CHAPTER 1

Tesla through 2015: Something Old and Something New

Introduction

When Tesla first appeared, the “EV industry” was already both very new and very old. Electric autos had been around since the beginning of the automotive era, but the new version seemed more promising than previous efforts mostly due to technological advancements (mostly in lithium-based electrochemical “batteries”). One might also view it as an industry within an industry, a new one within an old mature one based on a revolutionary technology (compared to the standard internal combustion paradigm). From a pre-introduction period to introduction (Volume I), industry-wide average profitability was clearly negative, and sustained firm-specific (quarterly or annual) profit was really out of the question.

At the time, a disproportionately large amount of impetus was being generated by just one company, Tesla, and just one founder-visionary, Elon Musk. This was still a time when the industry could and would be shaped by clear and individual strategic action, not faceless economic forces constraining change in traditional, almost deterministic ways. In a way, Tesla would become an economic force unto itself, sometimes rather eccentrically challenging many old rules and creating new ones of its own making.

Key Techonomics Terms in this chapter include:

Profitability and profit

Economic profit and accounting profit

Economic forces and threat of entry

Barrier to entry and economy of scale

Capital (as money, as equipment, as property) and capital expenditure

Some Essentials

A main point of this series is this: accounting profit and economic profitability are not the same thing.

Economic profitability is first and foremost an enduring or “structural” characteristic of an industry at large; accounting profit, in contrast, “the bottom line” on a firm’s income statement, is a calculation, and is the result of specific managerial decisions over any time period in question, usually short. Sustained positive accounting profits should reflect an organization’s capabilities as they match up against the specific economic forces that structure an industry, in which case, one may speak of the sustained profitability of the firm as well.

Economic profit is measured as economic value-added (EVA). If a firm stands at the top of an industry in this way, this reflects a competitive advantage. See Volumes I and II.

Consider not only the following accomplishment, but also the context of its timing:

The words “most valuable” are important. The value of a firm can be calculated in several ways for several different purposes (Bierman and Schmidt 2006), but often the term refers to total market capitalization, or “market cap” for short. This expression and ideas like corporate value pop up frequently, but their face value interpretations should not be taken for granted.

Market cap in business jargon is generally calculated as the number of shares of common stock that have been sold, times the price of each share at any specific point in time. Think of it as what the owners of common stock have actually ponied up out of their own pockets, plus-or-minus the vicissitudes of market ups and downs in the meantime, that is, capital appreciation. Unless qualified, this is what the media means by market cap when used in reference to what the company is “worth,” its “total value,” and so forth. Market cap means the total investment in stock as the market has determined—the “market value” of equity at any one point in time.

In contrast, the “book value” of equity is what is available for distribution to shareholders, basically total assets minus total liabilities, preferred stock, and intangible assets. (Book value was introduced in Volume II in another context, but otherwise is not important to the present point.) That said, market cap does not include things that can be important depending on the conversation; here, the most important being capital that has been borrowed by selling corporate bonds, called debt. That is considered capital too, in the sense that it is money borrowed from external investors, to be used in the expectation of it being invested profitably and later all of it returned “with interest” quite literally.

To mention another term now, then, a corporation’s “capital structure” refers to the total amount of equity and debt a firm is obliged to put to good use, where the term us used mainly for the purpose of managing the optimal balance (e.g., the “leverage”) between the two (Volume II). Capital structure and leverage become important in the Tesla story as it plays out especially in the later years, but more generally are more internal, management matters.

Debt is just that—debt, whereas equity or stock represents real, actual ownership of the corporation with all the rights due to private property possession.

Tesla Motors Inc. and the Roadster

The Tesla story begins around 1990 when Elon Musk was not the central figure, or any figure in the mix for that matter (Baer 2014). Around that time a friendly collaboration of Silicon Valley engineers—mainly Malcom Smith and Martin Eberhard—had worked on consumer gadgets and related mobility concepts. Soon another friend, named Marc Tarpenning, joined Eberhard. These latter two fellows and good friends did most of the “heavy lifting” during the earliest times.

