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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

    energy sources.

    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-

    powered cars.

    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

    production plant.

    LeadershipElon Musk

    3Tesla Motors 03

  • COASE CONJECTURE

    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

    404

  • 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.

    Two assumptions:

    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.

    05

  • OPPOSING EFFECTS OF MODEL 3

    PROFIT

    LOSS*

    NEGATIVE SPILL-OVER

    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).

    6

    Consumer segmentation, explored in depth below, decreases the impact of the

    Coase Conjecture, but cannot circumvent it completely. Consequently, a hybrid

    situation arises.

    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.

    06

  • PRICING STRATEGY : VARIABLESTeslas future pricing strategy, which has the purpose of resolving the Coase

    Conjecture, relies on three variables:

    PRICING STRATEGY

    Tesla aims to

    satisfy current

    demand and

    attract all

    residual

    consumers in

    each segment.

    Model S

    E-Segment

    (Executive)

    Model X

    J-Segment

    (Sport Utility)

    Model 3

    D-Segment

    (Large Cars)

    R&D of each

    previous

    model lowers

    innovation

    costs for later

    models,

    raising profit

    marginsSE

    GM

    EN

    TA

    TIO

    N

    DE

    MA

    N

    D

    INN

    OV

    AT

    IO

    N

    707

    (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

    Model Price*

    Roadster $ 109,000

    Model S $ 55,000

    Model X $ 75,900

    Model 3 $ 35,000

    8

    * Teslas base price, not including

    customisation or incentives.

    08

    With Model 3, Tesla hopes for access to a new

    consumer segment: the mass-market.

    (Bloomberg, 2016).

  • PRICING STRATEGY : FUTURE EXPECTATIONS

    Determined by innovation and

    differentiation by consumer segment.

    Price

    Make all transport sustainable by entering each

    segment with an appropriate electric

    vehicle.

    Long Term Vision

    Preserve monopoly power in each

    consumer segment through 3rd degree

    price discrimination.

    Objective

    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.

    909

  • 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.

    PRESSURE

    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.

    PROFIT

    LOSS*

    MODEL S Consumer Segment

    MODEL 3 Consumer Segment

    911

  • 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 innovation to keep up with growing competition.

    Set, and meet, realistic production output and financial targets retaining customer trust and

    investment attractivess.

    14

  • CONCLUSION

    Based on our assumption, by offering a car which costs less than half of its luxury Model S, Tesla is

    testing the Coase Conjecture. The company uses price discrimination & segmentation strategies

    as a tool to resolve the Coase Conjecture it remains to be seen whether it will work.

    Operational and financial pressure points put the company at risk of undermining the benefits of

    their strategy as the history of missing operational and financial targets could lead potential

    customers and investors to lose faith, deterring consumers from purchasing.

    Tesla currently faces a monopolistic market with few competitors, but there are more competitors

    entering the electronic car market immenently. This could lead to a more competitive market and

    eventually, force Tesla to abandon monopoly power and become a price-taker.

    To retain power, Tesla must set and meet realistic production goals, as well as maintain

    constant innovation and quality to stay ahead of growing competition.

    15

  • REFERENCES

    17

  • REFERENCES 18

    Audi. (2016). Audi e-tron. Retrieved from: https://www.audi.co.uk/audi-innovation/e-tron.html.

    Ayre, J. (2016). Tesla Actively Trying To Sell Model S 60s To Model 3 Reservation Holders. Retrieved from

    http://evobsession.com/tesla-actively-trying-sell-model-s-60s-model-3-reservation-holders/.

    Bloomberg. (2016). Electric Fantasy: Will the Next Tesla Sell for $25,000? Retrieved from:

    https://www.bloomberg.com/news/articles/2016-02-09/will-the-tesla-model-3-really-sell-for-25-000.

    BMW. (2016). BMW i. Retrieved from https://www.bmwusa.com/vehicles/bmwi.html.

    Business Insider/ (2016). The preorders for Tesla's new car outstrip the total sales of all other Teslas to date.

    Retrieved fromhttp://uk.businessinsider.com/tesla-model-3-orders-vs-lifetime-sales-2016-4?r=US&IR=T.

    Duffer, R. (2016). 8 Electric vehicles competing with the Tesla Model 3. Retrieved from

    http://www.chicagotribune.com/classified/automotive/fuelefficient/ct-electric-vehicles-competition-model-3-

    20160401-story.html.

    Eckl-Dorna, W. and Sorge, N. (2016). Tesla Model 3 - Also sprach Elon. Spiegel Online. Retrieved from

    http://www.spiegel.de/wirtschaft/unternehmen/tesla-model-3-die-elektroauto-revolution-ein-pro-und-contra-a-

    1085071.html.

