Tesla: a toy for the hipster? Maybe not for much longer.

Model S

Facing the decreasing supply of petroleum resources and the arising need for alternative solutions, the energy transition is currently a world-wide challenge, especially for car-makers. The car industry is slowly changing and more change is coming. We see four possible outcomes for car-makers in this transit: the end of car ownership and the apogee of car-sharing (such as Autolib’ with the Bolloré Bluecars), the hybrid car (using different sources of energy), the all-electric vehicles (EVs) that can be recharged at a paying station or at home or in some other places (parking, malls, food courts); and finally the model proposed by Tesla which is an all-electric vehicle plus the infrastructure throughout a region to recharge the car for free. Tesla is different from any other commercialized EV because the car comes with free energy in any Supercharger station.

 

Tesla is a US-based company primarily engaged in the designing, development, manufacturing and selling of electric vehicles and electric powertrain components. Tesla was founded in 2003 by a group of ambitious engineers in the Silicon Valley. The company recorded revenues of $2,1 billion in 2013, as compared to $413.2 million in 2012. Tesla operates in North America (75% of revenues), Europe (24%) and Asia (1%). The company revealed Roadster, a powerful electric vehicle in 2006. In May 2013, Tesla expanded its Supercharger network covering California and Nevada on the west coast and the Washington, DC to Boston region on the east coast. In January 2014, Tesla opened new Supercharger locations connecting the Netherlands, Germany, Switzerland, and Austria.

Tesla, the disruptive

Tesla engines bring the revolution in green tech businesses for those who are looking for an alternative to petrol cars. The then Vice chairman of General Motors stated in an interview "All the geniuses here at General Motors kept saying lithium-ion technology is 10 years away, and Toyota agreed with us, along comes Tesla. So I said, 'How come some tiny little California startup, run by guys who know nothing about the car business, can do this, and we can't?” Effectively Tesla forced the car industry to come up with similar technologies. However Tesla has succeeded in using battery-only systems. It also argues that this method of power is more efficient than petrol-powered vehicles. Tesla engines are about the size of a water-melon, with a lot more juice.

Indeed, Tesla produces a battery which is able to outperform traditional batteries in order to have vehicles entirely battery-powered with no emissions. They use their unique lithium-ion batteries to make the only EVs in the current market that combine long-distance driving. They propose unique EVs that combine high ranges, sportive performance, design, and a unique recharging infrastructure. Among the main commercialized EVs in the world, the Tesla Roadster has the highest autonomy for an all-electric (395 km), then the Tesla Model X comes second (260 km), then in third place is Tesla Model S matching Bolloré’s Bluecar (250 km), and finally the forth one is Renault’s Zoé (210 km) and all others EVs are under 200 km of autonomy.

The road might be bumpy

Although 25,000 world-wide customers were convinced by Tesla’s model S, some fear took over late last year, as three Tesla drivers saw their car turn into flames in the U.S and Mexico. This kind of incident got world-wide media attention as concerns were raised as to how qualitative Tesla’s batteries really are. Tesla’s CEO, Elon Musk, was fast to comment and reassure the public and investors stating that despite the incidents, Tesla cars were much safer than regular petrol cars. In February this year, Musk acknowledged that Tesla experienced “a significant drop in demand, and we are quite worried about it”.

Security issues are not the only concerns customers might have before buying a car from Tesla. A big question mark for European potential customers is the number of Superchargers, Tesla’s fast recharging stations which allow a driver the recharge up to 80% of the battery in 40 minutes and a full charge in 75 minutes. Although the U.S will be 80% covered by the end of 2014, there are currently only 14 stations in Europe, and most of them in Norway and Germany. We know it is Tesla’s intention to expand this network of Superchargers in Europe by the end of 2015 but for now only a handful of potential buyers live close enough to a station to make the use of a Tesla at least moderately convenient. For all the others, they can fully recharge in 12 hours using a regular plug at home… Not quite the dream yet!

How does Tesla’s strategy fit in the global picture?

The growing sales and infrastructure in the U.S will give Tesla the cash to scale up world-wide, and do the necessary work to do so. Currently, sales in the U.S finance the expansion in other countries. Compared to other luxury cars, Tesla sells the Model S to a much higher percentage of men (83,9%) and those buyers are, on average, 45-64 years old and wealthier than those purchasing competing models. The Model S is often compared to the General Motors' Chevy Volt and Nissan Leaf because they are the three best-selling all-electric, or extended-range electric cars. They all may be battery powered, but the type of buyer they attract is totally different.

In its expansion in Europe, Tesla will also be facing a marketing challenge: standardization or adaptation? Tesla will have to adapt to the demand for smaller cars that most Europeans drive. According to the European Commission, the main target for all-electrics is young female around 18-34 years old who live in metropolitan area, using a car everyday and are very familiar to electric cars. The technology will remain the same, only the body-work will have to be changed. In its effort to convince European buyers, Tesla will most likely come up with European versions of its fleet.

On another note, Tesla will most likely have a hard time competing with all the gas providers who are paying (or paid) for direct distribution on the highways, at least in France. Only through tough negotiations and ingenious competition Tesla will be able to develop its Supercharger network.

Finally, another important issue is the price of energy in Europe which is more expensive than in the U.S. Could they really offer, for free, electricity in Europe? Waiting for this to happen, most European car buyers will probably not connect the dots between the offer and the advantages. Old habits die hard.

On top of everything mentioned in this article, we have realized that electrical vehicles are not a new concept. Since the first petroleum shock in the 1970s, all car-makers have talked about transforming the existing petroleum model to a new one without really doing it. Tesla has done it with performance EVs using existing technology and more, implementing Android, creating Supercharger stations. Why do world-wide leading car-markers have difficulties matching Tesla’s performance? Tesla being a young company created in the Silicon Valley, they don’t have the lock in process to launch projects. An important fact is that Tesla’s CEO Elon Musk is an entrepreneur to the core who doesn’t hesitate to break barriers. 

By Anne-Claire Lanuzel, Marie-Sophie Pons, Juliette Soria, Kailash Kolla and Arnaud Juhel- - Esc Pau MBA franco-Indien - Avril 2014.