During the late 1990s, the founders-to-be successfully marketed an electronic book, eventually selling the company for 187 million U.S. dollars (Baer 2014). Encouraged by their entrepreneurial success, they wanted to start another company. A little analysis convinced them that electric vehicles (EVs) had a viable future. With a little looking around they discovered a firm called ACPropulsion, which was doing work in California, being enervated by that state’s clean air mandates in the automotive industry (Baer 2014). ACPropulsion already had a vehicle called the “tzero,” which had impressive acceleration and controllability. It was enough for them to develop a business plan and to invest in the technology—but not in ACPropulsion itself.

Their enthusiasm was partly based on advancements in lithium-ion battery technology. Lead acid batteries had been standard automotive technology for most of its history, but simply did not have the natural potential to become the basis of an EV paradigm. Other battery technologies were also under research for years, but all had their challenges.

A problem with perceptions was that EVs were something of a joke (McGrath 1996). Very literally they were often compared to glorified golf carts and the like, at least by the average mainstream consumer. But technology enthusiasts were highly interested as were people concerned about the natural environment. Still, it was difficult to envision a viable—that is, profitable—market for vehicles, which at the time were so pricey and underperforming in terms of range—how far a vehicle can travel on one “fill-up” or here, one recharging.

Range means how far a vehicle can travel on one “fill-up” or here, one recharging. The explanation is a little technical but not hard to understand. “Energy density” is a technical term about batteries that readily translates into vehicle range. Energy density is about the electrochemically active materials in a battery, and their ability to deliver energy. Early EVs had poor ranges for a variety of reasons, but none was more important than the energy density of the battery’s type. For present purposes, lithium is one type, and the basic element of concern. Also critical was that recharging early-generation EVs took hours (depending on the type and the voltage at the source,) if not overnight.

Dominating U.S. auto-manufacturing for decades were the traditional, Detroit-based giants that saw that their technology competencies were based on the internal combustion engine; they were glad to outsource such things as vehicle electronics. Electronics had a fabulous future in autos as they did in just about everything else. That might allow entry, but the real ambition of the Tesla Motors partners was to produce entire EVs, starting with a small two-seat car and pushing the frontiers out from there.

The company was incorporated on July 1, 2003 and named Tesla Motors, after the famous electrical genius of the 19th century. Incorporation is a legal term for a business where initially shares of ownership as percentages are distributed among the founder-owners. Later, numbers of shares can be distributed among employees and a select group of private investors, called a “privately held” corporation. It can get more complicated than that—especially if venture capitalists get involved—but the point is that basic incorporation does not confer the right to sell shares on an open market (e.g., a stock exchange). The corporation is not yet publicly owned or publicly traded.

An early EV concept and a prototype was ready around 2004. It wasn’t especially state of the art and was highly optimized for its purpose—if there was any kind of “breakthrough” about it, it was a novel combination of technologies. Media statements were good, though, and said things like “At one end of the spectrum, the Tesla Roadster has higher efficiency and lower total emissions than the best of the most efficient cars,” and “At the other end of the spectrum, the Tesla Roadster accelerates at least as well as the best sports cars, but it’s six times as efficient and produces one tenth of the pollution” (Baer 2014).

The Tesla team realized that it could not develop a car “from scratch” by itself—it would have to retrofit an existing car to its vision. After a search, the founders decided to build on the Lotus Elise, a small sports car. Lotus was a well-established design innovator in racing, at least in Europe. The basic Elise chassis had served similar purposes by other European and Asian car developers, so there was precedent for success. Their business terms were attractive to Tesla, and their organization was already suited to consulting with Tesla. Lotus was used to doing the kind of things that Tesla needed. This and other key relationships would be the focus of Tesla’s first vice president of vehicle development, Ian Wright, only the third member of the formal team.

