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Tesla Motors' Model 3: Strengths, Weaknesses, and Perspectives

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Tesla Motors’ Model 3: Strengths, Weaknesses, and Perspectives

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“Tesla Motors is unique because it is not merely selling cars but also selling new technologies”. One of the greatest strengths that Tesla has to offer is that they deal with two of the largest markets: premium luxury cars and eco-friendly electric cars. Tesla stands above their luxury car competitors due to their advantage of being more cost-effective in usage because they do not run on gasoline. The price of gasoline continuously increases each and every single day which consumers take into consideration when buying a vehicle. In comparison to other electric vehicles, Tesla is known to have a longer-range battery life which allows drivers to travel further without having to stop. As consumers are becoming more aware of their ecological footprint, the demand for a more eco-friendly vehicle is also increasing. Tesla Motors uses this to their advantage to expand their market by making a more cost-effective electric vehicle.

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Tesla has a brand reputation of being one of the more innovative electric vehicles. They strive to make their vehicles not only functional but tech-savvy as well.

“Our first product was going to be expensive no matter what it looked like, so we decided to build a sports car, as that seemed like it had the best chance of being competitive with its gasoline alternatives” (Zucchi, 2019). Tesla built its reputation based on having high quality and high valued vehicles, which resulted in consumers having faith in their products. Tesla continues to be able to grow by introducing new models by lowering the prices so that they are able to compete with the markets in which they want to enter.

Tesla keeps its inventory in its showrooms and dealerships to a minimum which makes them unique in comparison to its competitors. Their showrooms typically only include one vehicle of each model which allows them to decrease their costs by protecting themselves from high risks such as damage to inventory and theft. Tesla’s strategy on distribution allows consumers to cater to their specific needs by giving them the opportunity to customize their vehicles. Their main focus is to get consumers to purchase their vehicles online. They offer a 7 day or 1000 miles return policy, which gives consumers peace of mind and makes them more receptive to the idea of purchasing online. It is a great strategy for the company because they are able to expand their markets by reaching more consumers while increasing their profit margins by decreasing labor costs and maintaining fewer locations. In addition, consumers that shop online are less likely to return items versus consumers who shop in person due to the inconvenience of having to ship the product.

“During the quarter, a majority of orders continued to be for a long-range battery option and the Model 3 average selling price (ASP) was stable at approximately $50,000. At the same time, manufacturing costs continued to decline. The production rate of Model 3 continued to improve gradually throughout the quarter, breaking a monthly record in May and then again in June”. The manufacturing costs lowering while prices stayed perfectly inelastic gives Tesla a better profit margin. It gives them the power to lower prices while still creating profit. The strategy of creating model 3 was to create a “no-frills” price that gave consumers the choice to add in the extras depending on their own personal purchasing power. This is a pricing strategy that allows them to market it as a “cheaper” luxury vehicle, as the starting price is lower.

The main advantage of Tesla Motors is its management. Their background knowledge in technology, engineering, and manufacturing has given them a product differentiation competitive advantage. “The Model S can wirelessly upload data so technicians can view and fix some problems online without ever needing to physically touch the car (Zucchi, 2019). As a technology-based vehicle they are able to update and service their cars remotely, and easily communicate with all Tesla owners with dashboard messages. “Tesla has created its own network of Supercharger stations, places where drivers can fully charge their Tesla vehicles in about 30 minutes for free” (Zucchi, 2019). Tesla drivers will be able to charge at all-electric charging stations in addition to the supercharger stations, whereas the competing electric vehicles are constricted to the basic charging stations.

Weaknesses

This paints a flattering picture of Tesla but the company is not without vulnerabilities; for example, it has yet to post an annual profit. Stakeholders saw hope at the end of 2018 when the company produced a net income for the last two consecutive quarters (2019, O’Kane); however, in Q1 and Q2 of 2019, it has seen even greater losses despite the fact that its total unit sales, production, and delivery are better than ever (though still short of their targets). The greatest factor is the rise in sales of the Model 3—the margins for the Model 3 are significantly lower than on those for the Models S and X. Shifting attention and resources away from its high-margin products has endangered the company’s bottom line and puts into question whether the Model 3 is a worthwhile pursuit (DeBord, 2019a).

Adding to Tesla’s list of pain points, the company does not focus on advertising in the traditional sense—in fact, they famously have a $0 advertising budget as Musk prefers to allocate these funds towards ameliorating his products (Koetsier, 2019). Instead, the company relies on its strong brand identity to produce referrals, word-of-mouth, and organic social media and traditional media coverage (Bhasin, 2019) but is unlikely enough to sustain sales for the mass market given that their sales revenue has been falling short so far in 2019 (Koetsier, 2019). There is a limited life-span for such a strategy; as CEO of C3 Metrics, Jeff Greenfield explains ‘You got the first phase of early adopters. But it’s no longer that first tier that you’re interested in. They don’t have a choice. They have to advertise’ (Isidore, 2019). Musk himself has identified that “Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day” (Musk, 2014, para. 6). And yet Tesla’s promotional visibility where its competitors are already established limited. [will expand on this.]

