tesla's technological innovations by ghanesh kulkarni

Running head: Tesla’s Self-Driving Electric Vehicles

Tesla’s Self-Driving Electric Cars Powered by Over-the-Air Technology

Ghanesh Kulkarni

Florida Atlantic University

Dr. Stuart D. Galup

ISM 6026: Management Information Systems and Technology

March 3, 2016

TESLA’S SELF-DRIVING ELECTRIC VEHICLES 2

Table of Content

Certification of Authorship…..…………………………………………………………………3

Message Approving Topic.…..…………………………………………………………………4

Introduction…………………..…………………………………………………………………5

The Context…………………..…………………………………………………………………6

The Technology…..…….…..…………………………………………………………………...8

The Competitive Environment.………………………………………………………………...11

Strengths………………………………………………………………………………..11

Weaknesses…………………………………………………………………………….14

Opportunities…………………………………………………………………………...15

Threats………………………………………………………………………………….16

The Economics…………..…..…………………………………………………………………17

Financial Situation and Economic Feasibility………………………………………….17

Impact on Cost v/s Value Addition to the Company…………………………………...18

Comparison of Best Case, Worst Case, and Likely Case………………………………19

The Organizational Implementation……………………………………………………………20

Critical Success Factors………………………………………………………………...21

Critical Risks……………………………………………………………………………22

Implementation Timeline……………………………………………………………….23

Conclusion………………………………………………………………………………………24

References……………………………………………………………………………………….25

APPENDIX……………………………………………………………………………………...31


CERTIFICATION OF AUTHORSHIP

I certify that I am the author of this paper and that any assistance I received in its

preparation is fully acknowledged and disclosed in the paper. I have also cited any sources, from

which I used data, ideas, or words, either quoted directly or paraphrased. I also certify that this

paper was prepared by me specifically for this course.


Message Approving Topic


The Introduction

The automotive industry is going through an innovation shift where manufacturers are

trying to achieve new heights of technological and design innovations every day to lure

customers. Tesla Motors, Inc. is an American automotive company which is well renowned in

the market for manufacturing luxury electric vehicles. Tesla is swiftly pioneering in the

automotive industry leveraging information and technology systems (IT/IS) with a combination

of highly intelligent hardware and software system (Newcomb, 2015, para. 3). The technology

and IS integrated in the Tesla cars permit Over-the-Air (OTA) software updates and Autopilot

features. OTA was first launched in Tesla cars in 2012 with Model S (Newcomb, 2015, para. 3).

Since the adoption of “OTA software update” technology in tesla cars, it has created a

competitive advantage for the company over other well established automotive manufacturers

including BMW, GMC, Ford and others who are still trying to develop and integrate the OTA

technology in their cars (Zhang, 2016, para. 2).

This paper analyzes implementation of hands-free and feet-free travel experience also

called Autopilot feature in Tesla cars powered by Over-the-Air IS technology. First, this paper

describes a brief background of Tesla Motors Inc., current information system trends and their

requirements in automotive industry, and Tesla’s competitors. Second, the paper analyzes OTA

technology used to push firmware updates, support autopilot, and its influence on automotive

industry. Third, the paper presents tesla’s competitive environment in automotive industry, its

trading partners, and how tesla is leveraging OTA for sustainable competitive advantage. Next,

the paper analyzes economic feasibility to implement autopilot supported by OTA in all models,

compares best case, worst case, most likely case and its value towards the success of the


company. Lastly, the paper explains organizational implementation of self-driving cars powered

by OTA at a large scale.

The Context

Automotive industry has come a long way since the first patent for the modern

automobile was awarded to Karl Benz in 1895 (Indiagarner, 2013, para. 1). In 1908, Henry Ford

revolutionized the American car industry with his innovative assembly line Model T approach

for mass production, which brought cars within the reach of American middle class (Ford Motor

Company, 2016, para. 1). During the initial stage of car manufacturing, several engineers tried to

build cars powered by steam engine, gasoline, and electric engine (Energy.Gov, 2014, para. 8).

At that time gasoline proved to be the best option and was widely adopted by makers and

customers around the world. There were various reasons behind the wide adoption of gasoline

engine in 19th and 20th century (Energy.Gov, 2014, para. 8). First, the electric engine powered by

battery were unable to match up the acceleration and torque provided by the gasoline engines

and second the availability and affordability of gasoline (Energy.Gov, 2014, para. 12). In 2003, a

group of engineers at Silicon Valley, California came together to build an electric car to prove

that electric cars are better than gasoline cars in 21st century (Tesla, 2016, para. 1). They named

their company Tesla Motors Inc. after Nikola Tesla, who inspired the engineers to build an

electric powertrain for cars which was based on the principle of AC induction motor patented by

Nikola Tesla in 1888 (Tesla, 2016, para. 2). The company launched its first electric sports car

named Roadster in 2008 with the capability to accelerate 0 to 60MPH in just 3.7 seconds and go

over 260 miles in a single recharge (Tesla, 2016, para. 2). Since then, Tesla’s focus is on

technological, design, and energy innovations in auto industry as well as in the energy sector.

Tesla’s other cars picks up an acceleration of 0 to 60 miles in less than 3 seconds and goes over


290 miles on a single recharge (Randall, 2015, para. 3).Tesla is successfully leveraging modern

information and technology architecture in car designing, manufacturing, supply chain, and

corporate operations. As per CEO Elon Musk, Tesla is a hardware and software technology firm

that manufactures cars as an electronic device; this approach is also called a design approach

(Hirsch, 2015, para. 6). Tesla has pioneered in developing cars which are also called a

sophisticated computer/server on the wheels (Hirsch, 2015, para. 5). Following Ford’s model T

approach, Tesla is targeting on a capacity of manufacturing over 500,000 electric cars in one

year by 2020 (Randall, 2015, para. 4).

