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Dr. Marc Sansó

Tesla: the challenge of disruption

Abstract
Tesla, the world's leading manufacturer of electric cars, is going through one of its most
difficult moments in 2018. The company's competitive model is based on a three-pillar
ecosystem: energy, home, mobility that faces complicated operational problems. The case
examines the company's evolution and poses its most significant challenges in relation to
the desire to disrupt an industry as competitive as the automotive industry.
Keywords: automotive, electric car, competitive strategy, energy, Tesla

Tesla: the most difficult moment

On August 6, 2018, Elon Musk, co-founder and CEO of Tesla, one of the world's leading
manufacturers of electric cars, surprised everyone with an alarming tweet in which he
hinted at his plans to take the company off the stock exchange and return it to its private
status, frustrated by the constant criticism and pressure he was receiving from analysts
and public opinion. The American stock exchange authority, alarmed, immediately
suspended the company's stock price while criticism increased, which the market
interpreted as a new twist in the erratic strategy of American technolog y. In spite of the
subsequent rectification by Elon Musk himself, the damage was already done: the
company's stock price fell by 16% in the following fortnight
The episode was nothing more than a new installment of the problems that Tesla had been
accumulating over the past few years. From the continuous operational problems of the
Model 3, launched in late 2017 as the car that was supposed to bring the electric option
to a level of massive adoption by the global market and that was already accumulating
between 9 and 12 months of delays in delivery, to the growth rate of the company's losses,
which reached almost 2 billion dollars in 2017 (almost 600% more than in 2014), through
the continuous unfulfilled promises to investors and customers, Tesla was going through
what Musk himself had defined as an "operational hell".

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Graph 1Tesla annual net losses (2008-2017)

$-
Millones

$-500

$-1.000

$-1.500

$-2.000

$-2.500
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Having no trouble admitting that they had made numerous mistakes, Musk, however, also
boasted of what he had achieved in recent years. With an idea centered on a deep
disruption of one of the most difficult industries in which to compete, the automotive
industry, deeply conservative and traditionally shielded from the entry of new
competitors, Tesla had managed a much more technological model based on electric
energy. Despite all its problems, Tesla was in 2018 one of the largest sellers of electric
vehicles worldwide, having forced all the actors in competition to invest in the
development of new generations of electric batteries, autonomous driving systems, and
the general rethinking of the model of generation and consumption of energy. Thanks to
companies such as Tesla and Uber, among others, the mobility business was immersed in
the initial stages of the greatest disruption of the last 50 years. By 2017, in fact, Tesla had
become for a few months the American car manufacturer with the largest market
capitalization, surpassing Ford and General Motors.
With a product portfolio that included four car models (Roadster, Model S, Model X and
Model 3), products for home electric consumption (Powerwall and Solar Roof) and solar
energy transformation equipment for industries and businesses (PowerPack), as well as a
strong emphasis on downstream services and the world's largest technology development
and manufacturing center for electric batteries (Gigafactory 1), Tesla its initial models
(Roadster, S and X), destined for the luxury segment. The jump to mass production that
the company had sought with the Model 3, launched in late 2017, had been much more
controversial.

2
With a target production rate set at 5,000 units per week by the end of 2017, but with an
actual rate barely exceeding 4,500 in the third quarter of 2018, Tesla had shown itself
unable to meet the volume of demand for Model 3. By April 2016, the company had
received more than 325,000 pre-reservations (users had to pay $1,000 in advance), 25%
of which had to be reimbursed in June 2018. Continued delays in delivery, as well as
growing distrust of the company's future, were the main cause.
The traditional competitors in the automotive industry, meanwhile, were gaining precious
time to develop their new electric vehicles (initially light years away from Tesla's) and
adapt to the new competitive paradigm. Chevrolet, with the launch of the Bolt, Nissan,
with its Leaf model or even Renault, with the Zoe, were competing more and more
strongly in the mid-market segment, which in China was dominated by global
manufacturers. The struggle to become the benchmark in the market for mid-range
electric cars, affordable price and competitive performance was intensifying at times.