With that, the timely availability of minimally performing batteries, and a technology license with ACPropulsion, the car design became clearer. At that point the main problem became financing, a very significant hurdle. The year 2004 was largely dominated by solving that need. Tesla had accomplished some financing from personal contacts and small venture capitalists, but what they really needed was a major investor who shared their dream. The team was familiar with a man named Elon Musk, already famous in other circles as being the founder of SpaceX.

Musk was a visionary and long-term thinker yet acted aggressively in the present. After personal introductions, discussions, offers, and due diligence, Musk agreed to join the Tesla effort. Musk was particularly concerned about the natural environment and believed that EVs could play an important role in any real resolution to climate change. Like the founders, Musk shared their conviction that any such effect could only be achieved by large-scale commercial success, not symbolic niche efforts. Musk led a round of raising 7.5 million U.S. dollars and became the Chairman of the Board (COB).

Thus, at the outset he held two important roles: Chairman and major/majority investor.

Tesla’s first real product and basis for business was called the Roadster, released in 2008. It came in for high praise from sources such as Car and Driver, beginning a legacy of generally adoring press that would last for years. With some trouble about safety and reliability issues along the way, Tesla would enjoy a good public reputation as it concerns product technology.

Making a car from scratch was more difficult than imagined, and even using an existing chassis was not straightforward. Because Tesla aimed at an entirely new kind of a car, the powertrain, battery configuration, and others would necessitate modifications to the chassis. The existing partnership with ACPropulsion would thus prove fortunate, though in another sense Tesla passed the chance for deep internal, tacit learning about building a whole car, which, after all, was their real ambition.

But at the time, that task would have been overwhelming for a team that had never produced anything but an electronic notebook.

Lotus took the task seriously, if for no other reason to protect its image as a developer of racing autos. An advantage they held was to not be too integrated with existing suppliers, that is, not to get too “locked in” to business relationships that might hurt contractual flexibility and creativity. For the most part they maintained a policy of sourcing along the lines of immediate technical superiority.

Original Roadster design proposals were disappointing (Baer 2014). It seemed as if the designers were stuck on the then-existing image of EVs rather than envision a “real” car with a real market. A legendary design consultant and personal acquaintance named Bill Moogridge was contacted, but here was a person that had never designed a car. Nevertheless, in a few days’ time he used universal design principles to come up with a basic concept. It was futuristic enough but still exhibited classic and appealing design features. After a second round of design requests, the final winner was, not too ironically, from Lotus.

In November 2004, a prototype or “mule” was ready (Baer 2014.) The mule was an ungainly looking Elise, without any body panels but with the hardware and software componentry of an EV. Tests were successful and observers were astonished at its acceleration. As far as they were concerned, “proof of concept” was demonstrated. Led by Elon Musk and additional equity partnering, another 13 million U.S. dollars was raised.

By 2006 it seemed time to embark on a public relations and marketing effort (Baer 2014). On July 19, a star-studded event was pulled off in a hangar in Santa Monica, California. The event was reminiscent of the way new cars are lavishly revealed at auto shows. Movie stars and celebrities attended, and some got test rides. Despite some mechanical troubles, the general reaction was one of amazement. Within a few weeks, Tesla had 127 orders for Roadsters, priced at 100,000 U.S. dollars. Deliveries were scheduled for the summer of 2007.

Tesla made sure the word was spread outside the circles of auto purists and technology geeks. Positive press appeared in the New York Times, Fortune, Wired, and the Washington Post. The plan was to begin first deliveries of the Roadster in 2006 and continue scaling up production until “profitability” was reached in 2008—a sensitive word that will resonate throughout this story. The Roadster was not ready for first delivery until 2008, beginning with a problem with production, which would plague Tesla for years to come. Low cost and headcount across the system was a major goal, but quickly Tesla found itself managing hundreds of components rather than just the most value-adding and came to employ 140 people. The situation also surpassed the experience of the principals who were more accustomed to the compartmentalized Silicon Valley network way of doing things.

It is axiomatic that skillsets at the apex of a startup generally evolve, and “professional managers” eventually take over.

