global economic - tesla motors
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TESLA MOTORSBU 7541 Economics for Global Markets
Trinity College Dublin Business School
Teslas mission is to
accelerate the worlds
transition to sustainable
Tesla is not just an
automaker: it is a
technology and design
company with a focus
on energy innovation.
FoundationFounded in 2003 by a group
of engineers in Silicon
Valley who wanted to prove
that electric cars could be
better than gasoline-
ManufacturingThe company is expanding its
manufacturing footprint into
other areas, including in
Tilburg, the Netherlands,
where it has an assembly
facility, and Lathrop, California,
where it has a specialized
3Tesla Motors 03
A durable-goods monopolist can lose his
monopoly power because the consumers are
expecting a fall in price in the future and are
unwilling to pay more than the competitive price
for the early units of a good- Thpot, 1998
Under these assumptions, Tesla is testing the Coase Conjecture.
COASE CONJECTURE - MODEL 3 5
This results in a reduction of demand and market power today as consumers postpone their purchase decision and convert from Model S to Model 3.
Tesla operates as a monopolist selling a durable good.
Consumers who are served once do not come back to the market again.
Consumers who would might buy Model S today decide to wait to purchase,
expecting a lower price for Model 3. These consumers consider the Model 3 a
substitute for the Model S. Hence, Tesla creates its own competition.
OPPOSING EFFECTS OF MODEL 3
EFFECT MODEL S Consumer Segment
MODEL 3 Consumer Segment
*Profit loss due to Coase Conjecture.
Profit margin of Model S 25%; profit
margin of Model 3 < 25% (Eckl-Dorna
and Sorge, 2016).
Consumer segmentation, explored in depth below, decreases the impact of the
Coase Conjecture, but cannot circumvent it completely. Consequently, a hybrid
A third assumption: Some, but not all customers, that can afford to buy Model S,
convert to Model 3 in the expectation of a lower price for a product that they consider as a
substitute. For a technical comparison of Model S and Model 3, see Appendix A.
PRICING STRATEGY : VARIABLESTeslas future pricing strategy, which has the purpose of resolving the Coase
Conjecture, relies on three variables:
Tesla aims to
R&D of each
costs for later
(European Commission, 1999).
By offering new products distinguish from previous offerings, Tesla adapts prices to appeal to
new target audiences without decreasing the intrinsic value of previous models. Hence, the
company aims to maximize market coverage with a wider portfolio of products and minimize the
impact of Coase Conjecture.
CURRENT PRICING STRATEGY
Roadster $ 109,000
Model S $ 55,000
Model X $ 75,900
Model 3 $ 35,000
* Teslas base price, not including
customisation or incentives.
With Model 3, Tesla hopes for access to a new
consumer segment: the mass-market.
PRICING STRATEGY : FUTURE EXPECTATIONS
Determined by innovation and
differentiation by consumer segment.
Make all transport sustainable by entering each
segment with an appropriate electric
Long Term Vision
Preserve monopoly power in each
consumer segment through 3rd degree
Tesla seems to utilize 3rd degree price discrimination through product versioning and customer
segmentation. Based on the current data, Tesla reinforced their position in the electric car industry
with the Model 3 announcement by strengthening their current strategy.
By providing different models for different consumer segments, they strengthen their monopoly
power and work to resolve the Coase Conjecture.
Operational pressure points:
A history of not meeting production targets.
Aggressive deadlines and targets increases risk of quality issues (which in turn push back previously set goals, causing a vicious cycle).
Musks tendency to over-promise and under-deliver could undermine the attractiveness of the Model 3, as well as future successes.
(Pulliam, Ramsey and Dugan, 2016).
Financial/investment pressure points:
Musks financing of Tesla through inter-company loans (between Tesla and SpaceX, Tesla and Solar City) could destabilize the company (Pulliam, Ramsey and Mullins, 2016).
As of 2016, Tesla only has one profitable quarter (Pulliam, Stoll and Grant, 2016).
Tesla needs investors to make continued progress, and they are motivated mainly by their belief in Musk himself (Vance, 2016).
For Teslas price discrimination strategy to effectively counterbalance the Coase Conjecture, the companymust provide an attractive option for new and different consumer segments. However, Teslas financial,operational and investment history could reduce or eliminate the benefits this strategy might provide.
Teslas history of missing past operational and financial targets could lead potential customers lose faith inthe company, and lead investors to lose faith in Musk. This could exacerbate and already tenious financialsitutation, bring progress to a halt and cause potentially catastrophic repercussions for Tesla.
10STRATEGY AT RISK
TESLA PUSHES MODEL S SALES
MODEL S Consumer Segment
MODEL 3 Consumer Segment
NEW PROFIT LOSS*
* An increase in profit loss results from the affordability of the Model S at a lower price,
expanding the Model S Segment at the expense of Model 3.
By lowering the price of the Model S, Tesla exacerbates the Coase Conjecture,
and undermines their monopoly power.
Tesla is aggressively trying to meet production targets for the Model 3 (and hence raise credibility) by shiftingdemand from Model 3 to a lower-priced Model S (see Appendix B). If successful, this alleviates operationalproblems constraining production. Selling the Model S at a more competitive price today, rather than waiting untilyear-end 2017 for the Model 3, also helps alleviate financial pressures.
MODEL S Consumer Segment
MODEL 3 Consumer Segment
GROWING COMPETITION 12
BRAND CURRENT STATE FUTURE PLANS
Audi Hybrid e-Tron range All-electric e-Tron models set for 2018 production
BMW Hybrid i3 and i8 All-electric Mini expected in 2019, electric X3 in 2020
Ford Hybrid cars All-electric Focus in 2017
Hyundai Hybrid cars All-electric Ioniq in winter 2017
Mercedes-Benz 1 all-electric car and 3 hybrid models Insiders stated new all-electric sub brand to be launched by 2020
Nissan Sales leader in all-electric cars in USA Committed to improving existing models
Toyota Hybrid cars Some rumors about all-electric models in 2020
Volkswagen All-electric Golf model Said to offer 30 all-electric and hybrid models by 2025
Volvo 2 Hybrid models First all-electric model set for 2019 launch
In 2015 the threshold of 1 million EV cars was surpassed. Since then, battery costs have declined and energy density has
increased. Policy support increases sales, thereby enlarging individual market share and reducing technology costs (IEA,
2016). Tesla faces incoming competition from established car manufacturers, making the above strategies essential.
INDUSTRY: PEER OVERVIEW 13
(Audi, 2016; BMW, 2016; Ford, 2016; Hyundai, 2016; Mercedes-Benz, 2016; Nissan, 2016; Toyota, 2016; Volkswagen, 2016; Volvo, 2016; Duffer, 2016;
Shahan, 2016; Rosevear, 2016; EV Obsession, 2015; Korosec, 2016).
Tesla must keep core strategies in mind if attempting to preserve monopoly power:
Demand: expand market share by offering distinctive models to increase sales and revenue from diverse consumer segments.
Consumer segmentation: make effective use of 3rd degree price discrimination to minimize the negative spill-over effect and profit losses due to the Coase Conjecture, as well as fulfil the needs of different consumer segments.
Innovation: constant innovation and product differentiation to retain monopoly power in the face of increased competition.
INSIGHT: WHAT CAN WE LEARN FROM TESLA?Offering distinct models to cover more consumer segments and thus a bigger market creates both
opportunities and threats in regard to potential profit losses due to the Coase Conjecture
Perhaps even more important: to retain monopoly power and alleviate the impact of a Coase
Conjecture, Tesla must also change company policies to generate long-term stability:
Ensure constant quality and