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The following section prompt questions is for a paper about the development of the car and mainly, the production cycle of the automobile. How were they made back then, and how have companies, and people, like Ford and Henry ford changed the Industry(fordism). Please answer that following section questions

3. market structure (global oligopoly; which countries produce and consume)

Global Market structure

Product life cycle*

introduction , growth, maturity, and decline

How long does it take to make vehicles today?

How long do they usually last before they are unrepairable, or sold off

Who are the big players now

i. Who owns who

ii. Who are the leaders

Please only choose from among the following sources that have been attached or the links have been provided:

Here are the citations for these sources:

Bibliography Articles:

1. DENG, HAIYAN, and ALYSON C. MA. “MARKET STRUCTURE AND PRICING STRATEGY OF CHINA’S AUTOMOBILE INDUSTRY.” The Journal of Industrial Economics, vol. 58, no. 4, Blackwell Publishing Ltd, 2010, pp. 818–45, https://doi.org/10.1111/j.1467-6451.2010.00434.x.

2. Dussauge, Pierre, et al. “Asymmetric Performance: The Market Share Impact of Scale and Link Alliances in the Global Auto Industry.” Strategic Management Journal, vol. 25, no. 7, John Wiley & Sons, Ltd, 2004, pp. 701–11, https://doi.org/10.1002/smj.416.

3. “Automobile Manufacturing.”

Encyclopedia of American Industries

. Farmington Hills, MI: Gale, 2022.

Business Insights: Essentials

. Web. 6 July 2022.

https://www.encyclopedia.com/social-sciences-and-l…

4. Hoffman, Alan N. Tesla Motors, Inc. : the First U.S. Car Company IPO Since 1956. Rotterdam School of Management, Erasmus University, 2011.

5. Vynakov, O. F., et al. “MODERN ELECTRIC CARS OF TESLA MOTORS COMPANY.” Automatiza?cia Tehnologic?eskih i Biznes-Processov, vol. 8, no. 2, Odessa National Academy of Food Technologies, 2016, https://doi.org/10.15673/atbp.v8i2.162.

6. Czakon, Wojciech, et al. “Designing Coopetition for Radical Innovation: An Experimental Study of Managers’ Preferences for Developing Self-Driving Electric Cars.” Technological Forecasting & Social Change, vol. 155, Elsevier Inc, 2020, p. 119992–, https://doi.org/10.1016/j.techfore.2020.119992.

7.”Ford Motor Company.”

International Directory of Company Histories

. Ed. Drew D. Johnson. Vol. 238. Farmington Hills, MI: St. James Press, 2021.

Business Insights: Essentials

. Web. 6 July 2022.

URL:

8.V Sumantran. “The Hindu Business Line: The Supply-Chain Challenges in Restarting the Auto Industry after Covid.”

Newstex Global Business Blogs

, Newstex, 2020.

9.Vellequette, Larry P. “The New Abnormal: Auto Sales Had Wild Ride in 2021; Chip and Supply Shortages, COVID Jostled Industry.”

Automotive News

, vol. 96, no. 7020, Crain Communications, Inc, 2022, p. 1–.

10. Pistoia, G. Electric and Hybrid Vehicles Power Sources, Models, Sustainability, Infrastructure and the Market. 1st ed., Elsevier, 2010.

11 . “Ford Motor Co.”

Notable Corporate Chronologies Online

. Gale, 2022.

Business Insights: Essentials

. Web. 6 July 2022.

12. Xia, Yu, and Thomas Li-Ping Tang. “Sustainability in Supply Chain Management: Suggestions for the Auto Industry.” Management Decision, vol. 49, no. 4, Emerald Group Publishing Limited, 2011, pp. 495–512, https://doi.org/10.1108/00251741111126459.

13. Nayak J, Mishra M, Naik B, Swapnarekha H, Cengiz K, Shanmuganathan V. An impact study of COVID-19 on six different industries: Automobile, energy and power, agriculture, education, travel and tourism and consumer electronics. Expert Systems. 2022;39:e12677.

https://doi.org/10.1111/exsy.12677

14. Kamar, Sandra, et al. “Public Transport Passenger Attraction Using Policy Interventions for a Post-COVID Scenario.” Transportation in Developing Economies (Online), vol. 8, no. 1, Springer International Publishing, 2022, https://doi.org/10.1007/s40890-022-00151-w.

15.: Hoeft F. The case of sales in the automotive industry during the COVID-19 pandemic. Strategic Change. 2021;30:117–125.

https://doi.org/10.1002/jsc.2395

16. Teece, David J. “Tesla and the Reshaping of the Auto Industry.” Management and Organization Review, vol. 14, no. 3, Cambridge University Press, 2018, pp. 501–12, https://doi.org/10.1017/mor.2018.33.

Books:

1. Barbarossa, Camilla, et al. “A Self-Identity Based Model of Electric Car Adoption Intention: A Cross-Cultural Comparative Study.”

Journal of Environmental Psychology

, vol. 42, Elsevier India Pvt Ltd, 2015, pp. 149–60, https://doi.org/10.1016/j.jenvp.2015.04.001.

2.: Smitka, Michael, and Peter Warrian.

A Profile of the Global Auto Industry : Innovation and Dynamics

. First edition., Business Expert Press, 2017.

3. Curcio, Vincent.

Henry Ford

, Oxford University Press, Incorporated, 2013.

ProQuest Ebook Central

, https://ebookcentral.proquest.com/lib/marist-ebooks/detail.action?docID=1164139.

