Project - Vehicular Crash safety Systems

A case study of Tesla Motors

Introduction

Tesla Motors Inc. is an automotive company, which was established in 2003 by a group of Silicon Valley engineers who wanted to develop electric vehicles. More specifically, Tesla Motors was founded by Elon Musk (founder of PayPal), Marc Tarpenning and Martin Eberhard. In addition, Sergey Brin and Larry Page (the founders of Google) are among its investors (Musk, 2006). In 2006, when the co-founder and current CEO of Tesla Motors Elon Musk was asked about their strategy, stated: “The starting point is a high performance sports car, but the long term vision is to build cars of all kinds, including low cost family vehicles” (Hamilton, 2006).

Business Action plan

Tesla Motors has multiple pathways in order to enhance the number and the variety of its available EVs to consumers: Tesla trades its EVs via both online channels and company owned showrooms. Other auto manufacturers are able to get their own EVs to customers sooner by buying patented electric powertrain components from Tesla Motors. Tesla Motors inspires other auto manufacturers by proving that there is pent-up consumer demand for sportive performance and at the same time socially responsible vehicles. The overall strategy of Tesla can be summed up in three steps. The first step was to introduce the Roadster model to the market and consequently establish a keystone for EVs. This objective has already been accomplished. In continuation, in 2012 the new “Model S” was introduced to the market and it is targeted at middle to upper-middle class consumers. Finally, by 2014 Tesla plans to produce and market a new model named “Model X”.

Partnerships

Tesla Motors manufactures and markets its own EVs. At the same time, in contradiction

with other traditional auto manufacturers, it acts as an original equipment manufacturer

(OEM) by the production of electric powertrain components, which other companies can

buy and trade with their own brand names (Adén and Barray, 2008).

In order to facilitate its growth, Tesla Motors has been following three main strategic

alliance types:

• Supplier alliances
• R&D alliances
• OEM alliances with other automobile manufacturers.

Tesla Motors has set up partnerships with many firms. Firstly, some of its supplier

alliances are Lotus Cars and Panasonic. Also, the R&D departments of Tesla Motors and

Panasonic cooperates for the development of more efficient batteries. Finally, Tesla Motors cooperates with some OEM manufacturers like Toyota and Daimler.

The partnership with Panasonic

The battery pack is probably the most important component of an EV, especially for

Tesla Motors whose battery packs are one of its main core innovations. That makes the

partnership between Tesla Motors and the battery cell manufacturer one of its most

significant ones.

Initially, in 2009 Panasonic and Tesla Motors entered into a supply agreement. In 2010,

In order to strengthen their partnership, Panasonic invested $30 million in Tesla Motors.

Later, in 2011 they made a supply agreement for automotive grade lithium ion battery

cells. Those battery cells are used in Tesla’s Model S and this supply agreement aids

Tesla Motors to meet its margin and cost targets for Tesla Model S (Tesla Motors, 2011).

The collaboration between Panasonic and Tesla Motors has also lead to an agreement of

R&D collaboration for the development of next-generation automotive-grade battery cells.

This new battery cell is based on nickel chemistry and it is specifically optimized for

EVs. This new technology would be combined with Tesla Motors’ current EV battery

expertise in order to create one of the most efficient EVs, the Tesla Model S (Tesla

Motors, 2011).

According to Tesla’s Co-Founder and CEO Elon Musk: “It is a powerful endorsement of

our technology that Panasonic, the world’s leading battery cell manufacturer, has chosen

to partner with Tesla to advance electric vehicle performance and value”. He also adds:

“Incorporating Panasonic’s next-generation cells into Model S batteries will ensure

unrivaled range and performance. We are very grateful for our great partnership with

Panasonic” (Tesla Motors, 2011). Also, Mr. Ito, a Panasonic executive states: “Panasonic will supply lithium ion cells for EVs that can achieve longer range with large energy density. It is our pleasure to start supplying the cells for Tesla’s Model S and promote sustainable mobility” (Tesla Motors, 2011).

Daimler Partnership

The relationship between the two companies was strengthened in 2009 when Daimler AG acquired a 10% equity stake of Tesla Motors by investing $50 million. Through this investment, the two partners are enabled to cooperate on a greater scale in the development of electric drive and battery systems as well as in individual vehicle projects. That way, both companies benefit from each other’s know-how (Tesla Motors, 2009). Apart from that, both companies have already started working very closely on the integration of lithium-ion battery packs and charging electronics from Tesla Motors into the first 1.000 units of the electric version of Daimler’s Smart two-seater city car. In addition, as part of the partnership, Prof. Kohler H., a Daimler executive, has taken a seat on the board of directors of Tesla Motors (Tesla Motors, 2009). Finally, the partnership was expanded when Tesla Motors entered into an alliance agreement with a Daimler affiliate, Freightliner. The purpose for this alliance was the development of Tesla Motors’ battery back to Freightliner’s electric delivery vans.

