Case TESLA
Please update the case to the summer of 2023.
Please use one analytical framework from each of just 5 chapters chosen from chapters 2-12 to elucidate the situation. At this point the first chapter is too introductory to be helpful. Please note that last summer I asked for 8 chapters for the final.
Use the table of contents to clearly indicate which framework from which chapter you are applying to the case.
Please perform quantitative financial analysis. I recommend a separate section for this.
What should the CEO do? Please make 3-5 recommendations.
Tesla’s Strategy in 2020: Can It Deliver Sustained Profitability? Copyright ©2021 by Arthur A. Thompson. All rights reserved. Arthur A. Thompson The University of Alabama Tesla shocked shareholders and Wall Street by reporting an operating loss of $521.8 million and a net loss of $702.1 million for the first quarter of 2019. But during the next three quarters of 2019, the company reported a number of significant improvements and achievements that signaled a major turning point in its prospects for competitive success and future profitability: Tesla delivered a record 112,095 electric vehicles to customers in Q4 of 2019. For full-year 2019, Tesla delivered a record 367,656 electric vehicles to customers, a 50 percent increase over the 245,530 vehicles delivered in 2018. Buyer demand for Tesla’s models was so strong that the company spent zero dollars on advertising to achieve its record sales volumes. The company’s automotive revenues rose from $18.5 billion in 2018 to $20.8 billion in 2019, and its free cash flows from operations (after paying for capital expenditures) jumped from –$3.35 billion in 2017 to essentially $0 in 2018 to $1.1 billion in 2019. In January 2020, Tesla began ramping production of a soon-to-be-introduced Model Y at the company’s Fremont assembly plant in California ahead of schedule; deliveries to customers were planned to begin in late March or early April. The new Model Y, an SUV version of Tesla’s best-selling Model 3 sedan, was expected to become Tesla’s most popular vehicle. Tesla CEO Elon Musk said that within a few years he expected that worldwide annual demand for Model 3 and Model Y would be on the order of 750,000 and 1.25 million units, respectively. The company announced improvements that boosted the single-charge EPA range on the all-wheel drive Model Y from 280 miles to 315 miles. Tesla began producing its Model 3 electric vehicle at a new assembly plant in Shanghai less than 10 months after beginning construction; vehicles produced at the Shanghai plant were expected to be delivered to buyers in China and other Asian countries. China was by far the world’s largest market for motor vehicles, and sales of electric vehicles in China, which exceeded 1.4 million units in 2019, were the fastest-growing market segment. Tesla’s engineering team discovered ways to greatly enhance the production and assembly techniques at the new Shanghai plant compared to those currently in use at the older Fremont plant; because of the resulting efficiency gains, unit production costs were expected to be about 25 percent below those at the Fremont plant. The company finalized plans for constructing a third assembly plant just outside Berlin, starting in February 2020; this plant was intended to supply vehicles to customers all across Europe, Scandinavia, and the Middle East. The company returned to profitability in the last two quarters of 2019, with net income of $143 million in Q3 and $105 million in Q4. Due to continuing improvements in operating efficiencies and higher operating leverage, the company’s operating profit margin went from –11.5 percent in Q1 to –2.6 percent in Q2 to 4.1 percent in Q3 to 4.9 percent in Q4. page C-213 Following the January 28, 2020 announcement of Tesla’s 2019 financial results and its outlook for 2020, Tesla’s stock price, which had already climbed from $480 per share on January 3 to $567 on January 28, exploded to an intra-day high of $969 on February 19, 2020. Over the next two weeks, Tesla’s stock price lost some of its gains, but still was trading around $750 per share in the first week of March 2020. However, by June 2020, Tesla’s stock price had surged again on prospects of a reopening of the global economy following widespread COVID-19 shutdowns, reaching an all-time high of $1,027 on June 10. Exhibit 1 shows sales of Tesla’s four models from 2012 when the Models S was first introduced through the second quarter of 2020. EXHIBIT 1 Tesla’s Deliveries of the Model S, Model X, Model 3, and Model Y to Customers, 2012 through the Second Quarter of 2020 PeriodModel S DeliveriesModel S plus Model X DeliveriesModel 3 DeliveriesModel 3 plus Model Y Deliveries 2012 2,653 2013 22,477 2014 31,655 2015 50,332 2016 76,230 2017 101,420 1,734 2018 99,475 146,055 2019 66,771 300,885 Q1 2020* 12,200 76,200 Q2 2020* 10,600 90,650 *Deliveries in Q1 and Q2 2020 were negatively impacted by the spread of the Coronavirus, which