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An Improved Tesla Partnership

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A corporate strategy article by Thunderbird students Alistair Booth, Stephen Kill, Adeola Shabiyi and Douglas Stetzer

Tesla caught the eye of the consumer when they released their Roadster in 2008. The Roadster, a true fully electric super car with a practical driving range, boasts a 0 to 60 mph acceleration time of less than 4 seconds and can go almost 250 miles on a single charge.[i] Tesla, however, has not been able to turn its buzz or technology into exciting growth. In 2010 Tesla reported annual revenues of $116.7 million, only a 4% increase from 2009 and a net loss of $154.3 million in 2010, almost three times the net loss of 2009.[ii] To maintain operations and development of new products and technologies, Tesla has been able to garner modest investment through venture capital, US government loans, a successful IPO, and investment from competitors and suppliers.

Tesla and its investors are eagerly awaiting the launch of its new luxury Model S in 2012. Tesla has already pre-sold more than 3,000 Model S cars and plans to ramp production up to 20,000 cars a year.[iii] At an average sale price over $50,000, the Model S represents a potential $1bn a year or more of revenue for the company. Investors however, have pegged Tesla’s market cap at $2.3bn and still have doubts about Tesla and the potential success of the Model S.

Strategic Competitor Partnerships

In 2009 Daimler MG invested $50 million dollars into Tesla for a 10% stake in the company and rights to compete or participate in any strategic alliances Tesla may enter into with one of Daimler’s competitors. As part of the partnership Tesla was tasked with providing battery packs for a limited trial of Daimler’s all-electric Smart Fortwo vehicle. In addition to the revenue stream from the Fortwo development, Tesla hoped to gain access to Daimler production resources to support its Model S production. Daimler subsequently formed a joint venture with the Warren Buffet backed Chinese electric car manufacturer BYD to build electric cars for the Chinese market. Daimler also owns a 90% stake in a joint venture with German battery maker Evonik, and a stake in a joint venture with Bosch for electric motor design and production.[iv] While Daimler and Tesla are still hopeful about their continuing partnership, on the surface it appears that Daimler is trying to develop electric vehicle competency elsewhere.

In 2010, Toyota invested $50 million dollars for a 10% stake in Tesla and sold Tesla its Freemont, CA factory.[v] Tesla then signed a $60 million dollar deal with Toyota to provide an all-electric drive train for the Toyota RAV4 with production starting in 2012.[vi] In addition to the RAV4, Toyota is also planning on releasing internal designs of a plug in version of its Prius and a smaller commuter electric car.[vii] Toyota’s luxury brand Lexus, however, has not yet released plans for an all-electric vehicle offering.

Tesla’s Capability Analysis

Tesla’s primary strength lies in its technology. Tesla boasts the highest energy density battery packs in the industry which gives them a driving range advantage over all of its competitors.[viii] Tesla has also developed its own power electronics, electric motor, vehicle control systems, and vehicle software to give them full EV drivetrain design capability. Tesla also finds strength in its brazen leader Elon Musk who was the inspiration for the Tony Stark character in the Ironman films.[ix] Along with being the Product Architect, Musk has brought strong leadership, significant personal investment, and public awareness[A1] to Tesla. The launch of the Roadster solidified Tesla’s brand awareness with consumers and made them a household name within their segment.

Tesla, however, is still developing its total organizational capability. While it has a strong technology and leadership base, success in the highly competitive and operationally expensive car industry requires excellent procurement, manufacturing, quality, distribution, service capabilities, and enough capital to run the expensive and expansive operation. At this point, Tesla’s small size, low sales volumes, and limited financial resources have made total organizational capability and profitability impossible. Through higher projected volumes of the Model S and subsequent mass-market product lines Tesla hopes to improve in these areas.

Tesla does benefit from the presence of most Determinants of National Competitive Advantage[x], as outlined by Michael Porter. The US home base is properly positioned to maximize necessary factor conditions of skilled labor and infrastructure. Discerning customers and competitive choices present critical demand conditions, and the US continues to represent one of the best places for ease of company creation and entrepreneurial activity. The main shortcoming is in the lack of related and supporting industries, which is where Tesla has sought to embark on strategic partnerships to fill the void.

