The Tesla Acquisition

Archit Lohokare (archit_lohokare@mba.berkeley.edu)

Sam Kanakamedala (sam_kanakamedala@mba.berkeley.edu)
Shone Tran (shone_tran@mba.berkeley.edu)
 TABLE OF CONTENTS

Executive Summary ........................................................................................................2

Market and Competitive Landscape ............................................................................2
Product and Technology Mix .......................................................................................3
Core Competencies .....................................................................................................3
Culture-Fit and Talent Acquisition................................................................................3
Why Should Apple Enter the Automobile Market? ........................................................4
Strengths: Why is Apple the right company to redefine the in-car experience? ...........4
Product Development..............................................................................................4
Brand and Consumer Loyalty ...................................................................................4
Innovative Marketing...............................................................................................4
Leadership ...............................................................................................................5
Ecosystem ...............................................................................................................5
Weaknesses: What is preventing Apple from entering this market? ............................5
Partnership Development........................................................................................5
Expertise in the Automotive Market ........................................................................5
Opportunities: Why should Apple invest in this market? .............................................5
Are consumers asking for a change? ........................................................................6
Are the consumers willing to spend? .......................................................................7
What are the current solutions and what are consumers willing to adopt?..............8
Threats: Apple’s Competitors in the Car Market ..........................................................9
Building Blocks: The Apple Ecosystem in the Car..........................................................11
Why Tesla? ...................................................................................................................12
Culture Fit and DNA ...................................................................................................12
Growth Market..........................................................................................................12
Controlled Platform and Ecosystem...........................................................................13
Strategic Partnerships................................................................................................14
Product and Technology Fit .......................................................................................14
Tesla’s Financials ..........................................................................................................15
Conclusion ....................................................................................................................16

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Executive Summary

On October 18th 2010, Apple© (NASDAQ:AAPL) announced record revenues of $20.34

billion for its fiscal year ended September 25th 2010 with over $51 billion in cash on its
balance sheet, begging the question: “What is Apple going to do with all that money to
return the most shareholder value?” One immediate option is to start issuing dividends
again, but that would be inconsistent with Apple’s strategy over the last 15 years. The
firm has clearly proven that plowing cash back into R&D to continue leading the pack
has yielded generous returns for shareholders in the long-run. Vertical integration
would not generate much value because there is little margin left for Apple to gain by
bringing its supply chain in-house. Beefing up R&D and product development further for
current or roadmap products realistically would not push Apple much ahead of the
technology curve than it already is, and their existing R&D strategy is clearly on the right
track.

The only real way for Apple to substantially grow is to expand into new markets. They
are fundamentally a consumer technology company with products that have already
gained significant mindshare of consumers at home, school, work, and the gym. In each
of these settings, Apple has created paradigm-shifting products that completely
revolutionize user experiences for TV, video, personal computing, reading, phone,
music, and fitness. The one remaining avenue that Apple captures little consumer
awareness, and which could make the Apple experience truly omnipresent, is the car.

We propose that Apple strategically acquire Tesla Motors (NASDAQ:TSLA), leveraging its
cash position to make a foray into the automotive industry for future top-line growth
and profitability. This summary discusses the synergies of such an acquisition.

Market and Competitive Landscape

Automobiles can be envisioned as a hardware platform, much like computers and
smartphones. The automobile market is still relatively untapped by large consumer
technology companies like Apple, although that is rapidly changing. Google’s alliance
with Toyota in developing an unmanned Prius and Ford’s alliance with Microsoft to
develop Sync, an in-car communications and entertainment system, indicate this
market’s promise and readiness for disruptive innovation. Apple’s minimal participation
in this market to date can be effectively jumpstarted by this acquisition. Tesla’s strategic
alliances with Toyota and Daimler, who are also investors in Tesla, give Apple access to a
large new market it does not serve today.

According to iSuppli, smartphone-based systems are increasingly taking over the in-car
navigation and dashboard systems. This year’s projections are nearly 81 million units
and iSuppli forecasts a tenfold increase by 2014 with an explosion to 297 million
units. This market represents a significant opportunity for Apple to redefine the
consumer experience much like it did with the mp3 player, smartphone and tablet. Tesla

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would be the ideal launch pad for Apple to bring a fresh perspective on human-car
interaction. By taking the “Apple approach” at redefining contemporary dashboard
systems, Apple can embed its ecosystem into the automobile to act as a channel for
selling more of its devices, software, ads, and multimedia.

