case study on tesla pdf

Lessons from Tesla’s Approach to Innovation

by Nathan Furr and Jeff Dyer

Summary .   

Tesla has shifted the auto industry toward electric vehicles, achieved consistently growing revenues, and at the start of 2020 was the highest-performing automaker in terms of total return, sales growth, and long-term shareholder value. As a technology and innovation scholar, the author has studied how innovators commercialize new technologies and found that Tesla’s strategy offers enduring lessons for any innovator, especially in terms of how to win support for an idea and how to bring new technologies to market. To understand Tesla’s strategy, one must separate its two primary pillars: headline-grabbing moves like launching the Cybertruck or the Roadster 2.0 and the big bets it is making on its core vehicles, the models S, X, 3, and Y.

Few companies have attracted as much scorn and adoration as Tesla. When Tesla launches a product like the Cybertruck, the reception tends to be divisive: Critics see it as further evidence that founder Elon Musk is out of touch and doomed to fail, while supporters buy in — within a month Tesla received 200,000 preorders for the new vehicle. Compare that with the Ford-150, the world’s best-selling car in 2018, which sold just over 1 million vehicles that year.

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Tesla: Business & Operating Model Evolution (Abridged)

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• August 2013 (Revised November 2020)
• HBS Case Collection

Tesla Motors

• Format: Print
• | Language: English
• | Pages: 24

About The Author

Eric J. Van den Steen

Related work.

• Faculty Research
• Tesla Motors  By: Eric Van den Steen

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Teaching Resources Library

Tesla's Entry into the U.S. Auto Industry

Donald Sull

Cate Reavis

May 1, 2019

In mid-2018, the U.S. auto industry was in the early stages of what many believed would be a significant evolution in how people thought about and used cars. The future would be dominated by electric and autonomous vehicles. Car ownership in which people paid for a hard asset with all its bells and whistles would give way to people buying miles on shared vehicles. Tesla co-Founder and CEO Elon Musk had envisioned his company’s electric vehicles leading the charge in the industry’s evolution. However, the company was burning through cash at an unsustainable rate as it prepared to launch the industry’s first mass-market electric vehicle, the Model 3. Many industry observers doubted whether Tesla would have enough money to stay afloat and if Musk was the right leader.

Learning Objectives

To analyze the structure of a complex industry in the midst of a major transition; assess the fit between a company’s strategy and the structural attributes of its industry; and, evaluate how well a company is executing its strategy.

Appropriate for the Following Course(s)

strategy, entrepreneurship, leadership, operations management

Tesla's Entry into the U.S. Auto Industry 

supplemental material*

*TEACHING NOTES AND SUPPLEMENTAL MATERIALS ARE ONLY AVAILABLE TO EDUCATORS WHO HOLD TEACHING POSITIONS AT ACADEMIC INSTITUTIONS.

Audio Version of the Case

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Tesla Motors: A case study in disruptive innovation

Senior Director, Cost Benchmarking Services, IHS Markit

Associate Director, AutoIntelligence, S&P Global Mobility

Tesla Motors broke the mold. Then reinvented it. Not only did Tesla Chief Executive and Chief Product Architect Elon Musk demonstrate that convention could be defied, he did it in an industry with 100-year-old traditions, norms, and processes. Of course, the auto industry has innovated in the past, but Tesla, which was founded in 2003, has pushed the envelope beyond what most automakers thought possible. The company's Silicon Valley-style "techpreneurship" enabled it to move faster, work more efficiently, and create groundbreaking new ideas around sustainable mobility and automotive technology.

After all, this is Musk's modus operandi. In 1998, he disrupted e-commerce by creating a widely deployable and secure payment platform called PayPal. And in 2002, he launched SpaceX, a company that designs, manufactures, and launches rockets and spacecraft. The company's goal is to enable people to live on other planets. Musk, himself, wants to "die on Mars" and wholeheartedly believes it will be possible.

He is also a lightning rod in the debate around mass transit with an idea some critics refer to as vaporware. Dubbed Hyperloop, Musk's idea is to create a high-speed transportation system that is immune to weather, impossible to crash, uses little energy and recaptures most of what it uses, and travels twice the speed of today's commercial aircraft. He believes the concept could move people from Los Angeles to San Francisco in just 35 minutes. Oddly, he has no interest in making the Hyperloop a reality but, rather, is putting his ideas out there for others to take and improve the human experience.