Figure 2Production of Tesla Model 3

5.000 4.588 35.000

4.500
30.000
4.000
3.500 25.000
3.018
3.000 20.000
2.500
1.987 15.000
2.000
1.500 10.000
1.000 351
5.000
500
- -
Q4 2017 Q1 2018 Q2 2018 Q3 2018

Entregas Modelo 3
Tasa de producción semanal (última semana del trimestre)

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 50.000

0
100.000
150.000
200.000
250.000

Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Number of quarterly deliveries

Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020
Q1 2021
Q2 2021

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Elon Musk's Plan
Tesla, founded in 2003 by Martin Eberhard and Marc Tarpenning American engineers In 2004,
Elon Musk entered the Series A funding round as a major shareholder, contributing $7.5 million
from its personal funds. Musk, a serial entrepreneur, had founded the online bank X.com in
1999, in the seed of what would later become PayPal. When it was sold to eBay for $2 billion
in 2002, Musk founded SpaceX, a manufacturer of aerospace equipment and infrastructure.
After doing the same with Tesla, Musk created several additional companies such as OpenAI
(non-profit artificial intelligence), Solar City (solar energy services) and The Boring Company
(infrastructures). He also had time to conceptualize and start developing the ultra-fast
propulsion system for goods and passengers based on magnetic levitation (Hyperloop).
Elon Musk's plan for Tesla was reflected in a blog entry on August 2, 2006. In it it was stated
how the company's strategic development was going through three steps:
1. Create a low-volume, high-priced entry-level model of electric vehicle for a high-end
segment that appreciates the new value proposition
2. Use the profits derived to create a new model, with a lower price and average sales
volume
3. Use the profits derived to create a reduced price model and therefore high volume of
sales.
The vehicle described in the first step was essentially financed with money from the sale of
PayPal, as Musk himself later admitted: in 2008, Tesla launched the Roadster model. Without
access to economies of scale, the price of the Roadster was necessarily stratospheric. The
marketing period was barely 3 years, for a model that was clearly in the frame of a first pilot.
Between rounds of private ($187 million) and public (nearly $500 million in U.S. government
loans, and with a first success to his credit, Tesla was ready to take the next step.
Table 1Vehicles marketed by Tesla

Model Year of launch Base Price

Roadster 2008 109.000 USD
Model S 2012 50.000 USD
Model X 2015 85.000 USD
Model 3 2017 35,000 USD
New Roadster to be determined 250,000 USD

Launch of the Model S and X

The company's IPO in June 2010, followed by successive rounds of government subsidy-based
financing and the launch of corporate bonds, allowed Tesla to make a quantitative leap in
its scope and strategic objectives. In 2012 it launched the Model S, a revolutionary
electric sedan with a range that, even today, has not been surpassed (539 km for the 100D
version). The new Tesla model was an immediate success in its segment, becoming in 2013 the
first electric vehicle to lead the ranking of new car sales in a country. In 2015 and 2016 it was
the world's best-selling electric car. In between, it accumulated awards and recognition from
consumers, competitors and, in general, the entire automotive industry. Together with model

5
X, launched in 2012 as a crossover version of model S, and which also achieved considerable
sales success, they represented the company's global consolidation as a company to be reckoned
with in the future of mobility. Tesla had become the new technology in fashion and the real
terror of the conventional automotive industry

The future of energy according to Tesla

Musk's future plans, however, were not just about vehicle manufacturing, but encompassed a
much broader concept that included electric power generation and storage. Thus, with the
purchase of Solar City, the largest solar roofing installer in the United States in whose creation
Musk himself had played a leading role, in August 2016, Tesla took a decisive step in the
consolidation of a three-legged model: home, energy and automotive. The launch in 2015 of
the PowerWall rechargeable batteries (and its counterpart in the business segment, the
PowerPack) had already been a milestone in that direction. They were designed to store
electrical energy from solar energy (or from the conventional electrical grid itself) for the home,
being able to deliver up to 10Kwh in their second iteration, and sold for a price ranging from
3,000 to 5,500 USD. With the combination of solar roofs and energy accumulators, Tesla closed
the circle of generation-storage-energy consumption and proposed a radically different
approach to the mobility industry.
The purchase of SolarCity raised the first critics for the company. Some voices in the
automotive industry claimed that Tesla was not a manufacturer of cars, but of electric batteries
"some of which have wheels attached to them.

