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Capital Project Management,

Volume III
Capital Project Management,
Volume III
Evolutionary Forces

Robert N. McGrath
Capital Project Management, Volume III: Evolutionary Forces

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Abstract
As an extension of Volumes I and II of this series, this book contains a
very detailed elaboration of the Tesla story, in a way that also serves to
examine the interaction of technology and economic forces that deter-
mine the evolution of the structural profitability of any industry, espe-
cially capital-intense industries. The underlying economics are the “five
forces” introduced to the management lexicon in the strategic manage-
ment corpus of research. Here there is strong emphasis on the interplay
among product technology, production and supply chains, and “Wall
Street.”
Many popular media articles are excerpted and abridged to illustrate
points of emphasis. This keeps the story alive, meaningful, and urgent.
However, the author is a retired business professor, scholar, and researcher,
and not an investigative reporter. His abiding research interest has always
been the management of innovation and technology, a legitimate branch
of management scholarship. For this book, he conducted no interviews
and double-checked no media data, though multiple media sources by
themselves typically provided cross-checks. This approach does not por-
tend to be any kind of tell-all “inside story.” It advocates no one person,
no one company, no one technology, and no portion past, present, or
future of the global automobile industry at large. It accepts the veracity of
reported events and turns to their practical and theoretical interpretations.

Keywords
Tesla; Musk; technology s-curves; technological discontinuities; d­ ominant
design; economy of scale; economy of scope; capital intense; breakeven;
productivity; profitability; competitive advantage; industry life cycle; core
capability; supply chain; vertical integration
Contents
Preface��������������������������������������������������������������������������������������������������ix

Chapter 1 Tesla through 2015: Something Old and


Something New..............................................................1
Chapter 2 2012–2015: Industry Form Follows Technology
Function.......................................................................27
Chapter 3 2016: “Real Cars” and Real Competition......................53
Chapter 4 2017: “Enter” the Incumbents......................................75
Chapter 5 2018: One “Hell” of a Purgatory.................................107
Chapter 6 Epilogue: Into 2019....................................................143

Summary and Conclusion: Volumes I–III���������������������������������������������157


Media Articles������������������������������������������������������������������������������������161
References�������������������������������������������������������������������������������������������171
About the Author��������������������������������������������������������������������������������173
Index�������������������������������������������������������������������������������������������������175
Preface
As an extension of Volumes I and II of this series, this book contains a
very detailed elaboration of the Tesla story, in a way that also serves to
examine the interaction of technology and economic forces that deter-
mine the evolution of the structural profitability of any industry, espe-
cially capital-intense industries. The underlying economics are the “five
forces” introduced to the management lexicon in the strategic manage-
ment corpus of research. Here there is a strong emphasis on the interplay
among product technology, production and supply chains, and “Wall
Street.”
This volume may be likened to a complete case study of Tesla through
the time of publication, with the most salient learning points boldfaced
and italicized. Many popular media articles are excerpted and abridged to
illustrate points of emphasis. This keeps the story alive, meaningful, and
urgent.
However, the author is a retired business professor, scholar, and
researcher, and not an investigative reporter. His abiding research interest
has always been the management of innovation and technology, a legiti-
mate branch of management scholarship. For this book he conducted no
interviews and double-checked no media data, though multiple media
sources by themselves typically provided cross-checks. This approach does
not portend to be any kind of tell-all “inside story.” It advocates no one
person, no one company, no one technology, and no portion past, pres-
ent, or future of the global automobile industry at large. It accepts the
veracity of reported events and turns to their practical and theoretical
interpretations.
The development of this book started in 1993 when the author
decided on a research setting worth risking a career on, for his Ph dis-
sertation in business administration. The “experiment” of choice was the
electric vehicle (EV) movement in the early 1990s, and the unit of anal-
ysis was “the battery.” Data included over 2,000 public media items col-
lected systematically and professionally. That dissertation was published
x Preface

in 1996. Now retired after a successful academic career, his interest has
returned to studying EVs, and this book might better be subtitled “what
my 1996 dissertation always wanted to be when it grew up.”
Here, a similar approach was taken: first developing a media item
database, by the systematic collection of well over 1,200 media items
from 2012 to 2018. Out of that database, about 150 items are excerpted
or referenced. While there is plenty of other data that could be assem-
bled, it would be much more haphazard and prone to bias. Truth not-
withstanding, it is only fair to expect any given media company to speak
in terms that its consumers expect. For example, many articles are from
the business media, speaking to that clientele. Thus, while the data that
appeared in the news media are taken at face value, at the same time, to
use Tesla and Elon Musk in order to illustrate any kind of general business
phenomenon should be done anecdotally. Any specific article chosen as
an illustration does not necessarily represent an exemplar but sometimes,
represents an interesting anomaly useful for instructive purposes.
Thus, the author is grateful once again to all who have helped him
along the way since 1996, with special thanks to “the media.” The story
told there, the first draft of history, is our story as it stands. Perhaps this
book constitutes a second draft, but it won’t be the final draft, which
cannot be properly written for years to come.
CHAPTER 1

Tesla through 2015:


Something Old and
Something New

Introduction
When Tesla first appeared, the “EV industry” was already both very new
and very old. Electric autos had been around since the beginning of
the automotive era, but the new version seemed more promising than
previous efforts mostly due to technological advancements (mostly in
lithium-based electrochemical “batteries”). One might also view it as
an industry within an industry, a new one within an old mature one
based on a revolutionary technology (compared to the standard internal
combustion paradigm). From a pre-introduction period to introduction
(Volume I), industry-wide average profitability was clearly negative, and
sustained firm-specific (quarterly or annual) profit was really out of the
question.
At the time, a disproportionately large amount of impetus was being
generated by just one company, Tesla, and just one founder-visionary,
Elon Musk. This was still a time when the industry could and would
be shaped by clear and individual strategic action, not faceless economic
forces constraining change in traditional, almost deterministic ways. In a
way, Tesla would become an economic force unto itself, sometimes rather
eccentrically challenging many old rules and creating new ones of its own
making.
Key Techonomics Terms in this chapter include:
Profitability and profit
Economic profit and accounting profit
2 Capital Project Management

Economic forces and threat of entry


Barrier to entry and economy of scale
Capital (as money, as equipment, as prop-
erty) and capital expenditure

Some Essentials
A main point of this series is this: accounting profit and economic profitability
are not the same thing.
Economic profitability is first and foremost an enduring or “struc-
tural” characteristic of an industry at large; accounting profit, in contrast,
“the bottom line” on a firm’s income statement, is a calculation, and is
the result of specific managerial decisions over any time period in ques-
tion, usually short. Sustained positive accounting profits should reflect an
organization’s capabilities as they match up against the specific economic
forces that structure an industry, in which case, one may speak of the
sustained profitability of the firm as well.
Economic profit is measured as economic value-added (EVA). If a firm
stands at the top of an industry in this way, this reflects a competitive advan-
tage. See Volumes I and II.
Consider not only the following accomplishment, but also the con-
text of its timing:

(Tepper June 8, 2017)

The most valuable car company in America … has never turned a


profit… Yet thanks to a 65% jump in its stock price this year … Tesla
now sports a market capitalization of $59 billion, versus $52 billion
for General Motors and $44 billion for Ford.