Accelerat ing t he world’s research.
Asymmetric performance: the market
share impact of scale and link
alliances in the global auto industry
P. Dussauge, Bernard Garrette
Strategic Management Journal
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Strategic Management Journal
Strat. Mgmt. J., 25: 701–711 (2004)
Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.416
RESEARCH NOTES AND COMMENTARIES
ASYMMETRIC PERFORMANCE: THE MARKET
SHARE IMPACT OF SCALE AND LINK ALLIANCES
IN THE GLOBAL AUTO INDUSTRY
PIERRE DUSSAUGE,1 * BERNARD GARRETTE1 and WILL MITCHELL2
1
2
HEC School of Management, Jouy en Josas, France
The Fuqua School of Business, Duke University, Durham, North Carolina, U.S.A.
This study investigates how participating in strategic alliances with rivals affects the relative
competitive positions of the partner firms. The paper builds on studies that show significant
differences in the outcomes of scale and link alliances. The study argues that the more asymmetric
outcomes of link alliances translate into greater changes in the relative market shares of the
partner firms, due to unbalanced opportunities for inter-partner learning and learning by doing.
We find support for this argument by examining 135 alliances among competing firms in the
global automobile industry, from 1966 to 1995. Copyright ï›™ 2004 John Wiley & Sons, Ltd.
This study investigates how participating in different types of strategic alliances with rivals affects
the relative competitive positions of the partner
firms. Prior work suggests that link alliances, to
which partner firms make complementary contributions, lead to more volatile alliance outcomes than do scale alliances, to which partners
make similar contributions (Dussauge, Garrette,
and Mitchell, 2000). We extend this prior work
by arguing that the more volatile outcomes of link
alliances translate into greater changes in the relative market shares of the partner firms.
Key words: strategic alliances; scale and link alliances;
alliance outcomes; alliance performance; automobile
industry
∗
Correspondence to: Pierre Dussauge, HEC School of Management, 78351 Jouy en Josas, France.
E-mail: dussauge@hec.fr
Copyright ï›™ 2004 John Wiley & Sons, Ltd.
Following Hennart (1988), we use the scalelink typology of alliances. This typology categorizes alliances according to the partners’ contributions to the joint activity. Scale alliances, in
which the partners contribute similar resources for
the same stage or stages in the value-chain, aim
at producing economies of scale for those activities that firms carry out in collaboration. Scale
alliances can include joint R&D efforts, the joint
production of components or sub-assemblies, or
the manufacture of an entire product. The PRV
alliance that Peugeot, Renault, and Volvo set up
in 1971 to develop and manufacture a common
V6 engine is an example of a scale alliance,
as is the 1991 Ford–Volkswagen Auto-Europa
alliance that produced a minivan for the European
market.
Link alliances, in contrast with scale alliances,
aim at combining different skills and resources
Received 22 March 2002
Final revision received 20 January 2004
702
P. Dussauge, B. Garrette and W. Mitchell
from each partner. Link alliances include partnerships in which one partner provides market access
to products that the other firm has developed. The
1971 agreements between Chrysler and Mitsubishi,
the 1983 NUMMI joint venture between General
Motors and Toyota, and the agreements linking
General Motors to Isuzu in the 1970s and 1980s,
are all examples of link alliances in which a U.S.
firm marketed vehicles that its Japanese partner
designed.
Dussauge et al. (2000) found that link alliances
are often more volatile and lead to more asymmetric alliance outcomes than scale alliances. By
asymmetric alliance outcomes, they mean that
partners tend to reorganize or take over link
alliances earlier and more often than scale alliances; conversely, scale alliances often continue
without major changes in organization for longer
periods. Both reorganization, i.e., a change in
the allocation of tasks among the partners, and
takeover, i.e., one partner takes over all alliance
activities, denote a shift in the competitive positions of the partners within the alliance. The current study explores the extent to which the more
asymmetric outcomes of link alliances translate
into greater changes in relative performance of the
parent firms than do the more balanced outcomes
of scale alliances. The analysis focuses on changes
in relative market share that occur following collaboration among competitors. We expect significant changes in relative market share to be more
prevalent in link alliances than in scale alliances.
We find empirical support for this argument by
examining 135 alliances among competing firms in
the global automobile industry, from 1966 to 1995.
PRIOR RESEARCH AND HYPOTHESIS
Strategic alliances are arrangements between two
or more independent companies that carry out a
project or operate in a specific business area by
coordinating skills and resources jointly rather than
either operating on their own or merging their
operations. This definition of alliances includes
equity joint ventures as well as partnerships that
do not create a separate legal entity.
The alliance literature reflects the presence of
both benefits and risks associated with inter-firm
arrangements. On the one hand, some authors
Copyright ï›™ 2004 John Wiley & Sons, Ltd.
argue that collaboration provides mutual benefits, in a ‘win–win’ situation that favors all partners (Berg and Friedman, 1978; Teece, 1986;
Contractor and Lorange, 1988; Hennart, 1988;
Williamson, 1991; Mitchell and Singh, 1996; Chan
et al., 1997). In this view, collaboration helps partners combine complementary and difficult-to-trade
resources. Partner firms can thus pursue business
opportunities together that would be out of reach
for each firm on its own. On the other hand,
many authors argue that alliances may lead to
highly unbalanced outcomes, with one partner benefiting more than the other (Reich and Mankin,
1986; Balakrishnan and Koza, 1993; Park and
Russo, 1996). The issue of the potentially asymmetric benefits of alliances is particularly critical when alliances associate competitors. Indeed,
alliances between rivals can lead to the loss of
proprietary knowledge, to increased dependence
of one partner vis-à-vis the other, and more generally to the strengthening of one partner at the
expense of its ally (Hamel, Doz, and Prahalad,
1989).
Recent research on inter-competitor alliances
has tried to disentangle their benefits and risks.
Hennart, Roehl, and Zietlow (1999) find little
empirical support for the asymmetric view of
alliance outcomes in general. Several arguments
concerning alliance learning, though, suggest that
the benefits and risks may differ among scale and
link alliances.
The learning argument is common in the recent
literature on alliance dynamics (Aoki, 1986; Mody,
1993; Inkpen, 1995, 2000; Inkpen and Crossan,
1995; Sakakibara, 1997; Simonin, 1997; Gulati,
1998; Lane and Lubatkin, 1998; Doz and Hamel,
1998; Tsang, 2002; Kale, Singh, and Perlmutter,
2000; Lane, Salk, and Lyles, 2001). Three forms of
learning are particularly relevant for our research
question: joint learning, inter-partner learning, and
learning by doing (Inkpen, 2002). Through joint
learning, firms create new knowledge and capabilities jointly with their alliance partners, which
leads to common benefits, i.e., benefits that accrue
to all partner firms. Through inter-partner learning,
firms learn from their alliance partners and internalize their partners’ skills and capabilities, which
leads to private benefits, i.e., benefits that each
firm earns unilaterally. Learning by doing arises
when firms develop competencies as a result of
experience with new activities, which also leads to
Strat. Mgmt. J., 25: 701–711 (2004)
Research Notes and Commentaries
private benefits. We first consider joint and interpartner learning in link and scale alliances, and
then turn to learning by doing.
Joint and inter-partner learning opportunities
will differ among scale and link alliances. Dussauge et al. (2000) show that the extent to which
resources that partners contribute to an alliance
overlap or differ influences alliance evolution.
They show that link alliances lead to more asymmetric alliance outcomes than scale alliances. They
interpret the observed differences as results of differing levels of joint and inter-partner learning.
In scale alliances, most learning that occurs will
be joint learning that extends the partners’ common knowledge base, because the firms contribute
similar resources. In the Auto-Europa alliance we
mentioned above, for example, Ford and Volkswagen both operated in the European market and
offered similar lines of products before forming the
alliance. Because both partner firms contributed
similar skills and assets to design and manufacture a common vehicle, most of the learning that
occurred in this scale alliance is likely to have
been joint learning, which mutually enhanced their
pre-existing knowledge bases. In link alliances,
by contrast, the partner firms contribute different resources, which create greater opportunities
and incentives for inter-partner learning. In the
NUMMI link alliance, for instance, the joint manufacturing operation provided GM with a window
into the Toyota production system, while giving
Toyota an opportunity to observe how GM dealt
with U.S. trade unions, suppliers, and local authorities.
This view on joint and inter-partner learning
is consistent with Khanna, Gulati, and Nohria’s
(1998) argument concerning the dynamics of alliances. In their argument, the ratio of private
to common benefits determines the cooperative
vs. competitive behavior of the partner firms in
alliances. These authors define this ratio according to the ‘relative scope’ of the alliance, i.e., the
extent to which alliance activities overlap with a
partner’s overall activities. The less alliance activities overlap with a partner’s activities, the more
profitably the partner can internalize and implement skills acquired via inter-partner learning and
the more competitive the behavior that this partner
will adopt.
This argument translates directly into a comparison of scale and link alliances. In Khanna et al.’s
(1998) terms, scale alliances offer a low ratio
Copyright ï›™ 2004 John Wiley & Sons, Ltd.
703
of private to common benefits. In contrast, skill
complementarity in link alliances creates a potential for the partners to use newly acquired skills
on their own, outside the scope of the alliance.
Therefore, link alliances offer a higher ratio of
private to common benefits. The higher ratio of private to common benefits in link alliances, in turn,
implies that link alliances will favor more competitive behavior on the part of the partner firms,
while scale alliances will favor a more cooperative
behavior. Dussauge et al.’s (2000) finding that link
alliances have more asymmetric outcomes supports
this implication.
In turn, Khanna et al.’s (1998) logic suggests
that link alliances will have a more asymmetric impact on the partner firms themselves. Firms
involved in link alliances often will adopt competitive behavior, aggressively pursue the implementation of new skills in their own operations,
and are more likely to enhance competitive positions unilaterally. In addition, as the Khanna et al.
definition of the relative scope of an alliance is
specific to each partner firm in the alliance, not
all partners will have the same incentive to adopt
an equally competitive or cooperative behavior. In
other words, asymmetric benefits will accrue to
each partner (Hamel et al., 1989).
Just as joint and inter-partner learning differ
among scale and link alliances, so will learning by
doing opportunities, again causing differing ratios
of private to common benefits. The differences
arise because link alliances create greater opportunities for partners to gain footholds in new business
areas.
Scale alliances primarily produce efficiency
gains by pooling similar assets from the partners, carrying out business activities in which both
firms have experience. These efficiency benefits,
which accrue to both partner firms (Hennart, 1988),
can arise without any learning-by-doing benefits
that accrue from new experience. Any learning by
doing that does occur, moreover, will tend to be
symmetric, because both partners participate in the
same activities.
In contrast, link alliances organize the use of
complementary resources in order to pursue expansion opportunities in new business areas. This creates a foothold for each partner in new productmarket segments. Each partner then has an opportunity to exploit the foothold on its own, by