With Tesla, Musk is focused on disrupting mobility. As of mid-June 2014, the company has released all of its patent holdings, claiming that open-source innovation is more powerful than anything one company could do individually. While IP lawyers cringed, Wall Street applauded, sending Tesla's stock price up 14% to $231 a share. This radical approach to innovation runs deep, as evidenced in the technology and design approach of the company's flagship Model S, its $69,900 luxury car.

In August 2014, the IHS Technology Teardown Team purchased a used 2013 Model S and took it apart to see what made it tick. The team dismantled 12 systems and cataloged every part within each system. The teardown included both the electronics systems inside the car's interior and the drivetrain (see sidebar "What's inside the Model S?").

Technical differences

The teardown confirmed that the Tesla Model S is unlike anything else on the road. A massive plot of real estate in the center stack is dedicated to a 17-inch touch screen infotainment system, which became—since its production launch in 2011—an instant industry benchmark for automotive display integration. There is room left for only two physical buttons on the console—one for the hazard lights and one for the glove compartment release (see sidebar below).

The technical specifications are impressive. The 17-inch screen is a Chi Mei Optoelectronics display with 1920 x 1200 WVGA resolution that includes a projected capacitive touch screen—the same technology employed in many smartphones and tablets. The system runs on a Linux-based operating system, offers Garmin navigation with Google Earth overlays, and computes at speeds still besting most other systems available today with its NVIDIA Tegra 3 processor combined with 2 GB of DDR3 SDRAM.

The system includes an embedded 3G modem from Sierra Wireless that runs broadband data off AT&T's network. It can receive software updates over the air and controls all of the functions of infotainment, audio, navigation, Bluetooth phone, HVAC, and even vehicle settings like windows, door locks, sunroof, trunk release, traction control, headlights, steering, and suspension settings.

In addition, a 12.3-inch fully digital instrument cluster sits directly in front of the driver with its own NVIDIA Tegra 2 processor, which it uses to handle the diverse array of graphics, content, and redundant outputs for the driver. About the only "familiar" driver components are the steering wheel, pedals, and transmission shifter—the latter actually borrowed from the Mercedes-Benz parts bin.

Manufacturing differences

The system is clearly in a class of its own. However, with all of these high-end specifications, how can Tesla sell this as a standard feature in every Model S? More disruption.

The company chose to change up the supply chain and borrow from the electronic manufacturing services (EMS) model of production that is standard practice in the consumer electronics industry. In this respect, Tesla is closer to being a technology company than a traditional automobile maker. Much like how Apple designs the iPhone and then employs Foxconn to build it, Tesla contracted with a leading EMS provider to build its center infotainment system, instrument cluster, and several other systems in the Model S. This model required Tesla to internalize much of the hardware and software development, as well as the systems integration work. Given that Tesla has hired its engineers from all over Silicon Valley and beyond, this was not a problem.

The Silicon Valley culture and the EMS approach to manufacturing were a clear advantage for Tesla at one time but no longer make it unique. The EMS model is expanding in the automotive industry, and the likes of Compal, Flextronics, Foxconn, and Jabil are working with brands including Chrysler, Daimler, Ford, General Motors (GM), Jaguar, and Volkswagen.

However, the transition to the EMS model can be problematic. Ford outsourced the entire infotainment architecture for the development and deployment of MyFord Touch in 2011 to an EMS provider. The initial system had technical software problems that required Ford to issue several software upgrades. This cost tens of millions of dollars, contributed to a poor customer experience, and caused perception problems for Ford, from which the company has only recently recovered.

Development differences

In the last decade, virtually every automaker has relocated portions of vehicle and vehicle technology development to new R&D facilities in the San Francisco-to-San Jose tech corridor. In fact, some early innovators predate Tesla: BMW, Daimler, and Volkswagen set up shop in the Valley in the mid-1990s, and Honda opened its first office in 2003, the same year Tesla was founded.

The reasons for doing so now go beyond manufacturing. Automotive OEMs are co-locating with the likes of Apple, Cisco, Facebook, Google, HP, Intel, NVIDIA, and Oracle to help speed the pace of innovation. This involves accelerating the pace of hardware, software, services, and applications development but also rethinking the process of design.