But now comes the hard part. Musk & Co. are about to start produc-
tion of the highly anticipated Model 3, Tesla’s first stab at a truly mass
marketed car …

… investors will have to pay a high price to find out. Tesla’s price-to-
sales ratio is six times higher than GM’s, and it doesn’t have a price-
earnings metric since it won’t make a profit anytime soon.
Tesla through 2015: Something Old and Something New 3

The words “most valuable” are important. The value of a firm can
be calculated in several ways for several different purposes (Bierman and
Schmidt 2006), but often the term refers to total market capitalization,
or “market cap” for short. This expression and ideas like corporate value
pop up frequently, but their face value interpretations should not be taken
for granted.
Market cap in business jargon is generally calculated as the number of
shares of common stock that have been sold, times the price of each share
at any specific point in time. Think of it as what the owners of common
stock have actually ponied up out of their own pockets, plus-or-minus
the vicissitudes of market ups and downs in the meantime, that is, capital
appreciation. Unless qualified, this is what the media means by market cap
when used in reference to what the company is “worth,” its “total value,”
and so forth. Market cap means the total investment in stock as the mar-
ket has determined—the “market value” of equity at any one point in
time.
In contrast, the “book value” of equity is what is available for distribu-
tion to shareholders, basically total assets minus total liabilities, preferred
stock, and intangible assets. (Book value was introduced in Volume II in
another context, but otherwise is not important to the present point.)
That said, market cap does not include things that can be important
depending on the conversation; here, the most important being capital
that has been borrowed by selling corporate bonds, called debt. That is
considered capital too, in the sense that it is money borrowed from exter-
nal investors, to be used in the expectation of it being invested profitably
and later all of it returned “with interest” quite literally.
To mention another term now, then, a corporation’s “capital struc-
ture” refers to the total amount of equity and debt a firm is obliged to put
to good use, where the term us used mainly for the purpose of managing
the optimal balance (e.g., the “leverage”) between the two (Volume II).
Capital structure and leverage become important in the Tesla story as it
plays out especially in the later years, but more generally are more inter-
nal, management matters.
Debt is just that—debt, whereas equity or stock represents real, actual
ownership of the corporation with all the rights due to private property
possession.
4 Capital Project Management

Tesla Motors Inc. and the Roadster

The Tesla story begins around 1990 when Elon Musk was not the central
figure, or any figure in the mix for that matter (Baer 2014). Around that
time a friendly collaboration of Silicon Valley engineers—mainly Mal-
com Smith and Martin Eberhard—had worked on consumer gadgets and
related mobility concepts. Soon another friend, named Marc Tarpenning,
joined Eberhard. These latter two fellows and good friends did most of
the “heavy lifting” during the earliest times.
During the late 1990s, the founders-to-be successfully marketed an
electronic book, eventually selling the company for 187 million U.S.
dollars (Baer 2014). Encouraged by their entrepreneurial success, they
wanted to start another company. A little analysis convinced them that
electric vehicles (EVs) had a viable future. With a little looking around
they discovered a firm called ACPropulsion, which was doing work in
California, being enervated by that state’s clean air mandates in the auto-
motive industry (Baer 2014). ACPropulsion already had a vehicle called
the “tzero,” which had impressive acceleration and controllability. It was
enough for them to develop a business plan and to invest in the technol-
ogy—but not in ACPropulsion itself.
Their enthusiasm was partly based on advancements in lithium-ion
battery technology. Lead acid batteries had been standard automotive
technology for most of its history, but simply did not have the natural
potential to become the basis of an EV paradigm. Other battery technol-
ogies were also under research for years, but all had their challenges.
A problem with perceptions was that EVs were something of a joke
(McGrath 1996). Very literally they were often compared to glorified golf
carts and the like, at least by the average mainstream consumer. But tech-
nology enthusiasts were highly interested as were people concerned about
the natural environment. Still, it was difficult to envision a viable—that
is, profitable—market for vehicles, which at the time were so pricey and
underperforming in terms of range—how far a vehicle can travel on one
“fill-up” or here, one recharging.
Range means how far a vehicle can travel on one “fill-up” or here, one
recharging. The explanation is a little technical but not hard to under-
stand. “Energy density” is a technical term about batteries that readily
Tesla through 2015: Something Old and Something New 5

translates into vehicle range. Energy density is about the electrochemi-


cally active materials in a battery, and their ability to deliver energy. Early
EVs had poor ranges for a variety of reasons, but none was more import-
ant than the energy density of the battery’s type. For present purposes,
lithium is one type, and the basic element of concern. Also critical was
that recharging early-generation EVs took hours (depending on the type
and the voltage at the source,) if not overnight.
Dominating U.S. auto-manufacturing for decades were the tradi-
tional, Detroit-based giants that saw that their technology competencies
were based on the internal combustion engine; they were glad to out-
source such things as vehicle electronics. Electronics had a fabulous future
in autos as they did in just about everything else. That might allow entry,
but the real ambition of the Tesla Motors partners was to produce entire
EVs, starting with a small two-seat car and pushing the frontiers out from
there.
The company was incorporated on July 1, 2003 and named Tesla
Motors, after the famous electrical genius of the 19th century. Incorpo-
ration is a legal term for a business where initially shares of ownership as
percentages are distributed among the founder-owners. Later, numbers of
shares can be distributed among employees and a select group of private
investors, called a “privately held” corporation. It can get more compli-
cated than that—especially if venture capitalists get involved—but the
point is that basic incorporation does not confer the right to sell shares
on an open market (e.g., a stock exchange). The corporation is not yet
publicly owned or publicly traded.
An early EV concept and a prototype was ready around 2004. It wasn’t
especially state of the art and was highly optimized for its purpose—if
there was any kind of “breakthrough” about it, it was a novel combination
of technologies. Media statements were good, though, and said things
like “At one end of the spectrum, the Tesla Roadster has higher efficiency
and lower total emissions than the best of the most efficient cars,” and “At
the other end of the spectrum, the Tesla Roadster accelerates at least as
well as the best sports cars, but it’s six times as efficient and produces one
tenth of the pollution” (Baer 2014).
The Tesla team realized that it could not develop a car “from scratch”
by itself—it would have to retrofit an existing car to its vision. After a
6 Capital Project Management

search, the founders decided to build on the Lotus Elise, a small sports
car. Lotus was a well-established design innovator in racing, at least in
Europe. The basic Elise chassis had served similar purposes by other
European and Asian car developers, so there was precedent for success.
Their business terms were attractive to Tesla, and their organization was
already suited to consulting with Tesla. Lotus was used to doing the kind
of things that Tesla needed. This and other key relationships would be the
focus of Tesla’s first vice president of vehicle development, Ian Wright,
only the third member of the formal team.
With that, the timely availability of minimally performing batter-
ies, and a technology license with ACPropulsion, the car design became
clearer. At that point the main problem became financing, a very signif-
icant hurdle. The year 2004 was largely dominated by solving that need.
Tesla had accomplished some financing from personal contacts and small
venture capitalists, but what they really needed was a major investor who
shared their dream. The team was familiar with a man named Elon Musk,
already famous in other circles as being the founder of SpaceX.
Musk was a visionary and long-term thinker yet acted aggressively
in the present. After personal introductions, discussions, offers, and due
diligence, Musk agreed to join the Tesla effort. Musk was particularly
concerned about the natural environment and believed that EVs could
play an important role in any real resolution to climate change. Like the
founders, Musk shared their conviction that any such effect could only
be achieved by large-scale commercial success, not symbolic niche efforts.
Musk led a round of raising 7.5 million U.S. dollars and became the
Chairman of the Board (COB).
Thus, at the outset he held two important roles: Chairman and major/
majority investor.
Tesla’s first real product and basis for business was called the Roadster,
released in 2008. It came in for high praise from sources such as Car
and Driver, beginning a legacy of generally adoring press that would last
for years. With some trouble about safety and reliability issues along the
way, Tesla would enjoy a good public reputation as it concerns product
technology.
Making a car from scratch was more difficult than imagined, and even
using an existing chassis was not straightforward. Because Tesla aimed
Tesla through 2015: Something Old and Something New 7