Global Distribution Challenge

Even with all the challenges facing Tesla in bringing the Model S to market, Tesla has chosen to pick yet another fight with convention in the automobile world. With a distribution model based on self-owned showrooms and internet sales, Tesla is shouldering unnecessary cost and putting a legal and bureaucratic hurdle in front of its own survival. The automobile distributor network is well entrenched both politically and in local communities. They also provide a base for maximizing the ongoing relationships of service and maintenance which are important in achieving brand loyalty and repeat customers. In the US, Tesla’s largest market by volume, direct marketing by auto manufacturers to the consumer is actually illegal in some states. The legal challenges and cost associated with bucking the established distribution practice aren’t[A2] worthwhile at this point in the company’s development as a manufacturer[A3] . According to Tesla’s own 10K, the potential for problems with this distribution model in Europe and Asia has yet to be fully measured.

To date, Tesla has opened 17 showrooms and estimates further openings will cost between $5 and $10 million per year[xi]. While this distribution model has sufficed for the 1500 or so Roadsters that have hit the street and the 3400 pre-ordered Model S sedans, it could become a source of constraint when looking to ramp up production to the stated 20,000 target and for the introduction of more models in the future.

Expanding Partnership Agreements

Economies of scale are imperative in auto manufacturing, and Tesla will have trouble achieving meaningful capacity necessary for profitability at its current production levels. Sergio Marchionne, CEO of Fiat-Chrysler, believes that a mass market automaker needs to sell at least 5.5 million to 6 million units a year to hit the threshold for profitability and long term sustainability[xii], a position supported by Adrian Hallmark, the brand director for Jaguar. Meanwhile, Tesla’s limited partner Toyota distributed 7.24 million units in 2010 and Toyota Financial Services (TFS) supported 8.1 million customers globally[xiii]. With the world turning its eyes to growth prospects in the exploding markets of Asia, Tesla’s Asia/Pacific strategy consists of only three stores - Sydney, Hong Kong, and Tokyo. This insufficient presence further highlights the potential benefits of a deeper relationship consisting of marketing and distribution agreements with an established player such as Toyota. In China alone, TFS has increased their sales base from 27 cities in 2009 to 66 cities in 2010[xiv].

While Daimler seems to be moving away from Tesla in favor of a Chinese partnership, it is imperative for Tesla to seize the opportunity to enhance the ongoing relationship with Toyota beyond drivetrains to include global distribution and marketing. Toyota’s credibility in the unconventional hybrid auto segment is unrivaled due to the successful and progressive launch of the Prius in Japan in 1997 and worldwide in 2001. However, the rest of the market has finally caught up and Toyota is no longer without competition in this space. Additionally, the recent launch of all-electric cars marketed towards all segments of consumers, from the Nissan Leaf ($25,280[xv]) to the Tesla Roadster ($101,500[xvi]) and beyond, has left Toyota in the unfamiliar position of having a gap in its product line. Ironically, this is happening at a time when record oil and gas prices are combining with increasing readiness on the part of consumers to drive electric, hybrid, and alternative fuel cars. Worldwide government and private infrastructure investments in alternative fuel distribution and creative solutions for electric charging stations are rapidly changing the competitive landscape for electric cars by making them more practical.

Toyota’s Benefit

A full strategic partnership with Tesla can be in Toyota’s best interest. The Model S has the capability to fill the electric car void for Toyota and allow them to maximize the investment in goodwill they have made in the alternative fuel space. The placement of Model S sedans on Toyota or Lexus showroom floors would be an enticing and exciting draw for Toyota consumers globally, especially within the appropriately priced Lexus brand of luxury autos. BWM, Mercedes, and Infiniti all have plans to release fully electric luxury cars in the next 2-3 years, by having the Model S on Lexus showroom floors Toyota can leapfrog their competitors in this growing market segment.

Tesla can also help reinforce Toyota’s R&D department. Tesla’s small size has allowed them to stay on top of the rapidly evolving energy storage technologies and offer the highest energy density battery systems in the market. A partnership with Tesla would allow Toyota to access these technologies and help create a competitive advantage in the EV market.