The development speed of a typical mobile device is often six months or less. Compare that with the design-to-production timing for a new vehicle of approximately four years and it's no wonder car-buying consumers have been underwhelmed by standard in-vehicle electronics. Even today, consumers can find navigation and infotainment systems designed in 2008 for sale in model-year (MY) 2014 vehicles. To give an idea of how ancient that is in "tech-years," BlackBerry held more than 50% market share among smartphone users in 2008. Remember BlackBerry?

Tesla has had a competitive advantage over auto industry rivals in design innovation since day one. Located in arguably the center of the world for technological innovation, Tesla was able not only to construct its vision of mobility in Silicon Valley, but also recruit its employees from many of the leading technology companies to design and build the car there as well. All other OEMs grasping for automotive technology leadership had to learn the culture of Silicon Valley, figure out how to adapt to it, and dissolve the century-old "way of doing things." Tesla was born into it.

Service differences

With Tesla's technology come some very important services. Perhaps at the top of the list is the convenience of over-the-air (OTA) software updates for vehicle recalls, which Tesla has made free and standard for Model S owners. This functionality has, in turn, created plenty of positive press for the company.

It all starts with the connection. The 3G connection in the Tesla infotainment system is already providing this solution via relatively old wireless technology. Since the modular and flexible hardware architecture of its infotainment system allows for mid-cycle technology enhancements, IHS expects Tesla will soon debut true 4G LTE connectivity in its vehicles. The added bandwidth will further enhance the OTA update service, as well as the rest of the services the Model S offers.

IHS forecasts a 60% global penetration rate on embedded cellular connections in cars by 2022, with 4G LTE bandwidth comprising roughly 60% of that market. GM and Audi have actually beaten Tesla to market on this specification as both OEMs already have 4G LTE cars on the road now.

One central purpose of this mass-market vehicle broadband adoption is to accommodate FOTA (firmware over the air) and SOTA (software over the air). Tesla has already deployed this function in part because it allows the company to provide vehicle service without needing to charge (or possibly pay) for service bay labor.

Consider Tesla's recall of the Model S for overheating charger plugs in January 2014. The day the recall notice came out, Tesla had all 29,222 Model S vehicles updated wirelessly and running the new safer version of the software. Ironically, around the same time, GM had a similar fire-related safety recall issued that also required a software update. Despite all of its vehicles having standard OnStar telematics, owners were required to take their cars into a dealership for the software update, costing GM a warranty labor expense on all 370,000 recall service appointments.

While far from a sure thing, nanotechnology offers significant business opportunities for companies willing and able to take the long view. One avenue is to identify a sizable opportunity in an existing market where a nanotech product can displace an existing inferior solution, e.g., a coating for an automobile that keeps itself clean, clears mist from side mirrors, or self-repairs scratches in the automotive paint.

Volume aside, Tesla paid much less on a per-vehicle basis than GM, simply by providing a software update procedure that has been on personal computers for more than two decades and mobile phones since before the BlackBerry.

IHS sees the OTA software trend continuing strongly. With vehicles like the new Mercedes-Benz S-Class claimed to have over 65 million lines of code—10 times that of the Boeing 767 Dreamliner—the automotive industry stands at a crossroads. Software recalls are about to become a major problem, one that will be expensive if this type of technology is not broadly deployed.

As of February 2014, over 530 software-related recalls had been reported since 1994 (see figure below). Among these, 75, or 14%, were issued for MY 2007 alone, with over 2.4 million vehicles affected. Numerous questions arise from the variation in volume by model year—not the least of which is, why have recalls for MY 2007 been so numerous? There are likely several reasons for this spike:

MY 2007 had the last large-sales volume before the economic recession plunged US car purchases from approximately 16 million to 10 million in 2010.

Many new electronics systems were added in MY 2007 for infotainment, advanced driver assistance systems, and core auto control systems, which increased the amount of software in the typical car.

MY 2007 involved recalls of 75 vehicles, the most of any model year. Many automotive OEMs had multiple model recalls with software updates. Toyota had especially high recall rates that included software updates.

It is in this context that IHS expects FOTA and SOTA to be enabled in over 22 million vehicles sold worldwide in 2020 alone, growing from approximately 200,000 vehicles in 2015. Major deployment will begin in 2017. In the meantime, Tesla will continue to leverage its first-to-market status with FOTA and SOTA to help lower overall costs to the end user and improve unit margins on each additional Model S sold.

