Tesla Motors competes in a niche segment of the an automobile industry, which is the electric car segment. Specifically they occupy a luxury component of that segment. The macroenvironment is an interesting one, not the least because it is in a state of flux. The traditional model of the gasoline-powered automobile has been so dominant for so long that is seems almost inconceivable that this model is changing. Yet, with climate change, peak oil and a number of other issues, there is a groundswell of public opinion that is shifting. Surveys have revealed that acceptance of electric vehicles is not universal, but is stronger among women and the aged, and those with a high level of environmental conscious. Men perceive their knowledge of the issues surrounding electric cars to be high, while there is actually no evidence to back that up, and men score lowest on acceptance of electric vehicles (Ziefle et al., 2014). That said, Tesla has built some good buzz for itself. Perceptions of the Tesla brand are generally high, and the brand awareness is also showing evidence of growth as well. Ultimately the social environment is moderately positive, and possibly improving, for Tesla.
There is some thought that this will change, however. Increasingly, younger people have a high awareness of climate change, and they are spurred to make consumer decisions based on their vision for the future. As per their nickname, millennials have a vision for the future that is rooted in the 21st century, much different from the current dominant economic and social model, which is rooted in the 20th century in which the baby boomers (and up), and Gen Xers were raised. The social environment projects to become much more favorable going forward.
The economic environment is generally good for Tesla. The company sells in the luxury segment, where price sensitivity is low, and where sensitivity to economic health is also lower. That said, the company does make a point in its advertising to note that its product is cost-effective when the cost of fuel is taken into consideration, indicating that the company believes there to be some level of price sensitivity among its target market. The economy in the U.S. is growing slowly, and in Europe perhaps even more so. In the critical Chinese market, there are concerns that slowing growth with adversely affect Tesla (SCMP, 2015). The Chinese market is an interesting one in particular, because a lot of the company’s growth projections for its current models are based on growth in China, which Tesla sees as a major potential market.
The regulatory environment is one of perpetual challenge for Tesla. For years, it has faced obstacles from entrenched interests in car dealerships, because of its model of self-distribution, cutting out the dealerships. Tesla sales have been banned in some states as a result of this conflict (Tesla, 2014). The political environment is also relevant in terms of the support for electric vehicles in general and Tesla in particular. Americans receive a tax benefit of $7,500 for the purchase of a Tesla, and there are a number of state level incentives as well (Tesla, 2015). These are important because they help to create a market for the company’s products. In some cases, competitor products are also eligible for these rebates, but for gasoline-powered vehicles they are not. There is also the question of support with respect to building out superchargers and other charging infrastructure — in China for example there was the question of government support for building out this critical infrastructure (Voelcker, 2015).
Tesla has two main competitive advantages. First, it has superior technology, and second it has established a brand reputation as the leader in its field. The company competes in the electric car niche of the global automobile industry. The industry as a whole is worth an estimated at $9 trillion (IBIS World, 2015). Of this, the electric vehicle market was worth $83.54 billion in 2012, with an estimated 19.2% CAGR, implying that in 2015 the size of the electric car industry should be around $142 billion (TMR, 2013). Thus, electric cars are a niche market worth 0.015% of the global automobile market. Tesla, with revenues of $3.8billion in the last four quarters, accounts for 2.6% of the global electric vehicle market and thus an infinitesimal share of the global automobile market (MSN Moneycentral, 2015). It is worth noting that 55% of the electric vehicle market today is in the form of hybrids (Perkowski, 2014), whereas Tesla is a pure electric vehicle. Its share of the pure electric vehicle market is therefore around 5.5% globally.