Tesla has struggled with manufacturing its vehicles from the start, a surprise to veterans of the auto industry given that the industry as a whole has refined its practices over the course of decades (Debord, 2019b). At one point in time, demand was significantly exceeding supply, and customers needed to wait anywhere from months to years to receive their order (Isidore, 2019). Tesla CEO Elon Musk goes so far as to label this “production hell” (Debord, 2019b). The introduction of the Model 3 compounded these challenges as it meant a significant increase in Tesla’s production capacity. In an attempt to optimize efficiency, the company built an automated assembly line that failed disastrously due to the limitations of the robots performing the assembly (DeBord, 2019a). In addition, the company would perform experiments on the live assembly line to discover such aforementioned limitations, essentially breaking machinery. Finally, in order to amplify production, a tent was erected in the parking lot and humans were added back into the production equation to make up for the robots’ shortcomings (Boudette, 2019). If Tesla plans to sell the Model 3 to the mass market, it is first going to have to prove that it can produce for the mass market.

Opportunities

There are multiple opportunities that Tesla could take advantage of to get ahead of its competitors. One such opportunity lies in economic markets. An article on Evannex.com states that “China sales of EVs grew 60% last year” (Pressman, 2019). The Asian market presents a strong market growth opportunity for Tesla and the company has already started capitalizing on this potential with the construction of a new Tesla Gigafactory in Shanghai, with completion scheduled for the end of this year (Blanco, 2019). China is also paramount to the success of Tesla’s global strategy since the government has set ambitious targets for EV sales (Gardner, 2019). Additionally, “some 24 European countries accounting for 62 million people are banning diesel over the next decade” (Behrmann, 2019) thereby restricting consumer options to hybrid and electric cars and creating enormous growth potential for Tesla to expand further into Eurasian markets with its lower-cost Model 3, as more people are forced to turn towards EVs when making their purchase decisions.

Previously, one of the major hindrances to a long-lived battery in an electric vehicle was its sheer cost. That is changing, however, as numerous countries looking to invest in their lithium-mining operations (lithium is an integral component in battery manufacturing), with the market for lithium reaching a potential value of US$20 billion by 2025 (Stringer and Lombrana, 2019). Tesla can take advantage of the increased supply through its Gigafactory production, which accounts for 60% of all lithium-ion batteries in the world (O’Kane, 2018). Therein lies the opportunity for control of the battery market via cost reduction and means of production for Tesla, giving them the opportunity to further reduce the cost of the Model 3.

Because Tesla does not spend much on advertising, it relies upon its CEO, Elon Musk, to promote the company through Musk’s personal Twitter account. This unconventional strategy appears to have paid off, with Tesla being the number one most discussed auto manufacturer on social media (Folschette, 2019). With so many countries moving towards green energy and prohibiting fossil fuel-powered vehicles, the opportunity for Tesla to utilize Musk’s brand as a pioneer and visionary with inventions aimed at combating climate change is immense.

In the market for luxury cars in Canada, Tesla has 3.3% of company shares. Daimler AG (Mercedes-Benz) leads with 27.4% of company shares. After that, Volkswagen has 23%, Bayerische has 22%, Toyota has 13.7%, and Tata Motors has 8.8% (“Luxury Cars in Canada,” 2019). This information shows that Tesla’s competition is with cars that use gas. An opportunity for Tesla is to create a broader variety of Tesla cars with different price points to pursue their competitors’ customers. Mercedes has 30 models, with its price range from $34990 CAD Sudan to a $209000 CAD Maybach (“All Vehicles / Mercedes Benz”, n.d.). Tesla has 3 models, but if they were to create a diverse set of price points for each model (Sudan, coupe, roadster) they can cater to more consumer attitudes towards car purchases. Also, varying each model with differing interior design quality, power, speed, additional technology, and other qualities would help entice people to switch from competitors to Tesla. Having a low-cost mass-market option is important for millennials and generation X consumers, as having the prestige of a Benz or BMW with an affordable price is what they would look for, and if Tesla were to have one that can compete with its quality (materials, lush interior, etc.) then the fact that it is fully electric would convince buyers to choose Tesla over other brands.

Threats

For Tesla to enter the mass market with its Model 3, there are many threats they need to consider. These threats include competitors, regulations, the economy, society, and technology.

The main competitors that Tesla has in this market are aggressive with creating what consumers want whether it is fully electric vehicles or plug-in hybrids. In the industry, Tesla currently faces off with well-known luxury brands including Mercedes, Audi, Lexus, and BMW. When entering the lower end economy market, the big names they will compete with are companies like Hyundai, Kia, Toyota, and Nissan. These brands are already well established in the electric vehicle industry with each of their own known models like the Kia Soul and Optima, the Nissan Leaf, the Hyundai Ioniq, and the Toyota Prius. In regards to the market of electric vehicles, these companies make up the majority of the market in the lower end along with Ford and Chevrolet. Along with Ford and Chevrolet, these companies made up for 26.07% of electric vehicles sold in 2018 (Mcdonald, 2018). While the other vehicles sold were high-end luxury vehicles. Although these vehicles may not be up to the technological standards like Tesla, they still perform as well and are zero-emission vehicles.