at an entirely new kind of a car, the powertrain, battery configuration,


and others would necessitate modifications to the chassis. The existing
partnership with ACPropulsion would thus prove fortunate, though in
another sense Tesla passed the chance for deep internal, tacit learning
about building a whole car, which, after all, was their real ambition.
But at the time, that task would have been overwhelming for a team that
had never produced anything but an electronic notebook.
Lotus took the task seriously, if for no other reason to protect its
image as a developer of racing autos. An advantage they held was to not
be too integrated with existing suppliers, that is, not to get too “locked
in” to business relationships that might hurt contractual flexibility and
creativity. For the most part they maintained a policy of sourcing along
the lines of immediate technical superiority.
Original Roadster design proposals were disappointing (Baer 2014).
It seemed as if the designers were stuck on the then-existing image of EVs
rather than envision a “real” car with a real market. A legendary design
consultant and personal acquaintance named Bill Moogridge was con-
tacted, but here was a person that had never designed a car. Nevertheless,
in a few days’ time he used universal design principles to come up with
a basic concept. It was futuristic enough but still exhibited classic and
appealing design features. After a second round of design requests, the
final winner was, not too ironically, from Lotus.
In November 2004, a prototype or “mule” was ready (Baer 2014.) The
mule was an ungainly looking Elise, without any body panels but with
the hardware and software componentry of an EV. Tests were successful
and observers were astonished at its acceleration. As far as they were con-
cerned, “proof of concept” was demonstrated. Led by Elon Musk and
additional equity partnering, another 13 million U.S. dollars was raised.
By 2006 it seemed time to embark on a public relations and market-
ing effort (Baer 2014). On July 19, a star-studded event was pulled off in
a hangar in Santa Monica, California. The event was reminiscent of the
way new cars are lavishly revealed at auto shows. Movie stars and celebri-
ties attended, and some got test rides. Despite some mechanical troubles,
the general reaction was one of amazement. Within a few weeks, Tesla
had 127 orders for Roadsters, priced at 100,000 U.S. dollars. Deliveries
were scheduled for the summer of 2007.
8 Capital Project Management

Tesla made sure the word was spread outside the circles of auto purists
and technology geeks. Positive press appeared in the New York Times, For-
tune, Wired, and the Washington Post. The plan was to begin first deliveries
of the Roadster in 2006 and continue scaling up production until “profit-
ability” was reached in 2008—a sensitive word that will resonate through-
out this story. The Roadster was not ready for first delivery until 2008,
beginning with a problem with production, which would plague Tesla
for years to come. Low cost and headcount across the system was a major
goal, but quickly Tesla found itself managing hundreds of components
rather than just the most value-adding and came to employ 140 people.
The situation also surpassed the experience of the principals who were
more accustomed to the compartmentalized Silicon Valley network way
of doing things.
It is axiomatic that skillsets at the apex of a startup generally evolve, and
“professional managers” eventually take over.
A new CEO was in place in November 2007 who assured that first
Roadster deliveries would begin in the spring of 2008. Sure enough, pro-
duction began in March that year. Boasting that the Roadster was the
only true zero-emissions vehicle in actual production at the time, the next
announced goal was to be producing 100 per month about a year hence,
in early 2009. However, the new CEO lasted only until October 2008,
when Elon Musk essentially took over the company—starting by firing about
a quarter of Tesla employees.
By that time Musk himself had invested about 55 million U.S. dollars
of his own capital, and Tesla was on the verge of collapse by 2008 due
to operational cost overruns (Vance, 2012), Fortunately, Musk was able
to bail himself out in early 2009 with the sale of another earlier venture
of his, Everdream, for 120 million U.S. dollars. We can stop counting
Musk’s roles now, or perhaps boil them all down to one—boss.

Initial Public Offering and the Model S


By May 2009, Tesla had recalled 75 percent of the Roadsters sold since
March 2008. At least the problem had nothing to do with the electric
drivetrain; the problem was with loose bolts that affected handling. Cus-
tomers were disappointed, which was softened by Tesla’s decision to send
Tesla through 2015: Something Old and Something New 9

repair technicians to customers’ homes to fix the bolts. Still, some of the
glimmer was off the rose, made worse by several high-profile celebrities
announcing their displeasure. Still, Tesla was ready to make perhaps the
biggest move in any firm’s existence—to make the transition to becoming
publicly owned and traded. This event is called IPO, an initial public
offering of stock ownership. The move would give Tesla access to a theo-
retically unlimited pool of capital, but would also expose the company to
public scrutiny by fiduciaries who had good reasons for concern.
The aspiration is not difficult to understand, though. A great deal
of capital would be needed to develop and field their first car past the
Roadster. This would be Model S—a key strategic move not only in its
own right, but where it would eventually stand in the evolution of Tesla
products. However, these two key elements of an overall strategy—one
technological and one financial—were not always in perfect sync, and
other elements of an overall strategy could not help but suffer in the
meantime.
Let’s set the stage at the time Tesla “went public” in 2010.

Commercialized EVs

Three viable autos were already becoming consumer realities, not just
auto-show amusements (BusinessWeek 2010):
General Motors:
Model: Chevy Volt
Technology: Plug-in (Battery-Gasoline) Hybrid (BHEV)
Battery: Lithium-ion
Range: 40 miles in battery mode; 350+ miles on a tank of gasoline,
overall 37 mpg
Price: 40,000 U.S. dollars
Availability: 2010
Years to Develop: 4
Nissan
Model: Leaf
Technology: All-battery-electric (BEV)
Battery: Lithium-ion
10 Capital Project Management

Range: 100 miles per charge


Price: 32,500 U.S. dollars
Availability: 2010
Years to Develop: 4
Toyota
Model: Prius (PHEV variant of the successful hybrid)
Technology: Plug-in Hybrid (PHEV)
Battery: Lithium-ion
Range: 15 miles before gas-electric kicks in
Price: 25,000 US Dollars
Availability: 2012
Years to Develop: 4
There were 27 other hybrid models already on the market, including
hybrid versions of the BMW 7 series, Mercedes S-class, and Lexus LS.
Further out still, examples included: a Porsche Cayenne S hybrid SUV
(67,700 U.S. dollars); a Lexus CT 200h compact, due early 2011 (32,000
U.S. dollars); a hybrid Volkswagen Touareg SUV in 2010; and a hybrid
VW Jetta in 2012. Also, there were expectations raised by Ford, Honda
(fuel-cell, expensive), Toyota, Mazda, and virtually all other major man-
ufacturers. Longer out were cars from Jaguar and Volvo. Also, BMW,
Volkswagen, and Mercedes-Benz were introducing ultra-efficient diesel
engines.