Powertrain differences

The heart of Tesla's Model S is its electric propulsion system, which includes a battery, motor, drive inverter, and gearbox. The battery is a microprocessor-controlled lithium-ion unit available in two sizes; spending more buys more range and more power. The induction motor is a three-phase, four-pole AC unit with copper rotor. The drive inverter has variable-frequency drive and regenerative braking system, while the gearbox is a single-speed fixed gear with a 9.73:1 reduction ratio. The battery of each Model S is charged with a high-current power inlet, and each vehicle comes with a single 10kW charger and mobile connector with adapters for 110-volt and 240-volt outlets as well as a public charging station adapter.

This powertrain package allows Tesla to deliver a longer driving range than any other EV maker—about 200 miles versus just under 100—plus acceleration and driving performance similar to or better than a traditional gasoline-powered vehicle. While several automakers offer EV powertrains—Nissan's Leaf and Chevrolet's Volt, for example—none matches Tesla's commitment to EV development. And as a clean slate company, Tesla has had the advantage of developing an entirely new powertrain and supply chain without the hindrance of existing dealerships, physical plants, or inventory.

Other EV products use lithium-ion batteries, but in lower kWh and using fewer, but larger, battery cells. For example, the Nissan Leaf uses a 24kWh battery, with 192 cells and EPA-estimated range of 84 miles. The Model S' 85kWh battery has more than 7,100 cells, allowing it to move greater weight faster and with longer range.

To address range anxiety, Tesla has made a significant investment developing charging stations in the US (112 to date, according to the Tesla website), Europe (63), and Asia (17). These supercharger stations can swap out the battery in less time than it takes to fill a tank of gas. Owners must come back and swap again for their original battery. Nonetheless, this helps alleviate drivers' worries about becoming stranded on long trips.

Tesla is working to drive battery costs down in anticipation of the launch of its mass-market, $35,000 Model 3 EV sedan, which is slated to debut in 2017. To that end, the company recently announced a new $5 billion "gigafactory" battery plant in Nevada in partnership with Panasonic. It will reportedly handle all elements of battery cell production, from raw material to battery pack, rather than only battery pack assembly. And Tesla intends to sell its OEM batteries for non-automotive applications, which will enable it to increase production volume and reduce unit cost.

What does the future hold?

• Created a fun-to-drive electric roadster. Check.
• Leveraged the lessons to scale-up to a full-luxury sedan. Check.
• Disrupted the luxury car market and, according to IHS Automotive data, attracted "conquest" buyers from the likes of BMW, Mercedes, and Lexus, not to mention Toyota and other volume brands. Check.
• Diverged from entrenched supply chains to develop technology in-house and lowered per-unit development costs for an industry-leading infotainment platform. Check.
• Addressed a software-related vehicle safety recall in one day for almost 30,000 cars. Check
• Created a company destined to influence the industry as a whole and did so while pleasing Wall Street. Check.

Tesla has established benchmarks for infotainment system hardware, software flexibility, and manufacturing supply chain. The company innovated powertrain design, which has proven both robust and viable for everyday use. And it has received plenty of accolades for aesthetic design from the automotive media. The result is that "made in Silicon Valley" is no longer roundly dismissed as an option for an automotive OEM.

So what's next for Tesla? How does it maintain its leadership in technology development? Has it created a sustainable competitive advantage? Can it deliver on promises of a new luxury crossover with the Model X and a new high-volume EV competitor with the Model 3? Will Tesla be able to steal market share from not only luxury marques, but also from higher-volume brands?

Going forward, Tesla faces five distinct challenges:

Consumer demand. Perhaps the most significant is consumer acceptance of electric vehicles. In the first eight months of 2014, EVs accounted for only 0.7% of the 11.2 million light-vehicle sales in the US. Even Renault-Nissan CEO Carlos Ghosn, a staunch supporter of EVs, last year acknowledged Renault-Nissan would miss its original 2016 target of selling 1.5 million EVs by four to five years.

Dealerships and service. Today, Tesla's direct-sales model is illegal in most US states. As Tesla attempts to go mainstream, it will need the legal restrictions lifted or be forced to adjust its model. Further, as vehicles age and the numbers sold increase, there will be maintenance issues that cannot be handled by OTA software updates. Tesla will need to build out an after-sales service network that is robust enough to handle the demand.