There are many regulations that are threats to Tesla entering this market as well. One of the regulations includes a 5 million liability needed for driver insurance when using the technology in the vehicle like the full autopilot mode (Ministry, 2013). While companies like TD Insurance can offer discounts for electric vehicles, consumers will still need to make the change due to this regulation. On top of discounts, Canada offers a zero-emission vehicle incentive program for owners of certain electric vehicles. This program lets you submit claims online for payment through this program for fighting climate change and purchasing or leasing a zero-emission vehicle. It would be directly applied to your bill of sale or lease agreement but as of right now in Canada, there are limited models of vehicles listed in this program. Not until May 1st of 2019, the Tesla Model 3 was not listed on this program and as of right now they still do not have any other Tesla models like the Model S, X, or Y. If Tesla were to enter the lower end market, the vehicle would go through the process of being added and the incentives would be much lower compared to the current Model 3 to be relevant with Nissan, Kia, and other companies in the lower end market (Transport, 2019). Politically, Tesla has been involved in reaching out to the Chinese market with its new gigafactory that was built to increase their sales and lower their costs. With China’s increase in demand for electric vehicles, this was a good move by Tesla. As of right now, with the protests of Hong Kong and the ongoing trade war between China and the US, US companies with ties with China are sometimes brought under fire by people in support of Hong Kong. An example of this would be either through athlete Lebron James. As Lebron was interviewed and defended China, many people were upset with him and wanted to boycott both him and his brands like Nike. From Nike’s perspective, it is clear why they have their athletes not talk in support of Hong Kong because of how large the market is in China and many companies have followed.

The Price points these vehicles in the lower end market can begin from around $37,000 for the Hyundai Ioniq, and about $40,000 for the Nissan Leaf and Kia Soul. While these are more common economy prices, the Tesla Model 3 as of right now begins at a low of $55,000 up to $75,000 depending on the specifications on the vehicle (Tesla, 2019). While Tesla tries to make the vehicle cheaper for the consumer to enter the lower end market, even at the base of the vehicle, it is still at a high $55,000 which keeps it in the luxury market. In the economy as well, gas prices can threaten Tesla’s move into the market as of right in September of 2019, it is projected that gas prices will fall continuously through the months from the peak of 1.03 USD/L this past April. This will play a factor in consumers planning to buy regular gas-run vehicles over electric vehicles. (Trading, 2019).

Society is also a threat to Tesla as the Model 3 only comes in the fully electric version it is in. While this may not be an issue for some drivers, others prefer hybrids over fully electric vehicles (DeMuro, 2019). With hybrid vehicles, there are many advantages in comparison to fully electric vehicles due to society not being used to electric vehicles yet. As you travel around, most likely plug-in stations are located in high population areas so a vehicle that also runs on gasoline as a backup is a feature consumers look for. This is why they choose to buy hybrid vehicles. Hybrids are more reliable on longer commutes and when traveling as your range increases by hundreds of kilometers because of the gas engine (DeMuro, 2019).

Actionable Strategies to Mitigate Threats

In regards to the competitors, Tesla is already the top-selling company when it comes to EVs. A lower-end model 3 would sell as well. They have their brand built.

Regulations

Would be added to the ZEV program, if a lower end has less technology, the 5 million liability would not be needed. Incentives by the government can cover the increase to 5 million as well.

Social

For the far commuters etc, longer ranges on their engines, more plug-in stations.

While challenging, it is in Tesla’s best interest to continue selling and manufacturing its Model 3. Tesla’s primary objective has always been to get more electric vehicles on the road by producing affordable cars that would be heavily supported by the sale of luxury ones. The major hurdles that have been holding them back:

The sales of Model S and Model X has decreased and so profits have suffered given that the margin on the Model 3 is significantly lower.

In order for the Model 3 to be profitable in itself, Tesla needs to be able to both stimulate demand and increase the efficiency and speed of manufacturing.

In order to address these challenges, the company might consider the following: The Model S and Model X have not seen a redesign since their respective launches in 2012 and 2015, and in order for Tesla to stand a chance at sustainably achieving their goal to get more electric vehicles on the roads, they must turn their attention back to the promotion of their luxury products in order to support their lower-margin Model 3 and eventual Model Y (DeBord, 2019a).

Given that the company’s major competitors are advertising on a series of platforms where Tesla is absent, the company can turn its attention to promotion here in hopes to better stimulate their sales. In 2018, an estimated US $9.3B was spent on advertising by automobile manufacturers and dealers and it is in Tesla’s best interest to follow suit to avoid placing themselves at a competitive disadvantage (Isidore, 2019).

Just because Tesla has not achieved the level of automation as it had once strived for, that does not mean they cannot or will not. The company’s major hurdle when it comes to automating production lies in the fact that many tasks require a machine to adapt to variable conditions such as an auto part that finds itself in an orientation that is slightly askew. Given the steady advances we are collectively making in machine learning, this will likely be addressed in the future. (Kottenstette, 2019)

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