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This case was prepared by Senior Lecturer Donald Sull and Cate Reavis, Associate Director, Curriculum Development.

Copyright © 2019, Donald Sull. This work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California 94105, USA.

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18-186 May 1, 2019

 

Tesla’s Entry into the U.S. Auto Industry Donald Sull and Cate Reavis

In March 2016, CEO Elon Musk unveiled the company’s latest electric car, the Model 3, in front of an audience of 800 Tesla owners and fans. Musk enthusiastically explained how Tesla’s earlier electric vehicles (EVs) – the Roadster, Models S and X – had paved the way for the company to design and manufacture an EV “for the masses.” The baseline $35,000 Model 3 could accelerate from 0 to 60 miles per hour in six seconds, and its 75-kilowatt hour (kWh) battery had a range of 220 miles (the range increased to 310 miles with a long-range battery option). Deliveries of the car would begin at the end of 2017. Musk boasted to the audience that the company had already secured 115,000 pre-ordered cars at $1,000 per car (a number that would grow to 500,000 pre-orders by 2018).1 By August 2018, Musk’s enthusiasm had turned to misery, laid bare in a New York Times article entitled “Elon Musk Details ‘Excruciating’ Personal Toll of Tesla Turmoil.”2 Working up to 120 hours a week and sleeping on the factory floor, Musk was closely supervising the production of the Model 3. He described Tesla as being in a state of “production hell.” The company had paused production in late February and again in April to work out bottlenecks in its highly automated factory, staffed with over 1,000 robots.3 During a call with equity analysts in May 2018, Musk’s misery was palpable. He became testy, characterizing a question about the company’s capital requirements as “boring.”4 But it was a legitimate question. In the second quarter of 2018, the company recorded a net loss of $743 million on revenue of $4 billion. Analysts estimated that the company needed to produce at least 5,000 units a week to turn a profit in 2018.5 Some wondered whether Tesla would run out of cash by the end of the year.6 (See the Tesla Financials tab in the Tesla case workbook for additional financial data.)

 

 

TESLA’S ENTRY INTO THE U.S. AUTO INDUSTRY Donald Sull and Cate Reavis

May 1, 2019 2

In The New York Times article, Musk remarked, “The worst is over from a Tesla operational standpoint.”7 The company was finally producing 5,000 Model 3s a week after missing the original production goal by more than six months.8 As he worked to get production ramped up before the company’s cash ran out, Musk admitted on Twitter to one mistake: “Yes, excessive automation at Tesla was a mistake. To be precise, my mistake. Humans are underrated.”9 Investors and auto industry experts were split on Tesla’s future. Some believed that Tesla would create value by disrupting the traditional automobile industry, all while achieving its stated mission to accelerate the world’s transition to sustainable energy. Skeptics disagreed. “Tesla,” according to one prominent investor, “without any doubt, is on the verge of bankruptcy.”10

The Traditional Automobile Industry

Industry Overview

The new passenger car marketa in the United States was worth about $270 billion at the retail level in 2016.11 While the industry experienced a sharp downturn during the 2008 Great Recession, sales had rebounded by 2013 as the U.S. economy swung into recovery. With higher disposable incomes and easier access to credit, Americans, including Millennials born after 1980, flocked to dealerships. By 2016, the market’s momentum had slowed. Sales (by value and volume) were expected to remain flat until 2021 (Exhibits 1a and 1b). The average sales price of a new car was $35,500 (Exhibit 2). Americans were buying big cars. Of the nearly 7 million new cars sold in the United States in 2016, 60% were pickups and SUVs.12 However, industry analysts expected demand for small cars to comprise 20% of new car model launches by 2023, compared to 15% between 2008 and 2017 (Exhibit 3). Some also predicted that by 2025 nearly 60% of new vehicles (trucks and buses included) sold in the United States would offer some form of alternative propulsion (e.g., EVs, hybrids, and fuel cellb cars).13

Automakers

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