resulted in a government-mandated shutdown of the company’s two assembly plants and a sharp falloff in buyer purchases of new motor vehicles due to stay-at-home restrictions in China, the United States, and many other countries. Source: Company 10K reports, 2012-2019 and Tesla press releases, April 2, 2020 and July 2, 2020. Company Background Tesla Motors was incorporated in July 2003 by Martin Eberhard and Marc Tarpenning, two Silicon Valley engineers who believed it was feasible to produce an “awesome” electric vehicle. Tesla’s namesake was the genius Nikola Tesla (1856–1943), an electrical engineer and scientist known for his impressive inventions (of which more than 700 were patented) and his contributions to the design of modern alternating-current (AC) power transmission systems and electric motors. Tesla’s first vehicle, the Tesla Roadster (an all-electric sports car) introduced in early 2008, was powered by an AC motor that descended directly from Nikola Tesla’s original 1882 design. Financing Early Operations. Eberhard and Tarpenning financed the company until Tesla’s first round of investor funding in February 2004. Elon Musk contributed $6.35 million of the $6.5 million in initial funding and, as the company’s majority investor, assumed the position of Chairman of the company’s board of directors. Martin Eberhard put up $75,000 of the initial $6.5 million, with two private equity investment groups and a number of private investors contributing the remainder.1 Several rounds of investor funding ensued, with Elon Musk emerging as the company’s biggest shareholder. Other notable investors included Google co-founders Sergey Brin and Larry Page, former eBay President Jeff Skoll, and Hyatt heir Nick Pritzker. In 2009, Germany’s Daimler AG, the maker of Mercedes vehicles, acquired an equity stake of almost 10 percent in Tesla for a reported $50 million.2 Daimler’s investment was motivated by a desire to partner with Tesla to accelerate the development of Tesla’s lithium-ion battery technology and electric drive train technology and to collaborate on electric cars being developed at page C-214Mercedes. Later in 2009, Tesla was awarded a $465 million low-interest loan by the U.S. Department of Energy to accelerate the production of affordable, fuel-efficient electric vehicles; Tesla used $365 million for production engineering and assembly of its forthcoming Model S and $100 million for a powertrain manufacturing plant employing about 650 people that would supply all-electric powertrain solutions to other automakers and help accelerate the availability of relatively low-cost, mass-market electric vehicles. In June 2010, Tesla Motors became a public company, raising $226 million with an initial public offering of common stock. It was the first American car company to go public since Ford Motor Company in 1956. Management Changes at Tesla. In August 2007, with the company plagued by delays in getting its first model—the Tesla Roadster—into production, co-founder Martin Eberhard was ousted as Tesla’s chief executive officer (CEO). While his successor managed to get the Tesla Roadster into production in March 2008 and begin delivering Roadsters to customers in October 2008, internal turmoil in the executive ranks prompted Elon Musk to decide it made more sense for him to take on the role as Tesla’s chief executive officer—while continuing to serve as chairman of the board—because he was making all the major decisions anyway. Elon Musk. Elon Musk was born in South Africa, taught himself computer programming, and, at age 12, made $500 by selling the computer code for a video game he invented.3 In 1992, after spending two years at Queen’s University in Ontario, Canada, Musk transferred to the University of Pennsylvania where he earned an undergraduate degree in business and a second degree in physics. During his college days, Musk spent some time thinking about two important matters that he thought merited his time and attention later in his career: one was that the world needed an environmentally clean method of transportation; the other was that it would be good if humans could colonize another planet.4 After graduating from the University of Pennsylvania, he decided to move to California and pursue a PhD in applied physics at Stanford; however, he left the program after two days to pursue his entrepreneurial aspirations instead. Musk’s first entrepreneurial venture was to join up with his brother, Kimbal, and establish Zip2, an Internet software company that developed, hosted, and maintained some 200 websites involving “city guides” for media companies. In 1999 Zip2 was sold to a wholly-owned subsidiary of Compaq Computer for $307 million in cash and $34 million in stock options—Musk received a reported $22 million from the sale.5 In March 1999, Musk co-founded X.com, a Silicon Valley online financial services and e-mail payment company. One year later, X.com acquired Confinity, which operated a subsidiary called