Market and Regulatory Environment

In 2010, California law required the largest automakers to have low- or


no-emissions cars in their fleets by 2012, and the Obama administra-
tion’s fuel economy standards raised fleet averages to 35.5 mpg by 2016,
a 40 percent increase. Outside California and the West Coast, which fol-
lowed it generally, there was a similar movement in the northeast cor-
ridor, Washington–Boston, but regulatory efforts and future proposals
were more fragmented state-to-state.
Also worth noting is that the East Coast power grid was much more
hydrocarbon-based traditionally, with closer access to plenty of coal, and
the West Coast was already better suited to future hopes for a solar-based
Tesla through 2015: Something Old and Something New 11

grid. In between the two main coasts for the most part but especially near
the Gulf coast, a revolution in oil exploration (fracking and horizontal
drilling) was already revolutionizing Big Oil and America’s dependence
on oil imports. At the time, low gasoline prices were an impediment
(some calculations said that 6 U.S. dollars/gallon would make EVs via-
ble), but of course could not last forever. Consumers continued to say
that main impediments were sticker price, limited range, and lack of
recharging infrastructure.
J.D. Power projected that in nine years, battery EVs like the Leaf
would sell about 100,000 units in the United States and 1.3 million units
globally, about 1.8 percent of the 71 million cars expected to be sold.
About 3.9 million hybrids and plug-in hybrids would be sold worldwide
in 2020, or a total electric and hybrid market of about 7 percent. In con-
trast, Bloomberg projected that plug-in cars such as the Leaf and the Volt
could make up 9 percent of U.S. sales by 2020 and 22 percent by 2030.
Another poll found that only one-fifth of drivers would consider buying
an electric car, and about half wouldn’t be willing to pay more for either
an EV or the associated infrastructure.

Battery Technology

Many kinds of promising batteries were under development in the “lab”


stage, but few were commercialized due to cost and/or technological
obstacles—often, a version of the “scale-up problem.” By comparison,
the cost of lithium-ion technology was dropping rapidly and dependably.
For example, Elon Musk predicted that the cost of operating battery-run
vehicles would drop from around 1,000 U.S. dollars per kilowatt-hour (a
standard metric of battery performance along with energy density) to less
than 350 U.S. dollars by mid-decade.
Most owners would charge at home about 80 percent of the time,
where charging an electric car with a standard 120-volt outlet could
take up to 18 hours. Installation of a 240-volt outlet could bring this
down to several hours but installation could cost from 300 to 1,800
U.S. dollars. Around 13,000 public chargers were expected to be
installed by the end of 2011, mostly concentrated in the most viable
regional markets.
12 Capital Project Management

Tesla’s IPO and Further Developments


Tesla “went public” in 2010 with a 100 million U.S. dollars IPO, and the
public response to the stock offering was enthusiastic. However, owning stock
brings voting rights and the proportional power of voting constituencies, some-
thing that Musk would have to deal with on every level. Now some of the most
influential purse strings became different, and “Wall Street” became a major
actor. Owning stock brings voting rights and the proportional power of voting
constituencies, something that Musk would have to deal with.
Aside from improvements to the Roadster, Tesla realized that it
was not the future of EVs or the company. Pioneer markets and tech-
nophiles would never, even en masse, alone constitute long-term socio-
economic change. They needed a successor to the Roadster and a viable
stepping-stone toward building a mass-market EV. The response was the
Model S. When it was announced as early as June 2008, the price point
was 60,000 U.S. dollars—still a great deal of money for an underper-
forming mass-market consumer car. Still, that was only about half of what
the Roadster was priced at. In one sense the move was necessary; but in
another the Model S would likely cannibalize some Roadster sales, as
there really was no other immediate competition for such vehicles.
There was probably no other clear path to the future of the technology than
to field some stepping stones of Tesla’s own. In this way, the future might be
proactively created.
A prototype Model S was unveiled in March 2009—the first produc-
tion cars were not delivered to customers until the middle of 2012 at a
price of 106,000 U.S. dollars. Tesla followers of all stripes started getting
used to this pattern, but now the company was publicly owned.
This “public” was of another kind and it wasn’t just following the tech-
nology, but was also “following the money.” This group of stakeholders showed
remarkable patience.
The company was extremely ambitious in the first place, so ambitious
it simply was not surprising that the company’s amazing goals were only
partially reached by announced deadlines, which were equally ambitious.
Also, experts knew that these time frames were not unusual for the indus-
try, where three to four years normally passed between a first prototype and
initial production. Still, Tesla’s estimation by Wall Street continued to soar.
Tesla through 2015: Something Old and Something New 13

In June, the following article appeared:

(Linn June 5, 2010)

When rival automakers Toyota and GM decided in the early 1980s to


build cars together at the Northern California NUMMI auto plant,
many questioned whether the unusual arrangement would work out.

Nearly 30 years later, and only a month after Toyota followed GM’s
footsteps in abandoning the NUMMI plant, Toyota has made another
surprise decision: A $50 million investment in a small startup called
Tesla, which plans to make electric cars at the NUMMI plant …

For Tesla, the deal … offers another measure of legitimacy as it begins


the transition from offering a very expensive car on a very small scale
to catering to a broader market...

What was then reported as something of a coup for Toyota—getting


them access to Tesla technology and entrepreneurial verve—was obvi-
ously unappreciative of Tesla’s potential to learn from Toyota as well. One
observer said, “for Toyota it doesn’t really matter if this particular exper-
iment works or not … For Tesla, it’s obviously more important.” Said
another more prophetically, “It’s very easy [for Tesla] to make one-off vehicles
and handcraft them and charge a lot of money for them, vs. manufacturing
them in huge volumes” (Linn 2010.) That would soon be eclipsed by what
Musk apparently had in mind, which would bear little resemblance to the
original GM–Toyota experience.
Before long, two things stood out about the refitted Fremont facil-
ity (Vance 2012). One was that it was highly robotized, a harbinger of
the future of manufacturing industries across the board. More specifi-
cally to Tesla’s strategy, lithium-ion battery packs were also assembled in
the car manufacturing plant. It was unusual for EV manufacturers to be
that vertically integrated, producing batteries and entire vehicles in the
same plant. Most auto producers outsourced battery production com-
pletely. Later, Tesla would produce batteries in the Nevada Gigafactory,
decoupling battery and vehicle production but still maintaining vertical
integration in the organizational sense—which is what it really means in
terms of strategy.
14 Capital Project Management

The year 2011 began in the media at least, as a more sophisticated


discussion as EVs became more mainstream and that kind of consumer
experience began to accumulate and take shape. That is, the technophile
and the wealthy environmentalist groups were still around and vocal, but
the more populous mass-market voice began to emerge. The legitimacy this
helped develop in turn helped develop attitudes about ideas that pre-
viously would have been quickly dismissed as, well, nutty. As examples
beyond the Leaf, Volt, and Prius noted earlier, the menu offered by man-
ufacturers became broader:

(Eisenstein January 12, 2011a)

… they’re hedging their bets, investing into … diesel, compressed nat-


ural gas and even hydrogen [fuel cells] that could increase the appeal
of alternative power …
… how much of the market will convert to … plug-ins and pure bat-
tery-electric vehicles, is a subject of fierce debate. “It depends on a vari-
ety of factors,” including fuel costs, government regulations, subsidies,
technical advances and especially customer acceptance.
There were clear overtones of true globalization developing, not just
“export–import” business:

(Carney 2010)
• Ford Focus Electric … about the same driving range as the
Nissan Leaf...
• Ford Transit Connect …minivan... aimed at commercial
customers … 80-mile range …
• Mitsubishi I-MiEV … less than $30,000 …the least
expensive battery electric..
• Honda Fit EV … 2012 … the same 100-mile range as
most …
• Tesla Roadster … has a six-figure price tag, so most buyers
are wealthy consumers... helping to establish the Tesla brand
name as the company plots more mainstream models.
• Fisker … Like the Volt, backs up its battery. Like the
Roadster, an exclusive price tag …
Tesla through 2015: Something Old and Something New 15

• Think … from Norway… plans to sell the City in the U.S.


in 2011 …
• GEM … neighborhood electric vehicles …(starting at
$7,500) … an appealing option.
And for the moment:
(Eisenstein 2011b)

… The options coming to market are broad, … [with] big SUVs,


including the Jeep Grand Cherokee and Mercedes-Benz ML350 …
There will be mainstream offerings, such as the Toyota RAV-4 Electric,
and products from aggressive start-ups, such as Tesla’s new Model S
sedan.
The Model S will aim to overcome one of the biggest drawbacks of
battery power, offering buyers a choice of a base Model S with a range
of 160-miles, or optional 230- or 300-mile battery packs, the latter
adding $20,000 to the price tag.

