Tesla case

Tesla case January 1, 2015. Elon Musk, chief executive officer (CEO) of Tesla is taking it easy on this New Year’s Day. While having his coffee, he scrolls through some recent issues of The Wall Street Journal on his iPad. A headline from one current story jumps out at him, “Gasoline prices have declined for 88 consecutive days, the longest streak of falling prices on record.”1 The slide in gas prices, which began in September 2014, also happened to coincide with the slide in Tesla Motors (TSLA) stock. With increasing oil, and therefore gas, prices, people had an incentive for purchasing electric cars. Now with gas prices drop- ping, the incentive to buy would decrease, and the demand for the product would probably drop. This was one of the challenges facing Musk on this New Year’s Day. Tesla was confronting increasing com- petition and economic headwinds that were likely going to lower the demand for electric cars. At the same time, Tesla needed to ramp up production volume to drive down per-vehicle costs.

Musk is a serial entrepreneur longing to leave a legacy, and he believes that Tesla just might be the company that will help him leave his mark. He has a large profile already and has been described as “Henry Ford and Robert Oppenheimer in one person,” as well as “Tony Stark, the eccentric inventor better known as Iron Man.”2, 3 (In fact, Musk made a cameo appearance in Iron Man 2.) But, with sev- eral pressing issues and the additional demands of running SolarCity and SpaceX, can he find a way to make it all work?

As Musk attempts to prioritize all of the critical information that must be reviewed, he contemplates the many obstacles in his path at Tesla Motors. Is Tesla the next great American car company? Can it disrupt the market with electric vehicles just as Japanese and Korean car companies did in the past with their high-quality, low-fuel-consumption combustion vehicles? What is the competition doing to compete with Tesla, and how will Tesla need to change or adjust its strategy accordingly? Can an electric-car company really gain a competitive advantage with a limited infrastructure? Is Tesla’s busi- ness model sustainable? Most importantly, can Tesla scale production to meet demand for the Model S and its upcoming Model X, while also maintaining the same high quality and simultaneously driving down costs? Should Musk consider instead selling to an established car company or partnering even more closely with one that already has an equity stake in Tesla?

As Musk reads The Wall Street Journal article, he reaches for his cup of coffee and wonders, “What will the next few years bring for this company, and what should I do to ensure its success?”

F R A N K T. R O T H A E R M E L

D AV I D R . K I N G

Tesla Motors, Inc.

Professors Frank T. Rothaermel and David R. King prepared this case from public sources. We gratefully acknowledge Professor Erin Zimmer’s contribution to an earlier version of this case, and Research Associate Michael McKay’s assistance in data collection. This case is developed for the purpose of class discussion. It is not intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient manage- ment. All opinions expressed, and all errors and omissions, are entirely the authors’. © by Rothaermel and King, 2015.

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This document is authorized for use only by Bishal Siwakoti in BUS3310 HBR Coursepack taught by Jonathan Schultz, Amberton University from Oct 2021 to Apr 2022.

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Tesla Motors, Inc.

Elon Musk: Engineer Entrepreneur Extraordinaire

In 1989, Elon Musk left his native South Africa at age 17 to avoid being conscripted into the army. Says Musk, “I don’t have an issue with serving in the military per se, but serving in the South African army suppressing black people just didn’t seem like a really good way to spend time.”4 He went to Canada and subsequently enrolled in Queen’s University in 1990. After receiving a scholarship, Musk transferred to the University of Pennsylvania. He graduated in 1995 with bachelor’s degrees in both economics and physics and then moved to California to pursue a PhD in applied physics and material sciences at Stanford University.5

After only two days, Musk left graduate school to found Zip2, an online provider of content pub- lishing software for news organizations, with his brother, Kimbal Musk. Four years later, in 1999, com- puter-maker Compaq acquired Zip2 for $341 million (and was in turn acquired by HP in 2002).