Tesla is an exciting brand that represents a thrilling driving experience coupled with the energy efficient status-symbol of an electric car. While Lexus has been an extremely successful brand, luxury car consumers who crave performance are more likely to buy a car from a European manufacturer. Having a Tesla on a Lexus lot will allow Lexus to evolve their brand and go after a bigger share of the performance market segment. The Tesla-Lexus brand image would also make the Powered By Tesla RAV4 a more exciting buy for consumers. For access to their distribution network Tesla and Toyota would have to come to a financial agreement, perhaps a surcharge on every vehicle sold, and additional dealership benefits are possible if Toyota and Lexus dealers become the certified service centers for Tesla vehicles.

Tesla’s Benefit

Tesla has brought an exciting and marketable product to the industry with the Roadster and is looking to evolve into mass markets with the Model S and subsequent varieties. Reinventing the distribution channel at this stage is a challenge only necessary when seen through the eyes of a Silicon Valley entrepreneur. As of the last filing, Tesla holds $28.3 million in pre-payments for 3400 Model S sedans which are fully subject to refunding anytime prior to delivery. Focusing all available resources on getting the Model S to market on time and ensuring that refunding pre-payments will not be necessary is imperative.

If Toyota is going to let Tesla on their lots, it is in Toyota’s interest to make sure Tesla meets market reliability and cost requirements. Expanding their agreement with Toyota would allow Tesla to leverage Toyota’s competencies in distribution, service, procurement, manufacturing, and market intelligence giving Tesla the capabilities of a large automaker despite their small size. Toyota’s strengths could allow Tesla to streamline their organization and reduce manufacturing and distribution costs which would lead to profitability sooner. Also, once investors are reassured of a Toyota backed Tesla’s future, Tesla becomes a safer investment, increasing liquidity in equity markets and reducing the cost of borrowing. As highlighted in the article Collaborate with Your Competitors-And Win, “strategic intent is an essential ingredient in the commitment to learning.”[xvii] Tesla’s advantages in technology innovation would be maximized with the view that there are many lessons to be learned in the functions distant from their core competency.

Conclusion

The combination of the Tesla and Toyota brands could be a rare symbiotic relationship that enables both firms to compete in the rapidly growing EV market. By allowing Tesla access to their distribution mediums, with little up-front investment Toyota can profitably grow their brand and maintain an edge on their luxury car competitors. Tesla would gain the ability to act like a large automaker while retaining their flexibility to lead the market in innovation. If Toyota believes Tesla can be successful, they should form a stronger partnership before Tesla finds another partner or succeeds on their own.


[i] http://www.teslamotors.com/roadster/specs

[ii] http://www.teslamotors.com/about/press/releases/tesla-motors-reports-fou...

[iii] http://www.autoweek.com/article/20110111/CARNEWS/110119984

[iv] http://www.autoobserver.com/2011/04/despite-tesla-tie-daimler-moving-ev-...

[v] http://blogs.edmunds.com/greencaradvisor/2010/05/tesla-discloses-terms-f...

[vi] http://www.dailyfinance.com/2010/10/14/tesla-toyota-electric-rav4-deal/

[vii] http://articles.chicagotribune.com/2011-04-14/features/sc-cons-0414-tran...

[viii] http://www.teslamotors.com/roadster/technology/battery

[ix] http://www.time.com/time/specials/packages/article/0,28804,1984685_1984745_1985495,00.html

[x] Michael Porter. March-April 1990. The Competitive Advantage of Nations. Harvard Business Review, p78

[xi] http://ir.teslamotors.com/secfiling.cfm?filingID=1193125-11-54847&CIK=1318605, p13

[xii] Vanessa Fuhrmans. (2011, April 6). Cast-Off Car Brands Find a Road Back. Wall Street Journal (Eastern Edition), p. B.1. Retrieved April 17, 2011, from ABI/INFORM Global. (Document ID: 2311672641).

[xiii] http://ir.teslamotors.com/secfiling.cfm?filingID=1193125-11-54847&CIK=1318605, p15

[xiv] http://ir.teslamotors.com/secfiling.cfm?filingID=1193125-11-54847&CIK=1318605, p15

[xv] http://www.nissanusa.com/leaf-electric-car/index?next=header.vlp.postcard.picture.thumbnail

[xvi] https://www.teslamotors.com/own

[xvii] Hamel, Doz, and Prahalad. Jan-Feb 1989. Collaborate with Your Competitors-And Win. Harvard Business Review, p 134