Also and importantly, “field intelligence” reports like the following


became more common, showing signs of an actual sequential displace-
ment of one kind of consumer for another:

(Zax May 2, 2011)

… the average Volt driver is going 1,000 miles between gasoline fill-
ups. And for the most part, Nissan Leaf owners are perfectly happy to
do without the gas tank altogether …

… Volt owners are getting savvier about maximizing battery use and
minimizing use of the car’s gasoline-powered “range extender” …

… the Volt gets the equivalent of 93 mpg on electricity alone, 37 mpg


when the gasoline engine is running, and 60 mpg for combined bat-
tery-gasoline power. The Leaf gets a combined EPA rating of 99 miles
per gallon equivalent.
16 Capital Project Management

The competitive domain (Narayanan 2000) was not only expanding, but
also morphing in character. In traditional economic terms, the argument was
whether EVs were part of the global auto “industry,” or whether EVs had
become a new industry unto itself.
It is not an entirely academic argument, because analyses of things
like “entry barriers” and “substitution” had clear and dramatic practical
implications for strategy.

Exhibit 1.1  Five economic forces and the threat of entry

The Five Forces That Determine Industry


Profitability
An enduring framework for analyzing industry profitability is Michael Por-
ter’s (1980) five forces framework. Each of “the five” economic forces is an
economic composite of more precise forces. This approach is backed by a cen-
tury of empirical data and is about as powerful as economics gets. Business
managers have much to gain from this wisdom, where applying it in business
practice vies toward greater profitability as well as more profits. It is by exam-
ining the economic structure of an industry whereby its inherent profitability
can be determined both in rough size and its locus/source. It is important to
bear in mind that five forces analysis complements the ILC model (Volume I).
The five forces are: (1) the intensity of industry rivalry; (2) the
threat of entry; (3) the threat of substitution; (4) the bargaining power
of buyers; and the (5) bargaining power of suppliers (Porter 1980). As
an industry’s economic structure evolves, it is largely because of the
way these five forces evolve. It is being able to foresee evolutionary
change where dramatic decisions are in the offing. In the remainder
of this insert, the first force will be summarized. As the discussions
proceed, the other four will be addressed.

Threat of Entry
Regardless of whether one speaks of the EV industry, the U.S. auto-
mobile industry, the global auto industry, or anything else for ana-
lytical convenience, it is important to keep in mind that this force
Tesla through 2015: Something Old and Something New 17

addresses the threat of a potential firm entering an existing industry.


We can say that once the Roadster was introduced and appeared to
be a commercial success, the Tesla threat had already turned into a
competitive reality, at least from the present point of view. Past that, in
the context of the present discussion this force really applies to rumors
and announcements of future EV competition as well as surprises yet
to come. See Table 1.1.
Table 1.1  Components of the threat of entry
The threat of entry, i.e. threat to latent structural profitability is high when …
there are few economies of scale and new competitors enter at low overall cost of
capital
the pool of potential new entrants grows: for example, technology diffuses as appro-
priability wanes
learning effects are not steep or can be obviated—that is, “invented around”
the appropriability regime is weak: for example, patents are easy to copy without fear
of infringement
brand name recognition is weak and technology legitimacy is low: for example,
during Introduction
distribution channels are available, or new: for example, in introduction and ear-
ly-growth phases
regulatory policies—it depends. Each regulation bears individual inspection, and
“regulations” also come from standardization institutions public, quasi-public, and
private.
trade barriers such as tariffs—it depends.

As it concerns industry-wide profitability, the threat of entry is a


price-subduing force. Sometimes, say during a major growth spurt, prices
rise to the point of making it lucrative for other firms to enter. A common
mistake is to confuse the threat or possibility of entry, with actual entry.
Once a firm enters a fray, it becomes a rival. Since the issue is assessing
the profitability of the industry, the impact of the threat is how it affects
pricing flexibility to the point where the profits of Rivals entices others to
enter and compete.
The procedure is to assess, one at a time, each of the items above
in terms of whether it poses a threat to the firm’s profitability, or an
opportunity for exploiting it. These become inputs to a thorough
SWOT analysis later, where strengths and weaknesses are also assessed.
18 Capital Project Management

The first item in the table is highlighted because it was so critical to the
Tesla story. Inherent economies of scale in auto manufacturing is an endur-
ing “barrier to entry.” From the standpoint of the auto incumbency, it was
a defensible barrier to their existing profitability. From the standpoint of
Tesla, it was something that had to be established, at very great cost, in
order to be competitive in mass markets.

Beyond the IPO


By the end of 2012, Tesla had sold a total of only about 2,450 cars (Vance
2012); interesting, hardly a competitive threat. By late 2014, however,
Tesla’s market cap was about 28 billion U.S. dollars (Baer 2014), about
half of what it would be just a few years later and surpassing all other U.S.
auto makers. Many people thought this portrayed a firm-specific “bub-
ble.” That much was probably true, but present reality is not the issue in
market valuation.
Stock prices reflect future expectations monetized in present terms. The
present stock price reflects expectations of future earnings, calculated in net
present value (NPV) terms.
Much concerning expectations, then, at about the same time another
Tesla model was announced, a habit that became worrisome not only as a
sign of product proliferation, but also a dilution of effort and capital as a
financial one. The Model X SUV was promised for first deliveries in 2014,
but this did not happen until late 2015. It was priced even higher than
the Model S. Originally announced to be priced from 65,000 to 80,000
U.S. dollars, the Model X upon first delivery was priced at 132,000 U.S.
dollars, about 5,000 U.S. dollars more than the Model S, but it was pro-
jected to have an impressive range of between 230 and 300 miles on a
charge. However, early reports of vehicle reliability were bad and threat-
ened the overall viability of the Model X. Tesla responded rapidly with
improvements, and consumer loyalty to the still-emerging brand was
resuscitated. Advancements in technologies related to basic performance
were more important to the pioneer consumers than reliability issues that
were quickly fixed anyway.
Tesla buyers were demonstrating remarkable loyalty, paradoxically to
some observers, while the brand capital on Wall Street grew. Despite some
Tesla through 2015: Something Old and Something New 19

