the Cybertruck. Although Elon Musk was happy that Tesla beat expectations in 2019 by
delivering 367,500 vehicles (Exhibit 1), for 2020 he promises delivery of over 500,000 vehicles.

Perhaps, even more important, Elon Musk worried about future demand in the company’s three key markets:
the United States, China, and Europe. Even if Tesla succeeded to ramp up production, will there be sufficient

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demand? How could the electric vehicle (EV) company grow production by more than 35 percent while being
profitable? Although Tesla had some profitable quarters in the recent past, on an annual basis, the company is yet
to make a profit (Exhibit 2). Federal tax credits in the United States for Tesla vehicles have ended, while China is
also reducing tax incentives for electric vehicles. In the meantime, his phone kept buzzing with reports of some
kind of new coronavirus causing flu-like symptons and pneumonia, with adverse repercussions on Tesla’s supply
chain and its new Gigafactory in Shanghai.

Another issue that troubled Musk, and which leads him to tweet often directly with disgruntled customers, is
the perception that although Tesla styles itself as a luxury car brand, its delivery experience, and customer service
is not up to par. Given a large number of deliveries of Model 3s in the United States during the second half of
2019, Tesla’s customer service bandwidth and capabilities had yet to catch up. The EV-company began to develop
a reputation, at least in the United States, for launching innovative and paradigm-defining vehicles. Yet at the same
time, many Tesla owners and observers considered its customer service inferior.

As Musk grabbed a low-carb Monster energy drink from the fridge in his airplane suite, he booted up his Lenovo
laptop, and began to organize his thoughts …

Elon Musk: Engineer Entrepreneur Extraordinaire

In 1989, at the age of 17, Elon Musk left his native South Africa to avoid being conscripted into the army. Says
Musk, “I don’t have an issue with serving in the military per se but serving in the South African army suppressing
black people just didn’t seem like a really good way to spend time.”4 He went to Canada and subsequently enrolled
at Queen’s University in 1990. After receiving a scholarship, Musk transferred to the University of Pennsylvania.
He graduated in 1995 with bachelor’s degrees in both economics and physics, and he then moved to California to
pursue a Ph.D. in applied physics and material sciences at Stanford University.5

After only two days, Musk left graduate school to start Zip2, an online provider of content publishing soft-
ware for news organizations, with his brother, Kimbal Musk. Four years later, in 1999, computer-maker Compaq
acquired Zip2 for $341 million (and was, in turn, acquired by HP in 2002). Elon Musk then moved on to co-found
PayPal, an online payment processor. In 2002, eBay acquired PayPal for $1.5 billion, netting Musk an estimated
$160 million.

Elon Musk is widely viewed as the world’s premier innovator, bringing computer science, engineering, and
manufacturing together to solve some of today’s biggest problems such as sustainable energy and transport as
well as affordable, multi-plenary living in order to avoid future human extinction. Musk describes himself as “an
engineer and entrepreneur who builds and operates companies to solve environmental, social and economic chal-
lenges.”6 At one point, Elon Musk led three companies simultaneously that address the issues that are at the core of
his identity and vision: Tesla (sustainable transport), SolarCity (decentralized and sustainable energy), and SpaceX
(multi-planetary existence).

Musk indeed has a larger than life profile and has been described as “Henry Ford and Robert Oppenheimer
in one person,”7 as well as “Tony Stark, the eccentric inventor better known as Iron Man.”8 In fact, Musk made a
cameo appearance in the Iron Man 2 movie. In line with his movie avatar, the real-life Elon Musk plans to retire
on Mars.

Elon Musk’s larger-than-life personality frequently spills over into his Twitter feed. Musk is an avid tweeter and
has had some run-ins with the Security and Exchange Commission (SEC) in the past, as some of his tweets led

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Telsa, Inc.

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of McGraw-Hill Education.

to movements in Tesla stock.9 The SEC claims that some of his tweets contain material information that has no
basis in fact, and thus crossed the line into securities fraud. The issue came to the fore when Musk tweeted in the
summer of 2018: “Am considering taking Tesla private at $420. Funding secured.” The day prior to Musk’s tweet,
Tesla’s share price was $380. The SEC filed securities fraud charges against Musk claiming that his social media
statements were false and misleading investors.

