Tesla Business Model/Strategy: The Ultimate Breakdown

Last Updated on January 20, 2021 by Henry John

“To create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles”

Tesla vision statement

Founded in 2003, Tesla has risen to prominence in the auto industry, having achieved the status of the most valuable carmaker in the world, being more valuable than industry giants like Toyota and Volkswagen.

It has sold over 1 million electric vehicles cumulatively, reaching the milestone this year; a feat only it has achieved. Not to forget that Tesla only launched its first electric car, the Roadstar, in 2008 (12 years ago).

Tesla has achieved so much in quite a short amount of time, considering the average age of major carmakers.

What is Tesla’s blueprint, strategy & business model that has helped it climb so high so fast?

Tesla’s Business Model is fundamentally based on the selling of “smart” electric vehicles directly to customer (by-passing the conventional car-dealership) and offering subscription services on its cars in order to drive in recurring revenue, while also pushing other products like its solar roof tiles and batteries, and offering free services like the Tesla Superchargers in a conscious attempt to build a Tesla ecosystem.

Born digital, Tesla has put technology first above all, developing/advancing its electric car technology and design year after year; making itself more and more compelling as a result it has being able to build a loyal following of millions (the Tesla cult) that has help promote the company through word-of-mouth advertising aggressively.

As big as Tesla has grown, it might sound a little exaggerating to say that one man’s personality, its CEO’s (Elon Musk), thoroughly dominates the company. But that’s where Telsa is at the moment; where and how Elon trends, Tesla trends vis-a-vis.

Therefore, it’s almost impossible to appraise Tesla’s success and business strategy without putting Elon Musk in the spotlight.

Think Big, Think Apple under Steve Jobs. Apple seemed to have an unbeatable business model, so dominant that it’s the envy of its peers.

Everything seemed to work in perfection for Apple under Steve Jobs, especially in his second spell. And now, without ‘the man’, Apple has struggled greatly to create that unbeatable business model and its gradually losing its irresistible attraction.

So, when you ‘Think Tesla’, ‘Think Elon Musk’.

Tesla’s Business Strategy

Tesla’s business strategy is multi-dimensional, spitting on one-dimensional business models, it focuses on controlling the whole process and offering the complete bundle (the car, insurance, servicing, upgrades and charging).

It is the business strategy that sets it apart from its peers. On the surface, it looks like just another car company producing and selling cars, however, below the surface is where the magic happens.

Let’s dive below the surface:

The Tesla Ecosystem

The Tesla Ecosystem is a key part of their business strategy. Tesla offers different products and services for its electric vehicles, ensuring they offer the whole menu.

And their range of products and services are not just limited to their primary business (electric vehicles) but also covers other area of the clean energy sector with products like solar roof tiles and panels, and batteries.

Tesla specifically mentioned that they aim “to create an entire sustainable energy ecosystem”. A broader look at Tesla’s potential play field shows that they may not only want to dominate the auto industry but also the entire clean energy sector, especially through its battery tech.

However, the road to dominating the clean energy sector is still far ahead and currently relies on Tesla’s ability to succeed in the auto industry.

Here are a list of major products in Tesla’s ecosystem:

Tesla Product Ecosystem

Electric Vehicles

At the moment and for the foreseeable future, the production and sale of electric vehicles is and will be Tesla’s major product offering and majority of its services will revolve around this single product category.

There are currently four Tesla electric vehicle models in the market, namely; the Tesla Model S, Model 3, Model X and the recent launched Model Y.

Collectively the four models are dubbed “SEXY” as in Model S, 3, X, and Y. There’s a conscious marketing effort in choosing the models’ name, in order to make them easily remembered.
Class!

Indeed the models from a design and performance point are worth calling SEXY, especially their designs.

Strategically, the models are targeted at a well-defined market category, the Model Y is an electric SUV, the Model S and X are luxurious electric Sedans, and the Model 3 was built for mass production. As a result almost half of Tesla’s car sold till date are Model 3s; over 500,000 Model 3s have been delivered so far.

Solar Panels and Roof Tiles

In 2016, Tesla acquired SolarCity Corporation, a company that specializes in solar energy services, and effectively, Tesla offers all products offered by SolarCity, which is now a Tesla subsidiary.

Notably, SolarCity offers solar panels meant to be placed on existing conventional roofs and solar roof tiles meant to be used to build new roofs.

As much as Tesla would like to front itself as a clean energy company that has its hands on a wide range of products including solar panels and roof tiles, perhaps in an attempt to entice investors, it’s evident that its solar panel and roof tile business is not an integral part of Tesla. It is rather a cash-burning venture.

The business has been declining since Tesla acquired it. For context, in the second quarter of 2015, SolarCity installed 253 megawatts of solar system rentals, however, in the second quarter of 2019, it only installed 29 megawatts.

Note, that SolarCity was founded by Elon Musk’s cousins, Peter and Lyndon Rive and at the time before Tesla’s acquisition, the company was bleeding badly, suffering from cash-flow issues.

And prior to the acquisition in March 2016, SpaceX (another company owned by Elon Musk) had bought over $90 million worth of SolarCity’s stock, before Tesla finally acquired it for $2.6 billion in June 2016 (three months later).