Tesla has an interesting take on its competition. The outside observer might argue that as an electric vehicle, Tesla competes against others. But most of those are either hybrids or lower-end vehicles that have limited ranges and more standard car features. Tesla expects to compete in the latter market by 2017 or 2018 (Moseman, 2015). Tesla often frames its immediate competitive market in terms of the price range, so competing against higher end sedans from Mercedes, BMW and other brands of that type. As a result, Tesla is positioning itself as a niche car, but there is the risk of market confusion over how to view Tesla. That said, the company’s positioning is unique — while that creates risk of market confusion it also creates opportunity if Tesla finds itself tapping into previously untapped demand. So far, that seems to be the issue — the main constraint on Tesla is not demand, but supply (Waters, 2015).
Another way to conceptualize the environment is looking through the lens of what makes a company profitable. Tesla is definitely differentiated, but is that enough for it to be consistently profitable. Right now, the company has a negative operating profit, but a lot of that is related to investments for the future, growing the company, as cash flow from operating activities is being used to finance the company’s investing activities. A model for profitability is Porter’s five forces model. Within the model, the external environment is characterized by the different forces that affect profitability.
Tesla has only moderate bargaining power over suppliers. The company is too small among automakers to have much influence over major industry suppliers. That said, it is reasonably well-sized for many of the inputs, because Tesla’s cars as much about technology as they are about vehicles. . Moreover, the company has a fairly high degree of vertical integration, meaning that it buys commodities more than finished inputs. Tesla has high bargaining power over buyers. The company has built a great brand reputation, has relatively limited supply, and the customers it targets are not particularly price-sensitive. When you want a Tesla, you want a Tesla. So on that level, the company has been able to set its own prices, though it feels the need to keep those prices within the range of comparable luxury cars – its main points of differentiation are not the “luxury” aspects of the vehicle, so it does not have competitive advantage on those attributes.
The intensity of rivalry within the industry is not particularly strong. This is a rapidly growing business, with only a handful of players, and they are competing more on terms of innovation, something at which Tesla has staked out a leadership position. Furthermore, the barriers to market entry are reasonably high. Barriers to entering the automobile industry are exceptionally high in terms of capital requirements and expertise. Most newer auto companies are developing world companies that have received tremendous state support, and even then it takes anywhere from 20-30 years to make a vehicle you can sell to Western markets. Add in the electric angle, and the challenge of leapfrogging Tesla’s technology, and the barriers to entry are very high. Only existing automakers can even hope to enter this market, or companies like Apple that have tens of billions to burn (Wakabayashi, 2015). Only the thought that electric cars will one day dominate the automobile industry entices companies to overcome these barriers.
The threat of substitutes is high. Ultimately, electric cars exist to move people from one place to another, a task that can be accomplished any number of different ways. In many urban markets, people view electric cars favorably, but may not make enough car trips to justify the high cost of one – you need to drive a lot to realize the fuel savings. Wealthy potential customers, be they in San Francisco, New York, London, Vancouver, Tokyo, often live in cities where there is no great need for driving, with public transportation, bicycles and other non-car trips reaching rate of upward of half of all trips. Until the supercharger network fills out, Teslas are not great for road trips, which invites substitution of a hybrid or even a gasoline car. So the threat of substitutes is quite high. Overall, this presents some challenges for Tesla in terms of profitability. Being able to set its own prices is powerful, but will not be the case with the Model 3, as that targets the mainstream market. The threat of substitutes remains strong, and the competition in the industry will increase. Attention to branding and ensuring technological leadership will be critical for Tesla to establish sustainable profitability.
The biggest draw of the electric car industry is that it has the potential to dominate. Awareness of climate change is growing, and concern is growing even more quickly. The reality is that the millennial generation has a high awareness of climate change and substantial motivation to do something about it. Electric cars represent a bridge between our present society, which in most places is structured almost entirely around the automobile, and a post-automobile society that uses a lot less energy. Though electrics are only 0.015% of the automobile industry at present, if they were to be 10 or 20% of the industry within twenty years, that would equate to a 31 times increase in size. Anything after 20% and you are looking at the 100th monkey, and electrics will be on their way to domination. This is what is enticing about the industry, more than its current conditions.
