Tesla and the Revolution in the Car Manufacturing Industry

Tesla, Inc., an American manufacturer of all-electric cars, has revolutionized the

automotive industry with its innovative approach to electric vehicles (EVs). Founded in
2003 by engineers Martin Eberhard and Marc Tarpenning, Tesla aimed to prove that
electric cars could be better, quicker, and more enjoyable to drive than gasoline cars. Elon
Musk, who joined shortly after as chairman and then CEO, spearheaded the company’s
ambitious strategy. By 2022, Tesla's market capitalization exceeded $1 trillion, making it
one of the most valuable companies globally, surpassing traditional auto giants like Ford,
GM, and Volkswagen (Exhibit A).

Tesla's Strategy

Tesla’s remarkable transformation from a fledgling startup to a trillion-dollar titan can be

attributed to its well-crafted strategy, which Elon Musk outlined in a 2006 blog entry. The
strategy was straightforward yet ambitious: build a sports car, use that revenue to develop
an affordable car, then create an even more affordable model, all while providing zero-
emission electric power generation options. This master plan unfolded with the launch of
the Roadster, a high-end sports car in 2008, followed by the Model S, a luxury sedan in
2012, and finally the Model 3 in 2017, which targeted the mass market. Tesla's lineup
expanded further with the Model Y, a compact SUV, underscoring the company's
commitment to broadening its market appeal.

Integral to Tesla’s strategy was its approach to vertical integration. By building

Gigafactories to produce batteries and other components, Tesla reduced its dependence
on external suppliers, ensuring better control over production quality and costs. This
move not only improved operational efficiency but also positioned Tesla as a self-reliant
entity in the highly competitive EV market.

Adding another layer to its strategy, Tesla ventured into the energy sector. The acquisition
of SolarCity in 2016 marked Tesla's entry into the solar energy market, creating a fully
integrated clean-tech energy company that combined solar power, energy storage, and
transportation. This integration aimed to accelerate the world's transition to sustainable
energy, aligning with Tesla’s broader vision.

In a unique departure from conventional practices, Tesla took an open-source approach

to its intellectual property (Exhibit B). Elon Musk announced that Tesla would not initiate
patent lawsuits against anyone who wanted to use its technology in good faith. This move
was designed to encourage the broader adoption of electric vehicles and foster innovation
across the industry, reinforcing Tesla's mission to expedite the transition to sustainable
energy.

How Tesla Changed the Dynamics in the Auto Industry

Tesla's entry into the automotive market significantly altered the industry's dynamics,
shifting the focus from internal combustion engines (ICE) to electric. This disruption
forced traditional automakers to re-evaluate their strategies and accelerate their EV

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programs. Companies like GM, Ford, and Volkswagen began investing billions in electric
vehicle development to catch up with Tesla’s technological advancements and market
lead.

Tesla’s strategy of vertical integration, particularly through its Gigafactories, set a new
standard in the industry. By reducing reliance on external suppliers and ensuring high-
quality production, Tesla demonstrated the advantages of maintaining control over the
entire supply chain. This approach not only improved operational efficiency but also
created substantial barriers for new entrants. The high investment costs associated with
building such integrated operations make it challenging for new competitors to match
Tesla’s capabilities. Furthermore, Tesla’s emphasis on continuous innovation disrupted
the traditional barriers to entry and exit in the automotive market. By consistently
pushing the boundaries of EV technology, Tesla made it difficult for both new players to
enter the market without significant investments in new technology and infrastructure.

How Incumbents Are Reacting in Western Markets

The reaction of traditional automakers in Western markets to Tesla’s disruptive influence

has been multifaceted. Companies like GM and Ford have made bold commitments to the
future of electric vehicles. GM’s announcement to cease the production of internal
combustion engines by 2035 exemplifies the seriousness with which these legacy
automakers are approaching the transition to electric mobility. Ford and Volkswagen,
while not committing to specific deadlines, have allocated substantial resources towards
developing their EV portfolios, recognizing the impending tipping point that could render
conventional cars obsolete.

