Tesla in Automotive industry Strategy project essay

The automotive industry started with the production of what is widely considered to be the first ever automobile, the Benz Patent- Motorman in 1886. Although the first carcass originally manufactured in Germany, in the many decades to come, the United States led the world in total automobile production until the start of the 21st century, when China took the top position. Today, China produces nearly 20 million units per year, almost double the amount of the united States. It is one of the world’s most important sectors when measured by revenue and it is a business that is still rowing significantly.

Last year for example, over 87 million automobiles were produced worldwide, a 3. 6% increase compared to the year before and a 43. 82% increase compared to 20032. Needless to say, the automotive industry is big business and it is very probable there are business opportunities that are yet to be exploited. Tests Motors is an American car manufacturer that tried to exploit such a business opportunity. It’s an American company that designs and manufactures electric vehicles and electric car components.

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Founded in 2003, Teasel’s goal was to lessen the oral’s dependence on petroleum-based transportation and drive down the cost of electric vehicles. Moreover, Teasel’s aim is to prove that electric vehicles can be awesome as we. This might not sound particularly unique, but Tests Motors does have a very distinct strategy in the sense that it wants to enter the automotive market by first focusing on high-end luxury cars and sports cars. Later, when Teasel’s products and consumers acceptance have matured, they would move into the market for the middle-class consumer, which is larger but also significantly more competitive.

The idea is to establish a throng brand name at first, which will aid the company in a later stage when the decision is made to start producing lower-priced automobiles. Teasel’s first model, the Roadster, had a base price of approximately $100. 0006. Their second car, Model S, is priced at $63,750 including a $7. 500 tax credit. The company now has plans to launch a $30,000 small SUB the Tests Model X 7. Eventually, Tests wants to become a mass producer of electric vehicles and service both upper- and middle-class customer’s This discussion aims to analyze Teasel’s strategy.

It is clear that Tests has a very differentiated strategy ND we will want to determine whether or not Tests is likely to succeed in achieving its goals and become a successful enterprise. Firstly, we will take closer look at the ‘environmental’ automotive industry using Porters theory. Secondly, we need to closely look at Teasel’s strategy. How will Tests try to win a respectable share of the market? As mentioned before, Tests is a very young company and it will inevitably face fierce competition from incumbent firms.

A clear plan to establish a foothold in such a market will be essential for the firm’s survival. The next step is to see if Tests identified all relevant factors ND industry forces, and if it has defined a strategy that takes all of these elements into account. It will surely need to attain a unique strategy if it wants to position itself In a key position in the market. What is it exactly that differentiates Tests from other car manufacturers and in what way could this be beneficial for the firm? Does their strategy have a high chance of success?

How can Tests create a network of electric chargers? Before evaluating Teasel’s strategy, we must first clearly take a closer kick at the company Tests Motors itself and define the market in which the company is active. Even though they are currently operating in a smaller niche market (mid to high-end luxury cars), the plan is to eventually address the middle-class consumer and enter the ‘standard’ automobile market. This will inevitably complicate our discussion but it is essential for determining the chance of success.

The paper includes a discussion on the high entry barriers that are typically associated in the automotive industry and the possible presence of strategic entry barriers raised by incumbent firms to reduce the likelihood of new entrants. We will also mention any other strategies adopted by firms in the automotive industry who want to improve their competitive position. Furthermore, the extent to which the industry is concentrated will be discussed, as well as the possible presence of strategic complements and substitutes. Moreover, Tests will also need to take the non-market environment into consideration.

Typical for the automotive sector is that it is an industry with very strict safety regulations. Tests of course will also have to face the challenge of producing vehicles that respect these requirements. On top of that, the relatively recent discovery of global warming, partially caused by car emission (CA), has led to he implementation of a series of emission standards that aim to reduce the greenhouse gases emitted by petroleum-powered vehicles. This may not seem relevant for Tests Motors at first since its goal is to produce electric vehicles.