agonizing problems in the present, they should not be reflected in the


present stock price of a company unless it is felt that the company will not
resolve them, at least not at a cost that could be considered strategically
prohibitive—that is, a poor use of investment capital regardless of the
efficacy of the fix.
Past performance, even the past quarter, should be irrelevant unless an
investor feels that the same will repeat; not just as a matter of resolving a
competence, but perhaps economically “structural,” intransigent.
“Brand capital” can be instrumental during bad times. Brand capital
is difficult and time-consuming to build, and relatively easy to wreck.
And then of course, brand capital does not always translate into hard
investment capital. Conversely, while Tesla was developing star-like status
on the Wall Street, the EV price was still a large impediment to achieving
long-term goals, and that, of course, pointed more and more at cost man-
agement—specifically, production costs once a vehicle design is frozen
(an engineering term that marks readiness for production go ahead).
It could be asserted that Tesla stock was in a bubble, though the overvalu-
ation was difficult to measure. The “invisible hand” of a free capital market is
said to be the best at resolving such measurement difficulties over the long term.
Meanwhile, consumers were being asked to pay roughly twice origi-
nally announced target prices. Was this becoming a permanent pattern?
Also, by this time many of the major global auto makers were starting to
catch on to the Tesla threat and respond with major announcements of
their own. Non-U.S. car manufacturers would become especially prob-
lematic, and their home markets were more sensitive to environmental
concerns. In fact, it was foreseen early that the largest market for EVs by
far would be China.
Tesla’s forward supply chain concept was novel, controversial, and
legally challenged in many states (Vance 2012). Rather than having tra-
ditional, independent dealerships to deal with, Tesla set up a chain of its
own “stores” in areas popular to buyers of pricey items. By the end of the
year, Tesla planned to have 34 stores worldwide. In a store, a Model S was
available for viewing, but not for sale. There would be another display of
the chassis and drive chain only because after all, that was the heart and
soul of the EV concept from a hardware point of view. Everything else
about the car was state of the art, and in some ways futuristic. Stores also
20 Capital Project Management

had interactive touchscreen devices where prospective buyers could fash-


ion a Model S to their own tastes and check pricing. This point-of-sale
concept found pockets of acceptance and defiance, and in some places
was outlawed to protect dealership jobs.
Salespersons were not on commission, because for one thing at that
time Tesla was merely taking reservations for a Model S for a refundable
down payment of 1,000 U.S. dollars (Vance 2012). The number of peo-
ple making reservations became so remarkably large as to be a danger sign
if Tesla failed to come through on production promises. It was impossible
to know how many takers would demand refunds, when, and exactly
why. Technically it was a gigantic accounting liability as well as being an
equally gigantic asset.
Fortunately, after the Model S was released in 2013, it was awarded
the prestigious Motor Trend Car of the Year. It quickly outsold other large
luxury sedans made by Mercedes, BMW, and others. This was a remark-
able milestone from every point of view, especially vehicle technology and
design. This was not the repetition of the Model X introduction. Priced at
a much-improved 50,000 U.S. dollars, the Model S was touted to travel
300 miles on a charge, demonstrating that EVs had made great progress in
these two, foremost metrics of success—that is, performance and price. Stand-
ing apart from all the chaotic technological variety in the field, Tesla and
the Model S especially were held up as major advancements during 2013
(Bullis 2013). Tesla maintained its brand loyalty, something that would
become tested over and again:

(No author November 21, 2013)

Tesla Motors Inc … won a near-perfect score for its Model S electric
car in an annual owner-satisfaction survey conducted by influential
magazine Consumer Reports …
The results offer a rare piece of good news for Tesla … after three
cars caught fire in less than two months. This week, U.S. regulators
launched a safety probe into the Model S.
“Owners of the Tesla Model S gave it the highest owner-satisfaction
score Consumer Reports has seen in years: 99 out of 100,” the maga-
zine said.
Tesla through 2015: Something Old and Something New 21

(Egan December 24, 2013)

[Tesla stock] soared 5% Tuesday morning after a federal safety agency


reaffirmed the five-star safety rating of the electric car maker’s Model S
despite recent fire incidents.
Tesla said its vehicles are five times less likely to suffer a fire than the
average gasoline car and noted there haven’t been any serious injuries
or deaths “for any reason ever, fire or otherwise, in a Model S.”

It is not true that being an early leader always confers a “first-mover


advantage,” unless there are barriers created in the act of being first. Examples
abound where “fast-followers” ruled in the end.
Still, it is an envious place to be, if not always a sustainably advanta-
geous place:

(Bullis 7, 2013)

Tesla’s Model S is expensive (it ranges from $70,000 to over $100,000),


but its range is 265 miles, more than triple that of Nissan’s Leaf (75
miles)... Tesla hopes to [build] a nationwide network of charging sta-
tions that can deliver 200 miles of charge in about half an hour …

... Even when you factor in … power plants that produce the electric-
ity to power the cars … electric cars produce about 40 percent less
carbon dioxide and ozone than conventional cars.

But … electric cars still are haunted by … high costs and less-than-
optimal batteries.

Those few themes resonated time and again, as they had for over a
century. At any rate, on most fronts, Tesla seemed to be the industry
leader. Its own (with Panasonic) lithium-ion batteries were seen as design
state-of-the art—including safety considerations—and to soon plum-
met in production cost. The Model 3 was already being envisaged, a leap
ahead from even the Model S in being mainstream, as made evident by
the expected price of 35,000 U.S. dollars. Its charging-station approach
22 Capital Project Management

and technology were a good overall model for range extension, cost to
consumers, and technological standardization—a factor that cannot be
underestimated in its importance to survivability if not dominance.
Said the GM CEO, Tesla has “gone from being the quirky little media
darling to being something that is definitely making people in the industry
think” (Bullis 2013).

They Don’t Call It Capital-ism for Nothing


In the very middle of the decade, Musk hoped to be manufacturing 100
Model Ss a day. The year 2015 began like this:

(Tobak January 19, 2015)

… while the company gets an average of $100,000 plus per vehicle …


it still can’t make a profit.
Musk recently said the company could be profitable today if not for its
ambitious growth targets…
The truth is, Tesla faces several significant growth and profitability hur-
dles …
… it’s hard to imagine an all-electric car company going mainstream
… Even if the demand for electric cars is there, you can bet the big
guys will be all over it.

At that point another major announcement was made, in a fashion


that was becoming characteristically Musk and Tesla. In a tweet sent on
October 1, 2014, Musk teased Tesla followers by announcing, in effect,
the Model D. The D stood for dual motor, which translated into sensa-
tional acceleration. Of course, all EVs had great acceleration anyway.
The D would also have some autopilot features, something that
would dominate news in the automotive world before too much more
time passed. An unveiling happened on October 9, receiving intense and
widespread press coverage. Musk did the honors. However, the arguably
premature release of the poorly named “autopilot” feature caused quite
a headache and was possibly one of the true blunders Tesla made during
this time. In a word, the word autopilot could be easily confused with
the ideas behind words like “autonomous” and “driverless,” and confused
Tesla through 2015: Something Old and Something New 23

public perception about a fatality. This was to be a period when the media,
as the voice of the Wall Street investment community, made its concerns
more clearly understood:

(No author January 27, 2015)

… Tesla will need to continue increasing the volume of cars they sell
in order to gain economies of scale to lower their prices. The more
cars Tesla produces, the less it will cost per vehicle for the fixed costs
involved in manufacturing each car…
… but Tesla will need to find ways to reduce their variable costs as well,
in order to reach a price point most consumers can afford, while still
making profit on each sale... the company could be profitable today if
not for its ambitious growth targets.