Product and Technology Mix

The increasing intertwining of a car’s mechanical systems with computing systems is
evidenced by the advanced dashboard communications and electronics in modern cars.
The electric car is a new platform to host Apple’s iOS based devices and can serve as a
gateway to the iTunes and Apps Store. Additionally, geo-location based applications and
services, led by Foursquare and GoWalla, present a natural fit with the car, the most
pervasive tool of personal mobility today. These products point to increased revenue
opportunities for Apple and developers through Ping, the Apps store and iAds network.
Additionally, iTunes in the car is sure to give a big boost to Apple’s ventures into music
in the cloud and give it a leg-up over emerging competitors like Pandora and traditional
ones like FM and satellite radio. The Apple TV platform, modified for the car,
revolutionizes passenger entertainment which is currently a fragmented market and far
behind home entertainment. Bringing products to the automobile truly completes the
Apple experience, with Apple at home, in the office, in the car, and on the go. There is
undoubtedly an immediate synergy between Tesla’s cars and Apple’s products that will
translate into higher growth and profitability for both companies.

Core Competencies
Apple’s demonstrated track record of innovative design and ability to rethink user
experiences shows great potential for enhancing the in-car experience. The Tesla brand
bolstered by its superbly-designed customer focused products in the burgeoning electric
car market draws a parallel to Apple’s brand in consumer technology. Tesla hiring
George Blankenship, one of the key players responsible for Apple’s enormously
successful retail strategy, also points to a commonality in the companies’ marketing and
distribution philosophies, which are Apple’s core competencies.

Culture-Fit and Talent Acquisition

Tesla’s strong culture of disruptive product innovation resonates with Apple’s culture.
Both Tesla and Apple boast risk-taking industrial designs and marketing teams that fit
naturally together. The acquisition will also bring with it Elon Musk, co-founder of
Paypal, SpaceX and Tesla Motors. Musk has a history of developing and bringing to the
market game-changing ideas, much like Steve Jobs. His success with Paypal
demonstrates familiarity of software and the Internet, making him effective in
collaborating with Jobs to revolutionize the in-car experience and bring growth to Apple.

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Why Should Apple Enter the Automobile Market?
The hardware technology that Apple brings to the Automobile industry is not
particularly revolutionary or even really on the very cutting edge. In fact, there is
already a $38.3B infotainment & telematics market in 2011 that Apple has no part of,
which uses similar technology. However, the existing market is very fragmented with
solutions that do a poor job of enabling consumers to achieve the connected lifestyles in
a car, which they have become accustomed to at the home, office, and gym.

To answer the question of why Apple should enter the automobile market, consider first
the strengths which enable Apple to redefine the user experience in a confused market,
and then follow up with what challenges might prevent Apple from succeeding.

Strengths: Why is Apple the right company to redefine the in-car

experience?

Product Development
Apple, in essence, is a consumer technology company with a consistent and superlative
track record of revolutionizing consumer experiences in existing markets. The Macintosh
redefined people’s interactions with the computer and what they expect functionally
and aesthetically from a computer. The iPod and iTunes consolidated the portable music
experience to a fragmented portable music market. The iPhone, close on iPod’s heels,
has opened new vistas in mobile communications, providing direction and driving
forward a refreshed vision for mobility. The initial success of the iPad brought fresh
perspective to the tablet market, revitalizing what has time and again been labeled as a
‘dead market’. Apple’s strength lies fundamentally in its mastery of redefining the way
humans interact with technology through superiorly designed hardware and software
products.

Brand and Consumer Loyalty

These successes have helped create an aura around the Apple brand and spurred a
generation of die-hard loyalists. A large percentage of these individuals are early in the
technology adoption curve and their enthusiasm in evangelizing new technology has
given them an unparalleled sphere of influence in the market. The Apple brand itself will
go far in convincing consumers that the Apple in-car experience is what they’ve been
waiting for.

Innovative Marketing
The ‘Apple-reality-distortion-effect’, a term sometimes used in jest, nevertheless sums
up Apple’s expertise in marketing its products to the end consumer. The coherence and
the sheer brilliance of its product definition, distribution and retail strategies, and
consumer communications and advertising are known to be legendary in the
contemporary technology industry. The company has consistently been able to weave

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the marketing mix with complete perfection, from the consumer buying experience to
customer satisfaction and retention.

Leadership
Larry Ellison, founder and CEO of Oracle Corporation, famously described Steve Jobs as
an individual with the mind of an engineer and the heart of an artist. Jobs, undoubtedly,
is one of the greatest visionaries the technology industry has seen till date. That coupled
with Apple leadership’s in product design and strategy execution is a strong
differentiator and a definite strength.