In the spring of 2019, Musk settled with the SEC whom Musk called on Twitter the “Short seller Enrichment
Committee”—referring to investors that short Tesla’s stock. Short-sellers are investors, who borrow shares, sell
them, and then plan to buy them back at a lower price later to profit from the difference. Essentially, short-sellers
are betting against a company, and through their short-selling activities put downward pressure on the company’s
share price. Elon Musk and Tesla each had to pay a fine of $20 million to settle with the SEC, without admitting
to wrongdoing. Moreover, Musk had to agree that any of his future social media statements needed to be reviewed
internally by Tesla prior to posting. Musk also had to step down from the position as chairman of Tesla’s board of
directors, but he was allowed to continue to serve as CEO.

Yet, the “taking Tesla private” tweet by Elon Musk in the summer of 2018 marked the beginning of one of the
most challenging years in the company’s brief history. After missing production and delivery targets in the first two
quarters of 2019, Tesla’s market cap hit a low of $32 billion, down from $65 billion a year earlier. And, the company
was running low on cash. The short-sellers thought they had won, and Tesla would go bankrupt.

Rather than going bankrupt, however, in early 2020, Tesla, Inc. employed about 50,000 people worldwide and
boasted a market capitalization of $150 billion, an appreciation of more than 6,000 percent over its initial public
offering in 2010. As a consequence, Tesla’s shares outperformed the broader market by a large margin. The differ-
ence in performance between Tesla and the broader stock market has been more pronounced since the fall of 2019
as Tesla began to exceed performance expectations in subsequent quarters (Exhibits 3 and 4).

Brief History of Tesla, Inc.

Tesla, Inc. (TSLA) was founded in 2003 in San Carlos, California with the mission to design and manufacture
all-electric automobiles. Indeed, the company was inspired by GM’s EV1 electric vehicle program in California in
the late 1990s, which the Detroit automaker shut down in 2003. For a comparison between all-electric vehicles
(EVs) and plug-in hybrid electric vehicles, see Exhibit 5.

Tesla, Inc. is named after Nikola Tesla, the engineer and physicist who invented the induction motor and
alternating-current (AC) power transmission for which he was granted a patent in 1888 by the U.S. Patent and
Trademark Office. The Serbian-born inventor was a contemporary of Thomas Edison. Indeed, Edison, the prolific
inventor of the light bulb, phonograph, and the moving picture (movies), was at one-point Tesla’s boss. The two
geniuses fell out with one another and feuded for the rest of their lives. Edison won the famous “War of Currents”
in the 1880s (DC vs. AC) and captured most of the limelight. Because Nikola Tesla’s invention of the alternating-
current (AC) electric motor was neglected for much of the 20th century and he did not receive the recognition he
deserved in his lifetime, Elon Musk is not just commercializing Tesla’s invention but also honoring Nikola Tesla
with the name of his company. Tesla Inc.’s all-electric motors and powertrains build on Tesla’s original inventions.

From day one, Elon Musk was also the controlling investor in the original company, Tesla Motors, Inc., provid-
ing $7 million from his personal funds to get the company started. Tesla confronted a major cash crunch in 2007,
which put the future viability of the company into question. Musk stepped up and invested over $20 million in
this round to keep the company afloat, and his dream of transition to sustainable transport alive. In total, Musk

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Tesla, Inc.

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provided $50 million from his own money to fund Tesla in its early days because finding any outside funding was
next to impossible for a new car company during the global financial crisis.10

Tesla’s Secret Strateg y (Part 1)

In a blog entry on Tesla’s website in 2006, Elon Musk explained the startup’s initial master plan:11

1. Build a sports car.

2. Use that money to build an affordable car.

3. Use that money to build an even more affordable car.

4. While doing the above, also provide zero-emission electric power generation options.

5. Don’t tell anyone.

To achieve Step 1, Tesla held a design contest for the styling of its first product—Roadster. Lotus Cars, a British
manufacturer of sports and racing cars, won the contest. Lotus Cars and Tesla Motors, as it was known then,
jointly engineered and manufactured the new vehicle using the Lotus Elise platform. In 2006, Time magazine
hailed the Tesla Roadster as the best invention of the year in the transportation category. In 2007, Musk was named
“Entrepreneur of the Year” by Inc. magazine.