A new CEO was in place in November 2007 who assured that first Roadster deliveries would begin in the spring of 2008. Sure enough, production began in March that year. Boasting that the Roadster was the only true zero-emissions vehicle in actual production at the time, the next announced goal was to be producing 100 per month about a year hence, in early 2009. However, the new CEO lasted only until October 2008, when Elon Musk essentially took over the company—starting by firing about a quarter of Tesla employees.

By that time Musk himself had invested about 55 million U.S. dollars of his own capital, and Tesla was on the verge of collapse by 2008 due to operational cost overruns (Vance, 2012), Fortunately, Musk was able to bail himself out in early 2009 with the sale of another earlier venture of his, Everdream, for 120 million U.S. dollars. We can stop counting Musk’s roles now, or perhaps boil them all down to one—boss.

Initial Public Offering and the Model S

By May 2009, Tesla had recalled 75 percent of the Roadsters sold since March 2008. At least the problem had nothing to do with the electric drivetrain; the problem was with loose bolts that affected handling. Customers were disappointed, which was softened by Tesla’s decision to send repair technicians to customers’ homes to fix the bolts. Still, some of the glimmer was off the rose, made worse by several high-profile celebrities announcing their displeasure. Still, Tesla was ready to make perhaps the biggest move in any firm’s existence—to make the transition to becoming publicly owned and traded. This event is called IPO, an initial public offering of stock ownership. The move would give Tesla access to a theoretically unlimited pool of capital, but would also expose the company to public scrutiny by fiduciaries who had good reasons for concern.

The aspiration is not difficult to understand, though. A great deal of capital would be needed to develop and field their first car past the Roadster. This would be Model S—a key strategic move not only in its own right, but where it would eventually stand in the evolution of Tesla products. However, these two key elements of an overall strategy—one technological and one financial—were not always in perfect sync, and other elements of an overall strategy could not help but suffer in the meantime.

Let’s set the stage at the time Tesla “went public” in 2010.

Commercialized EVs

Three viable autos were already becoming consumer realities, not just auto-show amusements (BusinessWeek 2010):

General Motors:

Model: Chevy Volt

Technology: Plug-in (Battery-Gasoline) Hybrid (BHEV)

Battery: Lithium-ion

Range: 40 miles in battery mode; 350+ miles on a tank of gasoline, overall 37 mpg

Price: 40,000 U.S. dollars

Availability: 2010

Years to Develop: 4

Nissan

Model: Leaf

Technology: All-battery-electric (BEV)

Battery: Lithium-ion

Range: 100 miles per charge

Price: 32,500 U.S. dollars

Availability: 2010

Years to Develop: 4

Toyota

Model: Prius (PHEV variant of the successful hybrid)

Technology: Plug-in Hybrid (PHEV)

Battery: Lithium-ion

Range: 15 miles before gas-electric kicks in

Price: 25,000 US Dollars

Availability: 2012

Years to Develop: 4

There were 27 other hybrid models already on the market, including hybrid versions of the BMW 7 series, Mercedes S-class, and Lexus LS. Further out still, examples included: a Porsche Cayenne S hybrid SUV (67,700 U.S. dollars); a Lexus CT 200h compact, due early 2011 (32,000 U.S. dollars); a hybrid Volkswagen Touareg SUV in 2010; and a hybrid VW Jetta in 2012. Also, there were expectations raised by Ford, Honda (fuel-cell, expensive), Toyota, Mazda, and virtually all other major manufacturers. Longer out were cars from Jaguar and Volvo. Also, BMW, Volkswagen, and Mercedes-Benz were introducing ultra-efficient diesel engines.

Market and Regulatory Environment

In 2010, California law required the largest automakers to have low- or no-emissions cars in their fleets by 2012, and the Obama administration’s fuel economy standards raised fleet averages to 35.5 mpg by 2016, a 40 percent increase. Outside California and the West Coast, which followed it generally, there was a similar movement in the northeast corridor, Washington–Boston, but regulatory efforts and future proposals were more fragmented state-to-state.