Marketing. To date, demand for the Model S exceeds supply. But as the company targets the mass market with the Model 3 and aims for 500,000 units sold in 2020, it will need to beef up its marketing. Tesla's Apple Genius-bar-inspired dealership model has worked for the affluent early adopters, but can it be scaled up to meet its sales targets?

According to IHS registration data, 51.8% of all Tesla buyers have annual household incomes over $150,000. By comparison, the percentage of Chevrolet Malibu buyers with a household income higher than $150,000 is only 6.5%. Tesla will need to create a marketing strategy that targets economy-car consumers, who are notably different than those who buy the $80,000 to $100,000 Model S.

Production Boosting output will likely mean growing pains for Tesla as it transitions to a high-volume production model. How the company manages the transition will determine Tesla's near-term future. Of course, many automakers have had difficulties ramping up new plants or launches and yet overcome the challenges in the longer term. While growing pains are to be expected, there is no reason to believe Tesla does not have the capacity to become a volume manufacturer.

Innovation. Tesla has already made a name for itself around technology adoption and innovation. But it will be challenged, as all first movers are, to maintain that lead and continue to push the boundaries with future products. Assuming the gigafactory and its supply chain allow Tesla to make a mass-market offering and keep its infotainment stack as an industry benchmark, the company's next move will be automated driving. Musk has already stated that Tesla will "hit the market" by 2017 with a partially self-driving vehicle. With many other OEMs targeting this time frame as well, Tesla might not be as disruptive in automated driving as it has been in infotainment design and sustainable mobility

But then again, it might surprise the market and break loose another game-changing product or technology before the rest of the automotive industry is ready—because that's how Silicon Valley works.

Tesla's user-experience focus sets it apart

We live in an era of smartphone ubiquity. So we are routinely disappointed when we get into our cars and are forced to make do with resistive touch screens (if we are lucky) or LEDs and vacuum fluorescent displays controlled by dials and buttons (if we are not). Tesla understands the importance of smartphone ubiquity to modern life, so it's no accident the transition is seamless when one climbs into a Model S

That is not the case with the majority of comparably priced vehicles from other auto manufacturers. Indeed, many of the recent automotive infotainment systems that the IHS Teardown Team has analyzed feature relatively small displays (typically 7-inch diagonal size or less) and low resolution (typically 800 x 480 WVGA or less).

Then there's the touch technology. Many of the touch screens IHS tears down in automotive head units are using resistive technology. Combine these legacy technologies with often underpowered processing chips and proprietary software and you often end up with a user experience that is unfamiliar, not intuitive, and has a lot of "latency" issues (meaning it's slow).

At the center of the dashboard in the 2013 Model S is the Tesla Premium Media Control Unit, which blows away all of the head units we have seen in specs, not to mention sheer size. The 17-inch diagonal display with touch screen makes for a very large assembly when removed from the dash. Inside the unit are many subassemblies, which are all modular, giving Tesla numerous design options for future models.

Several of the printed circuit board (PCB) assemblies, including the main assembly, feature Tesla Motors logos and copyrights, meaning that they are all designed and controlled by Tesla. In and of itself, this is unusual, as we find that most automotive OEMs entrust and outsource the bulk of their head unit designs to third parties such as Harman

Automotive, Panasonic, Alpine, Denso, Pioneer, and others. Tesla is thus designing and controlling the bill of materials down to the component level. This is closer to Apple's design-and-build model than it is to other automakers.

Such an approach affords Tesla leverage in the supply chain, more direct control over the finished product, and ultimately more control over the user experience. It also gives Tesla a potential performance and technology edge that others might find difficult to quickly emulate, as so much of the design is done in-house at Tesla rather than by the head unit suppliers.

Many other PCB assemblies are modular and come from third parties, such as the processing PCB, which is a turnkey solution from NVIDIA, and the air interface module, which is from Sierra Wireless.

All told, there are 10 PCB assemblies in Tesla's media control unit. The modularity of this design is not unusual for automotive electronic systems and allows Tesla many options. If Tesla wants to upgrade the processing power or change the air interface module, it may be possible to achieve this more easily and with less redesign than if all of the functions were integrated into fewer PCB assemblies. In this sense, modularity of design, rather than aggressive integration, has always been an automotive electronic standard. Not only does modularity give automotive designers many upgrade options, it improves reparability.

