Professional Documents
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CSTR_Group F11
MOONIS AHMED, MANISH AGARWAL, NIKHIL RATANPAL, HARSH
SUREKA
TABLE OF CONTENTS
1
2.1
2.2
2.3
Electric Car Industry Structure before Tesla opened up its patents ....................................... 5
3.2
Electric Car Industry Structure after Tesla opened up its patents .......................................... 6
5.1
5.2
5.3
5.4
All Our Patent Belong To You An act of philanthropy or a strategic game changer?........ 11
6.2
6.3
Conclusion ..................................................................................................................................... 15
Bibliography .................................................................................................................................. 17
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1 EXECUTIVE SUMMARY
The following company report talks about the strategic plays that Tesla Motors has employed
to gain a competitive advantage in the electric vehicle segment of the automobile industry. It
has effectively played a new game strategy creating a niche product and a position for itself in
the market. Tesla has turned its lack of knowledge into an advantage by going for a new electric
drivetrain for its vehicles and a unique direct-to-customer selling model. This has enabled it to
provide an end-user experience unmatched by any existing automobile manufacturer.
Tesla has been successful because of innovation in product and supply chain. Electric hybrid
vehicles were already present in the market when Tesla entered but the innovative Lithiumion battery packs developed by Tesla are more efficient compared to the competitors. The
company has also developed a whole ecosystem with huge investments in the setup of
Supercharger stations and with projected further investments and government incentives, the
electric vehicle (EV) market is destined to take off. The setup of a Gigafactory for production
of Lithium-ion cells on a large scale, will help Tesla become one of the largest cell manufacturer
in the US and a potential supplier to other EV automobile manufacturers.
The opening up of the patents might be a dangerous move but Tesla could potentially convert
its competitors into collaborators and reduce the EV manufacturing costs. We feel Tesla has
identified that it cannot develop the whole ecosystem of EVs on its own and needs partners.
However, with its first mover advantage in the R&D of EVs and move towards being a battery
producer, it will still be able to secure a key position in the future EV market. This is reflected
in the stock price of the firm which is on a growing path despite low earnings per share.
Investors are confident in the strategies employed by Tesla and believe in it to become a
market leader in future.
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2.3
The mile per gallon (MPG) standards for passenger cars under CAFE (Corporate Average Fuel
Economy) in the US remained static between 1990 and 2010. However, CAFE passenger car
MPG standards rose sharply in 2011 and 2012. This prompted manufacturers to begin offering
a wider array of alternative fuel and hybrid vehicles in the US in order to comply with the rising
standards. Under new agreements finalized by the Obama administration in August 2012, MPG
standards are set to rise steadily between now and 2025. Consequently, it is essential for
manufacturers to look to hybrid and electric vehicles in an attempt to increase the average fuel
efficiency of their vehicles, releasing more of these vehicle types in the US market.
The return to relatively high gasoline prices in the US in 2011 had a positive effect on the hybrid
market: the market returned to rapid expansion in 2012. Higher gasoline prices drove priceconscious motorists towards purchasing hybrid and electric cars, as potential running cost
savings increased, justifying the typical premium paid by consumers at the purchase of hybrid
and electric cars.
Toyota is the clear leader in the Hybrid and Electric car segment in the US, with a 2013 market
share of 58.2% in terms of volume. It offers both plug-in mid-range sedans as well as premium
EVs under the Lexus brand. Ford has been in the ascendancy in recent years: its share of the
US hybrid segment has increased significantly, and it has also seen similar success in the plugin segment. However in 2013, Toyotas market share was almost 9% lower than for the whole
of 2012. Consequently, strong sales of Ford, Nissan and Tesla plug-in vehicles have eroded
Toyotas overall market share. It will be interesting to see how the industry will shape up in the
coming years with new and small players like Tesla trying to leapfrog the incumbents in Toyota
and Ford.
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3.1 ELECTRIC CAR INDUSTRY STRUCTURE BEFORE TESLA OPENED UP ITS PATENTS
Supplier power
(Very High)
Highly Segmented
Differentiated product
Quality (Mileage, battery cycle, comfort,
style) are of high importance
Low switching cost
Buyer power
(Moderate)
Substitutes
(Very High)
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Though the competition was low and Tesla was the leader in Electric car industry, the huge
supplier power of electric car component suppliers (a lot of them single suppliers for autocomponents for Tesla), limited super charging stations and battery manufacturers and the high
risk of substitutes from gasoline cars made the industry unattractive for Tesla even with a huge
competitive advantage because of its innovative technology.