Also worth noting is that the East Coast power grid was much more hydrocarbon-based traditionally, with closer access to plenty of coal, and the West Coast was already better suited to future hopes for a solar-based grid. In between the two main coasts for the most part but especially near the Gulf coast, a revolution in oil exploration (fracking and horizontal drilling) was already revolutionizing Big Oil and America’s dependence on oil imports. At the time, low gasoline prices were an impediment (some calculations said that 6 U.S. dollars/gallon would make EVs viable), but of course could not last forever. Consumers continued to say that main impediments were sticker price, limited range, and lack of recharging infrastructure.

J.D. Power projected that in nine years, battery EVs like the Leaf would sell about 100,000 units in the United States and 1.3 million units globally, about 1.8 percent of the 71 million cars expected to be sold. About 3.9 million hybrids and plug-in hybrids would be sold worldwide in 2020, or a total electric and hybrid market of about 7 percent. In contrast, Bloomberg projected that plug-in cars such as the Leaf and the Volt could make up 9 percent of U.S. sales by 2020 and 22 percent by 2030. Another poll found that only one-fifth of drivers would consider buying an electric car, and about half wouldn’t be willing to pay more for either an EV or the associated infrastructure.

Battery Technology

Many kinds of promising batteries were under development in the “lab” stage, but few were commercialized due to cost and/or technological obstacles—often, a version of the “scale-up problem.” By comparison, the cost of lithium-ion technology was dropping rapidly and dependably. For example, Elon Musk predicted that the cost of operating battery-run vehicles would drop from around 1,000 U.S. dollars per kilowatt-hour (a standard metric of battery performance along with energy density) to less than 350 U.S. dollars by mid-decade.

Most owners would charge at home about 80 percent of the time, where charging an electric car with a standard 120-volt outlet could take up to 18 hours. Installation of a 240-volt outlet could bring this down to several hours but installation could cost from 300 to 1,800 U.S. dollars. Around 13,000 public chargers were expected to be installed by the end of 2011, mostly concentrated in the most viable regional markets.

Tesla’s IPO and Further Developments

Tesla “went public” in 2010 with a 100 million U.S. dollars IPO, and the public response to the stock offering was enthusiastic. However, owning stock brings voting rights and the proportional power of voting constituencies, something that Musk would have to deal with on every level. Now some of the most influential purse strings became different, and “Wall Street” became a major actor. Owning stock brings voting rights and the proportional power of voting constituencies, something that Musk would have to deal with.

Aside from improvements to the Roadster, Tesla realized that it was not the future of EVs or the company. Pioneer markets and technophiles would never, even en masse, alone constitute long-term socioeconomic change. They needed a successor to the Roadster and a viable stepping-stone toward building a mass-market EV. The response was the Model S. When it was announced as early as June 2008, the price point was 60,000 U.S. dollars—still a great deal of money for an underperforming mass-market consumer car. Still, that was only about half of what the Roadster was priced at. In one sense the move was necessary; but in another the Model S would likely cannibalize some Roadster sales, as there really was no other immediate competition for such vehicles.

There was probably no other clear path to the future of the technology than to field some stepping stones of Tesla’s own. In this way, the future might be proactively created.

A prototype Model S was unveiled in March 2009—the first production cars were not delivered to customers until the middle of 2012 at a price of 106,000 U.S. dollars. Tesla followers of all stripes started getting used to this pattern, but now the company was publicly owned.

This “public” was of another kind and it wasn’t just following the technology, but was also “following the money.” This group of stakeholders showed remarkable patience.

The company was extremely ambitious in the first place, so ambitious it simply was not surprising that the company’s amazing goals were only partially reached by announced deadlines, which were equally ambitious. Also, experts knew that these time frames were not unusual for the industry, where three to four years normally passed between a first prototype and initial production. Still, Tesla’s estimation by Wall Street continued to soar.