In addition to their in-house developments, these automakers are forming strategic

partnerships and acquisitions to bolster their EV capabilities. Ford’s investment in
Rivian, an American EV startup, is indicative of the broader trend of legacy manufacturers
seeking to leverage the innovation and agility of startups to enhance their own product
offerings.

Government support has also played a crucial role in this transition. Policies and
incentives designed to promote the adoption of electric vehicles, such as subsidies, tax
credits, and stricter emissions regulations, have provided a conducive environment for
traditional automakers to accelerate their shift towards electric mobility. These measures
not only facilitate the market adoption of EVs but also ensure that the industry’s
transition aligns with broader environmental and policy goals.

The Situation in Asia and Tesla’s Relationship with China

Tesla's foray into the Chinese market has been a strategic maneuver with both significant
opportunities and challenges. The opening of the Gigafactory in Shanghai in 2020 marked
a pivotal moment for Tesla, enabling the company to scale its production and meet the
burgeoning demand in China, the world’s largest EV market. This move also allowed Tesla
to reduce production costs, thanks to local manufacturing and supply chain efficiencies.

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However, Tesla’s presence in China has not been without its challenges. The competitive
landscape in China is intensely dynamic, with local manufacturers such as BYD, NIO, and
SAIC rapidly advancing their EV technologies. These companies benefit from lower
production costs and robust government support, which has enabled them to emerge as
formidable competitors to Tesla, both domestically and globally (Exhibit C). BYD, in
particular, has made significant strides, overtaking Tesla in global EV sales in 2023 before
Tesla regained its position in the first quarter of 2024.

Moreover, Tesla’s operations in China and its open-innovation approach have inevitably
facilitated the transfer of technology and expertise to local competitors. While this has
accelerated the overall growth of the EV industry in China, it also poses a significant threat
to Tesla, as these homegrown companies leverage their newfound capabilities to
challenge Tesla’s market share.

Apple Project Titan and Huawei's Entry

Amidst this rapidly evolving landscape, Apple’s Project Titan, its ambitious venture into
the EV market, faced significant hurdles. Initially shrouded in secrecy and marked by high
expectations, Project Titan aimed to revolutionize the EV market much like Apple's
previous innovations in consumer electronics. However, the intense competition and
rapidly advancing technologies in the EV space proved too formidable. In 2024, Apple
announced the discontinuation of Project Titan, acknowledging the challenges and
competitive pressures that made it difficult to achieve the desired breakthrough.

Simultaneously, Huawei's entry into the EV market has further intensified the
competition. Known for its prowess in telecommunications, Huawei has leveraged its
technological expertise to make significant inroads into the EV industry, positioning itself
as a strong player in the Chinese EV market. This entry has not only increased competition
but also highlighted the technological and economic pressures within the industry.

A notable instance of this competition is the ongoing rivalry between BYD and Huawei.
In a recent public exchange, Huawei's smart car unit chairman criticized BYD for
competing on low prices rather than quality. This comment sparked a heated response
from BYD, reflecting the intense competitive pressures in the world’s largest EV market.
Both companies are striving to balance pricing strategies, technological innovation, and
market share, amidst a broader backdrop of geopolitical and economic challenges.

Adding to the competitive landscape, Xiaomi, often referred to as "China’s Apple," has
made a notable entry into the EV market. Xiaomi’s first EV model, the SU7, launched with
significant fanfare and secured a record number of pre-orders shortly after its debut. The
SU7, priced competitively against Tesla’s Model 3, offers features and performance that
appeal to a tech-savvy Chinese consumer base. Xiaomi has also obtained a production
license to independently assemble electric vehicles, allowing it to scale its production
without reliance on traditional car manufacturers. This move underscores Xiaomi’s
commitment to becoming a major player in the EV market and highlights the increasing
competition Tesla faces in China.

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Tesla's Recent Performance Drop and Layoffs

Despite its groundbreaking achievements, Tesla has faced recent challenges that
underscore the competitive pressures in the EV market. In the first quarter of 2024, Tesla
reported a notable 8.5% decline in sales compared to the previous year (Exhibit D). This
decline, coupled with increased competition and market saturation, has highlighted the
difficulties Tesla faces in maintaining its growth trajectory.