PayPal. Musk was instrumental in the development of the person-to-person payment platform and, seeing big market opportunity for such an online payment platform, decided to rename X.com as PayPal. Musk pocketed about $150 million in eBay shares when PayPal was acquired by eBay for $1.5 billion in eBay stock in October 2002. In June 2002, Elon Musk with an investment of $100 million of his own money founded his third company, Space Exploration Technologies (SpaceX), to develop and manufacture space launch vehicles, with a goal of revolutionizing the state of rocket technology and ultimately enabling people to live on other planets. Upon hearing of Musk’s new venture into the space flight business, David Sacks, one of Musk’s former colleagues at PayPal, said, “Elon thinks bigger than just about anyone else I’ve ever met. He sets lofty goals and sets out to achieve them with great speed.”6 In 2011, Musk vowed to put a man on Mars in 10 years.7 In May 2012, a SpaceX Dragon cargo capsule powered by a SpaceX Falcon Rocket completed a near flawless test flight to and from the International Space Station; since then, under contracts with NASA, the SpaceX Dragon had delivered cargo to and from the Space Station multiple times. In early 2020, SpaceX was working toward launching a rocket and spacecraft in May 2029 carrying two American astronauts to the International Space Station, the first visit by American astronauts on an American rocket and spacecraft since July 2011. But, more significantly, SpaceX was making rapid progress on Elon Musk’s ambitious Starlink project to provide high-speed broadband service worldwide via satellite by the end of 2020. Musk envisioned it might take a network of perhaps 12,000 Starlink satellites roughly the size of an office desk and weighing about 500 pounds orbiting about 375 miles above the earth to provide dense enough coverage to provide broadband service to every nook and cranny page C-215on earth. As of April 2020, SpaceX had put up five batches of 60 satellites into orbit. Musk had tweeted after the launch of the third 60-satellite deployment that Starlink internet services would become available in the Northern United States and Canada after the completion of at least seven to nine 60-satellite deployments. After 22 launches, the company would be able to offer the service around the globe; Musk believed that if the Starlink network could capture as little as five percent of the global telecommunications market with its high-speed broadband service, SpaceX could net annual revenues of $30 billion to $50 billion. SpaceX had developed a fully and rapidly reusable Falcon rocket to power the Starlink launches (as well as other types of launches). Headquartered in Hawthorne, California, SpaceX had 7,000 employees and was owned by management, employees, and private equity firms; Elon Musk was the company’s CEO and largest stockholder. Another of Elon Musk’s business ventures was SolarCity Inc., a full-service provider of solar system design, financing, solar panel installation, and ongoing system monitoring for homeowners, municipalities, businesses (including Intel, Walmart, Walgreens, and eBay), universities, nonprofit organizations, and military bases. Initially, investors were generally bullish on SolarCity’s future prospects, and the company’s stock price rose from about $10.50 in late December 2012 to an all-time high of $85 in March 2013. But when the company’s losses continued to grow, investor sentiment cooled and SolarCity’s stock price dropped to the $16-$20 range in February 2016. While Solar City had installed many solar energy systems and managed more solar systems for homes than any other solar company in the United States, its business model of recovering the capital and operating costs of the installed systems through leasing fees and power purchase agreements had resulted in negative cash flows and ever-larger net losses. In November 2016, to rescue SolarCity from probable bankruptcy, Tesla acquired the company for $2.6 billion (the deal was approved by an 85 percent shareholder vote); SolarCity’s operations were folded into a new division named Tesla Energy. However, the business model was changed to one where customers financed their new solar power installations with cash and loans, thus producing a healthier mix of upfront and recurring revenue; moreover, the costs of installing solar-powered installations were declining, partly because of improvements in solar technology, greater efficiencies in manufacturing solar-generation systems, and cost savings achieved by operating Tesla’s automotive and energy divisions as sister companies. During 2008–2015, many business articles had been written about Musk’s brilliant entrepreneurship in creating companies with revolutionary products that either spawned new industries or disruptively transformed existing industries. In a 2012 Success magazine article, Musk indicated that his commitments to his spacecraft, electric car, and