Not one to stand still, Elon Musk moved on to co-found PayPal, an online payment processor. In 2002, eBay acquired PayPal for $1.5 billion, netting Musk $175.5 million for his 11.7 percent share of the company. Although it was financially lucrative, Musk still harbors resentment about this deal. He feels that letting eBay acquire PayPal sold short the company’s potential, dooming it to a future as a niche tool rather than a launch pad for a full-fledged, online financial institution.

Musk describes himself as an “engineer and entrepreneur who builds and operates companies to solve environmental, social, and economic challenges.”6 He is now leading firms on three different fronts: electric cars, renewable energy, and space exploration. Two of his three ventures—SolarCity and SpaceX—seem to be doing well. SolarCity’s goal is to become the Walmart of solar-panel installations, and in 2014 it installed 34 percent of solar panels in the United States.7 SpaceX aims to send satellites into orbit at a quarter of the current cost. Since Musk took over engineering responsibilities, he has managed to launch rockets that reach outer space successfully. In May 2012, SpaceX’s Dragon space- craft attached to the International Space Station, exchanged cargo payloads, and returned safely to Earth. Until then, only governments had accomplished this technically challenging feat. More recently, SpaceX has taken over resupply missions to the International Space Station, has begun collaborating with NASA on a mission to Mars, and is working with Boeing to develop a market for commercial space passengers.8

Although crowned “2007 Entrepreneur of the Year” by Inc. magazine, Musk feels that his personal ambitions have not yet been fulfilled. Many in California’s venture-capital and high-tech community view Elon Musk as someone who has good ideas and breathes life into risky ventures but then fizzles out on them. He aims to prove them wrong. As a result, Musk’s dreams for Tesla Motors, the California- based designer and manufacturer of electric vehicles, are big; he wants to leave a legacy through this company. Thus, after firing three CEOs in the last few years, Musk is now leading the company himself.

A Brief History of Tesla Motors

Tesla Motors (TSLA) was founded in 2003 in San Carlos, California, as an automobile company dedi- cated to developing electric vehicles. Co-founder Elon Musk was also one of the first investors, putting up $7 million initially, and later an additional $30 million.

For the exclusive use of B. Siwakoti, 2022.

This document is authorized for use only by Bishal Siwakoti in BUS3310 HBR Coursepack taught by Jonathan Schultz, Amberton University from Oct 2021 to Apr 2022.

Tesla Motors, Inc.

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Tesla Motors held a design contest for the styling of its first product: the Roadster, code-named “Dark Star.” Lotus Cars, a British manufacturer, won the contest and jointly engineered and manufac- tured the new vehicle. Lotus was a natural partner for this project because of its experience and exper- tise in building its own line of sports and racing cars. In fact, the Tesla Roadster was modeled using the Lotus Elise as a template. The partners designed the Roadster’s chassis using Lotus software tools and had it was manufactured by the same Norwegian company that built the Elise.

In December 2006, Time magazine hailed the Tesla Roadster as the best invention of the year in the transportation category. In 2007, however, it became clear that sales were not enough to sustain busi- ness; the company was bleeding money. After combing through Tesla’s financial situation, Musk found that Tesla was losing $50,000 on each car sold. As CEO, Martin Eberhard had led investors to believe that the manufacturing of the Roadster cost only $65,000 per car, which appeared to justify the $92,000 sticker price. In reality, Musk found that it cost Tesla $140,000 just for the parts, subassemblies, and supplies to make each vehicle, and that the Roadster could not even be built with Tesla’s current tools. He also discovered major safety issues with the existing design. Completely taken aback by the messy state of affairs, Musk commented, “We should have just sent a $50,000 check to each customer and not bothered making the car.”9

Consequently, Musk fired Martin Eberhard and took over the engineering himself. Almost every important system on the car, including the body, motor, power electronics, transmission, battery pack, and HVAC, had to be redesigned, retooled, or switched to a new supplier. Such dramatic changes were necessary to get the Roadster on the road at something close to the published performance and safety specifications, as well as to cut costs to make the Roadster profitable.10