Ecosystem
Probably one of the most compelling strengths Apple possesses is the ecosystem it has
in place to monetize almost all aspects of consumer lifestyles, including music, radio,
and video entertainment, email and mobile communications, computing, reading,
fitness, etc. This ecosystem, if brought to the car, opens up unlimited revenue potential
for Apple, all by leveraging and repurposing existing products and infrastructure.

Weaknesses: What is preventing Apple from entering this market?

Partnership Development
Historically, Apple’s go-to-market initiatives have included few partners or OEMs that
can potentially accelerate product penetration in the consumer space, albeit
inorganically. In the car market, this might be a shortcoming considering the difficulty
to booting up product sales without the support of existing carmakers.

Expertise in the Automotive Market

The introduction of new technology in the car is characterized by a lengthy and intricate
qualification process. Building the right technology and navigating through this process
requires industry knowledge and experience, which Apple presently does not have.
Additionally, Apple’s location away from the automobile hub in Detroit could impede
how quickly and effectively it could penetrate the automobile market because
automotive talent is not abundant in Silicon Valley.

Opportunities: Why should Apple invest in this market?

To gauge the attractiveness of the automotive infotainment market to Apple, three
important questions to ask are:
• Are the consumers asking for change from the current solutions?
• Are the consumers willing to pay for it?
• What are they currently paying for, and what will they buy in the future?

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Are consumers asking for a change?
Consumers today want to stay connected in the car. Strong data exists from CEA1
showing that consumers are broadly interested in the following features built into a car:

Figure 1. Activities using Smartphone-integrated systems

Additionally, as smartphones and mobility computing become more pervasive, driver

and passenger expectations from in-vehicle electronics have been evolving. CEA also
describes the results of a survey administered to driver and passengers separately for
their expectations of what activities can be performed with in-vehicle systems:

1
Consumer Electronics Association, Sep 2010, “Staying connected on the Go: A Look At In-Vehicle
Smartphone Integration Systems”

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 Table 1. Driver & passenger activity preference in the car

As Table 1 illustrates, the driver and passenger requirements today range from basic
navigation and audio/video entertainment to complex activities such as social
networking, gaming, and location-based services over the Internet. People are clearly
looking for a richer, more holistic, revolutionary in-car experience that does not disrupt
their ongoing activities outside of the vehicle.

Are the consumers willing to spend?

Data shows that consumers are willing and ready to spend. In a survey by CEA on
consumers readiness to spend on in-vehicle integration systems, over 64% of
respondents said that they would buy the system within 2 years, and about 45% said
that they would buy it within 1 year.

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 Electronics
Source: Consumer Electronics Association
Figure 2. Time frame of consumer’ intent to spend

What are the current solutions and what are consumers willing to adopt?
Having established that the car consumers are increasingly getting vocal about
demanding to stay connected in the car, the next logical question is, “Are the customers
today actively buying alternatives, even though they do not fully address their needs?
What are they spending their money on?” The following table shows the current
factory-to-dealer sales which does not even include the mammoth after-market and
portable systems. This market is alone expected to generate about $9B in 2011.

Figure 3. In-Vehicle Technologies Market of Factory-Dealer Sales

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Additionally, according to ABI Research2, the global automotive telematics 3 market is
expected to generate over $38B in 2011, and grow from 37 million users to more than
211 million by 2015. The following histogram shows how the consumers are addressing
their needs in this market and what they are spending on:

Source: ABI Research

Figure 4. Current Telematics Market

Threats: Apple’s Competitors in the Car Market

Research shows us that a number of major technology companies have already
recognized the potential in the car market and have taken steps towards penetrating it.
Considering the “Winners take all” phenomenon in the technology industry as aptly
demonstrated by Google Search, Facebook Social Networking, Microsoft Windows and
innumerable other examples, this could be a potential lost opportunity and a future
threat for Apple if ignored today.

Microsoft has just released Windows Embedded Automotive 74 operating system for in-
car telematics and infotainment systems. Additionally, its partnership with Ford to
release SYNC5 and with Nissan to revamp its touch screen information hub in the new
LEAF electric car is a clear step in that direction. Fiat is also bringing its Microsoft-
powered Blue&Me6 system to North America for the first time in Fiat 500.

2
Wireless News: NA, September 02, 2010, “ABI Research: Global Number of Consumer Telematics Users
to reach 211 Million by 2015.
3
Automotive telematics is the idea of integrating a car as completely as possible. Automotive telematics
includes putting cellular services, GPS systems, weather displays, and dozens of other technological ideas
into a car to serve all the potential needs of a driver – eHow.com, 2010.
4
http://www.microsoft.com/windowsembedded/en-us/products/windows-embedded-
automotive/default.mspx
5
http://www.ford.com/technology/sync/
6
http://www.blueandme.net/blueandme/index.aspx?brand=fiat&lang=en

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The Google Andriod platform is also making in-roads into the in-vehicle infotainment
market. The Chevrolet Volt, GM’s much anticipated plug-in hybrid, will be one of the
first cars to connect with Andriod applications. Also, recent news7 about Google working
with Toyota to develop a self-driving artificially intelligent vehicle is evidence of the
company’s ambitious plans in this space.