Auto industry is over 200 years old and car makers are always trying to attract customers

with innovative car designs, engine technology, and infotainment systems. However, the recent

trends in the industry are focused on building cars leveraging capabilities provided by

information and technology (Gao, Kaas, Mohr, & Wee, 2016, para. 1). The trends show some

severe transformations in the auto industry kicked off mainly by three technologies. First data

driven services, second increased connectivity via internet, and third over-the-air firmware

update technology. These three technologies are disrupting the traditional automotive business

models with a significant capability to increase the industry revenue by 30 percent i.e. over $1.5

Trillion by 2030 (Gao, Kaas, Mohr, & Wee, 2016, para. 4). Additionally, 15% of the cars that

will be sold in 2030 may have an Advance Driver Assistance System (ADAS) leveraging

artificial intelligence and big data analytics, which will enable autopilot features allowing cars to

work fully autonomous (Gao, Kaas, Mohr, & Wee, 2016, para. 6). Another trend in the auto

industry is OTA, auto makers are actively trying to push firmware updates and bug fixes over the

air which gives an opportunity to control recall cost. As per a report by IHS, over-the-air will

help companies to cut the recall costs by $35 billion in 2022 compared to $2.7 billion as of today


(Sage, 2015, para. 6). Tesla has successfully integrated over-the-air technology in its Model S

cars which allow Tesla to push bug fixes and feature updates to improve the car performance

leveraging internet connectivity. While other competitors including BMW, GM, Ford and Toyota

are still trying to develop OTA technology to push firmware updates, Tesla has already pushed

over 75 firmware updates since 2012 including semi-autopilot features making Tesla an

automotive leader in OTA technology (Sage, 2015, para. 4).

Tesla’s major competitors in the autonomous car segment are tech giants like Apple and

Google who are actively working on development and testing of their self-driving electric cars

which are planned to be launched in 2019 or 2020 (Middleton, 2015, para 1). An interesting fact

which supports the requirement of self-driving electric vehicles is that electric vehicles reduces

the total carbon di oxide and ozone emission by 40% compared to gasoline vehicles (Bullis,

2013, para. 3). Point in fact, US regulators estimated a reduction of 32000 road fatalities

annually with the proliferation of autonomous cars capable of exchanging information (Spector

& Ramsey, 2016, para. 4). Autonomous cars will help to reduce travel delays, reduce road-

clogging, and ultimately reducing pollution (Spector & Ramsey, 2016, para. 4). This paper

analyzes Tesla’s ability to roll out fully autonomous electric vehicles. The next section will

explain over the air technology and how it is used to support autonomous driving.

The Technology

Tesla describes itself as a technology and energy storage company who is committed to

accelerate the world towards sustainable energy and transport solution (Tesla, 2016, para. 9).

Tesla manufactures electric cars and energy storage devices including power walls, and electric

powertrain components for cars. Tesla’s electric powertrain works on the principle of AC

induction motor. In terms of information technology, the most significant and distinct IS


integrated in tesla cars is over-the-air update capability (Newcomb, 2015, para. 6). As per the

company’s CIO Vijayan, the biggest advantage of OTA is that it allows tesla to push the updates

via internet removing the recall cost to the service center (King, 2014, para. 5). Tesla push

routine updates in every two to three months leveraging OTA which gives an ability to

continuously improve vehicle safety and performance over time (King, 2014, para. 5). Another

advantage of OTA is that consumers don’t have to take the car to dealership which saves their

travel and time. Additionally, OTA allows software upgrades to the infotainment system as well

as push updates to the electronic control units (ECU) linked directly to the controller area

network (CAN) (Mahaffey, 2015, para. 10). The updates are pushed over-the-air as software

packages (Mearian, 2015, para. 7). The software packages are compared to vehicle identification

number to validate the availability of required hardware component before installing the updates

(Mearian, 2015, para. 7). Tesla Model S cars manufactured after 2014 are loaded with hardware

components supporting autopilot technology which includes a forward looking camera, 12 long

range ultrasonic sensors, forward radar, and digitally controlled electric-assist break (Sparks,

2016, para. 4). The cars are loaded with processing chips, Ethernet, and indicators supporting

software install and updates (Mearian, 2015, para. 5). So when the autopilot updates were pushed

over-the-are in October 2015, there was zero recall cost to install updates on existing firmware.

Appendix A shows the architecture of Tesla’s onboard IS system and connectivity among

various components.

Appendix A shows central information display (CID) and instrument clusters (IC)

operates on modified Linux based operating system. There is a gateway to connect onboard

infotainment system to the controller area network which adds an isolation level between LAN

and CAN increasing security of the vehicle. As per CTO J.B. Strauble, the coding of CAN was


all written in house by Tesla engineers from scratch using C programming (Williams, 2012,

Para. 10). When updates are pushed over-the-air, the install needs to be scheduled by car owner

from CID. After this, the gateway allows a specific set of legitimate commands from CID in the

form of vehicle APIs (VAPI) to be installed on the main controller (Mahaffey, 2015, Para. 12).

VAPIs adds another level of security so even in the worst case if CID or Linux crashed it will not

affect the car controls. As per Mahaffey, Tesla did a great job on vehicle’s security and CID is

inaccessible without a physical connection to the IC via open ports (Mahaffey, 2015, para. 13).

