Case Study Analysis Of Tesla Company
Problem Statement
Tesla known for their innovative creations may be on the brink of extinction due to an increase in electric models from their competition and their inability to meet their projected production levels to turn a profit.
Analysis
Tesla remains competitive and at the forefront of innovation in their market as the competition continually closes the gap. In 2010 Tesla became the first auto manufacturer to launch an IPO in more than 60 years and was able to reach financial success similar to Ford and General Motors. Unfortunately, this level of innovation comes with a cost. Tesla is currently struggling to meet production levels which is negatively their ability to maintain adequate cash flow. The Model 3, Tesla's attempt at a mass market car, was projected to be Tesla's first economic electric vehicle struggled to hit their production levels due to several production delays. Tesla's co-founder and CEO Elon Musk's volatile behavior overshadows all the innovative and groundbreaking technology the company has ushered in. This has caused a lack of trust from investors and making them feel like the company is unstable and on the verge of collapsing. Tesla has the opportunity to turn a profit and to also restore faith from their investors. This could be achieved by keeping the focus on the production of their cars, reducing the attention focused on their CEO. The erratic behavior of their CEO has brought lawsuits and investigations to the company and is positioning the company in a negative light Tesla also needs to turn a profit, it is important that they continue to hit their production levels with the Model 3 to generate enough cash. Tesla must also generate trust from Wall Street, with the company’s stock down almost 20% the company must not go private to ensure that the stock increases again.
Alternatives:
- Diversify the supply chain to reduce supply-side risks.
- Increase investments for product innovation.
- Expand operations in foreign markets to take advantage of the global growth of the renewable energy industry.
Recommendation
Tesla should make it a priority to diversify their supply chain to reduce supply-side risks to continue making money, which will allow them to meet their projected goals to improve their investor relations and to restore the public's faith in their brand.Implementation: Tesla could partner with companies to help automate their factories to reduce their production delays. Tesla’s goal is to build the machine that makes the machine, and by having several different suppliers this could reduce their risk and increase the companies’ productivity.
SWOT Analysis
Strengths
Strong Brand Presence: Tesla is the brand that all other car brands strive to emulate, they are known for their ideas and products. Elon Musk utilizes his social media account to garner attention to innovation and to promote any new business ventures that he is undertaking. During his tenure at Tesla Elon Musk has become somewhat of an influencer for the latest technological trends in the car industry as well as an entrepreneur. Elon Musk and the Tesla brand have become synonymous when people buy a Tesla it is as if they are buying into the genius of Elon Musk. Some of Tesla's strongest supporters do not own a Tesla, and have never had any interaction with the brand or the product. Tesla has created a unique experience that has created a variety of brand supporters who are dedicated to the brand and their push for innovation. The buzz these committed brand supporters have been able to garner around Tesla has been a driver for continued growth and popularity for the company.
Innovation: Tesla is much more than a car manufacturer, they are a vision of the future. Tesla produces highly innovative cars, they create electric cars that can go faster, further and most importantly safe. Tesla’s brand’s innovation was so strong that nearly 400,000 reservations were made for the Model 3 before the car was available to purchase. Back in 2017, Tesla started building secretive Gigafactories, where engineers around the world could collaborate and work towards creating the next big future innovation.
Weaknesses
Production Delays: Tesla recently was finally able to meet production levels for their Model 3 vehicle back in June of this year. Tesla forecasted that the company would be able to produce 5,000 of the Model 3 vehicles per week, fans gave the company a thousand dollars to reserve their vehicle. Some consumers had been waiting since April 2016 when Tesla started taking orders. Tesla’s Model 3 production came in 84% below the CEO's predictions, which was a direct result of mistakes during the production process. One of the biggest mistakes that Tesla made when producing the Model 3 is that they tried to automate simple tasks that a person could have done, which proved difficult for a robot to complete.
High Operating Costs: Tesla’s high prices prevent the company from rapidly growing its customer base and market share. Elon Musk is working to automate almost every process which is very expensive and costly to maintain. Tesla invested in a Gigafactory which will be used to produce lithium-ion cells into the energy products and battery packs for Tesla vehicles. The cost of the building and operating the Gigafactory were expected to exceed Tesla’s expectations.
Opportunities
New products and services: With the EV market becoming more saturated with competition, establishing or acquiring new business could help Tesla to reduce business exposure to risks in the automotive market.
Back in November 2016, Tesla acquired SolarCity which is a company that produces solar roof products. Tesla and SolarCity unveiled a new product that can capture solar energy without the big bulky design. Tesla has also installed the world’s largest battery in Australia, this battery will be connected to a wind farm and could power 50,000 homes. Tesla has the funds, and the brain power to expand their reach beyond the car industry.
Global sales expansion: Tesla must consider the opportunity for global sales expansion. The company can increase its revenues through expansion in Asian automotive markets. China is on the verge of a large change in their auto industry, they are now allowing foreign automakers to set up their own non-JV factories to manufacture electric vehicles. The Chinese auto market is much larger than the North America market, in 2016 28 million cars were sold compared to 20 million sold in North America. The Chinese government is pushing to get more vehicles on the road, a manufacturing presence in Tesla could give Tesla the opportunity to capture more market share in a large country.