These regulations are however accompanied with a credit system, which means that car manufacturers that do not meet the standard are penalized and have to buy credits from other manufacturers that have a surplus of credits. Since Tests Motors only produces emissions-free vehicles, it has a major surplus of credits which it can sell to other car manufacturers. General Motors for example has to buy additional credits from Tests in order to respect the regulation. This implies large transfers of wealth across car manufacturers. As a result, companies selling cars with a (too) high emission must raise prices to pay for the credits.

On the other hand, the beneficiaries of these wealth transfers such as Tests can now use the extra revenue to lower prices and take on a more competitive position in the market. All of this will of course be discussed more thoroughly in our discussion below. The paper concludes with a summary of the discussion and our prognosis guarding the future success of Tests Motors in the automotive industry. 2. Market definition This paper only looks at models available in the US because it’s the largest electric car market, the EX. Is the second largest market but is much more complex because ELI-countries have different legislation for electric cars.

Some countries have large subsidies for electric cars and thus large market shares such as Norway, on the other hand some countries have almost no market share. The Model S is the only available model at the moment targeting the middle to high-end luxury car market. This model costs between 3. 750$(base model, 7500$ tax credit) and 125. 220 $(full option, 7500$ tax credit). 10 Because the model S is all electric, we can compare the car to slighter cheaper models because of lower long term ownership cost thanks to lower cost for electricity compared to fuel.

The base model is a full-size 5 adult seat sedan powered by a fully electric 60 k-h motor achieving phi. Top speed is relatively low at around km/h but acceleration is very good at 5. 9 seconds to 100 km/h, this is typical for an electric engine. More expensive models offer better range and performance and a warranty with unlimited limiters on the battery for 8 years compared to 200. Km for 8 years on the base model. We will consider the mid to high-end luxury market containing one electric the Tests, a couple of hybrids and a lot of traditional cars. Mid-end starts at prices of approximately 50. 00 $ with cars such as the BMW 5-series, Audio AY and Mercedes E-class. El High end stops at prices above 130. 000$. For the following analyses we will sometimes look at broader markets containing cheaper alternatives because even though these cars aren’t substitutes they are still relevant. Research show that tests owners ere most likely to previously own a Toyota Pries hybrid or secondly luxury BMW and Mercedes. 12 3. Industry attractiveness and profitability In this section the overall attractiveness of the ‘environmental’ automotive industry is assessed using Porter’s influential five forces model.

The term environmental indicates those vehicles that do not solely rely on the combustion of fossil fuels to power their engine. Examples are electric vehicles, hybrid vehicles or plug-in hybrid electric vehicles (Peeves). Both the pure electric automotive industry as well as the overarching environmental automotive industry is presented, as these cannot always be seen separately. In his model, Michael Porter identifies five key competitive forces that determine the structure and profitability of a certain industry.

The five forces are the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes, the threat of entry and the rivalry among existing competitors. Porters model enables managers, in an easy and straightforward way, to understand their industry environment and to shape their firm’s strategy accordingly. As a rule of thumb, the stronger the five ores, the lower the industry profit potential and hence the industry attractiveness to competitors. The most influential forces that have shaped and continue to shape the environmental automotive industry are discussed in the following paragraphs.

A first restraint on the overall profitability oaf firm is the bargaining power of its suppliers. For the environmental automotive industry the bargaining power varies among the suppliers of different components. An important component in the construction of hybrid and electric vehicles is the battery. The bargaining power of the battery impasses is low as there are a lot of manufacturers present on the market. Tests Motors, for instance, buys Lie-ion cells from different manufacturers. Consequently, in the case any problems occur with a particular battery supplier, Tests can easily switch or threaten to switch to other suppliers at low costs.

Among others, Tests works together with Daimler GAG and Panasonic to develop battery packs and chargers (Boyce, Change, Clovers, Schroeder, & Startup, 2010). Another important component of any vehicle is the chassis. For the construction of the chassis specialized engineering skills are required. These skills can often be obtained through strategic partnerships with other car manufacturing companies. In the case of such strategic interdependence the bargaining power of the suppliers is higher than in the take-it-or-leave-it’ battery case.