Additionally, onboard VPN is very strong which does not allow any remote activity without

physical connection to the car (Mahaffey, 2015, para. 14). Based on the results of Mahaffey’s

tests, Tesla immediately pushed bug fixes over the air with in a week without spending a dollar

on recalls setting up an example in the industry (Gilbert, 2015, para. 5). Tesla uses AT&T’s

cellular network to provide data services and push updates over-the-air via cellular system

installed onboard to improve operational performance (Moritz & Ohnsman, 2013). As per

Mahaffey, Tesla autopilot record system logs like any other computer and report all of its

activities to the central cloud platform (2015, para. 5). As per CEO Elon Musk, the autopilot

feature helps Tesla to continuously improve self-driving capabilities by sharing activity logs as a

part of continuous improvement process (Bergen, 2015, para. 6).

As per Tesla, the current autopilot feature enables hands free and feet free ride, however

the driver has to be present on the driving seat as per regulations (Ramsey, 2016, para. 2).

Additionally, the autopilot is also capable of self-parking and supporting limited summon

features in the car (Ramsey, 2016, para. 2). Autopilot detects the available parking spaces and

display it to the driver. Once a parking space is selected by the driver, autopilot will take control

and park the car. Furthermore, Tesla cars support limited summon feature when owner is less


than 33 to 35 feet away. In order to fully support autopilot, Tesla has launched a smart phone

application. Drivers can view complete health of their car using central information display or on

their smartphone using app. The app is used for enabling summon feature. As soon as the

command is given over the air using app, the car drives itself to owner. The app also provides a

full security by showing instant location of the car so the owner don’t have to worry about valet

parking as shown in Appendix E (Ramsey, 2016, para. 6). As per CEO Elon Musk, Tesla is

actively working on enhancing OTA, autopilot, and summon capabilities so that by 2018 the car

can be summoned cross country from Los Angeles to New York using mobile app (Calpito,

2018, para. 4). Tesla is definitely an early adopter and an OTA technology leader in automotive

industry, however the competitors are actively trying to grow similar OTA capabilities. The next

section will describe tesla’s competitive environment.

The Competitive Environment

As discussed earlier, Tesla’s mission is to accelerate the world’s transition towards safe,

powerful, zero emission, and sustainable transportation. As per CEO Elon Musk, Tesla has to

compete with 150 years old empire of traditional gasoline based automotive manufacturers by

developing sustainable technology (Hirsch, 2015, para. 4). This section presents a detailed

SWOT analysis of Tesla’s competitive environment, and factors affecting successful

implementation of self-driving features supported by OTA technology:

Strength

1. Tesla’s environmental friendly and tech savvy brand image

To start with strengths, Tesla’s zero emission electric cars powered by lithium-ion battery

are the primary reason for Tesla’s brand image as an environment friendly car company. Tesla

cars use modern telecommunication technologies like OTA to support autopilot and summon


features which are boosting Tesla as a tech savvy brand. Tesla’s brand image gives a competitive

advantage to the company over other gasoline car makers like BMW, Ford, and Hyundai who are

still trying to integrate OTA.

2. Integrated software and information systems platform

The homegrown software called Wrap is tightly integrated with primary and support

value chain activities. As per CIO Jay Vijayan, Wrap is highly capable to handle e-commerce

activities including sales, logistics and for managing backend activities including financials,

accounting and other internal business activities (King, 2014, para 3). From customer’s point of

view, Wrap gives them an ability to browse and buy cars online or raise any vehicle issues.

Additionally, the system is capable of handling financial transactions, route tickets and issues

leveraging workflows, and push bug fixes over- the-air to cars. In fact, Wrap has been a key

component in Tesla’s IS strategy which has successfully handled annual transactions of over

$204 million in 2011 to over $2 billion in 2013 (King, 2014, para. 7). Additionally, the system

has shown a great success in handling online visits from over 500,000 hits in 2012 to over 35

million in 2013 (King, 2014, para. 7). Wrap powered Tesla to handle industry competition

effectively allowing seamless information flow.

3. Innovation and Technology

First, the OTA software integrated in Tesla cars was built in-house from scratch and has

been very successful. OTA allows company to keep the recall cost very low and provides agility

to fix bugs quickly. OTA keep the customers happy as they don’t have to rush to the service

station for every single issue. This innovative OTA integration by Tesla made competitors to

think about leveraging OTA technology, but they are far behind Tesla. Second, from the

engineering point of view, innovation of very powerful electric powertrain has proven to be


another competitive strength. Tesla cars go over 290 miles per full recharge where as other major

competitors including BMW, Chevy, Ford, Toyota, GM, Nissan, and Honda are far behind with

a range of less than 129 miles per full recharge (Bullis, 2013, para. 6). Electric powertrain

achieve superfast acceleration and high torque allowing vehicles to go over 60MPH in just 2.8

seconds. Power of innovation and ability to implement using technology has proven Tesla’s

sustainable competitive advantage over other makers.

4. Direct to customer business model

Tesla’s direct to customer business model has been very successful so far. Tesla offer

products directly to customers from company’s retail stores like Apple store. Although in some

states, Tesla is not allowed to sell cars directly to the customers, customers can order them

online. This also allows Tesla to work directly with customers, satisfy their needs, hear customer

voice, and serve them faster than others. Direct to customer business model has given an

intangible competitive advantage to the company by building client database which also helps to

increase loyalty.

5. Network of supercharging stations

Tesla has developed a wide network of supercharging stations across the USA, Europe,

Australia, and Asia-pacific (SEC.gov, 2016, p. 7). Supercharging stations are fuel center for

Tesla’s self-driving electric cars which provides superfast battery recharge for free. Tesla

implemented a feature in its cars to scan supercharging stations. Self-driving cars can make a

stop and get recharged from these stations. The supercharging service cost is included in the

vehicle’s selling price and owners can enjoy free fuel recharge for the lifetime. No other car

company offer such benefits and neither invested in the fuel network infrastructure at such a


large scale. This strategy has reduced the potential threat from new entrants and substitute

products by posing a switching cost resulting in a sustainable competitive advantage.