using the experience to develop its own internal
competencies, thus generating unbalanced private
Strat. Mgmt. J., 25: 701–711 (2004)
704
P. Dussauge, B. Garrette and W. Mitchell
benefits. For example, many link alliances market one partner’s products in the other partner’s
home market. The entering partner may later take
advantage of this initial entry into a new zone
to develop an independent presence and market a wider range of products, such as Toyota’s
independent expansion within the United States
following its experience with the NUMMI joint
venture. Conversely, the host partner may capitalize on the alliance experience to broaden its
own product range (Buckley and Casson, 1988,
1998). Link alliances thus create private benefit learning by doing opportunities that differ for
each partner and often lead to asymmetric performance outcomes for the parents. Even absent any
inter-partner learning, each parent can leverage the
opportunities in order to expand its business.
These views lead to the following hypothesis:
The relative competitive positions of the partner
competitors will change more over time in link
alliances than in scale alliances.
DATA AND VARIABLES
We focused on one industry setting, the automobile industry, in order to assess the market
share impact of alliances. We tested our hypothesis on a set of alliances associating automobile manufacturers originating from North America, Europe, or Asia (Japan and Korea). All the
alliances involved operations in one of these three
zones. We focused on alliances between competitors that operated in at least one of the partner’s main markets. Thus, we excluded agreements
where none of the partners’ main markets was
involved (e.g., we did not consider agreements
such as the Australian General Motors–Toyota
joint venture, or the Autolatina alliance that Ford
and Volkswagen formed to jointly operate in Brazil
and Argentina). We also excluded the supply of
components and sub-assemblies (e.g., engines and
transmissions) from one manufacturer to another,
as well as government-sponsored research consortia (e.g., EU-sponsored consortia). We separated
multiple partner alliances into sets of bilateral partnerships involving each possible pair of allies. Our
definition of alliances includes both equity joint
ventures (Killing, 1983) and contractual alliances
that do not involve freestanding alliance facilities.
Copyright ï›™ 2004 John Wiley & Sons, Ltd.
The data have the following characteristics.
Each data point corresponds to an agreement
between two partners, covering one of the following four business areas: cars, trucks, parts and subassemblies, and research. Each agreement operates in at least one of three geographic zones:
Europe, North America, or Asia. In this approach,
an alliance between an American and a Japanese
automaker by which they each agree to market one
of the other’s models in their respective home markets would be broken down into two cases: one for
the marketing of the American car by the Japanese
partner in Japan, the second for the marketing of
the Japanese car by the American partner in North
America. We did not consider renewed alliances
between the same partners in the same business
and geographic areas as different data points.
We gathered data from secondary sources, supplemented by corporate interviews. Sources include industry reports, manufacturer association
publications, and automotive industry journals
(such as Automotive News). An annual survey
issued by the French Automobile Manufacturers’
Association (Comité des Constructeurs Français
d’Automobiles) on the evolution of alliances formed by automobile producers throughout the world
provided longitudinal data on all alliances in the
industry. Table 1 reports summary statistics for the
variables.
The focal independent variable, the type of
alliance (LINK ALLIANCE), is a dummy variable
taking on the value 1 in the case of link alliances
and 0 in that of scale alliances. We examined each
alliance to determine whether to class it as either
a scale alliance or a link alliance according to the
definitions given in the introductory section of this
paper. To do this, we classified possible contributions to an alliance into three categories that distinguished between technical, production, and marketing activities: (i) research, technology development, and product design; (ii) manufacturing facilities and capabilities; and (iii) marketing and sales
networks and capabilities. We then examined the
respective contributions of each partner. When,
based on the three categories, all the contributions
of the partners overlapped, we classified a partnership as a scale alliance. For example, the AutoEuropa alliance that associated Ford and Volkswagen to produce minivans in Europe fell into the
scale category because both partners participated
in the design and development of the joint vehicle, invested in the production facility, and carried
Strat. Mgmt. J., 25: 701–711 (2004)
Copyright ï›™ 2004 John Wiley & Sons, Ltd.
Table 1.
Summary statistics
Correlations
1
2
3
4
5
12
13
b
1
0.38
0.49
1
0.76
3
4
5
0.22
0.36
0.44
−0.12 −0.30 −0.21
1
−0.25
1
−0.21
0.17
−0.06
0.39
−0.08
0.14
−0.27
0.10
−0.12
0.33
−0.23
−0.12
−0.46
−0.03
−0.13
0.41
−0.32
0.03
−0.42
0.11
0.01
0.46
−0.61
0.36
0.12
0.01
−0.02
−0.27
0.13
−0.02
−0.04
0.38
0.36
0.40
−0.14
0.07
0.08
0.12
0.35
108
0.23
0.28
0
1.52
77
0.40
0.43
0
2.00
56
0.79
1.36
0.004
6.51
135
0.44
0.50
0
1
6
7
8
9
10
11
12
13
1
−0.40
1
0.18 −0.25
−0.21
0.00
0.33 −0.15
−0.19
0.09
1
0.02
−0.11
0.07
1
−0.27
0.00
1
−0.63
1
−0.23
0.10
0.07
0.34
−0.63
−0.22
1
−0.12
−0.20
0.19
−0.20
0.24
−0.09
−0.04
0.16
1
135
0.39
0.29
0.01
1
135
135
0.45 83.66
0.50
7.56
0
66
1
94
135
0.23
0.42
0
1
135
0.21
0.41
0
1
135
0.64
0.48
0
1
135
0.18
0.38
0
1
135
0.18
0.38
0
1
135
0.63
0.48
0
1
1
Volume of smaller partner/Volume of larger partner.
The three geographic scope measures comprise a mutually exclusive set of dummy variables, which correlate negatively.
705
Strat. Mgmt. J., 25: 701–711 (2004)
a
2
Research Notes and Commentaries
6
7
8
9
10
11
Dependent variables
Change in market share: Year 3
Change in market share: Year 7
Change in market share: Year 10
Independent variables
Link alliance
Relative competitive position when
formeda
Zone: EU
Founding year
Trucks
Equity holding (parent cross-holding)
Same-continent allianceb
Cross-continent alliance: Smaller
partner is hostb
Cross-continent alliance: Smaller
partner is entrantb
Contract (vs. equity joint venture)
Descriptive statistics
Cases
Mean
S.D.
Minimum
Maximum
1
706
P. Dussauge, B. Garrette and W. Mitchell
out marketing activities for their share of the total
output. When, in at least one of the three functional
activity categories, all contributions came from
one partner, we considered an alliance to be of
the link type. For example, The NUMMI alliance
between General Motors and Toyota was a link
alliance because all product development activities
were carried out by Toyota alone, while manufacturing was done in a jointly owned plant. Some
alliances in our sample do not cover all three functional activities. For example, the PRV alliance that
associated Peugeot, Renault, and Volvo for the production of a common V6 engine was limited to
design, development and manufacturing activities:
there was no marketing involved in this alliance
as the entire production was shared among the
partners. Three coders, including two authors and
an industry expert, independently coded the variable. We dropped three cases because of conflicting
coding.
We defined several control variables that address
characteristics of the business in which the alliance
operates, of the alliance itself, and of the parent
companies. The variable TRUCK addressed business area differences, denoting alliances set up to
develop, produce, or market trucks.
Three sets of variables address alliance characteristics. FOUNDING YEAR records calendar
year of alliance formation. CONTRACT denotes
alliance legal form and distinguishes contract alliances from free-standing equity joint ventures
alliances (Beamish and Banks, 1987; Hennart,
1988; Kogut, 1988, 1991). CROSS-CONTINENT
ALLIANCE and SAME-CONTINENT ALLIANCE denote geographic coverage (Nohria and
Garcia-Pont, 1991; Burgers, Hill, and Kim, 1993;
Dussauge and Garrette, 1995). In cross-continent
alliances, we traced whether the SMALLER PARTNER IS HOST or whether the SMALLER PARTNER IS ENTRANT (Yan and Grey, 1994).
Three sets of variables address parent characteristics. RELATIVE COMPETITIVE POSITION
WHEN FORMED (RCP0 ) records the total global
volume output of the smaller partner (measured in
number of vehicles) divided by the total volume
output of the larger partner, the year the alliance
was formed (Harrigan, 1985, 1988; Doz, 1988,
1996; Hamel et al., 1989). The relative competitive
position formula took the volume output of cars,
trucks, or all vehicles according to whether the
alliance was for cars, trucks, or research, respectively; in the case of parts and sub-assemblies,
Copyright ï›™ 2004 John Wiley & Sons, Ltd.
we made a case-by-case decision, depending on
the component involved. EQUITY HOLDINGS
traces whether the partner firms have stakes in
each other’s equity (Bresser, 1988; Williamson,
1991; Mowery, Oxley, and Silverman, 1996).
ZONE: EU denotes geographic origins, distinguishing alliances operating in Europe from others
(Hergert and Morris, 1987; Ghemawat, Porter, and
Rawlinson, 1986; Bartholomew, 1997).
To test the hypothesis, we conducted a two-stage
analysis. We first estimated a probit equation for
survival of the alliance after 3, 7, and 10 years, in
order to control for a possible alliance survival bias
in the competitive position estimates. A survival
bias might arise if factors that influence alliance
duration also associate with observed changes
in market share. For instance, suppose (a) joint
ventures survive longer than contract alliances,
(b) longer-lived alliances lead to greater changes in
parent market share, and (c) link alliances are more
likely to be joint ventures than contract alliances.
If so, then we might incorrectly treat alliance type
as a cause of market share change if we did not
address the survival bias.
We then estimated least square regressions on
three dependent variables: 3-year, 7-year, and 10year changes in relative competitive positions, taking into account the selection variable (lambda)
from the survival model. dRCP3 , dRCP7 and
dRCP10 record the absolute variation in relative
market share 3, 7 and 10 years after the alliance
was formed.
dRCPt = |RCPt − RCP0 |/RCP0
(t = 3, 7, 10)
We calculated RCP3 , RCP7 and RCP10 in the same
way as RCP0 (RELATIVE COMPETITIVE POSITION WHEN FORMED, as we described above),
using unit volume outputs of the partners in the
third, seventh, and tenth year after the alliance formation date. Interpretation of the dRCP3 , dRCP7 ,
dRCP10 variables is straightforward—they correspond to the percent growth or decline in relative
market share, 3, 7, and 10 years after alliance formation.
We chose three periods in order to examine
short-term and longer-term influences on competitive positions. Three years is less than the average time it takes vehicle firms to develop a new
model, whereas 7 years is more than the average development time, and 10 years is more than
Strat. Mgmt. J., 25: 701–711 (2004)
707
Research Notes and Commentaries
the maximum commercial life of a model. Thus,
measuring after 3 years examines changes in relative market share that occur holding constant the
partners’ product lines. That is, new products introduced during a 3-year period will benefit little from
design advantages acquired through the alliance;
therefore, advantages that each partner builds on
during the 3 years are likely to stem from marketing rather than from technology and new product
development. After 7 years, in contrast, partners
can begin to incorporate advantages into new products. After 10 years, it is likely that firms will have
substantially renewed their product lines and will
have explored most opportunities for implementing advantages acquired in the alliance. In addition,
we expect the competitive impact to increase over
time, leading to greater change in relative competitive position after 7 years and 10 years than after
3 years.
RESULTS
Table 2 presents the probit selection models for
survival to years 3, 7, and 10. We modeled the
effects of alliance type (link vs. scale) on alliance
survival, while adding other factors that also might
affect survival. The results were robust to adding
other variables to the selection equation.
Table 2 shows that survival tendencies of scale