3.2 ELECTRIC CAR INDUSTRY STRUCTURE AFTER TESLA OPENED UP ITS PATENTS
Potential
Entrants
(Moderate Increasing)
Highly Segmented
Differentiated product
Quality (Mileage, battery cycle,
comfort, style) are of high
importance
Low switching cost
Rivalry
Moderate/High (Increasing)
Supplier Power
(ModerateDecreasing)
Buyer Power
(Moderate)
Substitutes
(ModerateDecreasing)
The move significantly lowered the barrier of entry of existing car manufacturers to enter into
the electric car industry and collectively develop the infrastructure to support the electric car
market. This effectively converted their major competitor i.e. the gasoline car makers to join
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Tesla in meeting their vision to make economic electric cars available to the consumers. This
also increased the number of suppliers for high efficiency batteries and auto-components.
Though Teslas moves came as a surprise, it was well appreciated by most of its investors (~10%
increase in share price after the announcement) and resulted in other top car manufacturing
companies showing interest in making supercharging stations and developing batteries.
Tesla makes electric cars, and will only succeed if the entire electric-vehicle industry
succeeds. Newyorker.com
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2012 ($ million)
2013.5
-61.3
-74.0
2013 ($ million)
413.2
-394.2
-396.2
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Competitors can imitate this technology but Tesla has a significant first mover advantage. A
new model development for an established automaker can take anywhere from 1 year (e.g.
Toyota) to a decade (Mercedes & BMW) besides having significant fixed costs investment.
worldwide and because of full control over its operations, gets to maintain the same level of
customer service at these locations. Transferring ownership to dealers might put Tesla in a
disadvantage as it might not be able to control the service level. Maintaining a similar level of
customer experience is an intangible benefit which competitors cannot imitate easily.
Moreover, for the competitors, there are significant costs involved moving away from their
current model to imitate Teslas.
However Tesla is facing legal troubles in their online selling model from dealer associations in
the states of New Jersey, Texas, Colorado and Arizona with ongoing lawsuits in other states.
The problem is exacerbated for Tesla because these dealers enjoy political clout and could
influence regulations against Tesla (as seen in the state of New Jersey where the National
Automobile Dealers Association played a key role in the ban on Teslas direct to customer
approach). But the Federal Trade Commission (FTC) in US supports Teslas model and finds it
legal. It will be a challenge for Tesla to see how long they can sustain this online model of selling
to customers given the current challenge from dealers.
supercharger stations, it needs to boost sales but sales have not been able to meet the demand
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because of slow production of Li-ion cells. To mitigate this risk, Tesla plans to launch a
Gigafactory by the end of 2017 to minimize the crunch of supply-demand gap of Li-ion cells.
It has already raised 2 bn US$ by issuing a convertible bond for the factory and human resource
requirements and even Panasonic has promised investment in the setup. Tesla aims to reduce
car manufacturing costs by up to 30% with development of more efficient batteries and in large
numbers. Their current battery costs per car stands at $300 per kWh which is already
substantially lower than competitors. Proprietary designed batteries will help them bring their
cars to the market faster compared to automakers that rely on a third-party battery supplier.
With the opening up of the patents, while competitors will be focused on producing EV models
of their own, Tesla plans to setup up the factory to become a supplier of battery pack to these
automakers when the competitor models finally roll off the line. Moreover, as demand for
more efficient electric vehicles will go up, automakers will look towards going into joint
ventures with battery makers such as Tesla to secure raw material supply. Because of these
measures, Tesla will be in a strong position to be a market leader in Li-ion cells manufacturing
and supply. Reduced costs of manufacturing and reduced prices of cars will increase the
competitive edge of Tesla and make its cars a viable substitute for conventional oil-based cars.
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battery factory in recent months and many have thought the company would make much of
its money on its battery technology intellectual property.
