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Dr CR Rajan
Entry
footsteps?
• https://www.youtube.com/watch?v=9E3Si8FWb1
highway speeds.
highway speeds.
• http://www.youtube.com/watch?v=dGoobeIU4b
Q
Tesla Videos
• https://www.tesla.com/models
• https://www.youtube.com/watch?v=5XdiGMI
UxeY
Tesla’s position
– Audi or flash/niche?
Tesla’s Entry puzzle
WWII.
Marketing/Advertising, Design
of high-end entry?
Tesla?
Barriers
$30bln.
• Service network
• there are also some barriers specific to entering with an electric car
– As a point of reference for these barriers to entry, Tesla had about $1bln in
funding by the time of the Model S launch (some $300 million in start-up
funding, $250 million in equity funding since its IPO, and a $450 million
government loan).
incumbents
– All these barriers to entry are indeed stocks of resources and capabilities,
with some multiplier effect from scale and from the fact that they need to do
• Disruptor at high end - It gives them a halo effect, so they get their marketing for
free.
• How important is this? Even with their massive scale, Ford and GM spend about
• This approach of entering on the high end is a considerable departure from the
approach of other manufacturers, such as Toyota and Nissan. These firms entered
• Apart from this halo effect, is entering on the high end a good or a bad idea? High
end entry has some important advantages for Tesla. First, sales at the high end are
• Second, margins are (likely) higher, giving Tesla more room to breathe with a cost
disadvantage.
• High end customers are less price sensitive, so competing on price has limited
benefits
Tesla entry strategy
• Dealership
• Customer connect
• Pedigree ?
Partners -Ecosystem
Know-how:
knowledge obsolete
half the money than a regular design, even though this was
Tesla’s very first car. And the car wins about every award
– How can they do this design magic? (Silicon Valley) But Nissan
Simplicity.
advantage to Tesla?
capture
today fit with the expected path of the firm and with
need tomorrow.
may evolve.
• An explicit strategy can be a powerful guide for decision-making.
• Even high entry barriers can be overcome with a smart path, with
effective.
Innovation ecosystem ?
funded firm.
Audi?
to the BMW
• How worried should BMW be? Will Tesla survive and thrive
don’t see a Tesla as such a big is off. BMW has a much more
alternative energy
competitive advantage
charging stations.
Range etc
How should Tesla think about that? It is useful to make this more
concrete.
third doesn’t care, and a third values an electric car $10,000 less. Is
this good or bad for Tesla? This is good: a third of the market is
huge~ 2 mn
preferences.
• Does the case have any information that can help us think about
the range anxiety issue? Less than 1% of trips exceed 100 miles.
more likely to have more cars and less likely to do long trips by car
Is Tesla profitable?
case.
Tesla 2013 ( $ Th) BMW 2013( Euro Mn) Tesla ( indexed 100) BMW (100)
Tesla 2012 ( $ Th) BMW 2012( Euro Mn) Tesla ( indexed 100) BMW (100)
Tesla instead).
Note that for $48725 that the customer spends on the BMW, he
the $1500 per year savings in fuel costs alone and given the
for every $100 spent on the BMW, if that is the choice, Tesla would
Exhibit 3b.
• Tesla’s cars compete with the regular BMWs (which they clearly do)
and these regular BMWs are a stronger competitor, then that is the
right comparison. You want to compare with your real and toughest
competitor product.
adjusted)
Gr Profit 4 30 6 30
R&D 13 7 13 7
SG&A 7 18 7 11
Tot Exp 20 18 20 18
estimate is for a car ‘on scale’ – so that its average fixed cost
• Estimate that 80% of R&D and 80% of SG&A are fixed. (Any
revenue
• First, with another doubling of scale, the plant will be getting close
to full scale and so the economies of scale on that level will soon be
exhausted.
• Second, the share to which scale applies has become smaller: while
doubling scale a first time cuts the fixed cost in half, doubling it the
adjusted)
Gr Profit 4 30 6 30
R&D 13 7 19 (-8) 7
SG&A 7 18 10 (-4) 11
Tot Exp 20 18 29 18
• The case mentions a 90% learning curve on defects and assembly time.
production, the fixed costs of plant and labor get spread over more units.
• But there will be learning in the whole system, from SG&A to better and
• Assume for this analysis that the average learning curve for all costs is 95%
of H1 was about 10,000 cars. By the end of 2013 that would have doubled
and by the end of 2014, that would have quadrupled. With a learning
curve of 95%, that means a reduction of each cost item to about 90% (=
adjusted)
Gr Profit 4 30 6 30
R&D 13 7 19 7
SG&A 7 18 10 11
customer value).
• First, it reduces the exclusivity of the brand and thus the value to buyers
• Second, as Tesla fills more of the existing demand, it needs to start selling
about Tesla or more worried about range anxiety. Customer value will thus
• Second, Tesla bought its plant and its machinery on the cheap,
thanks to the crisis (and potentially thanks to the fact that they were not
yet seen as a threat). In the future, such bargains may be harder to come
by. And to start really competing with BMW, they will need to expand
capacity.
Outlook
• Third, government support for EVs may run out in a few years:
according to the current law, Tesla cars will start losing their subsidy
once Tesla reaches 200K cumulative cars (at which time Tesla’s will,
will go down. This is equivalent to a 10-15% price cut, wiping out all
• However, by the time that these benefits expire, both Tesla’s scale
• Currently, Tesla does not need to spend on advertising but that may
change when it needs to reach new customers, when its halo effect
• These negative effects will not kick in as quickly as the scale and learning
effects. But by the time that they kick in, the scale and learning effects will
likely have leveled off a lot. This suggests that Tesla will see an inverted U-
1) the massive effects of scale and learning and how this may really distort
2) details of these cost structures – for example, at what level the plant will
• Disruptor at high end - It gives them a halo effect, so they get their marketing for free.
• How important is this? Even with their massive scale, Ford and GM spend about 3% of
• This approach of entering on the high end is a considerable departure from the
• These firms entered in the mid-market with their hybrid and electric vehicles.
• Apart from this halo effect, is entering on the high end a good or a bad idea? High end
– First, sales at the high end are smaller, so Tesla is at less of a scale disadvantage
– Second, margins are (likely) higher, giving Tesla more room to breathe with a cost
disadvantage.
– . High end customers are less price sensitive, so competing on price has limited
benefits
High End
• While these two are generic benefits from high-end entry, there
are some other benefits that are more specific to Tesla’s situation:
service needs;
• for the very high end customers, this is not a big investment, so
acceptance;
• moreover, the very high end customers bring their own halo
effect.
• Entering on the high end clearly has a lot of benefits and was an
Distribution Network
customers.
at the time.)
Collaborative Ecosystem
Simplicity
• Design: A simpler product is faster and cheaper to design.
assembly saves on labor cost and on plant (as you can produce
more cars in the same plant, driving down average fixed cost)
and other fixed costs. Less errors (in assembly) reduce labor and
material cost (for rework) and reduce the space needed for
• Vs Nissan
build the Leaf on a line shared with traditional cars, which will
Simplicity
• How do dealers feel about that? They don’t like this at all:
cars.
• This throws a very different light on why Tesla prefers not to
Dynamics
strategy
economies of scale.
Conclusions
changing industry