A few months later, a highly related theme addressed capital expenditures,


since large investments in plant and equipment would be needed to achieve
the needed economies of scale and subsequently, true profitability and not
merely profit:

(Rocco February 11, 2015)

… Operating expenses almost doubled year-over-year to $336.5


million.
Fourth-quarter gross margin came in at 27.4%, or 26.7% on an
adjusted basis. Excluding emissions credits, gross margin was 22%...
Tesla said it believes the company can achieve a … gross margin of
30% for the Model S by the final quarter. Margins are expected to hit
26% overall in the current quarter.
… capital spending and operating expenses will continue to increase
in 2015.

Gross margin is a metric that is important in auto manufacturing


and is always reported on income statements in annual reports. It is not
the same as profit, or earnings, not literally and figuratively that “bottom
line,” but it comes close, and is gross sales revenues less operating costs.
24 Capital Project Management

The difference between gross margin and profit is, mostly, taxes and inter-
est paid on debt. The latter is the major part of the difference between account-
ing profit and EVA:

(No author May 6, 2015)

… Tesla is posting record volume and says it is on track to deliver


55,000 vehicles this year, but investments in its network of fast-
charging stations, and the development of its forthcoming Model X
sport-utility vehicle and other future products widened losses …
… the company said the gross margin on its Model S sedan was on
plan at 26% of revenue... Analysts closely watch gross margin because
it shows the company’s efficiency as it reaches higher levels of produc-
tion and scale.

Managing capital-as-money and capital-as-equipment were not distinct


financial and operational problems, respectively, but in strategic terms were
just two major parts of one overall problem—EVA and true competitive
advantage (Volume 1).
Consciously or coincidentally, the author of the following article used
the word “capabilities” in a correct and meaningful way:

(Keith August 18, 2015)

… Tesla’s path to profitability relies on … the accumulation of produc-


tion experience [and to] realize economies of scale in manufacturing,
driving down battery and vehicle costs...
… if battery costs do not come down as planned, vehicle costs will
remain high and sales low, slowing … further battery cost reductions.
By investing aggressively in battery production capacity, R&D, and
fast-charging availability, Tesla is building the capabilities that it hopes
will keep these feedbacks turning in the right direction.

The words “and to” were inserted in the above article to make clearer
that the accumulation of experience does not lead to an economy of scale.
Accumulation of experience achieves a “learning effect” as well as greater
Tesla through 2015: Something Old and Something New 25

efficiencies as depicted by a declining average unit cost curve, but these


are not economy of scale (Volume II).
After that, one could almost predict the following article a few
months later. It was becoming more obvious that a total system would be
needed not only at the Freemont plant and the Gigafactory, and not only
between those two systematically, but all along supply chains to include
recharging infrastructures:

(McLaughlin August 14, 2015)

… Tesla isn’t just building cars; it is also building a vertically integrated


supply chain and a proprietary recharging network … greater invest-
ment is required by Tesla to build these multiple businesses simultane-
ously …
Tesla’s path to profitability relies on harnessing the … feedbacks to
bring down battery costs rapidly and grow the global market for
electric vehicles. Growth in Tesla sales will accelerate the accumula-
tion of production experience, [and to] realize economies of scale in
manufacturing.

Production and supply chain skills would vie with product development
skills to be the core value-adding capability across the company. This is what
the ILC (Volume 1) would predict, assuming a strategy aimed at mass-markets.

Conclusion
This chapter covered events from Tesla’s beginnings in the late 1990s,
though to incorporation, IPO, and a little beyond. The year 2010 was
particularly pivotal in the life of Tesla as it is for any company that goes
public. The event gave Tesla access to a virtually unlimited amount of
Wall Street capital, but of course exposed the fiduciaries to endless pub-
lic scrutiny and in the present case, media attention. Wall Street specifi-
cally, though not all investor groups across the board, shows a strong bias
toward the short-term and really, quarterly earnings reports and annual
results. Corporate strategists are compelled to think in longer terms, if
for no other reason that capital investments usually take several years to
26 Capital Project Management

even begin generating revenue, no less a return on the principle fully


remunerated at last.
During this period, Tesla commercialized the Roadster and the
Model S, aligned strategically with the company’s initial incorporation
and then the IPO, respectively. In retrospect, one could argue whether the
Roadster was a “real car” for a valid market, or a prototype fielded experi-
mentally to gain experience for greater ambitions in global, mass markets.
Even then, the Model S was a great advancement past the Roadster but
still, most marketable to technophiles and wealthy enthusiasts.
To reach mass markets, vehicle range had to improve, and sticker price
had to come down. There was no other path to profitability.
This rendition of the century-long electric auto story was taking on
the shape of a real global industry, not just an exciting product class, and
not only for pioneer markets. However, from any business proposition,
overall profitability was still problematic, and that was the expectation
(or lack of it) that drove investor interest and Wall Street capitalization.
Fortunately for the company, the Tesla investment community was pre-
pared to postpone profits for a while longer, and the founders stuck to
the original vision. Corporate strategy was plainly becoming key to suc-
cess, not just technological innovation. Still, the major obstacles were
technological.

Exercises
Define each of the following terms individually, and then compare and
contrast them in the pairs shown:
Profitability and profit
Economic profit and accounting profit
Economic forces and threat of entry
Barrier to entry and economy of scale
Capital (as money, as equipment, as prop-
erty) and capital expenditure
Index
Alphabets ‘e’ and ‘t’ in italics after page number indicate ‘exhibit’ and ‘table’,
respectively
A123, 29 Tesla charging stations, 40
ACPropulsion, 4, 6–7 wireless charging system, 40–41
AC versus DC, 41 See also electric vehicles
Aquion’s batteries, 31 Boeing, 44
asset specificity, 76, 90, 105, 112, 113 Boring Company, 126
Boulder Ionics, 32
bandwagon effects, 38–39 brand capital, 18–19, 38
bargaining powers, 114e–116e breakeven, 96, 150
battery(ies), 108–118 business, global procurement risk,
Aquion’s, 31 146–149
cost of, 24–25, 109, 115 BYD Ltd., 101
lithium-ion, 62
Model S, 29 capital
Tesla’s residential, 49 allocation strategy, 81
decoupling, 13 commitment, 112
design, 28, 113 expenditures, 23, 60, 84
developments, 35 intense, 113, 158, 159
electrochemical, 39 risk, 146
energy density, 5, 57 spending, 23, 60, 84, 138
GM’s decision to outsource, 113 capital-as-equipment, 24
lead-acid, 4, 31 capital-as-money, 24
life, 90 capital risk, cash flow and, 146
lithium-ion, 4, 33–34,44, 111. See cash flow. See free cash flow
also lithium-ion battery China, 29, 107, 113, 129
limitations, 27–50, 37e, 51, 108 global procurement risk and,
manufacturing, 87–88, 90, 93, 99 147–149
Model 3, 15, 28 recharging standards, 151
parameter, 110 redefines mass market, 100–103
recharging, 32, 43, 69, 151 VW in, 79, 99
replacing, 144 Cobalt, 98, 113, 114, 143
reverse, 42 competitive advantage, 2, 24, 39, 70,
size, 111 87, 107, 112, 157
solid state technology, 111, 154 competitive domain, 16, 127, 157
stored power, 118–121 Consumer Reports, 71–72
technological discontinuities, contracting risk, 151–154
35–36 core capability, 92
technology, 11 corporate commitments, 39, 53
and packaging, 109 corporate cash flow, 146
development in, 34–38 corporate portfolio, 91, 108
176 Index

