Featured case: Tesla’s Entry into the US Auto Industry

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The case

teslaWho – the protagonist

Elon Musk, Tesla CEO.

What

Founded by the controversial Elon Musk, Tesla has disrupted the traditional automobile industry with its range of electric vehicles.

teslaWhy

It appeared Musk had bitten off more than he could chew when it came to the production of the Model 3.

Tesla was running out of cash and was nowhere near its production target of 5,000 units a week – the number needed to reach profitability. Tesla did achieve that target eventually but the original production goal was missed by six months.

Where?

As of 2016, the new passenger car market in the United States was worth around a staggering $270 billion at the retail level.

Tesla only accounted for a 0.2% market share of the US car industry, but it was nevertheless an extremely lucrative market to tap into.

When?

It was May 2018 when the pressure was being ramped up on Musk, as analysts were questioning the company’s capital requirements.

TeslaKey quote

“Yes, excessive automation at Tesla was a mistake. To be precise, my mistake. Humans are underrated.” – Musk remarked on Twitter.

What next?

Investors and auto industry experts were split on Tesla’s future. Would they continue to disrupt the industry and achieve its mission to accelerate the world’s transition to sustainable energy, or face bankruptcy?

 
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Tesla’s Entry into the US Auto Industry
Ref 18-188

Supplementary software
Ref 18-188S

The authors

author

Don Sull and Cate Reavis

Don and Cate discuss how to create a case that differs from others that cover the same subject, and the importance of students being able to relate to the topic matter.

Growing marketUSP

Don said: “From a teaching perspective, the case differs from others in a few ways.

“First, the case includes sufficient data on actual pricing, recommended retail prices, and market share gain to estimate Tesla’s willingness-to-pay advantage for Model S and X. Willingness-to-pay is a central concept in strategy, but few cases provide data to allow students to estimate it.

“Second, the case includes a detailed description of the automotive industry in 2018, which is undergoing significant upheaval. The case is as much about the automotive industry in transition as it is about Tesla per se. This provides the students with an opportunity to use industry structural models to evaluate a dynamic industry.

“Third, the detailed quarterly financial data provides students with an opportunity to understand the financial implications of Tesla’s strategic choices: minimal outsourcing increases fixed costs, and starting with luxury vehicles reduces initial volume (prior to Model 3 launch). Taken together these make it very difficult for Tesla to achieve break-even. Tesla’s financing challenges are not a function of operational inefficiency, but of core strategic choices.”

Identifying with students

Cate commented: “As a company, Tesla is very popular with students due to its attempt to disrupt the US auto industry with all-electric vehicles that many believe will soon displace internal combustion engines. With the release of its more affordable Model 3, the company is even more appealing because students can realistically envision themselves being a customer.

“The case provokes considerable debate due to Elon Musk’s visionary, futuristic, and, at times, erratic style of management. Is he the right person to lead Tesla at this point in time?

“Students also debate the company’s burn rate. Typically, half of the students believe that within five years Tesla will go bankrupt or be acquired, while the other half believe that it will continue to exist as a standalone company.”

teslaImportance of accurate sources

Don added: “Writing a case from published sources is always challenging as you never know how accurate the sources are that you use to build the narrative.

“This case was particularly challenging in describing the current status of the US auto industry amidst increasing consumer demand for electric vehicles, the eventual emergence of driverless vehicles, and shifting perceptions on what mobility will look like in 15 years.”

About the authors

Don Sull is a Senior Lecturer at MIT Sloan School of Management.
e dsull@mit.edu

Cate Reavis is Associate Director, Curriculum Development at MIT Sloan School of Management.
reavis@mit.edu

 

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