Tesla Strategy and Valuation

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Tesla Strategy and Valuation

University of Bath

School of Management

Strategic Financial Decisions

(MN20547)

29th  November 2015

Alexander Vega

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Contents

Introduction.....................................................................................................................1

Tesla’s Strategy and the Industry .................................................................................1

Competitive Advantage..................................................................................................4

Current Valuation............................................................................................................5

Potential Strategy and Valuation...................................................................................9

Conclusion ....................................................................................................................11

References ....................................................................................................................13

Introduction

Tesla Motors (NASDAQ: TSLA) was founded in 2003 in Silicon Valley, USA, with the aim to provide electric cars that can compete against their petrol-powered counterparts. Martin Eberhard and Marc Tarpenning set out with the mission to accelerate the world’s transition to sustainable transport. The company was named after Nikola Tesla, who invented the

AC induction motor, which was key in building their first product, the Tesla Roadster in

2008. Since then, Tesla has launched the Model S, Model X, expanded into car battery packs, home solar energy storage and sells parts to car manufacturers, such as Toyota and Daimler. The convenience of free high speed charging units placed along popular routes in USA, Europe and Asia has led to more than 50,000 Tesla vehicles being on the road worldwide. This Supercharger network is continuously expanding. “Tesla is not just an automaker, but also a technology and design company with a focus on energy innovation.” (Tesla Motors 2015a)

Tesla’s Strategy and the Industry

Contrary to most start up companies, Tesla entered the market as a luxury brand. They were able to establish themselves successfully, as it is rare for competitors to be able to afford the high capital investment required to set up in this select market. Their main strategy from this position has been to lower prices and increase sales volume, providing affordable mass-market electric vehicles. Model X exemplifies this, as, although being on the same price level as Model S, it is a larger and more substantial car, therefore relatively cheaper. Furthermore, the release of the Model X expands Tesla’s target market from the niche, luxury sports car, to a mass family 4x4.

Their primary strategy is popular in California, where Tesla has strategically placed production, surrounded by more innovation than in Detroit, a prominent location for other

car manufacturers. With the intention to reduce average prices across their models, but maintain margins, Tesla has been able to decrease costs by using its high negotiating power with its 200 minor suppliers. Conversely, main suppliers, such as Panasonic, have a high bargaining power due to the fact that Tesla is extremely dependent on their quality products and time efficiency. For example, Tesla’s CEO revealed in August 2015 that

since the Model X and the Model S share the same assembly line, a shortfall by one of the Model X suppliers could slow down output of both vehicles. This caused analysts to doubt whether Tesla would meet their plans to increase deliveries by 74% this year, resulting in a

5.8% drop in share price (Hull 2015).

Following the mission to decrease prices, individual buyers’ bargaining power would remain low, as there is high demand and the availability of comparatively priced technology is limited. This lack of 100% electric alternatives on the market means that the threat of direct substitutes appears low. However, hybrids and hydrogen cars can also be considered as potential substitutes and therefore increase competition. As eco-friendly living becomes more popular, public transport has become more attractive, especially in city centres. This is a much cheaper alternative to electric cars. The car industry, as a whole, is very competitive, yet within the niche sector of electric cars the rivalry is comparatively low. As the industry expands, competition is expected to increase, as more

companies release similar products. This analysis shows that Tesla is currently in a strong competitive position, but this may be hard to maintain, as the industry is growing.

Tesla is able to follow the incentive of lowering prices and increasing sales volume as they have a strong technological expertise in electrical cars. Through this, they have set out to create a Gigafactory, allowing them to make their own batteries, reducing these costs by approximately 30% (Tesla Motors 2015b) and increasing the availability of this key

component. This expertise is also seen through their CEO, Elon Musk, who has proved to be a valuable asset to the company. By founding PayPal and SpaceX, he has been able to use his start up experience to propel Tesla into the public eye and increase brand awareness. However, Musk’s busy schedule, as CTO and CEO of SpaceX, could be interpreted as a weakness due to his focus being spread over different projects. This might not be in Tesla’s best interest. Another major issue is the lack of liquidity due to minimal profits, which can be linked to the high level of reinvestment into Research and Development (R&D).