Figure 3Tesla Energy and Storage Division Revenues (2015-2017)

$1.200,0 $1.116,3
Millions

$1.000,0

$800,0

$600,0

$400,0

$181,4
$200,0

$14,5
$-
2015 2016 2017

The purchase of Solar City and the launch of PowerWall were not isolated moves within Tesla's
strategy. The most important part was missing: how to reduce the cost of the Kwh of electric
energy, a real bottleneck in the massive growth of the new concept of mobility. Thus, after a
couple of years of announcements, and with the financial participation of Panasonic, Tesla
partially opened in July 2016 the research center and lithium-ion battery factory known as
Gigafactory (later, Gigafactory-1) in Nevada. During its inauguration, Tesla revealed that its
complete development would require a total investment of more than 5 billion dollars and more

6
than four years of work, and that when completed it would be capable of producing 150 GWh
annually. Tesla's goal was to reduce the cost of electricity production by 30%, to below the
$100 per KWh mark. According to Musk, this was the threshold value below which the cost
advantage of internal combustion engines would disappear, even without subsidies.
In late 2017 Tesla opened a second factory (Gigafactory-2) in Buffalo, USA, and subsequently
announced plans to do the same in Europe in the near future.

Figure 4Cost of lithium-ion electric batteries (2010-2021)

1.200

1.000 $1.000,00

800 $800,00
USD por kWh

$642,00
600 $599,00
$540,00

400 $156,00
$350,00
$273,00 $137,00
200 $227,00
$175,00
$131,00
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

The Model 3

As he had announced ten years earlier, Musk's plan involved launching a vehicle that, leveraged
on successive technological improvements and a clear reduction in costs, would allow everyone
to have access to a truly competitive electric vehicle. The first unit of the Model 3 left Tesla's
facilities in July 2017, accumulating only 29,000 produced in June 2018. In between, the
company announced in June 2017 that it had 455,000 customer reservations pending delivery.
The five-seater model 3 was launched with a base price of 35,000 USD and an average range
of 350Km, along with pioneering technology that included advanced autopilot software and
advanced data control.
Tesla's production plan was to reach the figure of 500,000 vehicles produced per year
(combining models S, X and 3) in 2020, but later Musk announced the intention to bring it
forward to 2018 to meet the demand for model 3. As many analysts had predicted, this was the
beginning of the company's "productive hell". Would Tesla get out of the crossroads it was at?
Would Elon Musk's plan be completed?

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Tesla: 2018-onwards

To support its expansion and technological development projects, Tesla conducted several
stock offerings and debt issuances. Its robust financial performance during these years,
including multiple quarters of profit reports, solidified its position in the competitive global
financial market, which had a significant impact on its ability to finance its ambitious plans.

On the other hand, Tesla pursued a global expansion strategy by establishing factories in
strategic locations such as China and Germany. These "Gigafactories" not only enabled the
company to increase production to meet the growing international demand but also helped
reduce production costs and strengthen the company's global presence.

As Tesla continued to focus on the Model 3, it also diversified its product line. It introduced the
Model Y, a compact SUV based on the Model 3 platform, expanding its product offerings and
reaching a new market segment. Additionally, it announced exciting plans for the Cybertruck,
an electric truck with a futuristic design, promising to transform the truck market.

From an economic and financial perspective, one of the most notable milestones in Tesla's
history occurred in December 2020 when the company was included in the prestigious S&P
500 index. This achievement not only underscored Tesla's significance in the financial markets
but also reflected its impact on the global economy.