and link alliances change over time. Link alliances
and scale alliances are equally likely to survive to
3 and 10 years, but link alliances are less likely to
Table 2.
survive to 7 years. An interpretation of this result
is that in link alliances the firms have obtained the
major opportunities within the 7-year time frame.
In contrast, scale alliances are more prone to hit
the 7-year mark because, once they have started
producing adequate economies of scale, they are
likely to survive for an entire product life cycle.
In addition, the results show that EU alliances tend
to have short-term (3-year) survival advantages,
possibly stemming from the more fragmented,
and hence less turbulent, nature of the European
automobile market. Indeed, historically, the major
European automakers were ‘national champions’
that had a high level of control over their domestic
markets. In addition, government intervention and
protectionist policies have traditionally sheltered
the European auto market from global competition.
The greater stability of this environment allowed
for longer initial survival of alliances. Table 2 also
shows that alliances formed more recently have a
shorter life expectancy, which may be linked to
the increasing turbulence of the global automobile
industry. Equity holdings increase the stability of
alliances, while equity joint ventures have no significant influence on survival.
Table 3 presents the estimates of change in relative market share, accounting for the survival
selection effect. These results support the hypothesis that link alliances lead to greater changes
in relative competitive position, at least in the
longer term. Link alliances produce significantly
more change in relative market share than do scale
Probit selection equation for survival to year 3, 7, or 10 (negative coefficient = less likely to survive)
1
Intercept
Link alliance
Relative competitive position
when formed
Zone: EU
Founding year
Equity holding (parent
cross-holding)
Contract (vs. equity joint
venture)
Model log likelihood ratio (d.f.)
Pseudo R 2
Cases (survived to analysis year)
∗∗
2
3
3-year
S.E.
7-year
S.E.
10-year
S.E.
31.797
0.128
2.360
6.411∗∗
0.447
0.885∗∗
36.72
−1.421
0.632
5.983∗∗
0.518∗∗
0.759
17.428
−0.214
0.769
3.131∗∗
0.431
0.585∗
1.017
−0.364
0.912
0.531∗∗
0.073∗∗
0.582∗
−0.393
−0.423
0.642
0.457
0.068∗∗
0.490∗
0.369
−0.220
0.687
0.409
0.036∗∗
0.458∗
−0.190
0.447
0.467
0.460
−0.025
0.378
78.7
58%
135
(6)∗∗
(6)∗∗
109.3
60%
135
(6)∗∗
(108)
132.0
72%
135
(77)
(56)
p < 0.05; ∗ p < 0.10 (one-tailed) Copyright  2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 701–711 (2004) 708 P. Dussauge, B. Garrette and W. Mitchell alliances, both 7 and 10 years after alliance formation (Models 3 and 4). In contrast, 3 years after alliance formation, alliance type has no significant effect on changes in relative market share, provided that the analysis addresses survivor bias (Model 1). We note that the selection variable lambda is significant in the 3-year model (column 1), suggesting that it is necessary to correct for the survivor bias. Indeed, if the analysis does not include the selection variable (column 2), alliance type has a significant effect, which could lead to unwarranted support of the hypothesis in the 3-year measure. After 7 and 10 years, no significant impact of the selection variable arises, so that we do not report models that omit the selection effect (sensitivity analyses found no material differences). The results in Table 3 reveal influences of geographic coverage and partner size. In cross-continent alliances, the 3-year impact when the smaller partner is the entrant is negative and significant, i.e., relative competitive position is more stable. The 7-year and 10-year impacts are positive and significant, however, suggesting that relative competitive position varies extensively. This reversed effect after 7 years suggests that when the small partner enters the larger partner’s home market through the alliance, it cannot immediately take advantage of the foothold gained through the alliance, but achieves stronger changes in relative competitive positions after some time. This suggests that, in such contexts, most of the advantages related to technology and new product development skills materialize in relative competitive position only after longer periods. When the smaller partner is the host, no significant impact arises after 3 years, whereas relative market shares tend to remain highly stable after 7 and 10 years. This suggests that small partners derive few private benefits from alliances that operate in their Table 3. Least squares estimates of change in relative market share, with selection estimates for survival to measurement year (positive coefficient = greater change in relative market share) 1 Link alliance (Hypothesis: +) Cross-continent alliance: Smaller partner is entranta Cross-continent alliance: Smaller partner is hosta Same-continent alliancea Founding year Zone: EU Relative competitive position when formed Trucks Lambda (selection equation) Intercept R2 Cases 2 3 4 3-year share (w/ selection) S.E. 3-year share (w/o selection) S.E. 7-year share S.E. 10-year share S.E. 0.060 −0.089 0.073 0.049∗∗ 0.104 −0.092 0.070∗ 0.049∗∗ 0.256 0.205 0.133∗∗ 0.109∗∗ 1.198 0.516 0.644∗∗ 0.412∗ 0.050 0.048 0.038 0.048 −0.229 0.112∗∗ −0.864 0.474∗∗ 0.039 0.012 −0.129 −0.143 0.046 0.005∗∗ 0.070∗∗ 0.094∗ 0.054 0.006 −0.073 −0.099 0.046 0.024 0.004∗ 0.002 0.065 −0.030 0.093 −0.217 0.094 0.010 0.121 0.174∗ 0.348 −0.068 −0.522 0.019 0.403 0.042∗ 0.609 0.642 0.041 −0.310 −0.591 0.14 108 0.065 0.161∗∗ 0.399∗ 0.016 0.065 −0.076 −0.066 0.357 0.232 0.25 77 0.116 0.204 0.806 −0.816 0.296 5.767 0.33 56 0.461∗∗ 0.391 2.946∗∗ −0.232 0.11 108 ∗∗ p < 0.05; ∗ p < 0.10 (one-tailed) Mean effects dummies (i.e., the coefficients sum to zero). Mean effects dummies are appropriate when there is no conceptually motivated base case to compare the other case to. Empirically, the procedure involves three steps. First, define a set of exhaustive and mutually exclusive 0–1 dummy variables, as in the more common approach to dummy variable analysis. Second, determine which case will be omitted from the estimates (in our estimates, we initially omitted ‘Cross-continent alliance: Smaller partner is host’ from the analysis. Third, for cases in which the omitted variable equals 1, reset the values of the other cases to −1 rather than 0 (i.e., in our analysis, set ‘Smaller partner is entrant’ and ‘Same continent alliance’ to −1 when ‘Smaller partner is host’ is 1). One can repeat this procedure with a different omitted variable in order to obtain standard errors for the initially omitted variable. This has the effect of obtaining estimates such that the sum of the coefficients of exhaustive and mutually exclusive mean effects dummy variables equals 0. The value of this approach is that the statistical test determines whether the effect of a variable differs significantly from the mean of the set of variables, rather than from a single omitted base case variable. a Copyright  2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 701–711 (2004) Research Notes and Commentaries home market. In particular, small partners seem unable to benefit in a way that substantially modifies the long-term relative competitive position. Conversely, larger partners do not appear to take advantage of alliances to substantially expand their presence in small partners’ markets. Table 3 also provides results concerning temporal, geographic, and competitive effects. First, alliances formed in more recent years have a stronger short-term competitive impact and a weaker long-term competitive impact than alliances formed earlier. This is consistent with the conventional view that the automobile industry, like many others, has become more turbulent in recent years. Second, European alliances are relatively stable in their early years (Model 1), but reach average stability by years 7 and 10 (Models 3 and 4). Third, the more equal the relative competitive position at the time of alliance foundation (i.e., the closer to unity the relative market share of the partners), the less the market shares change in the short to mid term (3 and 7 years, in Models 1 and 3). This suggests that equal partners can protect themselves against partners taking advantage of them. DISCUSSION AND CONCLUSION The findings contribute to the understanding of alliance dynamics. We empirically support the theoretical distinction, suggested in the literature but rarely tested, between scale and link alliances. We show that the relative competitive positions of the partners tend to change more over time in link alliances than in scale alliances. This result suggests that asymmetric outcomes occur to a greater extent in link alliances than in scale alliances because link alliances favor inter-partner learning or learning by doing, while learning in scale alliances, when it occurs, is predominantly joint learning. By establishing the existence of a strong relationship between alliance type and changes in relative competitive position, this study extends previous arguments concerning the impact of learning on the dynamics of scale and link alliances (Hennart, 1988; Dussauge et al., 2000). The findings should be interpreted with care. The fact that two competitors have formed a link alliance does not, in itself, fully explain the variation in relative market share. Other factors, such as the pursuit of an aggressive growth and expansion strategy, which may link to a firm’s decision Copyright  2004 John Wiley & Sons, Ltd. 709 to cooperate, are likely to influence market share changes. In this perspective, our results can be interpreted as indicating that link alliances are one of the means firms can use to pursue aggressive market penetration strategies, while the rationale behind scale alliances is based more on efficiency considerations. In addition, an option view of alliances (Kogut, 1991; Chi, 2000; Chi and Seth, 2002) might offer a complementary explanation for why link alliances lead to more asymmetric outcomes for the parent firms. This perspective analyzes alliances as options to expand in new product-markets for which uncertainty is too high for the firm to make an immediate full commitment. In the case of scale alliances, the partners are in similar positions relative to the option created by the alliance, undertake similar activities during the period of the alliance, and will commonly see similar value in it. When the alliance ends, both partners can invest into similar operations if they choose. Moreover, a parallel valuation of the alliance by both partners is likely to lead to greater stability of scale partnerships. In link alliances, in contrast, the different positions of the partners relative to the alliance are likely to result in different option valuations, and to only one partner choosing to exercise the option, i.e., internalizing the joint activities and thereby expanding in the area that the alliance explored. Learning by doing arises as a factor even with the option argument, though, because expansion will have little value unless a firm learns from its experience with the alliance. The study advances research on strategic alliances and suggests generalizations. The study sheds light on the ambiguity that has made it difficult to gain an understanding of the anticompetitive or competitive impact of strategic alliances between competing firms. Some analysts argue that alliances between competitors are modern forms of coalition that mutually benefit the partner firms but hurt outside competitors and that, unlike traditional cartels, create value and benefit for consumers. Another, opposing, view is that alliances among rivals are a means for one partner to strengthen its own position, while weakening that of its ally, through obtaining valuable resources and developing new skills. Our findings suggest that alliances between rival firms, as a whole, are neither coalitions nor Trojan Horses. Instead, inter-rival alliances fall into two categories. Link alliances, on the one hand, appear Strat. Mgmt. J., 25: 701–711 (2004) 710 P. Dussauge, B. Garrette and W. Mitchell to be closer to the Trojan Horse view because of the opportunities for asymmetric capability development that they provide. Scale alliances, on the other hand, are closer to coalitions because, by increasing economies of scale, they strengthen the group of allied firms relative to other competitors. ACKNOWLEDGMENTS We gratefully acknowledge the financial support of Fondation HEC. We greatly appreciate suggestions concerning earlier work by participants at the 2001 ‘Cooperative Strategies and Alliances’ conference organized by Professors F. J. Contractor and P. Lorange, as well as participants in research presentations organized by Professors P. Beamish, J-F. Hennart, J. Mair, and J. E. Ricart. We would also like to thank two anonymous referees for their detailed comments, which considerably improved this paper. REFERENCES Aoki M. 1986. Horizontal vs. vertical information structure of the firm. American Economic Review 75: 971–983. Balakrishnan S, Koza M. 1993. 