In the same year, however, it became clear that the production of the Roadster was not scalable. After taking a
closer look at Tesla’s financial situation, Musk found that Tesla was losing $50,000 on each car sold. Tesla’s CEO
at the time, Martin Eberhard had led investors to believe that the manufacturing of the Roadster cost $65,000 per
car, which appeared to justify the $92,000 sticker price. Musk found that it cost Tesla $140,000 just for the parts,
subassemblies, and supplies to make each vehicle and that the Roadster could not even be built with Tesla’s current
tools. He also discovered major safety issues with the existing design. Completely taken aback by the messy state of
affairs, Musk commented, “We should have just sent a $50,000 check to each customer and not bothered making
the car.”12

In 2007, Elon Musk fired Martin Eberhard unceremoniously and took over the engineering himself. Almost
every important system on the initial Roadster, including the body, motor, power electronics, transmission, battery
pack, and HVAC, had to be redesigned, retooled or switched to a new supplier. Such dramatic changes were neces-
sary to get the Roadster on the road at something close to the published performance and safety specifications, as
well as to cut costs to make it profitable.

By 2008, Tesla Motors was finally able to relaunch an improved version of its Roadster, and thus fulfill the first
step of its initial strategy laid out two years earlier. The Roadster is a $115,000 sports coupé with faster acceleration
than a Porsche or a Ferrari. Tesla’s first vehicle served as a prototype to demonstrate that electric vehicles can be
more than mere golf carts.

After selling some 2,500 Roadsters, Tesla discontinued its production in 2012. The initial Roadster manufactur-
ing process was not scalable (with a maximum production rate of no more than two cars per day) because it was
a handcrafted car put together at a former Ford dealership near the Stanford University campus.13 Tesla learned
that it is better to build an electric vehicle from scratch rather than retrofit a given car platform created for internal
combustion engines (ICE). The Roadster 1 had no more than 7 percent of parts in common with the Lotus Elise.

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https://campus.13

https://crisis.10

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As a side project, in 2017, Tesla unveiled Roadster 2, a sports coupé that set new records for a vehicle to be
driven on public roads: It goes from 0–60 mph in 1.9 seconds and from 0–100 mph in 4.2 seconds, with top
speeds of well above 250 mph. The base price of the new Roadster model is $200,000. First customer deliveries are
expected in the second half of 2020.

In Step 2, Tesla focused on its next car: the Model S. This was a car that Tesla designed from scratch with the
idea to create the best possible EV that is also scalable for mass production. The Model S is a four-door family
sedan, with an initial base price of $73,500. Depending on the size of the battery pack (up to 100kWh), the range
of the vehicle is between 210 and 330 miles. Unveiled in 2009, the Model S appeals to a much larger market than
the Roadster, and thus allows for larger production runs to drive down unit costs. When deliveries began in 2012,
the Model S received an outstanding market reception. It was awarded the 2013 Motor Trend Car of the Year and
also received the highest score of any car ever tested by Consumer Reports (99/100). By the end of 2019, it had sold
more than 300,000 of the Model S worldwide (Exhibits 1 and 5).

In 2012, Tesla unveiled the Model X, a crossover between an SUV and a family van with futuristic falcon-wing
doors for convenient access to second- and third-row seating. The Model X has a similar range as the Model S, with
between 250-330 miles per charge. Technical difficulties with its innovative doors, however, delayed its launch until
the fall of 2015. The initial base price of the Model X was $80,000, with the signature premium line ranging from
$132,000 to $144,000, thus limiting its mass-market appeal. By the end of 2019, it had sold more than 150,000 of
the Model X worldwide (Exhibits 1 and 5).

Tesla also completed Step 3 of its master plan. In 2016, the electric carmaker unveiled its first mass-market
vehicle: the Model 3, an all-electric compact luxury sedan, with a starting price of $35,000 for the entry-level model
with a range of 250 miles per charge. Many want-to-be Tesla owners stood in line overnight, eagerly waiting for Tesla
stores to open so that they could put down their $1,000 deposits in order to secure their spots on the waiting list
for the Model 3—a car they had never even seen, let alone ever taken for a test drive. As a result of this consumer
enthusiasm, Tesla received more than 500,000 preorders before the first delivery, and thus $500 million in interest-
free loans. Despite initial difficulties in scaling-up production, deliveries of the Model 3 began in the fall of 2017.
By the end of 2019, Tesla had delivered more than 450,000 of the Model 3 globally.