In June, the following article appeared:

What was then reported as something of a coup for Toyota—getting them access to Tesla technology and entrepreneurial verve—was obviously unappreciative of Tesla’s potential to learn from Toyota as well. One observer said, “for Toyota it doesn’t really matter if this particular experiment works or not … For Tesla, it’s obviously more important.” Said another more prophetically, “It’s very easy [for Tesla] to make one-off vehicles and handcraft them and charge a lot of money for them, vs. manufacturing them in huge volumes” (Linn 2010.) That would soon be eclipsed by what Musk apparently had in mind, which would bear little resemblance to the original GM–Toyota experience.

Before long, two things stood out about the refitted Fremont facility (Vance 2012). One was that it was highly robotized, a harbinger of the future of manufacturing industries across the board. More specifically to Tesla’s strategy, lithium-ion battery packs were also assembled in the car manufacturing plant. It was unusual for EV manufacturers to be that vertically integrated, producing batteries and entire vehicles in the same plant. Most auto producers outsourced battery production completely. Later, Tesla would produce batteries in the Nevada Gigafactory, decoupling battery and vehicle production but still maintaining vertical integration in the organizational sense—which is what it really means in terms of strategy.

The year 2011 began in the media at least, as a more sophisticated discussion as EVs became more mainstream and that kind of consumer experience began to accumulate and take shape. That is, the technophile and the wealthy environmentalist groups were still around and vocal, but the more populous mass-market voice began to emerge. The legitimacy this helped develop in turn helped develop attitudes about ideas that previously would have been quickly dismissed as, well, nutty. As examples beyond the Leaf, Volt, and Prius noted earlier, the menu offered by manufacturers became broader:

Also and importantly, “field intelligence” reports like the following became more common, showing signs of an actual sequential displacement of one kind of consumer for another:

The competitive domain (Narayanan 2000) was not only expanding, but also morphing in character. In traditional economic terms, the argument was whether EVs were part of the global auto “industry,” or whether EVs had become a new industry unto itself.

It is not an entirely academic argument, because analyses of things like “entry barriers” and “substitution” had clear and dramatic practical implications for strategy.

Beyond the IPO

By the end of 2012, Tesla had sold a total of only about 2,450 cars (Vance 2012); interesting, hardly a competitive threat. By late 2014, however, Tesla’s market cap was about 28 billion U.S. dollars (Baer 2014), about half of what it would be just a few years later and surpassing all other U.S. auto makers. Many people thought this portrayed a firm-specific “bubble.” That much was probably true, but present reality is not the issue in market valuation.

Stock prices reflect future expectations monetized in present terms. The present stock price reflects expectations of future earnings, calculated in net present value (NPV) terms.

Much concerning expectations, then, at about the same time another Tesla model was announced, a habit that became worrisome not only as a sign of product proliferation, but also a dilution of effort and capital as a financial one. The Model X SUV was promised for first deliveries in 2014, but this did not happen until late 2015. It was priced even higher than the Model S. Originally announced to be priced from 65,000 to 80,000 U.S. dollars, the Model X upon first delivery was priced at 132,000 U.S. dollars, about 5,000 U.S. dollars more than the Model S, but it was projected to have an impressive range of between 230 and 300 miles on a charge. However, early reports of vehicle reliability were bad and threatened the overall viability of the Model X. Tesla responded rapidly with improvements, and consumer loyalty to the still-emerging brand was resuscitated. Advancements in technologies related to basic performance were more important to the pioneer consumers than reliability issues that were quickly fixed anyway.

Tesla buyers were demonstrating remarkable loyalty, paradoxically to some observers, while the brand capital on Wall Street grew. Despite some agonizing problems in the present, they should not be reflected in the present stock price of a company unless it is felt that the company will not resolve them, at least not at a cost that could be considered strategically prohibitive—that is, a poor use of investment capital regardless of the efficacy of the fix.

Past performance, even the past quarter, should be irrelevant unless an investor feels that the same will repeat; not just as a matter of resolving a competence, but perhaps economically “structural,” intransigent.