Research in Motion (RIM) recently acquired QNX software systems and Dash Navigation
Systems, two companies specializing in in-car telematics and infotainment systems. QNX
Software Systems is the creator of Neutrino an operating system that is deployed across
a range of markets and is licensed for use in more than 17 million car systems.

Lastly, Nokia and Intel have teamed up to create MeeGo8 for a new era of mobile
computing. The European car industry alliance GENIVI9 has officially chosen MeeGo as
its reference release for in-car infotainment system.

These examples are testament to the fact that there is a revolution of the in-car
experience taking place where connectivity and integration with consumer lifestyles is a
lucrative problem to be solved by consumer technology companies.

7
http://www.nytimes.com/2010/10/10/science/10google.html
8
http://meego.com/devices/in-vehicle
9
http://www.genivi.org/

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Building Blocks: The Apple Ecosystem in the Car

Location based iAds

App Store/Local
iOS devices & Apps/Electric Vehicle
dashboard Management Apps
system

ITunes in the Driver-Safe

Cloud/Internet Radio
communication Siri-VR
based PA

AppleTV, Games

Figure 5. The Apple ecosystem’s synergies with the car

Apple’s entry into this market is natural considering that the company already has most
of the building blocks for this system in place and already monetized. The Apple
ecosystem, embedded into the car platform via its iOS devices will serve to consolidate
the fragmented consumer experiences that exists today.
For instance, the consumers’ entertainment needs could be addressed by iTunes in the
cloud, the AppleTV platform, and Games on the iOS. Requirements related to
navigation, car management, security and such could be addressed through the
phenomenon of the App Store.
Driver safety is being increasingly being compromised by usage of smartphones in the
car to SMS, check directions, conduct phone conversations, etc. A recently
released study10 by the VirginiaTech Transportation Institute found that truck drivers
who were texting were 23 times more at risk of a “crash or near crash event” than “non-
distracted driving.” As per talking on a cell phone, the same study found no increased
risk for truck drivers and 1.3 times the risk for car drivers. Apple could make the driver
experience safe through innovating a new experience using its resources like Siri Voice
Recognition based Personal Assistance and Facetime.

10
http://www.vtti.vt.edu/PDF/7-22-09-VTTI-Press_Release_Cell_phones_and_Driver_Distraction.pdf

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IAds, a very recent addition to this ecosystem, has the potential of leveraging the
mobility of the car with location based advertising. Not only is this a future revenue
source for Apple, but also presents a strong value proposition to developers, retailers, as
well as the thrifty consumer.

Why Tesla?
Culture Fit and DNA
Elon Musk, Tesla’s founder and CEO, believes Tesla is closer to Apple or Google than to
an automobile company like GM or Ford. The electric car is, for all practical purposes,
consumer technology and Tesla, like Apple, is in the business of redefining the
consumer’s experience interacting with and using technology. Both Apple and Tesla
boast versatile industrial design and consumer marketing teams that have
entrepreneurial streak in them. The close culture and value fit is further evidenced by
Tesla hiring George Blankenship, Apple’s former retail executive, to apply the Apple
values at transforming the consumer buying experience.

Growth Market
The nascent electric vehicle market is positioned for explosive growth over the next
decade. IDC Energy Insights11 estimates that by 2015, there will be greater than 2.7
million plug-in electric vehicles (PEV) on the road worldwide, with 885,346 vehicles in
North America alone. This translates into a market in excess of $81B.

Source: IDC

Figure 6. PEV annual sales growth

11
IDC Energy Insights “Business Strategy: The Coming Plug-In Electric Vehicle Rollout – Forecasting the
Market”

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Government subsidies and local market’s requirements for zero emissions will further
propel Asian annual sales to eclipse North American by 2015, and by the end of 2020,
there could be in excess of 8.9 million PEVs driving across the globe. That represents a
market of over $270B. An important date to note in Europe for PEVs is 2020, as the EU
commission has set for itself to cut greenhouse gas emissions by 20%, increase share of
renewable energy to 20% and improve energy efficiency by 20% by 2020. This is sure to
introduce a new urgency in adopting the PEV in the coming decade. Using IDC Energy
Insights aggressive growth scenario for PEVs shown below, the PEV penetration into the
worldwide automobile market could potentially be in excess of 10 million, translating
into a $300B revenue opportunity.