In response to these challenges, Tesla announced layoffs of over 10% of its workforce,
signaling a need to streamline operations and reduce costs amidst growing competition.
This move, while indicative of the company’s efforts to adapt to market realities, also
raises questions about its long-term strategy and operational stability.

Moreover, concerns about Tesla’s innovation pace have emerged. The company has not
introduced a new model in several years, and delays in launching the Cybertruck and fully
autonomous driving capabilities have raised doubts about its ability to sustain its
technological edge. Elon Musk’s focus on ambitious projects like SpaceX has further
fueled these concerns, with some observers questioning his commitment to Tesla’s day-
to-day operations.

The Future of Tesla and the Automotive Industry

The future of Tesla and the broader automotive industry is poised at a critical juncture,
shaped by technological advancements, market dynamics, and evolving consumer
preferences. Despite its current challenges, the global transition to electric vehicles is
expected to continue, driven by technological innovations, government policies, and a
growing awareness of environmental sustainability.

However, the rise of potential substitute technologies, such as hydrogen fuel cells,
presents both opportunities and challenges. These alternative energy sources could
disrupt the market further and challenge Tesla’s dominance, particularly if they offer
advantages in terms of efficiency, cost, and environmental impact.

Tesla’s journey from a startup to a trillion-dollar company exemplifies the transformative

power of strategic innovation and vision. However, sustaining this leadership will require
continuous adaptation, renewed innovation, and a clear strategy to navigate the evolving
competitive landscape. As Tesla navigates this complex landscape, several open questions
remain. Can Tesla maintain its leadership amidst intensifying competition, particularly
from Chinese manufacturers? And how will the automotive industry evolve with the
advent of new technologies and shifting market dynamics?

The answers to these questions will not only shape the future of Tesla but also the broader
trajectory of the global automotive industry.

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Exhibit A. Global market value of carmakers in billion USD, 2023

600.00

500.00

400.00

300.00

200.00

100.00

0.00

Exhibit B. Number of active patents owned by the leading automobile manufacturers,

2000-2020

Tesla BAIC Motor FCA Tata Motors

SAIC Group Suzuki Motor Subaru Corp Renault
Daimler Mazda GM Kia Motors
Nissan Motor BMW Groupe PSA Ford
Honda Motor Hyundai Motor VW Group Toyota Motor
0 5,000 10,000 15,000 20,000 25,000

Source(s): LexisNexis PatentSight; ID 1178549

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Exhibit C. Plug-in electric vehicle market share by manufacturer 2023

50
45
40
Market share (%)

35
30
25
20
15
10
5
0
BYD Tesla Inc. VW Group Geely-Volvo Car SAIC Others
Group

Source: Statista

Exhibit D. Tesla Inc. financial profile, 2019-2023

th USD 31/12/2023 31/12/2022 31/12/2021 31/12/2020 31/12/2019

Operating revenue 96,773,000 81,462,000 53,823,000 31,536,000 24,578,000
(Turnover)
P/L before tax 9,973,000 13,719,000 6,343,000 1,154,000 -665,000

P/L for period [=Net 14,999,000 12,583,000 5,524,000 690,000 -870,000

income]
Cash flow [Net Income 19,666,000 16,330,000 8,536,000 3,012,000 1,284,000
before D&A]
Total assets 106,618,000 82,338,000 62,131,000 52,148,000 34,309,000

Shareholders funds 62,634,000 44,704,000 30,189,000 22,225,000 6,618,000

Current ratio (x) 1.73 1.53 1.38 1.88 1.14

Profit margin (%) 10.31 16.84 11.79 3.66 -2.71

ROE using P/L before 15.92 30.69 21.01 5.19 -10.05

tax (%)
ROCE using P/L 13.01 24.96 15.83 5.02 0.09
before tax (%)
Solvency ratio (Asset 58.75 54.29 48.59 42.62 19.29
based) (%)
Number of employees 140,473 127,855 99,290 70,757 48,016