“Brand capital” can be instrumental during bad times. Brand capital is difficult and time-consuming to build, and relatively easy to wreck. And then of course, brand capital does not always translate into hard investment capital. Conversely, while Tesla was developing star-like status on the Wall Street, the EV price was still a large impediment to achieving long-term goals, and that, of course, pointed more and more at cost management—specifically, production costs once a vehicle design is frozen (an engineering term that marks readiness for production go ahead).

It could be asserted that Tesla stock was in a bubble, though the overvaluation was difficult to measure. The “invisible hand” of a free capital market is said to be the best at resolving such measurement difficulties over the long term.

Meanwhile, consumers were being asked to pay roughly twice originally announced target prices. Was this becoming a permanent pattern? Also, by this time many of the major global auto makers were starting to catch on to the Tesla threat and respond with major announcements of their own. Non-U.S. car manufacturers would become especially problematic, and their home markets were more sensitive to environmental concerns. In fact, it was foreseen early that the largest market for EVs by far would be China.

Tesla’s forward supply chain concept was novel, controversial, and legally challenged in many states (Vance 2012). Rather than having traditional, independent dealerships to deal with, Tesla set up a chain of its own “stores” in areas popular to buyers of pricey items. By the end of the year, Tesla planned to have 34 stores worldwide. In a store, a Model S was available for viewing, but not for sale. There would be another display of the chassis and drive chain only because after all, that was the heart and soul of the EV concept from a hardware point of view. Everything else about the car was state of the art, and in some ways futuristic. Stores also had interactive touchscreen devices where prospective buyers could fashion a Model S to their own tastes and check pricing. This point-of-sale concept found pockets of acceptance and defiance, and in some places was outlawed to protect dealership jobs.

Salespersons were not on commission, because for one thing at that time Tesla was merely taking reservations for a Model S for a refundable down payment of 1,000 U.S. dollars (Vance 2012). The number of people making reservations became so remarkably large as to be a danger sign if Tesla failed to come through on production promises. It was impossible to know how many takers would demand refunds, when, and exactly why. Technically it was a gigantic accounting liability as well as being an equally gigantic asset.

Fortunately, after the Model S was released in 2013, it was awarded the prestigious Motor Trend Car of the Year. It quickly outsold other large luxury sedans made by Mercedes, BMW, and others. This was a remarkable milestone from every point of view, especially vehicle technology and design. This was not the repetition of the Model X introduction. Priced at a much-improved 50,000 U.S. dollars, the Model S was touted to travel 300 miles on a charge, demonstrating that EVs had made great progress in these two, foremost metrics of success—that is, performance and price. Standing apart from all the chaotic technological variety in the field, Tesla and the Model S especially were held up as major advancements during 2013 (Bullis 2013). Tesla maintained its brand loyalty, something that would become tested over and again:

It is not true that being an early leader always confers a “first-mover advantage,” unless there are barriers created in the act of being first. Examples abound where “fast-followers” ruled in the end.

Still, it is an envious place to be, if not always a sustainably advantageous place:

Those few themes resonated time and again, as they had for over a century. At any rate, on most fronts, Tesla seemed to be the industry leader. Its own (with Panasonic) lithium-ion batteries were seen as design state-of-the art—including safety considerations—and to soon plummet in production cost. The Model 3 was already being envisaged, a leap ahead from even the Model S in being mainstream, as made evident by the expected price of 35,000 U.S. dollars. Its charging-station approach and technology were a good overall model for range extension, cost to consumers, and technological standardization—a factor that cannot be underestimated in its importance to survivability if not dominance.

Said the GM CEO, Tesla has “gone from being the quirky little media darling to being something that is definitely making people in the industry think” (Bullis 2013).

They Don’t Call It Capital-ism for Nothing

In the very middle of the decade, Musk hoped to be manufacturing 100 Model Ss a day. The year 2015 began like this:

At that point another major announcement was made, in a fashion that was becoming characteristically Musk and Tesla. In a tweet sent on October 1, 2014, Musk teased Tesla followers by announcing, in effect, the Model D. The D stood for dual motor, which translated into sensational acceleration. Of course, all EVs had great acceleration anyway.