The center console of the Tesla Model S is dominated by a 17-inch touch screen infotainment system, which is an industry benchmark for automotive display integration.

What's inside the Model S?

In August 2014, IHS bought a second-hand 2013 Tesla Model S. The Los Angeles-based IHS Technology Teardown Team set to work pulling it apart to examine all primary systems inside the car. The team has cataloged every component and developed a detailed bill of materials for each system that includes the technical specifications, cost, and manufacturers of the components. In addition, the team estimated the labor and manufacturing cost of each system.

The 12 systems analyzed by the IHS Teardown Team comprised the following:

• Premium Media Control Unit
• Instrument Cluster
• EV Inlet Assembly
• High-Voltage Junction Box
• Battery Charger
• Thermal Controller
• Liftgate Left Hand Taillight
• Power Liftgate Module
• Body Control Unit
• Sunroof Control Unit
• Passive Safety Restraints Control Module

Mark Boyadjis, Senior Analyst, Infotainment and Human-machine Interface, IHS Automotive Andrew Rassweiler, Senior Director, Teardown Services, IHS Technology Stephanie Brinley, Senior Analyst, Americas, IHS Automotive Posted 7 October 2014

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Case study: How Tesla changed the auto industry

Tesla is experiencing growing pains, but has willingly invited more criticism than other young companies because the automaker is brazen enough to pronounce ambitious goals and, most boldly, insist that its vision of the future of the automotive industry is the definitive one.

But Tesla is forcing the auto industry to rapidly change. Large, established automakers now are making fully electric and hybrid electric cars. Automakers are starting to explore and include artificial intelligence (AI) in their cars, and now major automakers and U.S. Congressmen are discussing autonomous vehicles (AVs) and how best to innovate and regulate them.

Not only that, but Tesla's software design is state-of-the-art: the fact that Tesla can update vehicle software over-the-air (OTA) as if it were Apple updating an iPhone is unprecedented. As cars become more tech-savvy, Tesla is in the lead. But Tesla struggles to meet deadlines and frequently delivers flawed vehicles, and profitability remains elusive. Many use Tesla's failings to argue that the company shouldn't be followed as an innovator or even as a true automaker.

It turns out Tesla's story is far more complicated and nuanced than often portrayed, but the roots of its challenges come down to the company's finances and supply chain.

Tesla is forcing the auto industry to change rapidly

Tesla didn't invent the electric car (Scottish inventor Robert Anderson did, in 1832), but it was Tesla who popularized, pioneered and promoted the electric car ever since the company's founding in 2003. None of the major automotive manufacturers were making electric cars until Tesla made it cool in 2008 with its bombastic announcement of the first luxury electric car: the Tesla Roadster.

Since then, big automakers with lots of capital, solid supplier bases and seasoned supply chains went to work in rapidly developing and churning out their own electric cars, as consumers and governments pursue eco-friendly, low-emissions transit options. The next electric car, released in 2010, was made by Mitsubishi Motors.

According to the Bureau of Transportation Statistics data , the number of hybrid EVs sold in the U.S. didn't break 100,000 until 2005. The bureau doesn't have data on the number of EVs sold until 2011, which was 9,750.

Since then, the EV market has exploded. By 2015, 71,044 EVs were sold in the U.S., and 384,404 hybrid EVs. Between January and September 2017, Tesla led the pack by selling 73,227 EVs, followed by Chinese automaker BYD, selling 69,094.

Brian Loh, a partner at McKinsey&Company, said innovation is at an "all-time high" in the auto industry right now, which is significant because historically, the auto industry is very slow to evolve.

" There's so much change happening that the automakers are trying to make sure they’re as successful in the next era as they were in the past," Loh said.

The auto industry is not resistant to innovation and change, but does tend to adapt slowly. Lately however, that's changed dramatically, and largely because of Tesla's disruption in the market. Tesla has that "cool factor," something established automakers do not have, and has created hype around Tesla's EVs that other brands — like the Nissan Leaf, for example — do not get.

"The electronics innovation trend with the industry has been going on for a while, but I think it’s accelerating," Loh said. "The mega trends we read about in the papers every day of automotive driving, electrification, connectivity, shared mobility — these are huge industry sharping trends and they are really having a big impact in the industry at the OEM level and the supplier level, and it’s leading to a lot of big investment."