In the past Tests had an exclusive partnership with Lotus for the physical construction of the Roadster 13. As of recently Tests and Toyota Motor Corporation also agreed to cooperate on the development of electric vehicles, parts, the production system and engineering support. In conclusion, however, the overall bargaining power of suppliers in the automotive industry is low. The supplier firms must contend with substitute products for sale to the industry. Tests has more than 150 suppliers around the world, which provide over 2000 parts to Tests.

For the production of the Model S, Tests uses a highly integrated manufacturing approach, even negotiating with suppliers to manufacture products on site to use the excess capacity. In this way, the integrated approach enables Tests to alleviate its dependence on supplier performance (Boyce, Change, Clovers, Schroeder, & Startup, 2010). A second force that determines the profitability in an industry s the bargaining power of buyers. The bargaining power of buyers concerns the pressure buyers can put on the margins of producers by demanding a lower price or a higher product quality.

In the environmental automotive industry the bargaining power of buyers is rather low. For Tests in particular this is even more so. For starters, Tests does not sell products in bulk. This means that for the consumers that purchase the finished products no real scale effects are present. Moreover, Tests has a quite unique position on the market. Tests is the only manufacturer on the US market that produces high- ND, full electric cars that can drive autonomously for over 400 km. By employing a highly skilled, technocratic labor force and management team, Tests has branded itself as a cutting-edge, innovative firm.

They manufacture high quality electric vehicles that are very performing while being environmental-friendly and fun at the same time. The buyers of the Model S also have the possibility to entirely customize the vehicle to their taste. This creates a sense of exclusivity among the clients. Besides the BBC applications Tests has also established a strong position in the BOB environment 15. Tests or example licenses its patented processes and technologies to other companies. Especially in the area of battery technology and the construction of ‘supercharging’ stations Tests has a lot of expertise 6.

The proper licensing of these assets will benefit the entire environmental automotive industry as a whole. An especially important force in the electric automotive industry is the threat of substitutes from outside the given industry. Hybrid vehicles and more specifically PHEW provide a similar functionality as the full electric vehicles. Those manufacturers within these strongly related industries, which reduce vehicles and services with an attractive price and performance, pose a serious threat to the established electric car manufacturers. For the Model S the most important substitutes are those mid to high-end hybrids.

These vehicles offer low emissions and a good fuel economy at a similar price as the Model S. The most successful alternatives within the US automotive industry are discussed in the next chapter. In the specific price range of the Model S the threat of substitutes is still limited as Tests is gradually positioning itself as a high-value, exclusive and environmental brand with a growing number of enthusiasts 7. Nonetheless, a possible future expansion into the mid-end and low-end market segment will significantly increase the threat of substitutes.

There are, however, some complementing factors that might reduce the threat of substitutes both for Tests as well as the electric automotive industry in a whole. The scope for future development in battery technology, the presence of several tax and parking incentives for electric vehicles and the expected rise in oil prices in comparison to electricity prices might spur the attractiveness Of the electric automotive industry. These arrest dynamics both play on the level of customers as well as producers.

One possible negative factor in the realization of potential sales is the low availability of charging and home charging facilities. However, Tests Motors is addressing this issue by investing heavily in strategically located charging facilities and by expanding the power and endurance of the battery pack 18. Tests’ s battery pack technology is critical to the company s positioning and competitive differentiation. The low cost of the battery pack allows Tests to not only design cars with battery ranges greater than the competition but also place equal emphasis on design, performance, and energy efficiency.

On the short term, the threat of new entrants in the electric US market is rather limited because of several entry barriers. The industry is characterized by high capital requirements and high sunk costs. Moreover, advanced, often patented, technologies and processes as well as a highly skilled workforce are required to successfully manufacture an electric car. The success of a firm in the industry is also largely determined by its brand image and the realization of economies of scale. Therefore, it is not easy for a potential new entrant o establish a foothold.

This is even enhanced by the fact that the incumbent firms have a large and flexible production capacity that can be used as a retaliation device in case of entry (Boyce, Change Clovers, Schroeder, & Startup, 2010). However, established vehicle manufacturers with deep pockets that have currently missed the ‘environmental train’ or disruptive innovators like Tests Motors might overcome these entry barriers in the long run. The current competition in the US environmental automotive industry is moderate.

