Tesla’s Secret Strategy

IN 2017, TESLA INC.— an American manufacturer of

all-

electric cars—boasted a market capitalization1 of over

$60 billion, an appreciation of more than 1,400 percent

over its initial public offering price in 2010. How can a

California startup achieve a market valuation that exceeds

that of GM, the largest car manufacturer in the world,

making some 10 million vehicles a year? The answer:

Tesla’s Secret Strategy. In a blog entry on Tesla’s website

in the summer of 2006, Elon Musk, Tesla’s co-founder

and CEO, explained the startup’s master plan:2

1. Build sports car.

2. Use that money to build

an affordable car.

3. Use that money to

build an even more

affordable car.

4. While doing above,

also provide zero-emission

electric power

generation options.

5. Don’t tell anyone.

Let’s see if Tesla stuck

to its strategy. In 2008, Tesla

introduced its first car: the

Roadster, a $110,000 sports

coupe with faster acceleration

than a Porsche or a

Ferrari. Tesla’s first vehicle

served as a prototype to demonstrate that electric vehicles can

be more than mere golf carts. Tesla thus successfully completed

Step 1 of the master plan.

In Step 2, after selling some 2,500 Roadsters, Tesla

discontinued its production in 2012 to focus on its next

car: the Model S, a four-door family sedan, with a base

price of $73,500 before tax credits. The line appeals to

a somewhat larger market and thus allows for larger

production runs to drive down unit costs. The Model S

received an outstanding market reception. It was awarded

not only the 2013 Motor Trend Car of the Year, but also

received the highest score of any car ever tested by Consumer

Reports (99/100). Tesla manufactures the Model S

in the Fremont, California, factory that it purchased from

Toyota. By the end of 2016, it had sold some 125,000 of

the Model S worldwide.

Hoping for an even broader customer appeal, Tesla

also introduced the Model X, a crossover between an SUV

and a family van with futuristic falcon-wing doors for

convenient access to second- and third-row seating. The

$100,000 starting sticker price of the Model X is quite

steep, however; thus limiting mass-market appeal. Technical

difficulties with its innovative doors delayed its launch

until the fall of 2015.

Tesla has now reached Step 3 of its master plan. In

2017, Tesla delivered the company’s newest car: the

Model 3, an all-electric

compact luxury sedan,

with a starting price of

$35,000. Tesla received

some 375,000 preorders

within three months

of unveiling its model.

Many of the want-to-be

Tesla owners stood in

line overnight, eagerly

awaiting the opening

of the Tesla stores

to put down a $1,000

deposit to secure a spot

on the waiting list for

the Model 3, a car they

had never even seen,

let alone taken for a

test drive. By the time Tesla delivered the first 30 cars

of its new Model 3 (to Tesla employees for quality testing

and appreciation of their hard work), the California

car maker had received over 500,000 preorders. This customer

enthusiasm amounted to $500 million in interestfree

loans for Tesla. The Model 3 was slated for delivery

by late 2017. Tesla hoped to sell 500,000 total vehicles

by the end of 2018. To accomplish this ambitious goal,

Musk also promised that Tesla would increase its annual

production from 50,000 in 2015 to 1 million vehicles a

year by 2020.

Step 4 of Musk’s master plan for Tesla aims to provide

zero-emission electric power generation options. To

achieve this goal, Tesla acquired SolarCity, a solar energy

company, for more than $2 billion in the fall of 2016. This

joining creates the world’s first fully integrated clean-tech

energy company by combining solar power, power storage,

and transportation. A successful integration of Tesla and

SolarCity, where Musk is also chairman and an early investor,

would allow completion of Step 4 of Tesla’s master plan.

Step 5: “Don’t tell anyone”—thus the ChapterCase title

“Tesla’s Secret Strategy.”3