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Date: 2011 Subject: Strategic Management & Planning, Competitive Strategy, Industry Analysis Level: | Type: Indirect case | Length: 10349 Copyright: © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Organization: Tesla | Organization size: Large Region: Northern America | State: Industry: Wholesale and retail trade and repair of motor vehicles and motorcycles Originally Published in: Hoffman, A. N. ( 2011). Tesla Motors, Inc.: The first U.S. car company IPO since 1956. Rotterdam, Netherlands: Rotterdam School of Management, Erasmus University. Publisher: Rotterdam School of Management, Erasmus University DOI: https://dx.doi.org/10.4135/9781526429469 | Online ISBN: 9781526429469 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes. 2022 SAGE Publications Ltd. All Rights Reserved. The case studies on SAGE Business Cases are designed and optimized for online learning. Please refer to the online version of this case to fully experience any video, data embeds, spreadsheets, slides, or other resources that may be included. This content may only be distributed for use within Marist College. https://dx.doi.org/10.4135/9781526429469 Page 2 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases Abstract Tesla Motors, Inc. is in the business of developing, manufacturing, and selling technology for high-performance electric automotives and power train components. Hoping to develop a greater worldwide acceptance of electric vehicles as an alternative to the traditional internal combustion, petroleum based vehicles that dominate the market, Telsa is the first company that commercially produced a federally compliant electric vehicle with the design styling and performance characteristics of a high-end performance automobile. Telsa currently offers one vehicle, the Roadster, for sale, as well as supplying electric power train components to Daimler for use in its Smart EV automobile. Additionally, Tesla has a partnership with Toyota Motors to develop and supply an electric power train for Toyota’s Rav4 SUV. Case Tesla Motors, Inc. is in the business of developing, manufacturing, and selling technology for highperformance electric automotives and power train components. Hoping to develop a greater worldwide acceptance of electric vehicles as an alternative to the traditional internal combustion, petroleum based vehicles that dominate the market, Telsa is the first company that commercially produced a federally compliant electric vehicle with the design styling and performance characteristics of a high-end performance automobile. Telsa currently offers one vehicle, the Roadster, for sale, as well as supplying electric power train components to Daimler for use in its Smart EV automobile. Additionally, Tesla has a partnership with Toyota Motors to develop and supply an electric power train for Toyota’s Rav4 SUV. Company Background Tesla Motors was founded in Silicon Valley in 2003 by Martin Eberhard and Marc Tarpenning to create efficient electric cars for driving aficionados. The founders acquired their first round of financing from PayPal and SpaceX founder Elon Musk who subsequently took over as CEO in 2008. The company unveiled its first car, a two-seat sports car named the Roadster, in 2006 after raising $150 million and going through four years of technological and internal struggles. 1 Powered by a 3-phase, 4-pole AC induction motor the Roadster has a top speed of 130 mph and accelerates from 0 to 60 mph in under 4 seconds, all completely silent. 2 Production of the Roadster began in March of 2008 with a first year production run of 600 vehicles. 3 In June 2008, Tesla announced that it would be building a 4-door, 5-passenger sedan called the Model S to be built in California and available for sale in 2012. 4 The Model S is slated to retail for approximately $57,400 and be offered with battery options for 160, 230 or 300 mile ranges per charge. The company went public in June 2010 with an initial public offering at $17 a share, raising about $226.1 million in the first stock debut of a car maker since the Ford Motor Company held its initial public offering in 1956. 5 Tesla has also used its innovative technology to partner with traditional automobile manufacturers on their electric vehicle offerings. In 2009 Tesla signed a deal to provide Daimler with the battery technology to power 1,000 electric Smart city cars. 6 Tesla will supply battery packs and electric power trains to Daimler and in return it will receive auto manufacturing and design expertise in areas including safety requirements and mass production of vehicles. 7 Later in that same year Daimler announced that it had acquired a “nearly 10 percent” stake in Tesla. 8 On October 6, 2010, Tesla entered into a Phase 1 Contract Services Agreement with Toyota Motor Corporation for the development of a validated power train system, including a battery, power electronics module, motor, gearbox and associated software, which will be integrated into an electric vehicle version of the RAV4 for which Tesla received $60 million. 9 In May 2010, Tesla purchased the former NUMMI factory in Fremont, California, one of the largest, most advanced and cleanest automotive production plants in the world, where it will build the Model S sedan and future Tesla vehicles. 10 Additionally, Toyota invested $50 million in Tesla and together the two companies Page 3 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases will cooperate on the development of electric vehicles, parts and production system and engineering support. 11 Strategic Direction Tesla desires to develop alternative energy electric vehicles for people who love to drive. While most car companies are developing small, compact electric cars, Tesla has focused on a high-priced, highperformance electric vehicle that competes against traditional performance cars such as those offered by BMW and Porsche. The company has also devoted many resources to research and development in an effort to produce an electric power train that has both long mileage between recharges and the high performance that car enthusiast’s desire. Tesla’s main objectives are to achieve both growth in sales and profits, provide technological leadership in the field of electric vehicles, and foster sustainability and social responsibility. The company desires for growth are served with its development and sale of the Model S vehicle that is expected to retail for almost half of the Roadster price and thus create higher demand and revenue. The company further strives for growth through its strategic partnerships with Toyota and Daimler to supply electric power trains to those companies for use in their electric vehicle designs. The company’s objectives of sustainability and social responsibility are shown through its desire to develop automobiles that are not powered by petroleum products and produce very little carbon emissions. The company won the Globe Sustainability Innovation Award 2009 with the jury commenting that “the impact of Tesla’s effort reaches well beyond this one car – it sets the stage for a revolution in transportation that could quite literally reduce global petroleum consumption and greenhouse gas emissions by more than one third each.” 12 The company also announced in March 2011 that the combined fleet of Roadsters, “have collectively saved 500,000 gallons of fuel and over 5.3 million pounds of carbon dioxide emissions.” 13 Tesla’s Competition Tesla’s products participate in the automotive market based on its power train technology. It currently competes with a number of vehicles in the non-petroleum powered (alternative fuel) automobile segment from companies such as Mitsubishi, Nissan, General Motors (Chevy), Toyota, BMW and Honda to name a few. Within this market segment, there are four primary means of power train propulsion which differentiate the various competitors in this market: • Electric Vehicles (EV) are vehicles powered completely by a single on-board energy storage system (battery pack or fuel cell) which is refueled directly from an electricity source. Both the Tesla Roadster and the Model S are examples of electric vehicles. • Plug-in Hybrid Vehicles (PHEV) are vehicles powered by both a battery pack with an electric motor and an internal combustion engine which can be refueled both with traditional petroleum fuels for the engine and electricity for the battery pack. The internal combustion engine can either work in parallel with the electric motor to power the wheels, such as in a parallel plug-in hybrid vehicle, or be used only to recharge the battery, such as in a series plug-in hybrid vehicle like the Chevrolet Volt. • Hybrid Electric Vehicles (HEV) are vehicles powered by both a battery pack with an electric motor and an internal combustion engine but which can only be refueled with traditional petroleum fuels as the battery pack is charged via regenerative braking, such as used in a hybrid electric vehicle like the Toyota Prius. 14 • Hydrogen Vehicles are vehicles powered by liquefied hydrogen fuel cells. The power plants of such vehicles convert the chemical energy of hydrogen to mechanical energy either by burning hydrogen in an internal combustion engine, or by reacting hydrogen with oxygen in a fuel cell to run electric motors. 15 These vehicles are required to refuel their hydrogen fuel cells at special refueling stations. Examples of these types of vehicles are the BMW Hydrogen 7 and the Honda Clarity. Page 4 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases Mitsubishi i-MiEV Established in Japan in 1970, Mitsubishi Motors Corporation is a member of the Mitsubishi conglomerate of twenty-five distinct companies. Mitsubishi Motors is headquartered in Tokyo, Japan and employs roughly 31,000 employees. The company sells automobiles in 160 countries worldwide and in 2010 sold 960,000 units. 16 Within the U.S., the company had a meager 0.5% of the market share in 2010 with 55,683 units sold. 17 Along with traditional gasoline engine automobiles, the company has long been involved in the R&D of electric vehicles. Mitsubishi has been involved in electric vehicle research and development since the 1960’s with a partnership with the Tokyo Electric Power Company (TEPCO). 18 Over the time period from 1966 to the present, the company has been dabbled in electric vehicle and battery research and development with numerous prototype vehicles produced. In 2009 Mitsubishi released its newest EV car called the i-MiEV (Mitsubishi Innovative Electric Car). The iMiEV is a small, four passenger, all-electric car with a top speed of approximately 80 MPH and a quoted range of 75 miles on a single charge based on U.S. driving habits and terrain. 19 The car is based on lithiumion battery technology. In October 2010 the company announced that it had reached the 5,000 production unit mark for the car. 20 Currently the i-MiEV is being sold in Japan, other Asian countries, Costa Rica, and fourteen countries in Europe. The Japanese price of the i-MiEV was originally $50,500 but was reduced to $42,690 in mid-2010 due to competition from other car companies. Mitsubishi plans on introducing the i-MiEV to the U.S. market in the fall of 2011. Nissan LEAF The Nissan Motor Company, formed in 1933, is headquartered in Yokohama, Japan and employs over 158,000 workers. Currently it builds automobiles in 20 countries and offers products and services in 160 countries around the world. 21 In 2010 it sold globally over 3 million vehicles in its first three fiscal quarters (April 2010 – Dec 2010) with over 700 thousand of those being sold in the United States. 22 The company operates two brands, Nissan and Infinity, which design and sell both passenger vehicles and luxury passenger vehicles. On December 3, 2010 Nissan introduced the LEAF, which it billed as the world’s first 100% electric, zeroemission car designed for the mass market. 23 The LEAF is a five passenger electric car with a top speed of 90 MPH and a quoted range of 100 miles on a single charge using Lithium-Ion battery technology. The current 2011 price in the U.S. for the LEAF is approximately $33,000 which is also eligible for the $7,500 electric vehicle tax credit. It is reported that Nissan has sold 3,657 LEAFs by the end of February 2011 with 173 of the sales within the U.S. and the rest in Japan. 