6. Suppliers and Partners

Tesla has partnered up with over 350 suppliers including market leaders like Panasonic

(SEC.gov, 2016, p. 9). Company has a strong financial support from investors like Daimler and

Toyota. Additionally, Tesla has teamed up with Toyota and Daimler to help them with

manufacturing of electric power train. Company is actively working on knowledge sharing and

R&D of fully autonomous vehicles with Google. Tesla worked in collaboration with NVIDIA to

develop onboard firmware which handles control and IS activities. Tesla provides software

updates and navigation service via AT&Ts cellular network. Teaming up with suppliers and

partners from various industries allow Tesla to focus on R&D, product differentiation, and cost

leadership. This allow company to control the threat of industry competition and product

substitutes.

Weakness

1. Production delays due to insufficient infrastructure

Tesla is a growing automotive company and has been dealing with a problem of not

being able to deliver vehicles on time. Additionally, its current manufacturing facility is smaller

in size and capacity compared to other industry leaders. Company is working on building a new

production facility to overcome this weakness.

2. Limited product range

Tesla has launched only 3 car models in last 13 years targeting more affluent customer

segment. The company is missing products to attract mass market looking for lower price cars.


Tesla is planning to deliver Model 3 at lower price by 2017 targeting mass-market to overcome

this weakness (Stoll, 2016, para. 2).

3. Lack of experience

As per CEO Elon Musk, Tesla is a technology company that manufacture cars along with

other products including electric powertrain, batteries, and other energy storage products. The

company is only 13 years old and is competing with other automotive companies like GM, Ford,

and BMW with over 150 years of experience. Tesla is trying to overcome this weakness by

stealing talented employees from competitors at higher wages (Ramsey, 2015, para. 2).

4. Expenditure is higher than earnings

As per Wall Street Tesla is burning its cash faster than its earnings which is one of the

main concern for management. However, most of the cash is spent over network expansion of

supercharging stations and company infrastructure (Sparks, 2016, para. 3). Tesla will have to

quickly find a way to post profits on its financial reports.

Opportunities

1. Economies of Scale from Gigafactory

Tesla is actively working on building a new production facility named “Gigafactory” in

collaboration with Panasonic. By 2020, gigafactory is targeted to produce twice as much as

world’s total battery production in 2013 (Young, 2014, para. 3). Tesla is targeting to manufacture

500,000 vehicles in gigafactory by 2020. Gigafactory will create an opportunity for tesla to

benefit from economies of scale and control bargaining power of suppliers.

2. Increased environmental awareness in society

More than 190 countries has approved a plan of action at Paris environmental summit

2015 to control climate change, and to increase awareness in society to preserve ecology by


encouraging use of sustainable energy resources (Dalton & Steinhauser, 2015). As discussed

earlier, self-driving cars leveraging OTA will reduce traffic load and carbon footprints. Tesla’s

zero emission self-driving EVs will bring a great opportunity for the company to benefit from

increased awareness towards saving ecology.

3. First-mover’s advantage

Tesla is very agile in implementing new technological innovations which are also

integrated in its cars as well as in its business model. Tesla is first mover in the industry to use

OTA technology to push software updates supporting hands free and feet free driving. OTA will

create new opportunities for the company to push updates efficiently and to sustain the first

mover’s advantage.

Threats

1. Experienced industry leaders

One of the biggest threat to tesla is from well establish industry leaders like BMW, Benz,

GM, Ford, and Toyota. Overall, competitors are more experienced with greater number of

financial resources, talented staff, greater infrastructure, and existing long term relationships with

large suppliers (Sparks, 2015, para. 4).

2. Regulatory restrictions

Second biggest threat to fast growing Tesla is from regulatory restrictions. Tesla is trying

to capture the market share by implementing advance technology, but there is not so much

allowed to implement in the cars without getting proper licensing approval from regulatory

authorities. As per CEO Elon Musk, regulatory hurdles are one of the biggest threats for Tesla’s

plan to roll-out fully autonomous cars in next 5 years (Hirsch, 2015, para. 7).


The Economics

As discussed earlier, Tesla is effectively working on implementing self-driving cars

leveraging over-the-air technology. OTA was first introduced in 2012, and autopilot feature was

first introduced in October 2014 in Tesla cars. Since, its roll-out in 2014 company has shown a

linear growth in sales and revenue generation. First, this section analyzes Tesla’s current

financial health and economic feasibility to implement hands free and feet free driving powered

by OTA. Second, this section compares cost and value addition to the company from the

implementation of autopilot. Lastly, this section presents impact of autopilot feature on revenue

growth by comparing best case, worst case, and likely case results.

Financial Situation and Economic Feasibility

As per Tesla’s annual financial reports submitted to security and exchange commission

(SEC) for the year 2015, company posted a sales revenue of over $4.05 billion from automotive

sales and services (SEC.gov, 2016, p. 38). Company registered a gross income of over 923.5

million which is 102.50% higher than gross income in 2013 and 4.7% higher than 2014. As per

SEC filing there has been a significant growth of over 35% in car sales and deliveries in 2015

compared to 2014. As per CEO Elon Musk’s letter to investors, Company has shown a positive

core operational cash flow of $179 million (Tesla, 2016, p. 1). In 2015 company has sold 50,580

cars with a profit margin of 29.81% per car (Tesla, 2016, p. 1). These past trends show tesla’s

promising sales performance and ability to generate revenue. Similarly, Tesla expects a strong

revenue growth and positive net income based on the future projections shown in Appendix C.