Figure 7. Cumulative growth of PEVs on the roads worldwide assuming three scenarios

Controlled Platform and Ecosystem

The current in-vehicle telematics and infotainment market is fragmented with a number
of point solutions solving differing customer needs. As such, the entire user experience
leaves a lot to be desired. Additionally, the installation process for these devices often
includes modifying the vehicle interiors and attaching contraptions to the car that
diminish the experience.

This draws strong parallels with the traditional MP3 player market and to some extent,
the smart phone with its fragmented applications market. Apple, through control over
the iPod and iPhone platform, revolutionized the user experience and redefined the way
people interact with these devices. Apple can bring this expertise to Tesla through an
acquisition maintaining control over the underlying platform, the Tesla car.

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Strategic Partnerships
Tesla brings with it several strategic partnerships with automakers like Toyota and
Diamler. Tesla plans to collaborate with these companies, who use Tesla’s electric drive
train and battery technology in their cars, to bring out an entire generation of new
vehicles such as eRAV4, Smart, Roadster, Model S, etc.
Apple, through Tesla’s acquisition, can penetrate the in-vehicle telematics and
infotainment market more effectively leveraging these partnerships.

Product and Technology Fit

The Plug-In Electric Vehicle (PEV) presents the ideal platform to serve as a showcase for
the confluence between vehicle and computing technology.

Figure 8. The future EV Telematics Package

The above diagram from a Frost and Sullivan12 whitepaper on the Electric Vehicle (EV)
market shows how the ideal EV Telematics package is the confluence of four distinct
packages, viz., Navigation Package, Points of Interest (POI) Package, Vehicle to Grid
(V2G) Communication, and Other value added services.

12
Frost & Sullivan, 2010, “Outlook of the Global Telematics and Infotainment Market -2010 and Beyond”

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A number of these services or package components are, in all essence, Apps that can
benefit from the wide Apple App developer network, and the App store infrastructure.
The EV market, thus, has the potential to spur an entire generation of EV vehicle
management Apps. Frost & Sullivan further goes on to summarize its key findings into
five points, as described below:

Figure 9. Key findings and conclusions for EV market

Tesla’s Financials

While this paper doesn’t aim to provide a valuation recommendation for Tesla, some of
the important multiples and their comparisons have been displayed in the key financial
statistics below.

Statistic Tesla GM Toyota Honda

Market Cap $3.29B $50.70B $122.87B $66.40B
Price/Earnings N/A 142.62 18.42 9.02
Price/Cash Flow 34.07 0.99 2.53 4.51
EV/Revenue 33.01 0.19 0.91 0.92
EV/EBITDA -30.09 3.53 9.54 8.02
Enterprise Value (EV) 3.27B 25.31B 220.52B 101.36B
Revenue 99.04M 131.04B 243.63B 109.88B
EPS -1.27 0.24 4.25 4.08
ROA -28.53% 0.39% 1.31% 3.71%

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ROE -82.20% 5.30% 5.49% 14.63%
Debt/Equity 26.11 28.8 118.15 92.9
Book Value per share 2.36 15.17 78.44 29.23

Table 2. Tesla’s key financial statistics

The table gives a quick snapshot of some important Tesla financial statistics13 in
comparison with the major automobile manufacturers today. The table also provides
four critical ratios that can be used in valuation analysis:
• Price/Earnings or P/E Ratio
• Price/Cash Flow Ratio
• Enterprise Value/Revenues or EV/Revenues Ratio
• Enterprise Value/EBITDA Ratio
Tesla’s excellent fourth quarter, 2010, results have caused its market cap to increase by
approximately 61% in the past three months, as shown in the chart below sourced from
Yahoo Finance.

Figure 10. Tesla’s 3 month stock performance

Conclusion
The car industry today is at the cusp of a revolution, one that marries together the
consumer’s desire for continuous connectivity with the inevitable transformation of
today’s automotive technology. The present in-car experience is fraught with a range of
issues ranging from an incoherent and stressful buying experience to safety risks and
inconsistent user experience. The timely advent of the electric drive train and electric
vehicles in general has reignited the consumer’s need and expectation of a clean and

13 th
Snapshot taken on 28 November, 2010.

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sustainable transportation experience. The intelligent nature of electric vehicles
fundamentally urges the need for connectivity and integration which Apple is best
positioned to provide through its ecosystem. Acquiring Tesla presents Apple with the
unique opportunity to address these consumer needs and revolutionize the field of
human-vehicle interaction.

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