Step 4 of Musk’s initial master plan for Tesla aims to provide zero-emission electric power generation options.
To achieve this goal, Tesla acquired SolarCity, a solar energy company, for $2.6 billion in 2016. With the acquisition
of SolarCity, to which Musk is also chairman and an early investor, Tesla, Inc. is the world’s first fully integrated
clean-tech energy company, combining solar power, power storage, and transportation. In the process, Tesla’s mis-
sion also changed from “to accelerate the advent of sustainable transportation” to “accelerate the advent of sustain-
able energy,” thereby capturing the vision of a fully integrated clean-tech energy company.

Step 5: “Don’t tell anyone”—thus the cheeky title of Elon Musk’s original blog post: “Tesla’s Secret Strategy.”

Tesla completed an initial public offering (IPO) on June 29, 2010, the first IPO by an American automaker since
Ford in 1956. On the first day of trading, Tesla’s market capitalization stood at $2.2 billion; less than 10 years later,
it stood at $150 billion. Despite significant future growth expectations reflected in Tesla’s stock price appreciation,
the company is still losing a significant amount of money: $900 million in 2015; $675 million in 2016; almost $2
billion in 2017; close to $1 billion in 2018; and over $860 million in 2019. Tesla’s revenues in 2019 were $24.5 bil-
lion, up from $21.5 billion in 2018 and $11.8 billion in 2017. Exhibit 2 provides an overview of Tesla’s key financial
data, 2015–2019.

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Tesla’s Secret Strateg y (Part 2)

In 2016, 10 years after Tesla’s initial “secret strategy,” Elon Musk unveiled the second part of his master plan for
the company (“Master Plan, Part Deux”) to continue the pursuit of its vision “to accelerate the advent of sustain-
able energy.”14 Again, Tesla’s CEO and co-founder Elon Musk detailed a set of stretch goals:

1. Create stunning solar roofs with seamlessly integrated battery storage.

2. Expand the electric vehicle product line to address all major segments.

3. Develop a self-driving capability that is 10 times safer than manual via massive fleet learning.

4. Enable your car to make money for you when you aren’t using it.

In the updated strategy, Step 1 leverages the 2016 acquisition of SolarCity. Tesla, Inc. has morphed from a
manufacturer of all-electric cars into one of the first fully integrated sustainable energy companies, combining
energy generation with energy storage, while providing zero-emission vehicles.

In Step 2, Elon Musk is planning to expand the lineup of Tesla’s electric vehicles to address all major segments,
including compact SUVs, pickup trucks, and heavy-duty semis.

In 2019, Tesla launched the Model Y, a compact luxury SUV that is a smaller and much lower-priced version of
the Model X, starting at $39,000 (and a 230-mile range). The first customer deliveries for the Model Y are planned
for spring 2021. A longer-range (280 miles) and thus a higher-priced version of the Model Y starting at $60,000
will be available in the fall of 2020. Customer demand for the Model Y is expected to be even stronger than that for
the Model 3, the compact luxury sedan.

In late 2019, Elon Musk set out to change the paradigm of what a pickup truck should look like and how it
should perform by unveiling the Cybertruck. Musk emphasized that the pickup truck concept had not changed in
the past 100 years and that he decided to do something completely different. Musk reminded the audience that he
does zero market research whatsoever, but rather he starts with a clean slate by using a first-principles approach to
design products (that is, reducing problems to the fundamental parts that are known to be true, and start building
from there).

Musk designed a truck of the future the way he thought it should look and perform. The result is a futuristic-
looking triangular truck using exoskeleton of ultra-hard stainless steel, which provides more interior room and also
higher passenger safety and great vehicle durability. Customer deliveries are planned for late 2021, with the base
model of the Cybertruck achieving a range of 250 miles per charge, and starting at $40,000. The high-end version
of the Cybertruck equipped with the performance tri-motor and a range of 500 miles per charge starts at $70,000
(Exhibit 7). Demand for the Cybertruck appears to be high because Tesla received over 250,000 preorders just
within a few days of introducing the futuristic vehicle.