On the contrary, despite being able to increase gross revenue from sales, company posted

a negative net income of $888.66 million on the statement of operations for year ended

December 31, 2015 (SEC.gov, 2016, p. 48). One of the primary reason behind negative net


income is Tesla’s big investment in company’s infrastructure development and expansion of

supercharging stations network. As per SEC filings, company is going to invest 50% of gross

income on the expansion of supercharging network across the US, Europe, Australia, and Asia-

pacific (SEC.gov, 2016, p. 33). In addition, Tesla is investing over $5 billion on development of

gigafactory to accomplish future revenue goals from economies of scale. Gigafactory will help

tesla to control higher operating cost and provide energy resources to supercharging stations.

Supercharging stations will support tesla’s plan to roll-out autopilot and summon feature based

powered by OTA so that owners can summon their cars from any place at any time. Over the air

technology will support autopilot to scan supercharging stations, which means navigation system

in car will know where to get the recharge while traveling long distance autonomously. Tesla’s

ability to invest in gigafactory and supercharging stations is a strong indicator of company’s

strategy and economic feasibility to roll-out fully autonomous EVs on a large scale.

Impact on Cost v/s Value Addition to the Company

As discussed earlier, Tesla’s OTA software supporting autopilot was built in-house by Tesla

engineers. Over the air technology works with a combination of hardware and software. All the

tesla cars manufactured in and after 2014 are fully loaded with the required hardware to support

autopilot and OTA including sensors, radar, camera, CID, IC, and electronic control units (ECU)

(Sparks, 2016, para. 4). As per Tesla’s consumer forum website, Cars manufactured before 2014

were not loaded with required hardware for which tesla charges $67,000 including $20,000

hardware cost and $47,000 labor charges to upgrade as shown in Appendix F (TeslaTap.com,

2014, para. 1). Based on the information available from Tesla’s website, company charges

additional $3000 to activate autopilot feature per car (Tesla, 2016, para. 1). Buyers can either pay

the autopilot activation fees upfront while buying or afterwards. As per EV-Analyst.com, over


80% Tesla customers buy autopilot feature (Ninkovic, 2015, para. 3). Tesla sold 50,580 cars in

2015 out of which minimum 80% i.e. 40,464 car owners paid $3000 autopilot activation fees,

which means company generated over $121 million from current semi-autopilot feature in 2015.

As per TechInsider.com, Tesla’s mass market Model 3 car will be loaded with standard hardware

supporting autopilot and safety features, however buyers will be charged extra to activate the

autopilot convenience feature (Muoio, 2016, para. 2). Appendix D Table 1 shows estimated

revenue from autopilot feature in next 5 years. Another benefit to the company from OTA

supported cars is ability to control recall cost by pushing software updates for autopilot and bug

fixes leveraging data service. Tesla has collaborated with AT&T to provide internet connectivity

in cars but company has not disclosed the actual contracting terms for data services. Next is the

best, worst, and likely results of autopilot feature in terms of revenue.

Comparison of Best Case, Worst Case, and Likely Case

As discussed in previous section, tesla is projecting a sales of over 500,000 by 2020.

Additionally over 80% of the buyers paid an autopilot activation fees of $3000 in past. These

numbers create an exciting opportunity for tesla to generate revenue by implementing autopilot

feature in low cost Model 3 cars supported by over the air technology. Table 1 in Appendix D is

created by assuming the best case scenario when tesla will meet all its projected future sales by

2020. Assuming the best case scenario, tesla will increase the production and sales capacity up to

500,000 cars per year and if all the car owners pay $3000 autopilot activation fees then company

will be able to generate a total revenue of $3.66 billion in next five years from 2016 to 2020.

On the contrary, table 2 in Appendix D shows worst scenario if Tesla will not be able to

meet its projected goals by 2020. To understand it better, back in 2015 tesla projected a sales of

55,000 cars but only sold 50,580 cars missing its target by 8.74%. Worst case table is created


assuming the same fact that if tesla will be short by 8.74% every year and only 80% of the

customers pay autopilot activation fees. In the worst case scenario, company will still be able to

generate a revenue of $2.67 billion which will be 23% lower than the best case scenario.

On the flip side, table 3 in Appendix D shows most likely scenario when tesla will meet

all its projected goals of manufacturing and selling 500,000 cars per year and 90% of the

customer pay autopilot activation fees of $3000. Point in fact, 10% of the customers may not

consider it very useful or may not be very tech savvy. Considering most likely case, company

will be able to generate $3.29 billion in next five years by 2020 with the implementation of

autopilot.

Therefore, the autopilot technology powered by OTA shows a huge revenue potential for

Tesla in next five years. Next section describes organizational implementation of autopilot and

summon features on a large scale.

Organizational Implementation

As discussed in previous sections, Tesla is actively working on implementation of fully

autonomous vehicle on a large scale. Autopilot in its beta version was recently activated in Tesla

cars with software update 7.1 pushed over to thousands of Model S cars leveraging OTA

technology (Ramsey, 2015, para. 1). Additionally, all model 3 cars will be equipped with the

firmware supporting current autopilot and summon features. As discussed in the technology

section, the current autopilot technology in Tesla cars allow self-parking, limited summon

features, and limited self-driving features. This section describes critical success factors,

implementation risks, and mitigation plan with an estimated timeline to implement the fully

autonomous autopilot feature in Tesla cars.