Musk says that the new policys goal is to provide impetus to the advent of sustainable
transport and stem climate change. Teslas competitors can now freely take advantage of
its batteries, chargers, or sunroofs. These market disrupting innovations have lowered the cost
and increased the safety of battery packs. Its cars recharge much faster than others on the
market, thanks to connector, software, and power-management advances. Now Tesla intends
to offer these innovations to the entire industry asking for nothing but goodwill in return.
However, is this altruistic action of the Tesla CEO a genuine act of philanthropy or a strategic
game changer for Tesla? We analyze that ramifications of this move on both the EV (Electric
Vehicle) industry as a whole and on Tesla Motors.
Transforming competitor into collaborator: Tesla has realized that its biggest competitors
arent EV innovations from other car manufactures. Instead, its from the enormous flood
of gasoline cars. Tesla makes electric cars, and will only succeed if the entire electric-vehicle
industry succeeds. It needs an ecosystem comprising other enterprises to help build
charging stations, to improve batteries, and to change the widespread perception that only
the rich and famous can drive these vehicles. Tesla wins if for e.g. its patents help General
Motors improve its batteries, which then leads GM to make more electric vehicles, which
then leads someone else to start a chain of charging stations.
Promoting standardization: If open patents promote standardization, this would imply that
Tesla would be setting the de facto industry standard that other EV manufacturers would
adopt. It would likely mean faster innovation for all as well as cementing Teslas position as
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the market leader (as it still holds legal rights to the patents and could use these at a later
stage to gain back the advantage).
small
today.
Attracting human capital: Tesla needs to retain the brightest talent in its attempt to stay
ahead of the innovation curve. If the EV standard is adopted by all and sundry, this will help
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Tesla attract and motivate the world's best technical talent by giving them an opportunity
to work at the mecca of EV technology.
Prima facie, it appears to be a good move by Tesla. However, there are several unanswered
questions. For instance, if Ford or GM were to use the patents to create their own Tesla
knockoffs, would Tesla let that revenue go. What if its a rival start-up instead?
service and sales locations in Europe. It intends to construct a plant in Europe once its electric
cars achieve the sales target of 160,000 units annually in the region. The auto maker also
intends to launch a R&D center in the UK within the next two years and expand its final
assembly factory in Netherlands. In the Asian market too, Tesla intends to raise sales of its
Model S by more than 56% in 2014 by expanding sales to the Chinese markets. Tesla is poised
to invest hundreds of millions of dollars in China helped by various government incentives.
7 CONCLUSION
Teslas 'Open source' strategy might turn out to be a masterstroke in the long run. While the
commercial incentive to do is clear: encourage investment and provide fresh impetus in
adoption of electrical vehicles by other manufacturers, the reason for acting now isnt so.
Possibly, Tesla has realized that it lacks the scale and financial wherewithal to create the
electric car market on its own and is now prepared to loosen its grip on the market.
While Musks desire to encourage innovation and the transition to an environmentally friendly
transport system is commendable, we feel, Teslas decision is more about securing its position
as a key player, if the not the leader, in the future automobile ecosystem. Much could rest on
Musks definition of acting in good faith. We feel that this is a deft strategy to proclaim that
Teslas technology is in fact the de facto standard of EV industry and the very patents that Tesla
claims to offer for free at this point will allow it to play an important role in shaping the industry.
Teslas technology adopters will most likely sign license agreements to protect themselves if
Tesla decides to back track. Tesla too may wish to retain some right to enforce their patents in
the future, and to protect future inventions using the patent system.
While this move is a risky one, it certainly does make sense from Teslas point of view. The
companys stock has doubled in the past year, but the industry is struggling. We believe that it
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is Teslas strength and innovative business model that will propel it forward, not any reliance
on patent litigation or licensing models. Therefore, opening up its patents in order to evolve
the EV industry, certainly seems to be a stroke of genius for the high flying Elon Musk.
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8 BIBLIOGRAPHY
Bloomberg: Teslas Direct Sales Push Raises Auto Dealer Hackles - link
Economist: Better Power Packs Will Open Road for Electric Vehicles - Better Power Packs
Tesla: The Californian start-up that made head way on the automotive giants http://advantage.marketline.com/Product?pid=ML00013-051
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