corporate strategy, 26, 66 General Motors (GMs), 2e, 9, 13, 22,


cost-driven strategies, 127 59–60, 101
breakthrough technology, 33
dominant designs, 69 EVs and, 49
electric vehicle, 36e–39e free cash flow, 85
standards wars for, 38–50 global procurement risk, 147
technology standards and, 83, 109, manufacturing batteries, 90
150–151 outsourcing batteries, 70, 113
product strategy, 87, 109
economic profitability, 1, 139, 140 charging outlets, 150
economic sustainability, 58 sales, 29, 49–50, 77–80, 82
economies of scope, 97–100, 102, 148 self-driving technology, 92
economy of scale, 24–25, 58, 90, 99, warranty repairs, 65
159 Gigafactory, 13, 47, 58, 63, 76, 90,
economy of scope, 90, 99, 132 94, 102, 113, 127, 131, 147
electric vehicles (EVs), 4, 5, 155 globalization, 14
in 2016, 54t global procurement risk, 146–149
in China, 100–103 Goldman Sachs, 134
commercialized, 9–10 gross margin vs. profit, 23–24
competitive domain, 127–128
cost for, 32 hybrid car models, 10
designs, 113–114 hypercompetition, 28
discussions about, 14–16
dominant designs, 36e–39e induction versus conduction, 41
facts and figures, 145–146 industry life cycle, 77, 104
future of, 12, 99–101, 110 industry rivalry, 76e–77e
market demand for, 75, 88 initial public offering (IPO)
performance/price ratio of, 73 beyond, 18–22
profitability of, 138 Model S and, 8–11
recharging, 5, 38, 41, 69 Tesla’s, 12–18
regulations, 124–125 in-sourcing, 117e, 117t–118t
rivals, 77e–86e
sales of, 38, 77–82 law of unintended consequences, 125
technological breakthrough of, lead-acid batteries, 31
110–111 lithium-ion battery, 13, 21, 39
technology standards and, 83–89 advancements in, 4
Tesla’s “value proposition” and, costs, 62
48–49 fires, 44–45
energy density, 4–5, 11, 28, 31, 56e, issues in using, 59
57, 58, 91, 109–111, 154 making, 33
modelling, 109
field intelligence reports, 15 packs, 13
Ford, 10, 14, 37, 43, 65, 71, 75, 92, technical complexity, 44
95, 147, 150, 152–155 technology, 34
Fortune, 8
free cash flow, 77, 81–85, 93, 95–96, manufacturing efficiency, 138
138 market and regulatory environment,
fuel cells, 14, 32, 35, 42–43, 109, 123 10–11
Index 177

market capitalization, 2–3, 84, 103 Powerwalls and, 49


market-demand characteristics, 144 production hell, 129
mass customization production promise, 88–89, 99, 120, 130
technologies, 67 strategic change, 60
maturation, 104, 145 Tesla’s IPO and, 12–13
media observation, 59 See also Tesla
Megachargers, 123
Model 3, 28, 53, 57, 62, 64–68, 75 net-metering policies, 63
Bolt versus, 70, 87–88, 110, 112 net present value (NPV), 16
cannibalization of, 69 New York Times, 8
deliverables of, 155 Nikola Motor Company, 123
future, 80, 81, 83, 85–86, 88, 93, Nissan, 9–10, 15, 21, 43, 50, 78, 101,
98, 100 153
key issue for, 135–136
mass-market, 75, 81–82 outsourcing, 116e–117e, 117t–118t
media attention over, 124 overcapacity, 144–145
pricing, 83
production of, 84, 86, 95, 97, performance/price ratio, 55e–57e
130–132, 134, 136–139 PowerPack, 88
profitability, 135–140 privately held corporation, 5
technology strategy, 98 product innovation, 67
Model D, 22–23 production capability, 67
Model S, 12, 15, 18–24, 26, 29, 45, productivity, 158–159
49, 53, 57, 65, 69, 76, 127, product quality, 128
131 product substitutability, 128
IPO and, 8–11 profitability, 2, 115e, 128, 135
Model X, 18, 20, 24, 53, 57, 66, 68, threat of entry, 16e–18e
78, 80, 82, 83, 131 profit, gross margin vs., 23–24
sales performance of, 80
Model Y, 76, 129, 131, 132, 147 regulatory environment, market and,
multidisciplinary capability, 107 10–11
Musk, Elon, 1, 4, 6, 39 return on investment (ROI), 95–96
ambition, 86, 97 risk
automation, relied on, 134 capital, 146
battery technology and, 11 contracting, 151–154
debt market and, 93 global procurement, 147–149
enthusiasm, 146 intellectual property,
free cash flow, 138 technology, 149–151
Gigafactory, 76, 90, 94, 102, 131 rivalry, 75e–76e
irrational exuberance, 85 Roadster, 4–8
manufacturing hell, bracing for,
122 Samsung, 44, 98
market demand for electric vehicles S-curve technique, advantages of, 110
and, 75 Securities and Exchange Commission
other ventures, 126–127 (SEC), 80
personal relationship with Wall seller–consumer effect, 115
Street, 126 SpaceX, 6, 126
power packs, 120 stored power, 118–121
178 Index

supply chain, 25, 58, 76, 99, 121, Model Y, 129, 132
128n production difficulties, 68–70
capacities, 128 production rate of Model 3, 132
development, 101 productivity, 159
global strategy and, 149, 154 professional management, 143–145
latent profitability, 159 profitability, 137–140
lithium, 113 regulations, 10–11, 124–125
production technology and, 66 and Roadster, 4–8
strategic consistency in, importance sales performance, 80
of, 92 scaling up for mass production,
Tesla’s, 19 127–128
vertical integration and, 116e shares, 132–135
SWOT analysis, 17e strategic change, 60
strategies, 22–25
technology/technological supply chain, 19, 25, 58, 66
breakthrough, 35e, 110, 145, 154, technical limitations, 64
158 technology risk, 149–151
convergence, 71, 93 threatening financial position, 126
discontinuities, 35e–36e time-consuming, 70
innovation, 25, 55e–57e, 120–121,
value proposition, 48–49
158
vs. information technology, 92
maturity, 144
and VW, 99–100
risk, 149–151
warranty expenses, 65
S-curves, 35e
Tesla Motor Inc. See Tesla
uncertainties, 27–38
Tesla Semi, 121–124
Tesla, 1, 4–8
agenda for 2017, 75 threat of entry, 16e–18e
Autopilot hardware system, 92 threat of substitution, 55e–57e
battery technology, 11 time-consuming, Tesla’s, 19, 70
beyond IPO, 18–22 time-of use rates, 63
brand capital, 19 Toyota, 10, 13, 43, 92
capital expenditures, 60
charging stations, 40 value proposition, Tesla’s, 48–49
debt situation, 93 vertical integration, 116e
facts and figures, 145–146 Volkswagen, 10, 30, 78, 89, 90, 94,
free cash flow, 77, 81, 84–85, 93, 98, 102, 150–153
96 Volvo, 10, 102, 153
future perceptions of, 83
initial public offering and, 12–16 Washington Post, 8
lithium-ion battery and, 47–48 Wired, 8
mass production, 91 Wireless charging system, 40–41
Model 3, 64–68, 130 wireless versus plug-in, 41
Model D, 22–23 Wright, Ian, 6
Model S, 8–11, 20–21, 45, 131
Model X, 18, 53, 131 zero-emissions vehicles, 78