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Get Help Now!Production Can Tesla achieve economies of scale and keep its promise?
Mini Case Studies 2
Production: Can Tesla achieve economies of scale and keep its promise?
With more than 350,000 pre-orders for its first mass market
car, the Tesla Model 3 Sedan, Tesla Motors will need to boost
production to 500,000 cars by 2018. That’s 10 times the
50,000 cars it produced in 2015.
The pre-sale numbers would seem extraordinary, but Tesla
has been ‘extraordinary’ from the beginning, fueled by the
vision of CEO Elon Musk and a cultural determination to
revolutionize the car industry.
Electric vehicles make a come-back Electric vehicles were popular in the late 19th and early 20th centuries until Henry Ford began
mass-producing gasoline-fueled cars with internal combustion engines. It took high oil prices,
environmental concerns, and advances in battery technology in the late 20th century to bring
electric cars back into the mainstream.
Now, with these changes in the market, the major car companies including Ford, GM,
BMW, Toyota, Honda, and Nissan have released electric or electric/gasoline hybrid cars to
accommodate for these changes. Yet these new innovations were conservatively tied to
existing models, attempting to retrofit and revise existing models to a newer format. On
the other hand, in 2013, Tesla, a small automotive start-up from California, began not only
winning several design awards, but also proving a profitable model for electric cars that might
challenge the traditional car companies. Tesla opened a new market segment: luxury electric
cars with a longer battery life, longer range, that were designed to excite discerning motorists
and sold through its own stores, not dealerships. It wasn’t offering the battery version of a
gas-powered car with fewer extras, but a new sought-after trend in upscale motoring.
Tesla making good on affordable car promise When Tesla made its first profit in 2013, Elon Musk said his company’s goal had always been
to mass-produce fully electric cars at a price affordable to the average consumer, and would
do it “within five years.” Musk was standing by his product life-cycle strategy – entering at the
high end where customers will pay more, then driving down costs and building volume.
Improving battery technology leading to increase driving range will lower costs in coming
years. Additionally, suppliers have begun demonstrating that they can revamp their own
production and reduce the cost of parts leading to more efficient manufacturing. Indeed, Tesla
claims it is steadily cutting the number of worker hours necessary to build each car in lieu
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of robotic automation and more efficient design processes. Tesla isn’t stopping there either,
as they expand their overall capacity, by pumping money into a Gigafactory and additional
production capacity in order to be ready to fill orders with significantly higher volume than
before. Altogether, these factors strongly tip future balance of the market in Tesla’s favor.
Challenges ahead The traditional car making giants, however, are not sitting idly by while Tesla muscles into
their space. Improved battery technology itself is replicable, plus they already have experience
in mass-manufacturing. Recognizing the value of experience, Tesla hired a long time Audi
executive to lead its vehicle production team – a departure from the company’s practice of
hiring from the technology and energy industries.
Perhaps Tesla’s biggest advantage is the strong support it enjoys from its investors. By mid-
2016 Tesla’s market cap was $32 billion with sales of just over 50,000 vehicles in 2015. GM’s
market cap was $50 billion, less than twice Tesla’s, and it sold 9.8 million cars. As 247wallst.
com said, “Something is wrong with this picture.”
Forbes calls Tesla’s share price “a cult-like valuation”, and critics suggest that without
generous U.S. Government loans and subsidies that the company has received, it may not
survive.
Tesla’s performance in the next few years will prove whether the beliefs of the Tesla faithful
are well founded, or whether the challenge of economies of scale for mass market vehicles
was too tough for the new market entrant.
Musk was standing by his product life-cycle strategy – entering at the high end where customers will pay more, then driving down costs and building volume.