The current conditions are moderately unfavorable. While Tesla has pricing power, and its vertical integration helps it control costs, the industry overall remains unfavorable and it is expected that the level of competition will only intensify. Strong growth will help, and for Tesla having first mover advantage (more or less) will be a major boon. Today, the company cannot turn an operating profit, but that is because Tesla is playing the long game with respect to building its brand and building capacity. The demand is there, it is the supply that is the problem.
But again, a moderately unfavorable industry today, one where the costs of acquiring the technology are higher than what most people are willing to pay for it, is projected to give way to massive growth in the future. If electric cars are growing at 19% CAGR with oil prices this low, it only makes sense that when Saudi stops being silly with its production levels and oil prices spike back up, that the electric business will see even stronger growth. This is an interesting industry to evaluate in this way, because on the surface it looks like any company would turn a loss or at least struggle to break even, but the potential for growth is phenomenal and for many companies it is very much worthwhile to establish a market position today, and ride that growth for the next couple of decades, as having a strong market position will help make this industry more favorable as it grows — not having an established market position will only make the barriers to entry more substantial in the future.
Moseman, A. (2015). Confirmed: The $35,000 Tesla Model 3 will be unveiled in March 2016. Popular Mechanics. Retrieved November 20, 2015 from http://www.popularmechanics.com/cars/a12983/35000-tesla-model-iii-coming-in-2017/
Water, R. (2015). Delivery shortfall holds back Tesla. Financial Times. Retrieved November 20, 2015 from http://www.ft.com/cms/s/0/c6903a96-b23f-11e4-80af-00144feab7de.html#axzz3rzSRTgmV
SCMP (2015). Tesla electric cars struggle to ignite Chinese market. South China Morning Post. Retrieved November 20, 2015 from http://www.scmp.com/news/china/money-wealth/article/1771599/tesla-electric-cars-struggle-chinese-market
Ziefle, M, Leusmann, S., Kasugai, K., & Schwalm, M. (2014). Public perception and acceptance of electric vehicles: Exploring users’ perceived benefits and drawbacks. Retrieved November 20, 2015 from http://www.comm.rwth-aachen.de/files/public_perception.pdf
Perkowski, J. (2014). Electric cars: a review of 2014. Forbes. Retrieved November 20, 2015 from http://www.forbes.com/sites/jackperkowski/2014/12/12/electric-cars-a-review-of-2014/
Tesla Motors (2014). Tesla sales banned in Arizona, Texas and New Jersey. Tesla Motors. Retrieved November 20, 2015 from http://my.teslamotors.com/it_CH/forum/forums/tesla-sales-banned-arizona-texas-new-jersey
Tesla Motors (2015). Support: Incentives. Tesla Motors. Retrieved November 20, 2015 from http://www.teslamotors.com/support/incentives
Voelcker, J. (2015) Tesla superchargers still free in China; fees on sign apply to private charger. Green Car Reports. Retrieved November 20, 2015 from http://www.greencarreports.com/news/1099062_tesla-starts-charging-for-charging-in-china-superchargers-still-free-for-owners
Wakabayashi, D. (2015). Apple targets electric car shipping date for 2019. Wall Street Journal. Retrieved November 20, 2015 from www.wsj.com/articles/apple-speeds-up-electric-car-work-1442857105
IBIS World (2015). Global car and automobile sales. IBIS. Retrieved November 20, 2015 from http://www.ibisworld.com/industry/global/global-car-automobile-sales.html
TMR (2013). Electric vehicles market to rise at 19.2% CAGR from 2013 to 2019. Transparency Market Research. Retrieved November 20, 2015 from http://www.transparencymarketresearch.com/pressrelease/electric-vehicles-market.htm
MSN Moneycentral (2015). Tesla Motors Retrieved November 20, 2015 from http://www.msn.com/en-us/money/stockdetails/financials/fi-126.1.TSLA.NAS?ocid=qbeb
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