Critical Success Factors

As per CEO Elon Musk, over the air connectivity to the central cloud server supporting

autopilot, increased connectivity among cars, proper functioning of the firmware, well-

constructed roads with specified lane markings, approval from regulatory authorities, and

overcoming public fear are the most critical factors for the successful implementation of fully

functioning autopilot (Sparks, 2016, para 6). Specifically, Tesla is very cautious about the

updates pushed over-the-air and strictly follow the guidelines stated by regulatory authorities

related to the usage of safety gears and high-tech gadgets in the cars (Ramsey, 2016, para 2).

Musk is targeting to successfully implement fully functioning autopilot and summon features

powered by OTA in next 24 to 36 months (Sparks, 2016, para. 4). However, the rollout of fully

functioning autonomous vehicles may depend on the speed of regulatory approval and

establishing regulations for autonomous vehicles. Furthermore, Tesla is evaluating modern

hardware options that would overcome the requirement of specific lane markings which will also

support fully functioning autopilot as well as summon features more effectively (Sparks, 2016).

In parallel, Tesla is working on better connectivity between cars and central server supporting

autopilot. Central server collects autopilot logs from vehicles equipped with activated autopilot.

Point in fact, the server and autopilot system tries to improve itself leveraging collected logs

based on machine learning mechanism. Therefore, the increased connectivity among cars and

with central server will play a critical role in the performance improvement and successful

implementation of fully autonomous vehicles. Overcoming general public fear of self-driving

cars is also considered as a critical success factor by Musk (Sparks, 2016).


Critical Risks

As per Tesla’s 2015 SEC filing, company has identified various risks that could affect its

business operations, financial situation, and brand image (SEC.gov, 2016, p. 13). Customer

acceptance of EVs and fully autonomous vehicles is identified as one of the major risks by

management (SEC.gov, 2016, p.15). As discussed earlier some customers may not be tech savvy,

and may not consider autopilot as a major requirement in their buying decision. Company should

try to increase brand awareness and technology acceptance by positively influencing perceived

ease of use and perceived usefulness of the autopilot technology. Additionally, company should

mitigate the customer acceptance risk by increasing environmental awareness and by

communicating cost benefits from the use of autopilot and electric vehicles.

Second, approval from regulatory authorities and support from government in R&D

initiatives for implementing autopilot is another major risk. Company will not be able to rollout

fully autonomous features without getting regulatory approval. Company needs to work with

regulators, prove the results from successful autopilot testing, and justify the benefits of

autonomous vehicles discussed earlier in the technology section of this paper.

Third, company has identified high dependency on services of CEO Elon Musk as a

major managerial risk in its SEC filing (SEC.gov, 2016, p.20). Musk is the largest stock holder,

product architect, and highly active in the EV and autopilot projects. Musk also works as a CEO

at SpaceX and as a chairman of SolarCity (SEC.gov, 2016, p.20). Company needs to have a

backup of Musk who can look after the successful implementation of autopilot project in his

absence. Company should use knowledge sharing tools and knowledge management practices to

mitigate such risks.


Fourth, delay in production is considered another major risk to the implementation of

autopilot on a large scale. In 2015, company was not able to deliver vehicles on time because of

its limited production capabilities and limited supplier capabilities. Company is working on

increasing its production capabilities with its most awaited project of building gigafactory to

mitigate the risk of production delays and decrease its dependency on suppliers. Company needs

to work on continuous improvement of its supply chain activities to mitigate the risk of delays

caused by suppliers.

Lastly, Tesla’s established competitors like BMW, GM, Daimler and many other

automotive manufacturers can pose a potential risk by influencing supplier relationships.

Additionally, these companies are working on implementing OTA and researching autopilot

opportunities in their cars. Tech giants Apple and Google are actively working on development

of fully autopilot electric vehicles. However, being a first mover in OTA technology always

gives an advantage and company should mitigate the risk by sticking to its plan of successfully

testing autopilot as soon as possible.

Implementation Timeline

CEO Musk recently made a public comment saying, “Owning a non-autonomous car in

fifteen years from now will be like still owning a horse” (Heisler, 2016, Para. 1). Tesla has rolled

out semi-autopilot features and is actively working on implementing fully autopilot and summon

capabilities. Company is planning to test fully autonomous vehicles in next 24 to 36 months,

however its availability for general public will depend upon the approval from regulators and law

makers which could take anywhere between 5 to 6 years from now (Heisler, 2015, para. 5). Until

that time company will be working on achieving perfection by continuously improving autopilot

and summon features powered by OTA technology.


Conclusion

In brief, this paper presented a detailed business case analysis for the implementation of

fully autonomous electric vehicles by Tesla on a large scale. Benefits of autopilot and summon

features supported by over the air technology were discussed in terms of value addition to the

ecology, people, and stock holders. Tesla will have to focus on successful implementation of

fully autonomous features and mass production capabilities to compete with established market

leaders both in technology and automotive industry. In all, information and technology is driving

the next wave of engineering advancement in automotive industry.


References

Bergen, M. (2015, October 14). With New Software Rollout, Tesla Accelerates Toward Fully

Self-Driving Cars. Retrieved 02/18/2016 from http://recode.net/2015/10/14/with-new-

software-rollout-tesla-accelerates-toward-full-self-driving-cars/

Bullis, K. (2013, August). How Tesla Is Driving Electric Car Innovation. MIT Technology

Review. Retrieved 03/22/2016 from https://www.technologyreview.com/s/516961/how-

tesla-is-driving-electric-car-innovation/

Calpito, D. (2016, January 11). Tesla Curbs Model S Autopilot Features, Yet Elon Musk

Promises Driverless Cars Going Cross-Country in 2018. Retrieved 02/25/2016 from

http://www.techtimes.com/articles/123277/20160111/tesla-curbs-model-s-autopilot-

features-yet-elon-musk-promises-driverless-cars-going-cross-country-in-2018.htm

Dalton, M. (2015, December 12). Nations Unite in Global Agreement on Climate Change. The