    European Commission. (1999). Regulation (EEC) No 4064/89 Merger Procedure.

    EV Obsession. (2015). 10 Best Electric Cars. Retrieved from http://evobsession.com/10-best-electric-cars/.

    Ford (2016). Ford Hybrid and Electric Vehicles - The Lineup. Retrieved from http://www.ford.com/new-

    hybrids-evs/?gnav=header-cars.

    https://www.audi.co.uk/audi-innovation/e-tron.htmlhttp://evobsession.com/tesla-actively-trying-sell-model-s-60s-model-3-reservation-holders/https://www.bloomberg.com/news/articles/2016-02-09/will-the-tesla-model-3-really-sell-for-25-000https://www.bmwusa.com/vehicles/bmwi.htmlhttp://uk.businessinsider.com/tesla-model-3-orders-vs-lifetime-sales-2016-4?r=US&IR=Thttp://www.chicagotribune.com/classified/automotive/fuelefficient/ct-electric-vehicles-competition-model-3-20160401-story.htmlhttp://www.spiegel.de/wirtschaft/unternehmen/tesla-model-3-die-elektroauto-revolution-ein-pro-und-contra-a-1085071.htmlhttp://evobsession.com/10-best-electric-cars/http://www.ford.com/new-hybrids-evs/?gnav=header-cars

  • Hyundai (2016). Ioniq. Retrieved from https://www.hyundaiusa.com/ioniq/index.aspx.

    International Energy Agency (IEA) (2016). Global EV Outlook 2016 - Beyond one million electric cars.

    Retrieved from https://www.iea.org/publications/freepublications/publication/Global_EV_Outlook_2016.pdf.

    Korosec, K. (2016). Audi Plans to Launch a New Electric Vehicle Model Every Year. Retrieved from

    http://fortune.com/2016/05/12/audi-plans-to-launch-a-new-electric-vehicle-model-every-year/.

    Mercedes-Benz (2016). Hybrid and Electric. Retrieved

    fromhttps://www.mbusa.com/mercedes/vehicles#!layout=/vehicles/showroom/EDV&waypoint=EDV.

    Motortrend. (2016). Electrifying S3X: Tesla Model 3 In-Depth Exclusive Photos and Analysis. Retrieved on

    30.12.2016, from: http://www.motortrend.com/news/tesla-model-3-photos-analysis/.

    Nissan (2016). Nissan Electric Vehicles. Retrieved from https://www.nissan.co.uk/range/electric-cars.html.

    Pulliam, S., Ramsey, M. and Dugan, I. (2016). Elon Musk Sets Ambitious Goals at Tesla and Often Falls

    Short. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/elon-musk-sets-ambitious-goals-

    at-teslaand-often-falls-short-1471275436.

    Pulliam, S., Ramsey, M. and Mullins, B. (2016). Elon Musk Supports His Business Empire With Unusual

    Financial Moves. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/elon-musk-supports-

    his-business-empire-with-unusual-financial-moves-1461781962.

    19REFERENCES

    https://www.hyundaiusa.com/ioniq/index.aspxhttps://www.iea.org/publications/freepublications/publication/Global_EV_Outlook_2016.pdfhttp://fortune.com/2016/05/12/audi-plans-to-launch-a-new-electric-vehicle-model-every-year/https://www.mbusa.com/mercedes/vehicles#!layout=/vehicles/showroom/EDV&waypoint=EDVhttp://www.motortrend.com/news/tesla-model-3-photos-analysis/https://www.nissan.co.uk/range/electric-cars.htmlhttp://www.wsj.com/articles/elon-musk-sets-ambitious-goals-at-teslaand-often-falls-short-1471275436http://www.wsj.com/articles/elon-musk-supports-his-business-empire-with-unusual-financial-moves-1461781962

  • 20REFERENCES

    Pulliam, S., Stoll, J. and Grant, C. (2016). Elon Musk Faces Cash Squeeze at Tesla, SolarCity. The Wall

    Street Journal. Retrieved from http://www.wsj.com/articles/elon-musk-faces-cash-squeeze-at-tesla-solarcity-

    1472687133/.

    Rosevear, J. (2016). How Will Audi's Electric Vehicles Stack Up Against Tesla Motors? Retrieved from

    http://www.fool.com/investing/2016/08/31/how-audi-will-try-to-challenge-tesla-motors-with-a.aspx.

    Shahan, Z. (2016). Tesla Crushes Electric Competition in US. Retrieved

    from:https://cleantechnica.com/2016/01/05/tesla-crushes-electric-competition-in-us/.

    Tesla. (2016). Models. Retrieved from https://www.tesla.com/en_IE/models/.

    Thpot, J. (1998). A direct proof of the Coase conjecture. Journal of Mathe...