How Attractive Is the North American Automobile Industry for New Entrants?

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Tesla’s single greatest driver of willingness-to-pay and economic value creation across all customer segments was their technology. Whether the customer was concerned with environmental benefits, safety, performance, maintenance costs, or battery range, Tesla simply produced a superior product that reduced their costs while concurrently adding value for buyers.[5] For instance, Tesla reduced the extra costs of production associated with rear wheel drive by improving motor location near the rear axis, and they utilized what they had learned from partnering with Panasonic on the Roadster battery to create a battery for the Model S that had 2x the energy density of typical EV battery.[6] This in turn reduced both vehicle weight and material costs. By comparison, the Nissan leaf battery cost $1200 per KWh while Tesla’s Model S battery only cost $250-$300 KWh.[7] Wisely, they placed the battery on the bottom of vehicle, which improved handling and rigidity- key factors in safety ratings. Software updates in many cases supplanted the need for shop visits, reducing maintenance time and repair costs. Even their choice to use a touchscreen dashboard that required far fewer parts reduced costs and drove willingness to pay. By bringing technology in-house, they made certain that all of these adjustments could be coordinated, unbound by design limitations of suppliers and partners.

Finally, crucial to Tesla’s business strategy was how they decided to interact with customers. By electing to operate Tesla stores rather than use dealers, they retained ownership of the customer relationship. Tesla eliminated commissions in favor of salaries, enticing salesman to educate consumers with information that they could then proliferate, rather than incentivizing salesmen to get a deal made at a bargain. Tesla also eliminated the conflict of interest for most salesmen of EVs and traditional cars, in which promotion of one necessarily undercuts the value of the other. With this focus in mind and the understanding that Tesla customers likely were evaluating other luxury vehicles, Tesla marketed speed, comfort, handling, and safety (traditional metrics) first, then emphasized potential cost savings from gas and reduced maintenance as supplementary benefits. To further distinguish the customer experience, service stations were distinct from stores. Therefore, unlike most dealership environments, Tesla buyers were not made imminently aware of repair needs. Tesla even offered a mobile concierge team, the Tesla Rangers, and allowed customers to substitute loan vehicles while repairs were performed.

Is Tesla a threat to BMW? What actions could Reithofer have taken to prevent the threat? What should BMW do now?

Tesla certainly poses a credible threat to BMW based objectively on their comparison metrics, Tesla’s sales growth rate, and competitor profiles.[8] To inhibit Tesla, BMW could have partnered with battery experts and leveraged their design resources to create an EV for luxury segment at prices similar to existing BMW models (40k-60k) or lower price points. They were probably deterred by Nissan, since Nissan was large enough to compete with BMW in R&D expenditure. As a result of BMW’s inaction and Nissan’s failure to produce a competitive product, Tesla was able to enter the market at the high end and work their way down the strategic frontier.

Given the choice of whether to now compete or accommodate, BMW should compete with Tesla. As mentioned earlier, automobile manufacturing involves a very steep learning curve, and they don’t want to fall so far behind Tesla and others that they can never compete in the market. Instead, since they know that Tesla plans to offer more affordable models, BMW should push to become the dominant luxury player in this space and forcus on the higher end of the strategic frontier.

Is Tesla managing their scope correctly?

Tesla is indeed managing their scope correctly, especially as it pertains to the purchase of their new battery facility. Like Honda did by building out infrastructure to compete in motorcycle technology, this battery plant allows Tesla to respond flexibly to market demands. While some might argue that they should be concerned about liquidity and overcapacity given the current size of the EV market, Tesla needs to be prepared to leverage technology in order to meet demand as they product differentiate with the more affordable Gen 3 model and the Model X. They will also need capacity to sell their battery technology to partners like Toyota and Daimler. Further, thinking allocentrically, it is prudent for Tesla to build on their brand perception as an elite automobile manufacturer by positioning themselves also as the preeminent car battery makers with essential infrastructure, since battery technology is Tesla’s greatest competitive advantage. This way, rather than competing in an arms race to create the best battery, they could instead capitalize on this core competency by inducing cooperation from competitors who would buy their technology. Good companies continue adjusting the scope of their offerings to segment customers and leverage competitive advantages, and Tesla is doing exactly this with both design and battery production. They will need the capacity to continue this strategy. They should not reduce or eliminate any of their existing capabilities as they seek to further expand the strategic frontier and penetrate new markets.

Gross Margin:

BMW: 30%

Tesla: 20%

Average: 5%

Operating Ratio (How efficiently they use capital. Used in Carnival case)

Tesla: 22%

BMW: 18%

This shows that Tesla is not far behind, given the considerable learning curve in the industry

BMW net income is decreasing (5%) between 2011 and 2012

DuPont is not useful since Tesla is so early stage. Too young to have meaningful ROA, ROIC, ROE.

Tesla operating expenses are relatively flat 2012-2013, but revenues quadrupled

Cannot calculate profitability for battery factory without knowing new cost structure and revenue sources

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