Tesla demonstrated its capacity to scale production to unprecedented levels during this period.
The company established records both in production and delivery of electric vehicles in
multiple quarters, further solidifying its position as the undisputed leader in the electric vehicle
market. Throughout this period, Tesla experienced a remarkable increase in its market
capitalization, becoming one of the most valuable companies in the world. This achievement
not only marked Tesla's phenomenal growth but also emphasized its influence in the global
automotive and technology industry.

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Annex

Graph 5Global Electric Vehicle Sales and Market Share (2010-2022)

EV Market size evolution

12.000.000 14,00%

10.000.000 12,00%
10,00%
8.000.000
8,00%
6.000.000
6,00%
4.000.000
4,00%
2.000.000 2,00%
- 0,00%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Sales (Vehicles) Market share EV

Table 2Top-10 electric vehicles in 2017, by units sold

Ranking Manufacturer Model Units Sold

1 BAIC EC 78.079
2 Tesla Model S 54.715
3 Toyota Prius Prime/PHV 50.830
4 Nissan Leaf 47.195
5 Tesla Model X 46.535
6 Zhi Dou D2 42.342
7 Renault Zoe 31.932
8 BMW i3 31.410
9 BYD They are PHEV 30.920
10 Chevrolet Bolt 27.892

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Chart 6Tesla share price (NASDAQ) (2010/2018)

$400,00

$350,00

$300,00

$250,00

$200,00

$150,00

$100,00

$50,00

$-

feb.-17
feb.-12

ago.-14
may.-13

may.-18
jun.-10
nov.-10

sep.-11

mar.-14

jun.-15
nov.-15

sep.-16
ene.-15
dic.-12

dic.-17
abr.-11

abr.-16
jul.-12

oct.-13

Graph 7Tesla segment benefits in 2017 jul.-17

8,5%

9,4%

9,5%

72,6%

Automotive (no leasing) Power generation and storage

Automotive Leasing Services and others

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Table 3Main economic variables of TESLA Motors (2013-2022)

TESLA 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Tesla/Toyota (Sales) 0,9% 1,2% 1,5% 2,5% 4,3% 7,3% 8,1% 10,5% 21,6% 26,0%
YoY Sales 58,8% 26,5% 73,0% 68,0% 82,5% 14,5% 28,3% 86,5% 38,4%
Gross Margin 22,7% 27,6% 22,8% 22,8% 18,9% 18,8% 16,6% 21,0% 23,1% 25,6%
Operating Margin -3,0% -5,8% -17,7% -9,5% -13,9% -1,8% -0,3% 5,2% 11,0% 17,0%
R+D 11,5% 14,5% 17,7% 11,9% 11,7% 6,8% 5,5% 5,8% 4,4% 3,8%

Table 1Main economic variables of Toyota Corporation (2013-2022)

TOYOTA 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
YoY Sales 16,4% 6,0% 4,3% -2,8% 6,5% 2,9% -1,0% -9,1% 15,3%
Gross Margin 18,4% 19,0% 20,4% 20,4% 17,6% 18,7% 18,0% -0,9% 17,8% 19,0%
Operating Margin 6,0% 8,9% 10,1% 10,0% 7,2% 8,2% 8,2% -1,2% 8,1% 9,5%
R+D 3,7% 3,5% 3,7% 3,7% 3,8% 3,6% 3,5% 3,7% 4,1% 4,5%

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Graph 8Evolution of Tesla and Toyota Corp. sales increase (2014-2017)

80,0%
70,0%
60,0%
50,0%
40,0%
30,0%
20,0%
10,0%
0,0%
2014 2015 2016 2017
-10,0%
-20,0%

Tesla Motors Toyota Corporation

Table 4Loading stations by type in the USA (data from January 2018)

Type Power stations Loading points

CHAdeMO 1.651 2.006

SAE Combo 1.186 1.438
Tesla 390 2.792

CHAdeMO: used by Nissan, Mitsubishi, Toyota, Honda, Kia, Mazda, and Tesla (with an adapter). SAE Combo:
BMW, General Motors, VolksWagen and others

References
• Tesla Financial Reports 2010-2022
• Toyota Corporation Financial Reports 2010-2022
• McKinsey; Bloomberg New Energy Finance; IHS Report 2018

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