24 Chevy Volt Chevrolet Motor Company was formed in 1911 and joined the General Motors Corporation in 1918. 25 GM has its global headquarters in Detroit, MI and employs 209,000 people in every major region of the world and does business in more than 120 countries. 26 In 2010, Chevrolet sold 4.26 million vehicles worldwide and 1.57 million in the U.S. 27 In mid-December 2010 Chevy began delivery of a 4-passenger, plug-in hybrid electric vehicle called the Volt. The Volt operates by using an electric engine until the batteries are discharged and then a gasoline engine kicks in for what Chevy calls “extended-range” driving. The car is quoted as having a range of 35 miles in electric mode and an additional 340 miles of extended driving using the gasoline engine. 28 It is reported that Chevy has sold 928 Volts by the end of February 2011; all within the U.S. 29 The current 2011 price in the U.S. for the Volt is approximately $42,000 which is also eligible for the $7,500 electric vehicle tax credit. Page 5 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases Toyota Prius The Toyota Motor Company was established in 1937 and is headquartered in Toyota City, Japan. It employs over 320,000 employees worldwide with 51 overseas manufacturing companies in 26 countries and regions. 30 Toyota’s vehicles are sold in more than 170 countries and regions. For fiscal year 2010, Toyota sold over 7.2 million vehicles worldwide of which 1.76 million were sold in the U.S. 31 In 1997 Toyota introduced a five passenger, gasoline-electric hybrid automobile called the Prius. The Prius has both a gasoline engine and an electric motor which is used under lighter load conditions to maximize the car’s fuel economy. The electric batteries are recharged via the gasoline engine only. On April 5, 2011 Toyota announced that it had sold its 1 millionth Prius in the U.S. and had surpassed 2 million global sales 6 months earlier in October 2010. 32 Currently Toyota offers four versions of the Prius in the U.S. with prices ranging from $23,000 to $28,000. The company has announced a plug-in version of the Prius which is slated for sale in 2012. BMW Hydrogen 7 Bayerische Motoren Werke (BMW) was established in 1916 in Bavaria, Germany. Originally the company started manufacturing airplane engines but after World War I Germany was not allowed to manufacture any airplane components as part of the terms of the armistice. 33 The company turned its focus to motorcycle engine development and subsequently, in 1928, developed its first automobile. Presently the company is headquartered in Munich, Germany and employs approximately 95,000 workers. In 2010, BMW sold approximately 1.2 million vehicles. 34 In 2006 BMW introduced the four passenger Hydrogen 7 automobile that was the world’s first hydrogendrive luxury performance automobile. 35 The car is a dual-fuel vehicle capable of running on either liquid hydrogen or gasoline with just the press of a button on the steering wheel. 36 The combined range for the car is approximately 425 miles with the hydrogen tank contributing 125 miles and the gasoline providing the rest. To date BMW has only produced 100 of the vehicle that have been leased/loaned to public figures. The car has not been made available for purchase by the general public and no sale price has been quoted. Honda Clarity The Honda Motor Company was established in the 1940’s in Japan originally as a manufacturer of engines for motorcycles. 37 Honda produced its first production automobile in 1963 and has been a global supplier since then. In 2010 Honda sold 3.4 million automobiles worldwide with 1.4 million being sold in the U.S. 38 In 2008 Honda began production of its 4 passenger FCX Clarity, the world’s first hydrogen-powered fuel-cell vehicle intended for mass production. 39 The FCX Clarity FCEV is an basically an electric car as the fuel cell combines hydrogen with oxygen to make electricity which powers an electric motor, which in turn propels the vehicle. 40 The car can drive 240 miles on a tank, almost as far as a gasoline car, and also gets higher fuel efficiency than a gasoline car or hybrid, the equivalent of 74 miles a gallon of gas. 41 The company planned to ship 200 of the Clarity to customers in Southern California who can lease it for three years at $600 a month. Barriers to Entry and Imitation The barriers to entry into the non-petroleum powered automobile market segment are high. The hybrid technology for vehicles such as the Prius is well understood by the major automobile companies and many of them have developed and marketed their own version of electric/gasoline hybrid vehicles. The all-electric and hydrogen fuel-cell automobiles are unique technologies which require resources to develop. In this segment, the energy storage and motor technologies are barriers to new competitors. Rechargeable battery systems and fuel cells are newer technologies that require large investments in research and development. A competitor would need to develop its own technologies or partner with another company to acquire these resources. Page 6 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases Proprietary Technology As electric vehicles are a newer technology, Tesla’s innovation has led it to have some unique resources in technology and intellectual property over its competitors. Tesla’s proprietary technology includes cooling systems, safety systems, charge balancing systems, battery engineering for vibration and environmental durability, customized motor design and the software and electronics management systems necessary to manage battery and vehicle performance under demanding real-life driving conditions. These technology innovations have resulted in an extensive intellectual property portfolio—as of February 3, 2011, the company had 35 issued patents and approximately 280 pending patent applications with the United States Patent and Trademark Office and internationally in a broad range of areas. 42 These patents and innovations are not easily duplicated by competitors. A second unique resource that a company developing electric vehicles would require would be its battery cell design. Tesla’s current battery strategy incorporates proprietary packaging using cells from multiple battery suppliers. 43 This allows the company to limit the power of its battery supply chain. The company also has announced a partnership with Panasonic to jointly collaborate on next generation battery development. Inherent to the requirements for an electric automobile company is the knowledge and skills of the workforce. Tesla believes that its roots in Silicon Valley have enabled it to recruit engineers with strong skills in electrical engineering, power electronics and software engineering to aid it in development of its electric vehicles and components. 44 Being one of the first to market with a high-performance EV also gives the company a first mover advantage in experience and branding. Tesla has an agreement with the automobile manufacture Lotus for the supply of its Roadster vehicle bodies. The company entered into a supply agreement in 2005 with Lotus that requires Tesla to purchase a certain number of vehicle chassis and any additional chassis will require a new contract of redesign to a new supplier. 45 This places a large dependence on Lotus to both fulfil the existing contract and also gives them significant power in the event that Tesla requires additional Roadster units. Tesla is dependent on its single battery cell supplier. The company designed the Roadster to be able to use cells produced by various vendors but to date there has only been one supplier for the cells fully qualified. The same is also true for the battery cells used for battery packs that Tesla supply to other OEMs. 46 Any disruption in the supply of battery cells from its vendors could disrupt production of the Roadster or future vehicles and of the battery packs produced for other automobile manufacturers. 47 External Opportunities and Threats Electric Vehicle companies may be able to take advantage of many of the opportunities with the continuous shift towards green energy. President Barack Obama has publicly committed to funding “green” or alternative energy initiatives through various vehicles. 48 In his 2011 State of the Union Address, the President set a goal of getting 1 million electric cars on the road by 2015. 49 Within the U.S., various federal and state governmental agencies are currently supporting loan programs through the likes of the Department of Energy and the California Zero Emission Vehicle (ZEV) program. The tragic Louisiana BP oil spill that took place from April-May 2010 intensified the focus on decreasing US dependence on petroleum products. It also highlighted the fact that while alternative energy is currently more expensive to produce than conventional energy, there are hidden environmental and human costs that must be taken into consideration when making this comparison. This increased focus on alternative energy has been beneficial for the EV industry, benefiting both Tesla and its competitors. Due in part to this increase in funding, Tesla is competing in an industry that is expanding, making its absolute market share less relevant than how fast it is growing its market share. Despite the new dawn of interest a pledges for funding alternative energy, many plans for funding will never come to fruition. Currently in the US, there is a massive budget deficit, and members of the Republican Party have focused their demands for budget cuts in the “discretionary spending” arena, which is where alternative energy funding falls. Notably, some of the cuts proposed would seriously affect programs funding energy efficiency, renewable energy, and the DOE Loan Guarantee Authority. 50 The EV industry has very Page 7 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases few lobbyists compared to the traditional car and petroleum industry, and so is more vulnerable to being targeted in budget cuts. These cuts represent a serious threat to the continued development of the alternative energy and electric car industry. For EVs to come into widespread use, the US must develop an EV charging infrastructure, and this will need the support of both state and federal government in the form of both funding and regulation. Not only is the federal government facing budget cuts, but the state of California is also dealing with massive shortfalls and reduction in services and funding. This is especially important to Tesla, since it operates its manufacturing in California, and one of its largest target markets is California, due to the strict emissions regulation and traditional green focus of Californians. There are also many regulations to which companies developing electric vehicles are subjected. A topic of current interest is the upcoming change in how the range of electric vehicles is calculated – a regulation determined by the EPA. It is thought that the new calculation will result in a lower advertised range for the all electric vehicles which may make their superiority over traditional petroleum based vehicles less prevalent. There are also numerous safety requirements that EVs must adhere to, governed by the National Highway Traffic Safety Administration. Companies that produce less than 5,000 cars for sale, and having 3 product lines or less can qualify for a gradual phase-in regulation for advanced airbag systems, and other safety requirements. Similarly, In Europe, smaller companies are currently exempt from many of the safety testing regulations, and are currently allowed to be operate under the “Small Series Whole Vehicle Type Approval.” Additionally, battery safety and testing is regulated by the Pipeline and Hazardous Materials Safety Administration, which is based on UN guidelines for safety of transport of hazardous materials. These guidelines ensure that the batteries will perform or travel safely when undergoing changes in altitude, temperature, vibrations, shocks, external short circuit, and overcharging. Other regulatory issues include automobile manufacturer and dealer regulations, which are set on a state-bystate basis. In some US states, such as Texas, it is not legal for the dealer and manufacturer to be owned by the same company. Therefore, these regulations would impact the market penetration levels that a company wishing to utilize a distribution model based on being able to both manufacture and sell its cars through its own wholly-owned