The Toyota partnership

In 2010, Tesla Motors agreed to partner with Toyota, one of its current most significant alliances. Through their partnership, the two companies collaborate in order to develop production systems, EVs as well as providing engineering support. Initially, in May 2010, Toyota acquired a 3% equity stake of Tesla Motors by investing $50 million (Holmberg, 2011). In addition, Tesla Motors will help Toyota to create a plug-in EV. That vehicle will be the electric version of Toyota’s current model RaV4. Also, Tesla Motors will help Toyota in the development of the electric powertrain for the RaV4. As a return, Toyota has aided Tesla Motors by providing engineering and production expertise for its Model S. In addition, Tesla Motors through this partnership will target to secure its manufacturing facility. Holmberg (2011) defined Tesla Motors and Toyota partnership as a perfect example of a partnership, which can boost the company: “This is a huge, transforming kind of alliance for this stage of Tesla. They couldn’t have done it early on. It wouldn’t have been appropriate, and Tesla didn’t have the pieces put together to be attractive at that point.” Furthermore, through this partnership, Tesla Motors got the opportunity to proceed in the purchasing of a large manufacturing plant in California for the production of Tesla’s Open Innovation in EVs: A case study of Tesla Motors 21 Model S. This transaction took place in 2010 and it cost $42 million. The previous owner

was a joint venture of Toyota with Motors Liquidation Company (GM). In addition, Akio Toyoda, the president of Toyota points: "Through this partnership, Toyota would like to learn from the challenging spirit, quick decision-making, and flexibility that Tesla has. Decades ago, Toyota was also born as a venture business. By partnering with Tesla, my hope is that all Toyota employees will recall that ‘venture business spirit,’ and take on the challenges of the future" (Tesla Motors, 2010) Tesla Motors’ CEO and co-founder Elon Musk says: "Toyota is a company founded on innovation, quality, and commitment to sustainable mobility. It is an honor and a powerful endorsement of our technology that Toyota would choose to invest in and partner with Tesla.” He also adds: “We look forward to learning and benefiting from Toyota’s legendary engineering, manufacturing, and production expertise" (Tesla Motors, 2010).

U.S. Government Policy

The U.S. federal government has established various incentives and regulations that urge new entrepreneurs and corporate entrepreneurs to invest in the green-technology vehicle market. An important incentive for new technologies was the Corporate Average Fuel (CAFE) standards, which was established in 1975. The CAFE standards had a limit of 27,5 mpg and it was valid until 2010. In 2007, the Energy Independence and Security Act, which was enacted by the Congress, forced the automobile manufacturers to achieve a limit of 35 mpg by 2020. Apart from the regulations, the U.S. government has established various programs in order to give financial incentives to customers.

Some of those incentives are listed below:

• Loans for the promotion of battery research and other green-technology

development for vehicles.

• Support for EV battery charging station implementation.
• The EV purchase by the federal government.

Discussion

According to Miller and Olleros (2007), three of the elements that constitute innovation are new products, new processes and new markets. According to Francis and Bessant (2005), product innovation and process innovation are among the four categories of innovation. The first one refers to changes in the products that a company offers and the second one to changes in the ways of creating and delivering products. By observing the case study of Tesla motors we can see that this company applies product innovation by designing the only EVs in the current market that combine long driving range, sportive performance and design. It also applies process innovation since it combines multiple know-hows deriving from different companies although; it is on top of manufacturing some parts in their entirety. Regarding the open innovation principles, Chesbrough (2003) states that a successful company should work with people inside and outside of the company in order to make the best use of internal and external ideas. Tesla Motors has applied that strategy by establishing R&D collaborations with major companies. By doing that Tesla motors manages to combine the ideas of its employees with the ones of its collaborators. There have been some significant achievements from these alliances such as an innovative battery technology (Panasonic) and important innovations in the design and manufacturing processes (Lotus and Toyota). According to Chiaroni et al. (2010), open innovation can be categorized into three processes; the inbound process, the outbound process and the coupled process, which is the combination of the other two. Furthermore, Mazzola et al. (2012) point out that the coupled innovation process refers to innovation in cooperation with supplemental partners (alliances, joint ventures). That way R&D departments cooperate in order to develop complementary technology. Tesla Motors applies a coupled innovation process by establishing multiple alliances. As Nieto and Santamaria (2007) state, R&D alliances can help companies achieve better results in product innovation. This can be seen by observing the technology innovations that Tesla Motor uses (battery capacity, sportive performance). In addition, Lecocq and Looy (2009) state that technological collaborative networks and R&D alliances are more effective strategies than mergers and acquisitions. Tesla Motors moves towards that direction by setting up alliances with major companies without considering merging with them.

Conclusions

Based on the data collected for this study and on the analysis that was carried out the following conclusions can be drawn. Initially, the strategy of Tesla Motors is to apply product innovation by designing innovative vehicles and process innovation by combining multiple know-hows deriving from different companies. Therefore, Tesla Motors can be considered as an innovative company. In addition, Tesla Motors applies open innovation and its coupled process by establishing R&D collaborations with major companies.

That way, it manages to further develop its innovative technologies. Furthermore, in a globalized market where the level of competition is extremely high, it is very difficult for a start-up company to penetrate the market. An investment in an entirely new car manufacturer requires a huge capital cost. Moreover, an EV company has to invest in infrastructure projects to secure the proper function of the EV network (battery charging, battery changing). Hence, close partnership with other companies to share their know-how is quite desirable.

Tesla Motors has launched a plan in that direction by cooperating with many partners and thus it pursues further development of its strategic alliances network. In that context, it has set up supplier, OEM and R&D alliances that have helped Tesla Motors in various fields. However, despite the many advantages of open innovation, several risks exist. Some of them are hidden costs, opportunistic behavior and the likelihood that one of the partnering companies may face financial difficulties, which may affect the outcome of the cooperation. The last one could be the most significant risk in the current EV market since a lot of EV companies have bankrupted with Better Place being the latest example. Therefore, Tesla Motors has to be careful in the implementation of the open innovation process. It has to choose its strategic alliances carefully and make sure that everyone has understood its role and has a clear picture of the shared goals and objectives. Finally, Tesla Motors should underline its green technology nature and the environmental impacts of EVs and therefore urge for a government policy scheme that will further facilitate EV companies.