The market for fully electric vehicles is growing. Some reasons behind the growth include new regulations on safety and vehicle emissions, technological advances, and shifting customer needs and expectations. But much of the mainstream acceptance and excitement for electric cars can be traced back to Tesla Motors Inc (TSLA). In this article we review Tesla’s business model and how it differs from traditional automobile manufacturers.
Tesla founder and CEO Elon Musk launched the company with the mission, “to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.” This mission has served as the backbone to Tesla’s very successful business model.
- Tesla is probably best known for its charismatic CEO Elon Musk and his vision to produce affordable and high-quality electric vehicles.
- Tesla vehicles have been hugely popular, but the company has been hard a tough nut to crack for investors and analysts.
- This could be because Tesla's unique business model integrates aspects of being an auto-maker, a hardware supplier, and a tech company.
In the Beginning
Tesla took a unique approach to getting its first vehicle in the market. Instead of trying to build a relatively affordable car that it could mass produce and market, it took the opposite approach, focusing instead on creating a compelling car.
In a post on Tesla's website, CEO Elon Musk said this about the company's mission, “If we could have [mass marketed] our first product, we would have, but that was simply impossible to achieve for a startup company that had never built a car and that had one technology iteration and no economies of scale. Our first product was going to be expensive no matter what it looked like, so we decided to build a sports car, as that seemed like it had the best chance of being competitive with its gasoline alternatives.”
So, Tesla delivered to the market the first high-performance electric luxury sport car, the Tesla Roadster. The company sold approximately 2,500 Roadsters before ending production in January 2012.
The Next Stage
Once Tesla established its brand and had produced and delivered its concept car to the marketplace, it reinforced its business model. Tesla's business model is based on a three-pronged approach to selling, servicing, and charging its electric vehicles.
- Direct sales: Unlike other car manufacturers who sell through franchised dealerships, Tesla uses direct sales. It has created an international network of company-owned showrooms and galleries, mostly in prominent urban centers around the world. By owning the sales channel, Tesla believes it can gain an advantage in the speed of its product development. But more importantly, it also creates a better customer buying experience. Unlike car dealerships, Tesla showrooms have no conflict of interest. Also, customers only deal with Tesla-employed sales and service staff. Including the showrooms, Service Plus centers (a combination of retail and service center), and service facilities, Tesla has 429 locations around the world as of the end of Q4 2019. Tesla has also made use of Internet sales—consumers can customize and purchase a Tesla online.
- Service: Tesla has combined many sales centers with service centers. They believe that opening a service center in a new area corresponds with increased customer demand. Customers can charge or service their vehicles at the service centers or the Service Plus locations. Also, in certain areas, Tesla employs what it calls Tesla Rangers – mobile technicians who can service vehicles from your house. Sometimes, no onsite technician is required at all. The Model S can wirelessly upload data so technicians can view and fix some problems online without ever needing to physically touch the car.
- Supercharger network: Tesla has created its own network of Supercharger stations, places where drivers can fully charge their Tesla vehicles in about 30 minutes for free. The premise behind building and owning these stations is to speed up the rate of adoption for electric cars. Without the ability to charge on the go (similar to the concept of getting gasoline while driving), electric cars face a huge obstacle to mass adoption. Tesla will continue adding to the network of Supercharger stations in the United States, Europe, and Asia.
Tesla entered the market with the sporty Roadster. When it introduced the sedan, called the Model S, in June 2012, it had stopped producing the Roadster. Tesla began delivering its first SUV, the Model X, in September 2015. The first Model 3 deliveries kicked off in July 2017.
Tesla is also working on a new supercharged version of the Roadster, which they claim is the "quickest car in the world" and will be capable of going 0-60 in 1.9 seconds. The new Roadster isn't expected to release until 2021.
Tesla's biggest 2017 moment was the unveiling of their fully electric Semi-Truck. The truck features enhanced autopilot and boasts an energy consumption of less than 2kWh per mile. The Semi has been receiving pre-orders from various delivery companies, including UPS who ordered 125 trucks. Production on the Semi is expected to begin in 2019.
Other Tesla Products
If you recall, part of Tesla’s mission is, “to accelerate the advent of sustainable transport.” To that end, Tesla sells powertrain systems and components to other auto manufacturers. In April 2015, it also introduced a line of home batteries, called the Powerwall, that serve as energy storage systems in homes or businesses. They are meant to connect with a solar energy system and can be used as backup power when power is interrupted or when peak demand is high. Tesla sells solar panels, full solar roofing (that's a roof made up of solar panels but it still looks like a roof), and the aforementioned Powerwall.
Along with its three-pronged business model, Tesla offers financial services, similar to that of other car manufacturers, like General Motors Co (GM). This includes standard loans and leases. For some of the loan programs, it had a resale value guarantee provision. This provided some downside protection on a vehicle’s value should the customer want to resell it.
Is Tesla a Tech Company?
The idea that Tesla is a technology company gained credibility in 2013, when its stock price shot up by more than 300% within a single year. Publications scrambled to find similarities between companies from the technology sector, which had similar growth rates, and Tesla. Online publication Slate even ran a piece that compared Tesla to Apple Inc. (AAPL) and Alphabet Inc. (GOOG) subsidiary Google. Back then, Morgan Stanley analyst Adam Jonas, who has been a Tesla bull since the company's earlier days, gave the stock a price target of $103 "at full maturation." Tesla's shares raced past that figure in May 2013 and as of March 19, 2020 are trading at $427.64.
There are several points of similarity between Tesla and the tech sector. For starters, Tesla's valuation in the markets has increased despite its history of reporting losses. Several tech companies, such as Workday, Inc. (WDAY), sport high valuations despite generating losses. Tesla has also adopted the disruption credo of the tech sector. Much like other tech companies, Tesla is intent on changing existing business models within the stodgy automotive industry by selling directly to consumers. Its product pipeline and founder evoke loyalty and frenzy similar to those for iconic tech companies such as Apple.
Even the company's financial ratios are similar to those from the tech sector. For example, Tesla has a high negative P/E ratio, reflecting investors' faith in its future earnings despite its current losses.
The Bottom Line
Tesla did not invent the electric car or even the luxury electric car. What Tesla did invent was a successful business model for bringing compelling electric cars to the market. Part of the strategy was building a network of charging stations to solve one of the greatest obstacles facing the adoption of electric vehicles – refueling on long trips. Tesla’s unique business model, which includes control over all sales and service, is one of the reasons its stock has soared since its initial public offering.