Then there's the AV discussion. Tesla's Autopilot, which uses AI to drive a Tesla vehicle for you with some minor assistance, has been the subject of hot debate, with some consumers misusing the technology and crashing the cars while using Autopilot. Other automakers are following Tesla's lead and looking to create semi-autonomous or fully AVs, and that has sparked contention in Washington as lawmakers try to reconcile safety concerns with innovation-hungry automakers.

U.S. senators and industry leaders — including automakers, manufacturers , 3PLs and supply chain leaders — now believe AVs are the definitive future of the auto industry, largely because Tesla is driving the conversation.

Tesla is one of the key drivers of innovation as the auto industry is forced to evolve, but Tesla also shows how difficult it is to succeed in the auto industry at all, and how there is still room for improvement within the hotly competitive, tight margin business. In fact, Tesla is a good example of how critical stable supply chains are to the success of an automotive company.

Tesla's supply chain is it's Achilles' Heel

Tesla doesn't meet deadlines. Tesla doesn't meet market expectations. Tesla delivers cars riddled with defects.

Last fall, Tesla missed Model 3 production goals in Q3 2017 due to supplier issues , and ended up having to redesign a key part of the Model 3 . What CEO Elon Musk called "production bottlenecks" continued through Q4 2017, although by then Tesla was no longer blaming suppliers, and told investors in February that the company would produce 5,000 Model 3s a week by the end of Q2 2018 .

Almost all of these problems can be attributed to lack of funding and the fact that Tesla is still a small company, compared to the rest of the auto industry, and so ramping up production for a new car is much harder for Tesla than it is for landed companies like Ford or General Motors.

Tesla's supply chain is still in the development phase, and right now Tesla doesn't have the capital and supplier relationships that other big automakers have.

" For better or worse, Tesla makes its own batteries, so it's heavily dependent on its own sources," said Michelle Anderson, a partner with Boston Consulting Group. "If that went down, batteries are heavily commoditized, so there wouldn’t be too much of a hiccup, but there would be some down time."

Because Tesla's supply chain often relies on single source suppliers, one can quickly fit the puzzle pieces together to see how and why Tesla has struggled. According to a Tesla statement provided by CSIMarket , the electric car manufacturer does have more supply chain volatility than other automakers.

"While we obtain components from multiple sources whenever possible, similar to other automobile manufacturers, many of the components used in our vehicles are purchased by us from a single source," the statement reads. "To date, we have not qualified alternative sources for most of the single sourced components used in our vehicles and we generally do not maintain long-term agreements with our suppliers. While we believe that we may be able to establish alternate supply relationships and can obtain or engineer replacement components for our single source components, we may be unable to do so in the short term or at all at prices or costs that are favorable to us."

That's essentially the story of the company's struggle: Tesla tries to scale high and fast, but gets bogged down by a faulty supply chain.

Tesla suffers from a lack of funding and a narrow supplier base

Supply chains are critical to an automaker's success, but the most critical part of the automaker's supply chain is its relationship with suppliers — and that might be where Tesla is weakest.

Loh told Supply Chain Dive that in general, the auto industry doesn't single source, and described the average auto supply chain as being far more efficient and effective than Tesla's.

"Typically an OEM will have a supplier panel or a collection of a few suppliers, anywhere from 2-5 suppliers they source from for that commodity," Loh said. "Oftentimes for a particular vehicle, they might be single sourced on that vehicle, like one supplier would have all of a certain part for a Honda Accord or something like that, but it’s extremely rare for a supplier to be single sourced across an entire commodity for all their vehicles."

Then there's the funding problem. Tesla is technically still in the red — the company isn't profitable yet, and many critics use that fact as their main reason for arguing that Tesla isn't worth investment or even worth paying attention to.

But when it comes to suppliers, Tesla's lack of funding is a huge issue. For example, Tesla is trying to ramp up production of the Model 3, necessitating a high volume of parts and components from its suppliers. Because of that capital outlay, Tesla might hold off on paying upfront costs for the parts and wait until the car starts selling before paying suppliers.

That compounds the problem; now Tesla has to produce and sell as many cars as possible in order to pay suppliers and maintain strong supplier relationships. But because Tesla is still learning how to mass produce electric cars — relatively speaking, Tesla is still new to the auto industry — production problems still arise, making it increasingly difficult to sell and deliver quality cars at an efficient rate.