dealerships would be able to reach in certain states. An interesting, though potentially costly new regulation is the minimum noise requirements, mandated by the Pedestrian Safety Enhancement Act of 2010 signed in January 2011. There have been concerns that since electric cars are so much quieter than their combustion engine counterparts that their design must be somehow altered to increase the amount of noise that they generate in order to make them easier to hear by people with impaired vision. These regulations are likely to take effect by 2013 and could alter electric vehicle designs. The macroeconomic conditions of 2011 and the outlook for the near future is slow but continued growth 51 , in contrast to the past several years of economic retraction. In recent years, the American buyers, and indeed buyers in most parts of the world, have cut back on discretionary purchases in light of high unemployment and general economic uncertainty. The economic recovery has created more demand for higher priced, luxury vehicles. The largest component of what makes an electric vehicle attractive from a financial standpoint is the savings in traditional fuel costs. There is a huge difference between the cost of electricity to recharge an electric vehicle versus the cost of gas to fuel a conventional vehicle. Hence, as oil prices increase, the financial incentive to purchase an electric vehicle increases as well. Additionally, the variability of oil prices means that owners of conventionally powered vehicles cannot predict what their fuel costs for the year will be with any confidence. Thus, the much more stable costs of electricity make an electric vehicle more desirable. It is not likely that the cost of oil will ever see a sustained and significant drop in price, nor is it likely that the cost of oil will ever be as stable as the cost of electricity, creating a sustained advantage over traditionally powered vehicles. Electric Vehicle manufacturers are currently riding the wave of environmental consciousness that began in the Page 8 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases 1960’s, and has been slowly gaining momentum since. The “Green movement” encourages people to make choices that lessen their negative impact on the environment, and to use resources which are renewable. Alternative fuel products fit this description, by both reducing consumer demand for oil, and eliminating harmful emissions during use. For the time being, electric vehicles still leave a noticeable “footprint” though not nearly as large as a conventional car. Challenges to Adoption of Electric Cars: Consumer Perceptions Consumer perceptions of electric vehicles are a huge challenge to adoption. Many people think of electric vehicles as being underpowered, clunky looking, hard to charge, quirky and undependable vehicles. Public experience with traditional vehicles and their concerns about the newness of alterative fuel vehicles must be overcome. Additionally, the absence of a public infrastructure for recharging electric vehicle batteries introduces a “Which came first – the chicken or the egg?” paradox: there is no infrastructure because there are not enough electric vehicles, and part of the reason why there are not many electric vehicles is because there is no infrastructure to support them. For the time being, consumers must charge their vehicles either at home, or possibly at their place of work. This limits the electric vehicle driving range that could have a negative impact on the image of electric vehicles with consumers. Another concern that consumers have when considering an alternative energy vehicle is the cost. Electric vehicles, as well as most alternative fuel vehicles, cost significantly more than traditional vehicles of similar style and performance. This is due both to the cost of the research and development, and high cost of materials, particularly for the battery cells. 52 Additionally, the production of low environmental impact products is in most cases more expensive than their conventionally produced counterparts. So long as there are areas of the world willing to sacrifice the environment (natural resources, air, water, waste production) to create low-cost products, this dynamic will continue. The EV industry is hampered by the public view of the limited range of vehicles in comparison to traditional gasoline cars. In recent years there has been much advancement in the ways of sustainable energy. High gas prices along with increased awareness on environmental impacts have become the catalysts for new research into sustainability. There has been an increase in new battery technology that is an opportunity for the electric vehicle industry. Currently the most viable battery for an electric vehicle, that also provides performance, is the lithium ion battery, (what is found in your laptop). Companies like Planar Energy are now coming out with “solid state, ceramic like” batteries that could potentially provide more energy for a lower cost. 53 With these new advances there is a distinct opportunity for electric car companies to create a better performing and less expensive vehicle. Electric Vehicle companies that can develop battery architectures that cross this limited mileage chasm will have positive implications in the public view. Tesla is credited to have one of the industry’s best batteries, and it is on the cutting edge of innovative technology. “The battery pack in the Tesla Roadster is the result of innovative systems engineering and 20 years of advances in Lithium-ion battery technology. The ingenious pack architecture enables world-class acceleration, safety, range, and reliability.” 54 This type of innovative technology is what distinguishes Tesla from other competitors in its industry, and will continue to set it apart across contexts in the market. Electric vehicles are also reliant on a network of available power sources. Though infrastructure is currently limited, companies like GE are already planning a rollout of EV charging stations to be sold to households, companies, and local governments. 55 The Government has set out to aid in the building of electric vehicle charging stations with Government grants supporting the installation of the electric-car charging stations in areas such as San Francisco and Oregon, will soon host 15,000 stations around the state, some of them public. 56 An increase in charging station technology and infrastructure should broaden the demand electric vehicles that are still encumbered by limited service and “refueling” capabilities. Along with the advantages of technological innovations in electric vehicle designs, there are also respective weaknesses to consider, including the amount of time necessary to charge a battery and the limited driving range per charge. Currently Tesla has reduced the recharge time to of its battery cell to 45 minutes, but this Page 9 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases is a long time compared to the few minutes that it takes cars to refuel at the gas pump. Coupled with the recharge time of the battery cells is the limited range of electric vehicles. For owners of conventional cars who are used to having a range of 300 miles or more, with a refilling time of 3 to 4 minutes, the limited range and recharging options of EVs can seem very restrictive. However, the average American driver travels only 35 miles per day, and the average trip length is only 10 miles. 57 More importantly, long distance trips (more than 100 miles, accounting for less than 1% of all trips) made by American drivers have a median distance of 194 miles. 58 This indicates that for most drivers will very infrequently be driving non-stop for more than 245 miles, making range a virtual non-issue. However, while the facts may be different from perception, it is the perception of consumers which will drive their purchasing behavior, thus still making the range issue a serious concern for EV manufacturers. The second issue with batteries is their end-of-life concerns. Rechargeable batteries, over time, batteries become less efficient, and no longer hold their charge as well as when the battery was new. The same issue exists with electric vehicle batteries. Tesla estimates that after 100,000 miles or 7 years the Roadster’s battery will only operate at 60-65% efficiency. 59 This decrease in battery performance will decrease the range of the car, and will start taking place well before the 100,000 mile/7 year marker. Proper battery disposal is another issue. At this time, there are not many battery disposal facilities due to the limited electric vehicle market to date. Finally, maintenance of electric vehicles is a concern, given the paucity of many adequately trained repair facilities, and the low market penetration of the cars. There simply are not many EVs on the road, and conventional car repair shops do not have proper training in the repair of electric vehicles. This can have a detrimental effect on adoption of EVs. In recent years, international emerging markets have increased their infrastructures and stratification of wealth and the current consumer demographic is better equipped to afford more expensive vehicles as a result. Additionally, there is a growing global awareness and commitment to developing sustainable and “green” energy and innovations. These factors may increase opportunities for sales of EVs in these markets. Oil Price The rising cost of oil is also a major opportunity for electric vehicle manufacturers to cultivate to great a presence in the market, due to the demand of consumers to seek alternative types of vehicles, including electric. “The ‘cheapest’ oil has been largely tapped out, and demand from China, India, and Brazil continues to burgeon, it’s very likely oil prices will move in one direction—up. That means the cost savings from driving an electric vehicle will also increase, and cause more consumers to switch over to EVs. Less than 1% of total U.S. energy production comes from petroleum, so electricity prices will be largely insulated from volatility in the oil market.” 60 The global future of the EV market is promising based on the current trends in oil cost, consumption, and awareness about conservation. Global economic policies, such as the Kyoto protocol, advance the cause of environmentally sustainable products, such as electric vehicles. However, every country has the choice to either ratify these protocols, or not. This lack of accountability means that the financial and political support of environmentally sustainable products are highly variable, and can affect the favorability and feasibility of selling electric vehicles in every country in which they are sold or manufactured. Finances Revenues at Tesla Motors are derived from sales that are recognized from two sources, sales of the Roadster and sales of Tesla’s patented electric power train components [Exhibit C]. Coinciding with the sales of the Roadster, Tesla recognizes income from the sale of vehicle options and accessories, vehicle service and maintenance and the sale of Zero Emission Vehicle (ZEV) credits. Zero Emission Vehicle credits are required by the State of California to ensure auto manufacturers design Page 10 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases vehicles to meet strict eco friendly guidelines. Credits are acquired by producing and selling vehicles that meet a minimum emission level in an attempt to offset the pollutants produced by mainstream vehicles. If a manufacturer chooses not to design ZEV vehicles, it is able to purchase credits from companies such as Tesla, who only produces electric vehicles and does not have to accrue credits. Tesla has realized sales of ZEV credits $14.5 million since 2008. Total quarterly revenues at Tesla have been increasing steadily throughout 2010, but no definitive year-overyear positive trends can be established from Tesla’s sales data. Two trends that do appear to be gaining in the most recent fiscal year are foreign sales and sales of power train components and related sales. Tesla’s cash position is currently in a less than optimal position. Through its IPO, Tesla was able to raise $226 million in June of 2010 and has also been able to take advantage of state and federal programs to raise capital at low prices due to its investment in alternative energy programs. These sources of cash offer the company the ability to meet its current obligations, but revenues have not been able to match expenses resulting in the company’s largest net loss yet in December of 2010 of $51 million. The United States Department of Energy (DOE) loaned Tesla $465 million at the beginning of the year, so no matter what Tesla has to manage a “mountain of debt.” 61 This specific loan has various restrictions that are structured around the progress of the Model S and several financial ratios. Tesla stands to lose revenue if the Model S delays, since the DOE loan pays in instalments as the Model S reaches various development and production benchmarks. “Management even said that if it can’t access the DOE loan in its entirety for any reason, then it’ll have to issue more equity or debt, diluting the stock price and increasing company risk.” 62 Although debt as a percent of total capital increased at Tesla Motors, Inc. over the last fiscal year to 25.96%, it is still in-line with the Automobiles industry’s norm. Additionally, there are enough liquid assets to satisfy current obligations. 