Only a few major brands are competing. Because of the high entry aeries and the threat of substitutes not a lot of brands risk burning cash in an innovative and insecure business. However, as the sector matures and more people consider switching to an electric car this will change. In a recent report of the Electric Vehicles Initiative (EVE) a global goal of 20 million electric passenger cars, including plug-in hybrid vehicles, battery electric vehicles (Bees) and fuel cell electric vehicles, in stock by 2020 is set forward.

This is still a long way to go as the total worldwide electric vehicle stock at the end of 2012 only amounted to a large 180. 000 units. In 201 2, 38. 585 Peeves and 14. 592 Bees were sold in the US. The cumulative stock in the US in 201 2 was 71 . 174 units (Clean Energy Ministerial, Electric Vehicles Initiative, International Energy Agency, 2013). In 2013 roughly 96. 000 electric vehicles were sold in the US environmental automotive industry(including hybrids)20. The three top selling brands are the Chevrolet Volt, the Ionians Leaf and the Tests Model S.

It is clear that the popularity of electric vehicles has significantly increased over the last few years. It is expected that this trend will only continue in the future s the number of models on the market increases. The share of electric cars is still only about 3,5% of the total number of cars that are sold annually in the US marketer. Hence, the growth potential of the environmental automotive industry is huge, this both On a domestic as well as an international level. In conclusion of this section an assessment is made of the overall profitability of the environmental automotive industry.

As previously argued, the bargaining power of suppliers and buyers is rather limited in the industry. Therefore, the vehicle manufacturers can attract more profits than heir up- and downstream partners. The industry is also characterized by several entry barriers, especially on the short term. The effective prevention of possible entrants reduces the pressure on prices and allows incumbent firms to attract a significant share of the profits. The threat of substitutes is one of the most important restriction on the profitability within the industry.

Because of the similarity in functions between electric brands and hybrid brands it is important for the incumbent firms to create a positive consumer image towards their products. The growth potential of Eves is the most important driver of future profitability of the industry. Until now incumbent firms have undertaken a lot of R&D initiatives in the area of battery and charging technologies. The sales numbers in the US market show that these investments are finally starting to pay-off.

In the long run, with a growing global popularity of Eves, it is to be expected that also other companies will consider entering the environmental automotive industry. 4. Tests in the market Tests differentiates itself by producing environmental responsible cars that have all the benefits of a luxury vehicle. By equally emphasizing on speed, handling, design, comfort, and zero-emissions, Tests creates a unique balance between performance, efficiency and aesthetics. Through the offering Of this first fully electric luxury sedan car, Tests attained a first mover advantage.

Together with its ‘Silicon Valley’ culture, an approach that is innovative, competitive, and effective, Tests achieved a solid brand name in the automotive market. (Anagram, 2012) Teasel’s battery technology is also critical to the company’s competitive advantage. With its cutting-edge battery technology, combined with essential genealogy research, Tests is able to design and produce electric cars with a far greater range than its competitors. Its lithium-ion based battery, for instance, is 250 kilograms lighter compared and has a range of up to 500 kilometers. Born ? Everglades met watt ?

But even with a supercharger a full charge is approximately one hour. Moreover the company produces many of its key parts in-house, thus making it harder for competitors to replicate. With the expansion of its own retail shops and the establishment of a network of free recharging points for its customers, Tests keeps challenging he traditional car companies (The Economist, 2013). Teasel’s main strategy can be seen as a reflection of the innovative marketing approach Apple used for its ingenious technology. It holds that any new technology is often very expensive and wealthy customers are regularly the first to accept it.

Consequently, Tests produced its first vehicle, the Roadster, for the premium sports car consumer segment. Nowadays, with the production of the Model S Sedan, the middle to upper- middle class consumers are being targeted. Finally, by 2015 Tests plans to produce and arrest an electric car available at a mass-market consumer price range (Tests Motors, 2014). Although this ‘Apple Computer’s business model’ is considered to be rather exceptional in the automobile industry it helped the company to position itself as groundbreaking, self-determining, and cool.