"In some cases, a vehicle program might be really big and the OEM might say, I’m not going to pay the supplier any upfront funding, you need to handle that cost yourself because you’ll get a big volume down the road," Loh said. "The other extreme is low volume with very little return (for the supplier) down the road, and the OEM might need to pay for more of the engineering upfront."

While that paints a bleak picture for any startup trying to break into the auto industry, there's some silver lining: if you've got a solid vision and can sell that vision — like Tesla — suppliers just might take a risk on you.

"If you have a combination of small budget and low volumes, then it’s trickier to get enough interest from a supplier, especially if it’s an OEM with cutting edge technology and known for leading the market," Loh said. "Even though the pure economics of the program isn’t normal, a supplier might say, the technology might be worth it."

Tesla delivers on its promises, just not always on time

For all of the problems Tesla is now experiencing with the Model 3, the company already experienced with the Model S. At this point, most of the wrinkles in Model S production have been ironed out. That may instill some hope in investors, but the fact remains that Tesla still has inroads to make as a trusted automaker.

What Tesla has proved is that it takes a tremendous amount of funding, grit and hard work, star power and a strong vision in order to succeed in the auto industry and launch a radical new product — especially if you're trying to do both those things at the same time. The fact that Tesla is still around 15 years after its commencement is impressive all by itself.

"On one hand, ramping up a car company from scratch is really hard," said Greg Kefer, vice president of marketing at GT Nexus. "There’s a lot of basic tackling. An assembly line that produces 10,000 cars a week? That’s really hard."

Tesla shows how crucial it is for an automaker — or any company, really — to have all the kinks worked out of its supply chain before pursuing such big goals, like skipping the prototype stage and rushing to produce 5,000 cars a week right away, which is how Tesla approached the Model 3.

While Tesla can be seen as an inspiration to the industry, it also serves as an example of what happens when you lack capital, sufficient cash flow and an unstable supply chain. But if Tesla can keep investors hooked on its vision of a future filled with electric cars, it may just be a matter of time before it becomes an industry bedrock.

"Once they work out the supply chain issues, watch out," Kefer said. "The big three better be looking over their shoulder."

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Case Study of Tesla: Supply Chain Challenges and Enablers

This paper provides an evaluation and analysis of the supply chain configuration of Tesla, the challenges faced, and the enablers needed to deal with them. The present supply chain with respect to the processes, facilities, transportation, inventories, information system and people is touched upon. The key findings show that Tesla have suppliers not conventional to the auto-world as it deals with the electric powertrain. Tesla has a ‘vertical integration approach’ which can help in few aspects with regards to not being reliant on suppliers and lowering the cost of the final products, but the downsides being loss in flexibility and focus. The challenges with respect to climate change, political instability, raw materials scarcity and labor aspects is covered with potential enablers being the implementation of Sustainable Supply Chain Management by triple bottom line approach and Technological developments in the field of Material Science, IoT, Robotics, AI and sustainable energy sources. Initiatives for enabling a wholistic supply chain in a networked economy without silos between business teams and partners are enabled with new business models and recommendations

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Tesla Motors: Disrupting the Auto Industry?

Prizes & Awards

Winner of the Case Centre Awards and Competitions 2018 in the Category 'Strategy and General Management Category'

The Tesla case provides multiple opportunities to discuss core strategy and innovation topics, such as: • Patterns of innovation, e.g., new technologies competing to replace older generations • Types of disruption, e.g., low-end versus high-end • The innovation ecosystem, e.g., thinking beyond a single technology to the interdependence of an ecosystem of supporting technologies • Systems strategy, e.g., thinking beyond the product to understand the role of technology architecture and systems • The innovation process, e.g. learning under conditions of uncertainty, scaling up for execution.

The teaching note is organized around a set of discussion questions that bring out each of these issues in the case. Videos of Tesla’s factory (available online) can be used to make the case more vivid, or compared with a video of a General Motors manufacturing plant to inspire further discussion (URLs are cited at the end of the case).

• Technology Change
• Architectural Innovation
• Technology Strategy
• Radical Innovation
• Entrepreneurship
• Corporate Governance
• Value Creation, Strategy and Implementation

Act 2: Tesla Disrupted?

By   Jeff Dyer ,  Nathan Furr ,  Brian Henry

Jeff Dyer

Nathan Furr

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