Wall Street Journal. Retrieved 03/22/2016 from http://www.wsj.com/articles/final-draft-

of-global-climate-change-deal-is-complete-1449906731

Energy.gov. (2014, September 15). The History of the Electric Car. Retrieved 03/23/2016 from

http://energy.gov/articles/history-electric-carFord:

Ford Motor Company. (2016). Company Timeline. Retrieved 03/22/2016 from

http://corporate.ford.com/company/history.html

Gao, P., Kaas, H. W., Mohr, D., & Wee, D. (2016, January). Disruptive trends that will

transform the auto industry. Retrieved 03/23/2016 from

http://www.mckinsey.com/industries/high-tech/our-insights/disruptive-trends-that-will-

transform-the-auto-industry


Gilbert, D. (2015, August 6). Tesla Model S hacked: Researchers discover six security flaws in

popular electric car. International Business Times. Retrieved 03/26/2016 from

http://www.ibtimes.co.uk/tesla-model-s-hacked-researchers-discover-six-security-flaws-

popular-electric-car-1514352

Heisler, Y. (2015, November 4). Elon Musk: Not having a self-driving car in 15 years will be

like still owning a horse. Retrieved 03/23/2016 from http://bgr.com/2015/11/04/tesla-self-

driving-cars/

Hirsch, J. (2015, March 19). Elon Musk: Model S not a car but a “sophisticated computer on

wheels.” Los Angeles Times. Retrieved 03/24/2016 from

http://www.latimes.com/business/autos/la-fi-hy-musk-computer-on-wheels-20150319-

story.html

Indiagarner. (2013, June 6). Relationship between Human beings and Cars. Retrieved

03/24/2016 from https://indiagarner.wordpress.com/2013/06/06/relationship-between-

human-beings-and-cars/

King, R. (2014, May 15). At Tesla, Software Takes the Driver’s Seat. The Wall Street Journal.

Retrieved 03/24/2016 from http://blogs.wsj.com/cio/2014/05/15/at-tesla-software-takes-

the-drivers-seat/

Konrad, A. (2013, October 17). Tesla Now Connects Every Car to Internet through AT&T

Wireless, but it’s Not 4G LTE. Retrieved 03/31/2016 from

http://www.forbes.com/sites/alexkonrad/2013/10/17/tesla-att-connected-

cars/#32c855e1359a


Loveday, E. (2014). Tesla’s Model S App. Retrieved 04/02/2016 from

http://insideevs.com/video-9-to-5-mac-selects-tesla-model-s-app-as-iphone-app-of-the-

year/

Mahaffey, K. (2015, August 7). Hacking a Tesla Model S: What we found and what we learned.

Retrieved 03/25/2016 from https://blog.lookout.com/blog/2015/08/07/hacking-a-tesla/

MarketWatch.Com (2016, February 24). Annual Financials for Tesla Motors Inc. Retrieved

04/01/2016 from http://www.marketwatch.com/investing/stock/tsla/financials

Mearian, L. (2015, February 5). Over-the-air software coming soon to your next car. Retrieved

03/27/2016 from http://www.computerworld.com/article/2880150/over-the-air-software-

coming-soon-to-your-next-car.html

Middleton, R. (2015, September 22). Apple targets electric car shipping date for 2019.

International Business Times. Retrieved 03/28/2016 from

http://www.ibtimes.co.uk/apple-targets-electric-car-shipping-date-2019-1520641

Moritz, S., & Ohnsman, A. (2013, October). Tesla Using AT&T Service in Cars. Bloomberg.

Retrieved 03/26/2016 from http://www.bloomberg.com/news/articles/2013-10-17/tesla-

will-use-at-t-service-in-cars

Muoio, D. (2016, April 1). Here is the Tesla Model 3. Tech Insider. Retrieved 04/02/2016 from

http://www.techinsider.io/photos-here-is-the-tesla-model-3-2016-4

Newcomb, D. (2015, March 27). Tesla Update Strategy Leaves Other Automakers in the Dust.

Retrieved 03/28/2016 from http://www.pcmag.com/article2/0,2817,2478816,00.asp

Ninkovic, S. (2015, October 10). The 3 Advantages Of 2-Part Pricing - How Tesla’s Autopilot

Could Have Changed Its Business Model. Retrieved 03/29/2016 from http://www.ev-


analyst.com/home/the-3-advantages-of-2-part-pricing-how-teslas-autopilot-changes-the-

business-model

Ramsey, M. (2015). Tesla Ramps up Hiring as Rivals Loom. The Wall Street Journal. Retrieved

from 03/29/2016 http://www.wsj.com/articles/tesla-ramps-up-hiring-as-rivals-loom-

1451350702

Randall, T. (2015, August). Here’s How Elon Musk Gets Tesla to 500,000 Cars a Year by

2020. Bloomberg. Retrieved 03/29/2016 from

http://www.bloomberg.com/news/articles/2015-08- 10/here-s-how-elon-musk-takes-

tesla-to-500-000-cars-in-five-years

Duffer, R. (2016, April 2). Tesla autopilot turns driver on to not driving. Chicago Tribune.

Retrieved 04/02/2016 from http://www.chicagotribune.com/classified/automotive/sc-

tesla-models-autopilot-1210-20151207-story.html

Sage, A. (2015, September 29). Big Auto look to tech companies to fix cars over the air.