Tests BMW Daimler GAG General Motors Toyota Revenue 2 billion 60 billion 117 billion 155 billion 22 trillion Net Income -74 oho billion 5,35 billion 962 billion As Sees Growth 387% 3,22 % 2,08 % 18. 73% The luxury car market is highly competitive, with several incumbent companies with loyal customers. Teasel’s main competitors in the luxury car segment are BMW, General Motors, Toyota and Mercedes. While the number of any competitive electric car is still low, an increase can be expected. General Motors Chevrolet Volt is one of the main competing vehicles in the market.

It covers a wide target market and comes at a notable lower price than Teasel’s Model S. Toyota remains the global leader when it comes to selling hybrids. Although Toyota has 4 electric cars (the Pries, the RAVE EVE, the FICHE fuel cell car, and the Socio IQ-EVE), it strategically collaborates with Tests to improve the electric car development. This alliance has been one of the main factors of Teasel’s growth as Tests consumers can get customer service in Toyota sites (Toyota Motor Corporation, 2014). The chart compares Teasel’s main competitors on the basis of revenue, net income and sales growth.

As we can see, its sales growth is overwhelming. Given that is a rather new company, it indicates its rapid expansion on the electric car market. However, Teasel’s net income remains negative. Nonetheless, the company’s share is currently being traded at 20 times its earning, and as the company continues to grow these numbers are expected to rise. According to an article by Wall Street, 43 new hybrid, electric, and fuel-cell vehicles will be produced in the US market by 2015. Moreover, the market share of alternative fuel cars will increase from in 2012 to almost 5% in 2014 (wall street, 2013).

New electric vehicle entrants and existing plug-in hybrids manufactures will continue to compete with Tests in the near future. While the traditional car manufactures are firmly entrenched, Teasel’s competitive advantages could develop to the securing of a significant market share in the electric car market. 5. Sustainability of the competitive advantage This chapter analyses the degree of sustainability of Teasel’s competitive advantage. First the relevant trends and developments in the automotive industry are briefly reviewed.

Furthermore, the predominant isolating mechanisms in force given the market position Of Tests are discussed. We argue Tests is a textbook example of a disruptive technology. To conclude, strategy recommendations hereupon are formulated. The primordial focus of our analysis shifts in this chapter from the luxury car market to the overarching automotive industry. The rational hereof is clear-cut. On the one and, the trend analysis for the automotive industry applies to and sufficiently covers the luxury car segment. On the other hand, Tests continuously voices the strategy to level down through the segments.

Furthermore, the majority of car manufacturers produce for multiple segments of the industry. The sustainability of Teasel’s competitive advantage thus strongly depends on the industry rather than the Model S market segment. 1. 1 Trends in the automotive industry The automotive industry is, may be argued, rather conservative. The market structure is little dynamic, without change in market leading firms for long. Furthermore, the industry evolved the past century merely through optimizing the traditional ‘automobile’, with limited major breakthroughs.

To illustrate, though fuel efficiency and exhaust of the combustion engine has greatly improved, working principles remain unchanged. The emergence of (electrical) alternatives that are sold commercially is only a recent phenomenon. We review three developments that will impact the automotive industry. First, the society-wide surge of environmentalism a fortiori impacts the automotive industry. A thickening body of government actions forces car manufacturers to produce cleaner cars. This both directly, through legislation (e. G.

CA output limits for new cars), or indirectly by altering consumer behavior through excises or tax incentives. Furthermore, consumers are increasingly environmentally conscious. Bottom-line, car sales undeniably grow more echo-friendly. Furthermore, the panoply of driver assisting technology that brakes automatically for obstacles or parks the car will be further developed. Self-driving cars may be short-term everyday reality, with Google pulling the cart. Lastly, Gene Y is argued to focus on services rather than ownership. The emergence and success of car sharing by

Zipper or Cambial illustrates this shift in mentality for the automotive industry. 1. 2 The isolating mechanisms The electric car is strongly based on the century old inventions of Serbian engineer Nikolas Tests. We nevertheless argue that the electric car is a text book disruptive technology. This technology, spearheaded by Tests, will herewith potentially overturn the automotive industry, challenging the incumbents. The early-mover advantage in this creative destruction may enable Tests to sustain its competitive advantage. The disruptive technology concept is extensively reviewed in the of literature.