63 Marketing Tesla’s internal marketing situation has to operate with many limitations stemming from the company’s infancy, and lack of resources. Looking at the product offerings, the only vehicle Tesla currently has on the market is the Roadster, a sporty two-seater priced at $108,000 and up. The high price tag puts it firmly in competition with other luxury vehicles as opposed to other electric vehicles. The key demographic market for luxury cars are white males, 45 and older, who are married, have no kids, and make over $75,000 a year. Primary considerations for this group when purchasing a luxury vehicle are performance, design, and safety, while factors such as financing, the environment, and gas mileage are not important 64 . The Roadster does deliver on aesthetics and performance, but it is questionable whether or not its electric motor will be an effective differentiator. Bearing this in mind, Tesla needs to focus on early adopters and environmentalists, who also have the resources to afford their car. One could argue that this is a narrow market segment. In 2012, Tesla will roll out the Model S, a premium four door sedan that will be variably priced at $57,000 for the lowest range, $67,000 for the mid range, and $77,000 at the top of the range. This lower priced vehicle will target larger families and a greater sized market. Unless it can lower the price point, this will still be a difficult sell, as households with children have less disposable income and accumulated wealth. Demand for electric cars is also estimated to remain below 10% until at least 2016, because of perceptions of high cost for marginal utility 65 . Two advantages Tesla does have on price, however, are the $7,500 government tax credit for buying fuel efficient vehicles, and the low cost of maintenance and fuel. Aside from a minimal product offering, Tesla is also limited by its distribution and fulfilment infrastructure. At the moment, Tesla has a mix of brick and mortar dealerships in premium locations, along with regional sales representatives, and online ordering. North America has ten stores and four reps, Europe has seven stores and four reps, and Asia has one store and two reps. Over the next few years, Tesla plans to open fifty stores in preparation of the Model S roll-out. To ease its current lack of fulfilment capabilities, Tesla sales representatives will arrange a test drive in your location and organize vehicle delivery. This is an inexpensive way to increase its distribution capabilities without investing in physical stores. This might also hinder sales though, given that the key demographic for luxury vehicles rely on car dealerships as the second most influential outlet on what car to buy 66 . Page 11 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases Tesla could ramp up distribution by allowing existing dealerships to sell its cars but chooses not to, preferring a customized sales approach where it has complete control over its message. To compliment direct sales the company has avoided traditional advertising in lieu of product placement, Internet ads, and event marketing. It is adept at turning current customers into vocal brand ambassadors. The company website is littered with quotes from owners and industry reviewers such as, “Driving the Roadster Sport felt like having sex while being sprayed with champagne” 67 . This promotion strategy is a clear strength for Tesla, especially considering that recommendations from friends and relatives, as well as general word of mouth, are the most influential factors for luxury/sports car’s key demographic. The Tesla brand is also inherently tied to the environmental/green movement. Because of this, it has been able to generate a lot of free media publicity. Operations Tesla is headquartered in Palo Alto, California, where it also manufactures its power trains, battery packs, motors, and gearbox. The body and chassis for the roadster are manufactured by Lotus in Hethel, England and then are fully assembled in Menlo Park, California for U.S. buyers, or Wymondham, England for European and Asian customers. For the upcoming launch of the Model S, Tesla is building a new factory in Fremont, California that will have a capacity of 20,000 cars per year. Tesla’s main operating strength lies in its intellectual property and its patents. Currently Tesla has 35 issued patents with another 280 pending. Proprietary components include power train technology, safety systems, charge balancing, battery engineering for vibration and environmental durability, motor design, and the electricity management system. The company also owns the proprietary software systems that are used to manage efficiency, safety, and controls. Tesla’s software is designed to be updatable, and many aspects of the vehicle architecture have been designed so that it can be used on multiple future models. To boost operational know-how and supplement the revenue Tesla gets from sales of the Roadster, it also sells zero-emission vehicle credits, and supplies power train and battery pack components to original equipment manufacturers. Currently, Tesla has strategic partnerships with Daimler and Toyota, and is providing their electric vehicle expertise in the development of Daimler’s Smart Car and Toyota’s new RAV4. These partnerships are an opportunity for Tesla to diversify its revenue streams, network, and access greater supply chains. As previously mentioned, Tesla has decided to distribute through its own network of stores and regional sales staff as opposed to selling through established dealer networks. Despite fulfilment implications, Tesla considers owning its own distribution channel as a competitive advantage. Channel ownership not only allows for greater operating efficiency through inventory control, but also gives Tesla control over its sales message, warranty, price, brand image, and user feedback. The drawbacks to this strategy include the high capital costs of buying real estate and constructing showrooms and the cost of additional sales staff. Currently, over 2,000 parts are sourced from 150 suppliers. One major issue with the current supply structure is that many of vendors are the single source. This leaves Tesla vulnerable to delays and increased costs. Due to limited economies of scale, (as of December 31, 2010 only 1,500 roadsters were sold) production costs also run high. The first Roadster was sold in early 2008, but revenues didn’t exceed the costs of production until the second quarter of 2009. Tesla is still struggling to bring the costs of the Model S down so that it can be profitably sold at $57,000. Servicing vehicles presents another challenge for Tesla. Given the complex and proprietary components of their cars, the average mechanic won’t be able to diagnose and fix issues. Lacking the appropriate physical infrastructure, Tesla sends maintenance technicians, (which it refers to as Rangers) to wherever the car owner lives. The cars themselves also have advanced diagnostic systems which link up to a server at Tesla’s headquarters. Issues can be determined prior to sending Rangers out to fix the car, which saves time and resources. Overall though, this system isn't as convenient as having a worldwide infrastructure of third party repair shops. Page 12 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases This Ranger service system may work for the time being, with only 1,500 cars on the road, but with the anticipated sales of the Model S and subsequent vehicles, services infrastructure will have to be greatly expanded. Two ideas that Tesla hopes will come to fruition are an increase in fast charge stations, and the creation of a battery replacement network. The latter harkens back to the days where cowboys would exchange tired horses for fresh steeds. In anticipation of this, the Model S will incorporate removable battery packs. Human Resources Tesla Motors operates more like a software company than a car company and innovation is top priority. CEO Elon Musk is a serial entrepreneur who has stocked his executive team with half techie, half business hybrid employees who are former industry leaders. Taking a cue from Google, the environment is fast paced and culturally unstructured. Employees are encouraged to challenge norms, think outside the box, and commit time to innovation. In order to boost teamwork and eliminate departmental silos, most staff work in an open room with no walls. Tesla prides itself on solutions created through an integration of all departments working side by side. An explanation for this corporate culture can be found in the hiring of Human Resources director, Arnnon Geshuri, who was the former director of staffing and operations at Google. Because of the emphasis on technology and innovation, the majority of manufacturing is done in California as opposed to areas with lower labor costs is because of the abundance of top quality engineers. Due to the extreme importance of Tesla’s intellectual capital it is imperative to have happy employees. Aside from being able to get on the ground floor of an innovative new company, employees are also given competitive salaries, benefits, aesthetically pleasing office space, and “meaningful equity”. Currently Tesla has about 900 employees including 212 in the power train and R&D department, 170 in vehicle design and engineering, 121 in sales and marketing, 79 in the service department, and 213 in the manufacturing department. Tesla is currently looking to hire more graduating engineering students and sales staff, especially those who have had some hands-on experience. Recruiting and retaining the best talent is a paramount goal, because difficulties arising from Tesla’s capacity to design, test, manufacture, and sell at the same time. Tesla’s Future: Success or Bust? In a nutshell, Tesla has limited sales in a limited market, and is making low margins due to high product costs and a lack of economies of scale. However, if oil prices continue to climb toward $200 a barrel and new electric cars, such as the Chevy Volt and Nissan Leaf, catch on with consumers, the upside for Tesla could be enormous. Can Tesla reach the tipping point? Or will it become just a footnote in automotive history… Time will tell. Notes 1. NYTimes.com. (2010) Tesla Motors. http://topics.nytimes.com/top/news/business/companies/tesla_motors/ index.html 2. Blanco, Sebastian. (2006) Roadster unveiled in Santa Monica. http://green.autoblog.com/2006/07/20/teslaroadster-unveiled-in-santa-monica/ 3. U.S. Dept. of Energy. (2008) Tesla Motors Starts Production of its Electric-Only Roadster http://apps1.eere.energy.gov/news/news_detail.cfm/news_id=11645 4. Tesla Motors. (2008) Tesla Motors to Manufacture Sedan in California. http://www.teslamotors.com/about/ press/releases/tesla-motors-manufacture-sedan-california Page 13 of 19 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 SAGE © 2011 RSM Case Development Centre, Erasmus University. All rights reserved. Business Cases 5. http://topics.nytimes.com/top/news/business/companies/tesla_motors/index.html 6. Chuck Squatriglia. “Tesla Motors Joins Daimler On a Smart EV,” Wired.com, January 13, 2009. http://www.wired.com/autopia/2009/01/tesla-motors-jo/ 7. Eric Loveday. AllCarsElectric.com. “Daimler Announces New Strategic Partner Tesla Motors.” http://www.allcarselectric.com/blog/1020804_daimler-announces-new-strategic-partner-tesla-motors 8. Jim Motavalli. “Daimler Takes a Stake in Tesla Motors,” The New York Times, May 9, 2011. http://wheels.blogs.nytimes.com/2009/05/19/daimler-takes-a-stake-in-tesla-motors/ 9. Tesla Motors. (2010) Tesla notifies SEC of Agreement with Toyota to Develop Electric Version of RAV4. http://www.teslamotors.com/about/press/releases/tesla-notifies-sec-agreement-toyota-develop-electricve... Purchase answer to see full attachment

  
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