Moving into the pickup truck segment of the car industry is a bold move by Tesla because pickup trucks account
for roughly one-third of sales of the incumbent carmakers (GM, Ford, and Fiat Chrysler Automobiles) in the
United States, but generate some two-thirds of profits. Also, unlike other models, the Cybertruck is unlikely to
cannibalize an existing segment in which Tesla has vehicles in its lineup. In contrast, sales of Model S and Model
X vehicles fell sharply after the Model 3 was introduced, and are expected to drop further with the Model Y intro-
duction. No such direct cannibalization is expected with the Cybertruck as the customer profile of truck buyers is
generally quite different from those buying high-performance luxury sedans or SUV crossovers.

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Overall, Tesla has made significant improvements along a number of important performance dimensions in its
vehicle line since customer deliveries for its first mass-produced car, the Model S, began in 2012. Exhibit 8 details
Tesla’s product improvements over time by comparing the 2012 Model S with the 2021 Cybertruck.

In Step 3, Tesla is aiming to further develop the self-driving capabilities of its vehicles. The goal is to make self-
driving vehicles 10 times safer than manual driving, and thus being able to offer fully autonomous vehicles (Exhibit
9).

Fully autonomous driving capabilities are required for Tesla to fulfill Step 4 of the new master plan: Turn your
car into an income-generating asset. Musk’s goal is to offer an Uber-like service made up of Tesla vehicles, but
without any drivers. On average, cars are used less than three hours a day. The idea is that an autonomous-driving
Tesla will be part of a shared vehicle fleet when the owner is not using their car. This will drastically reduce the
total cost of ownership of a Tesla vehicle, and it will also allow pretty much anyone to ride in a Tesla because of
the sharing economy.

Tesla’s Manufact uring

When Tesla began selling its first Roadster model in 2008, it was plagued with both thorny technical problems
and cost overruns. The fledgling startup managed to overcome these early challenges, in part by forming strategic
alliances. Tesla entered alliances with premier partners in their respective category: Daimler in car engineering
(2009; discontinued in 2014); Toyota in lean manufacturing (2010; discontinued in 2016); Panasonic in batteries
(2014; ongoing).

The alliance with Toyota brought other benefits for Tesla besides learning large-scale, high-quality manufactur-
ing from the pioneer of lean manufacturing in the car industry. It enabled Tesla to buy the former New United
Motor Manufacturing Inc. (NUMMI) factory in Fremont, California in 2010. The NUMMI factory was created as
a joint venture between Toyota and GM in 1984. Toyota sold the factory to Tesla in the aftermath of GM’s Chapter
11 bankruptcy in 2009.

The NUMMI plant was the only remaining large-scale car manufacturing plant in California and is a mere 25
miles from Tesla’s Palo Alto headquarters. Tesla manufactures both the Model S and the Model X in its Fremont,
California factory. The Model S and Model X share the same vehicle platform and about 30 percent in parts.

Unlike more traditional car manufacturers that outsource components and tend to rely heavily on third-party
suppliers, Tesla is largely a vertically integrated company. Tesla put a value chain together that relies on integration
from upstream research and development, as well as battery and electric vehicle manufacturing to downstream bat-
tery software; hardware chip and software design for full self-driving (FSD) capability and autopilot; and provides
a dense network of supercharging stations (complimentary for all Model S and Model X owners), as well as sales
and service—all done in-house. Tesla’s proprietary supercharging station network allows seamless coast-to-coast
travel with any Tesla vehicle.

Gigafactor y 1 (Giga Nevada)

Tesla also made serval multi-billion-dollar commitments when building super large manufacturing facilities,
dubbed “gigafactories.” Elon Musk describes a gigafactory as the machine that builds the machine. Tesla Gigafactory
1 (or, Giga Nevada) is a 1,000-acre facility near Reno, Nevada, with an option to expand by an additional 2,000
acres. The new factory required a $5 billion investment and produces an estimated 50 GWh/year of battery packs

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with a full capacity of 150 GWh/year. Giga Nevada’s current output can produce 500,000 battery packs per year,
with an estimated 1.5 million battery packs upon final completion, in late 2020.

Lithium-ion batteries are the most critical and the most expensive component for electric …