Threats
Fluctuations in material prices: Tesla has incurred significant costs related to procuring the raw materials need to manufacture their high-performance electric cars, the assembly of vehicles and also the compensation of their employees. Tesla utilizes various raw materials such as aluminum, steel, nickel, and copper which fluctuate depending on the global demand which adversely affects Tesla's business. Depending on the price Tesla could be subjected to the disruption in the supply of battery cells due to recalls by manufacturers or the increase in the costs of certain raw materials used in the production of the Model S.
Increased Competition: At the 2016 Geneva International Motor Show, the show was dominated by cars that slot into the same markets that Tesla operates in. There are now more luxury EVs and hybrids than ever before, which are much cheaper options than the Model 3 car. The I-Pace is the biggest challenge to Tesla’s EV market share, the I-Pace has a similar range and acceleration and starts at $69,500 which is $10,000 less than the Model X 75D and $5,000 less than Tesla's entry-level Model S. More eco-friendly options are on the way, especially for the larger and high performing vehicles.
Financial Analysis
All income statement and balance sheet figures were retrieved from Yahoo Finance. From 2016 to 2017 Tesla has increased their total revenue by 68%. Tesla’s cost of revenue is almost as high as their revenue with an increase of 76.6% from 2016. Tesla’s cost of revenue jumped from $5.4 million in 2016 to $9.5 million in 2017, which shows that Tesla was forced to invest a large amount to incur a sale from 2016 to 2017. Tesla is an innovative company, which explains why their expenses for R&D have increased by 65.2% from 2016 to 2017. Tesla spends a great amount of money on their raw materials, which could be the reason they have experienced an operating loss for the past five years 2017. Tesla also experienced the greatest net loss in 2017, which is most likely due to the costly raw materials that Tesla utilizes in their vehicles. Elon Musks' push for the use of lithium-ion batteries and to mass-produce the Model 3, production costs are at an all-time high. Tesla’s total assets increased by 26.44% from 2016 to 2017 and they exceed the company’s total liabilities, but total liabilities total liabilities increased by 36.33% from 2016 to 2017. Tesla has reported negative retained earnings for the past five years, Tesla has a large number of investors and this could be the result of distributing dividends that exceeded their earnings.
Proposed Solutions
Although Tesla has finally hit their production goals for the Model 3 in the past two months, the company is vulnerable to price fluctuations for their raw materials. As Tesla continues to lead the way for innovation in the car industry, they are not able to meet production levels if supplies are not available.
Diversify the supply chain to reduce supply-side risks: It is important for Tesla to engage with companies of all sizes, more specifically it is important to work with companies that are based in different locations. It is important for Tesla to evaluate their sourcing strategy and to determine if their supply chain network is diverse.
Increase investments for product innovation: Tesla is known for being innovative and creative within the auto industry. To maintain their presence as a market leader Tesla needs to invest more time and money in their R&D department to continue churning out state of the art products and services.
Expand operations in foreign markets to take advantage of the global growth of the renewable energy industry: The renewable industry car industry has become highly saturated for Tesla, there are several untapped markets that Tesla could pursue. One of them being China whose government is experiencing a large push from their government to get more EVs on the road.
Optimal Solution and Recommendations
Diversify the supply chain to reduce supply-side risks: Tesla can reduce the risk by designing supply chains to contain risk rather than allowing it to spread through and ruin their whole supply chain. A diverse supply chain could help foster competition among suppliers which could drive down the costs of materials. Through the diversification of their supply chain, Tesla could foster innovation and could help provide solutions for a new generation of consumers. With a diverse group of suppliers, Tesla can be more selective with their raw materials when the price fluctuates and less reliant on a few suppliers which results in missed production goals.
Implementation
Develop a supplier diversity program: This program can attract top talent for Tesla and identify companies that Tesla could utilize for their raw materials. The corporate policy should outline Tesla’s primary objectives and any benefits of this program for the company. This program should be something that Tesla should roll out in Q4, to reassure their investors of their ability to turn a profit.
Train staff on the supplier diversity program: First Tesla should train buyers and managers within their organization on this new initiative. This training will include any new policies and procedures that result from the supplier diversity program. There should be extensive meetings and emails to ensure that all internal communications are tailored articulate the message we are pushing out to our potential suppliers.
Develop external communications strategy: Work with marketing and operations team to tailor messages that will best fit the program. The messaging will have to ensure new suppliers that this program is in their best interest, and they will not be losing business as a result of the global supply program.
Train new suppliers: Develop training and mentoring programs for the new suppliers that will allow them to grow with the needs of the business. Supplier development goals should be implemented to ensure that the new suppliers are meeting their training objectives and are aligned with Tesla’s vision.
Track and measure progress: Tesla should develop desirable targets and commitments for the suppliers to help assess growth while also providing accountability throughout the organization. Tesla should also set up objectives for the program to measure the program’s effectiveness in helping them meet production goals.