Retrieved 03/28/2016 from http://www.reuters.com/article/us-autos-wireless-

idUSKCN0RT0BV20150929

SEC.gov. (2016, February 2). Form 10-K - Annual report. Retrieved 04/01/2016 from

http://www.sec.gov/Archives/edgar/data/1318605/000156459016013195/0001564590-

16-013195-index.htm

Sparks, D. (2015, May 13). SWOT Analysis of Tesla Stock. Retrieved 03/29/2016 from

http://www.fool.com/investing/general/2015/05/13/swot-analysis-of-tesla-

stock.aspx?source=eptfxblnk0000004


Sparks, D. (2016, March 2). Tesla Motors, Inc.’s Autopilot is “a Breakthrough Technology.”

Retrieved 04/01/2016 from http://www.fool.com/investing/general/2016/03/02/tesla-

motors-incs-autopilot-is-a-breakthrough-tech.aspx

Sparks, D. (2016, January 11). Elon Musk: The First “Summon” Feature Is Just a “Baby Step.”

Retrieved 03/30/2016 from http://www.fool.com/investing/general/2016/01/11/elon-

musk-the-first-summon-feature-is-just-a-baby.aspx

Spector, M., & Ramsey, M. (2016). U.S. Proposes Spending $4 Billion to Encourage Driverless

Cars. The Wall Street Journal. Retrieved 03/31/2016 from

http://www.wsj.com/articles/obama-administration-proposes-spending-4-billion-on-

driverless-car-guidelines-1452798787

Stall, J. D. (2016). Tesla’s Model 3 Electric Car Gets Requests for 180,000 Vehicles on First

Day of Orderings. The Wall Street Journal. Retrieved 04/02/2016 from

http://www.wsj.com/articles/teslas-musk-model-3-orders-surpassed-115-000-within-24-

hours-1459483890

Tesla Motors, Inc. (2016). Tesla’s mission is to accelerate the world’s transition to sustainable

energy. Retrieved 03/26/2016 from https://www.teslamotors.com/about

Tesla Motors, Inc. (2016, February 10). Tesla Fourth Quarter & Full Year 2015 Update.

Retrieved 03/26/2016 from http://files.shareholder.com/downloads/ABEA-

4CW8X0/1769288916x0x874449/945B9CF5-86DA-4C35-B03C-

4892824F058D/Q4_15_Tesla_Update_Letter.pdf

TeslaTap.com. (2014, October 17). Cost for Autopilot Retrofit. Retrieved 04/02/2016 from

https://forums.teslamotors.com/forum/forums/cost-autopilot-retrofit


Wesoff, E. (2014, May 27). Tesla CTO on Energy Storage: “We Should All Be Thinking

Bigger.” Retrieved 03/26/2016 from

http://www.greentechmedia.com/articles/read/Tesla-CTO-on-Energy-Storage-We-

Should-All-Be-Thinking-Bigger

Williams, M. (2012, August 14). Tesla CTO talks Model S, batteries and in-car Linux. Retrieved

03/27/2016 from http://www.techworld.com.au/article/433612/tesla_cto_talks_

model_batteries_in-car_linux/

Zhang, B. (2012). Tesla wants to take self-driving cars to a whole new level. Business Insider.

Retrieved 03/26/2016 from http://www.businessinsider.com/elon-musk-on-tesla-over-

the-air-software-update-summon-feature-2016-1


Appendix A

Figure 1: Tesla’s Model S internal IS architecture supporting autopilot (Mahaffey, 2015)

Appendix B

Figure 2: Tesla’s last 5 year’s gross income summary (MarketWatch.com, 2016)


Appendix C

Figure 3: Tesla’s next five year sales projection (Sparks, 2015)


Appendix D

Table 1: Best case - Tesla meets all business goals

Projected

Year

Target

Sales

Actual

Sales

(100%)

100%

Autopilot

Activation

Autopilot

Sales Rev

In Millions

NPV (7%

Discount

rate)

2020 500,000 500,000 500,000 $1,500.00 $1,069.48

2019 310,000 310,000 310,000 $930.00 $709.50

2018 185,000 185,000 185,000 $555.00 $453.05

2017 125,000 125,000 125,000 $375.00 $327.54

2016 100,000 100,000 100,000 $300.00 $300.00

Total 1,220,000 $3,660.00 $2,859.57

Table 2: Worst case - Tesla miss sales by 8.74% and only 80% autopilot activations

Projected

Year

Target

Sales

Actual

Sales

Miss by

8.74%

80%

Autopilot

Activation

Autopilot

Sales Rev

In Millions

NPV (7%

Discount

rate)

2020 500,000 456,300 365,040 $1,095.00 $780.72

2019 310,000 282,906 226,325 $678.90 $541.27

2018 185,000 168,831 135,065 $405.00 $330.60

2017 125,000 114,075 91,260 $273.80 $239.15

2016 100,000 91,260 73,008 $219.00 $219.00

Total 890,698 $2,671.70 $2,110.74

Table 3: Likely case - Tesla achieve 100% target sales and 90% autopilot activations

Projected

Year

Target

Sales

100%

Actual

Sales

Miss

90%

Autopilot

Activation

Autopilot

Sales Rev

In Millions

NPV (7%

Discount

rate)

2020 500,000 500,000 450,000 $1,350.00 $962.53

2019 310,000 310,000 279,000 $837.00 $638.54

2018 185,000 185,000 166,500 $499.50 $407.74

2017 125,000 125,000 112,500 $337.50 $208.88

2016 100,000 100,000 90,000 $270.00 $270.00

Total 1,098,000 $3,294.00 $2,487.69


APPENDIX E

Figure 4: Tesla’s Model S iPhone App (Loveday, 2014)


APPENDIX F

Figure 5: Tesla’s autopilot components and labor cost (Loveday, 2014)