The D would also have some autopilot features, something that would dominate news in the automotive world before too much more time passed. An unveiling happened on October 9, receiving intense and widespread press coverage. Musk did the honors. However, the arguably premature release of the poorly named “autopilot” feature caused quite a headache and was possibly one of the true blunders Tesla made during this time. In a word, the word autopilot could be easily confused with the ideas behind words like “autonomous” and “driverless,” and confused public perception about a fatality. This was to be a period when the media, as the voice of the Wall Street investment community, made its concerns more clearly understood:

A few months later, a highly related theme addressed capital expenditures, since large investments in plant and equipment would be needed to achieve the needed economies of scale and subsequently, true profitability and not merely profit:

Gross margin is a metric that is important in auto manufacturing and is always reported on income statements in annual reports. It is not the same as profit, or earnings, not literally and figuratively that “bottom line,” but it comes close, and is gross sales revenues less operating costs.

The difference between gross margin and profit is, mostly, taxes and interest paid on debt. The latter is the major part of the difference between accounting profit and EVA:

Managing capital-as-money and capital-as-equipment were not distinct financial and operational problems, respectively, but in strategic terms were just two major parts of one overall problem—EVA and true competitive advantage (Volume 1).

Consciously or coincidentally, the author of the following article used the word “capabilities” in a correct and meaningful way:

The words “and to” were inserted in the above article to make clearer that the accumulation of experience does not lead to an economy of scale. Accumulation of experience achieves a “learning effect” as well as greater efficiencies as depicted by a declining average unit cost curve, but these are not economy of scale (Volume II).

After that, one could almost predict the following article a few months later. It was becoming more obvious that a total system would be needed not only at the Freemont plant and the Gigafactory, and not only between those two systematically, but all along supply chains to include recharging infrastructures:

Production and supply chain skills would vie with product development skills to be the core value-adding capability across the company. This is what the ILC (Volume 1) would predict, assuming a strategy aimed at mass-markets.

Conclusion

This chapter covered events from Tesla’s beginnings in the late 1990s, though to incorporation, IPO, and a little beyond. The year 2010 was particularly pivotal in the life of Tesla as it is for any company that goes public. The event gave Tesla access to a virtually unlimited amount of Wall Street capital, but of course exposed the fiduciaries to endless public scrutiny and in the present case, media attention. Wall Street specifically, though not all investor groups across the board, shows a strong bias toward the short-term and really, quarterly earnings reports and annual results. Corporate strategists are compelled to think in longer terms, if for no other reason that capital investments usually take several years to even begin generating revenue, no less a return on the principle fully remunerated at last.

During this period, Tesla commercialized the Roadster and the Model S, aligned strategically with the company’s initial incorporation and then the IPO, respectively. In retrospect, one could argue whether the Roadster was a “real car” for a valid market, or a prototype fielded experimentally to gain experience for greater ambitions in global, mass markets. Even then, the Model S was a great advancement past the Roadster but still, most marketable to technophiles and wealthy enthusiasts.

To reach mass markets, vehicle range had to improve, and sticker price had to come down. There was no other path to profitability.

This rendition of the century-long electric auto story was taking on the shape of a real global industry, not just an exciting product class, and not only for pioneer markets. However, from any business proposition, overall profitability was still problematic, and that was the expectation (or lack of it) that drove investor interest and Wall Street capitalization. Fortunately for the company, the Tesla investment community was prepared to postpone profits for a while longer, and the founders stuck to the original vision. Corporate strategy was plainly becoming key to success, not just technological innovation. Still, the major obstacles were technological.

Exercises

Define each of the following terms individually, and then compare and contrast them in the pairs shown:

Profitability and profit

Economic profit and accounting profit

Economic forces and threat of entry

Barrier to entry and economy of scale

Capital (as money, as equipment, as property) and capital expenditure