There has been allegations that Tesla’s acquisition of SolarCity was a bailout for Elon Musk’s cousins and that Tesla overpaid for the company. Elon Musk’s case hasn’t been helped by the fact that total solar installations have been declining since the acquisition.

SolarCity is a major source of cash-flow deficit for Tesla at the moment and it is seemingly not in Tesla’s grand business strategy for the foreseeable future. Tesla’s solar panel and roof tiles are the only black moor currently in its product ecosystem.

Batteries

Batteries are integral part of Tesla’s business, whether they’re batteries for its electric vehicles, industrial supply or home supply.

Tesla entered the battery technology business heavily in 2015 when it unveiled the Tesla Powerwall (for home usage) and the Tesla Powerpack (for industrial usage) batteries.

It has partnership agreement with Panasonic (a battery giant) and has made series of acquisitions to strengthen its battery technology, bring more efficiency and capabilities to its batteries.

Notably, it acquired Maxwell Technologies in May 2019, a manufacturer of energy storage and power delivery solutions for automobiles.

And in July 2019, Tesla unveiled the Tesla Megapack battery, it is a battery product specifically for utility scale projects. It also acquired Hiber System, a small cell battery tech company, in October 2019.

Batteries are major components of EVs and solar energy derivation. The idea of electric vehicles has been around for decades and its major limitation then and even now has been battery tech.

For Tesla, developing its battery technology is not just important to help push its battery supply business, it’s also important for everything it stands for; almost everything clean (solar) energy.

Whether it be its electric vehicles, battery products, solar panels or roof tiles; they all depend on battery technology to performance at a consumer acceptable level.

Tesla’s battery technology is the oxygen they breathe, controlling its development and production ensures it will have sufficient oxygen to breathe dominantly at least for the next decade.

Tesla Service Ecosystem

For most automakers their offering ends the moment their vehicle arrives at a car dealership but not a Tesla, as a matter of fact, they don’t even need a dealership to sell their vehicles.

Like I noted early on, Tesla are in it to control the whole process, from production to post-purchase services.

When you buy a Tesla your journey with Tesla just got started. And it isn’t just the journey you take with your Tesla car on the road, it’s also a journey you take with the company, as they aim to cover consumers’ post-purchase needs, this includes repairs, upgrades, and insurance.

Tesla Autopilot

Tesla Autopilot is an advanced semi-autonomous driving system that is featured in Tesla’s electric vehicles.

This driver-assistance system comes with exciting features such as self-parking, automatic lane changes, lane centering, semi-autonomous navigation and the smart summon (the ability to summon the car from a garage or parking spot).

It is a technology that makes Tesla’s electric vehicles stand out; a technology Tesla is building for the present and the future.

Through over-the-air updates, Tesla keeps on adding more Autopilot features to existing vehicles running on the road and new vehicles, as it works towards developing the technology into a full self-driving tech.

Current Autopilot system enables Tesla vehicles to steer, accelerate and brake automatically while remaining within its lane.

However, since the technology has not reached full self-driving, active driver supervision is required while Autopilot autonomously navigate a Tesla.

Repairs

Telsa offers remote diagnostics, claiming to be capable of diagnosing an issue and what is needed to repair 90% of the time through remote diagnoses.

They don’t just diagnose an issue and tell customers with faulty cars what is need to repair and hang them out to dry. Tesla offers mobile services at no charge to customers based on availability.

This means after diagnosing an issue, their mobile service technicians can drive down to where you are and fix the issue, that is if the issue can’t be fixed over-the-air.

However, when their mobile service technicians are not available, Tesla owners can visit a nearby Tesla Service Center and get their car fixed.

Upgrades

Buy a Tesla and it keeps getting better as it ages, it’s like a fine win that gets better with age. This is because Tesla provides periodical over-the-air vehicle improvements through software updates.

What other car in the world will you buy and after months of usage, you wake up one morning to discover that your car just got smarter?

Well, it’s a Tesla and a Tesla.

Insurance

Building on its goal to offer the full menu, in 2019, the company launched the Tesla Insurance. The Insurance program as Tesla claims will “provide Tesla owners with up to 20% lower rates, and in some cases as much as 30%”.

However, for the time being, the Insurance program is only offered to customers in California, it’s expected to expand to additional US States in the future.

Marketing Strategy

Tesla’s marketing strategy is like no other. Imagine an over $250 billion company that spends $0 on advertisements.

Yada! Tesla spends nothing on ads and yet it is able to reach out to prospective electric car buyers and turn them into not just customers but loyal followers.

Here’s how Tesla is able to effectively market its products without spending a cent on advertisements:

Word-of-Mouth Advertising


Create a great product, then create an avenue to showcase how great your product is and allow people tell ‘other people’ how great your product is and if the ‘other people’ fall in love with the product, they will go on to tell other people and the chain continues: that’s essentially Tesla’s key marketing strategy.

However, to start this chain of word-of-mouth advertising, Tesla first showcases its products to the first set of enthusiasts. Right?

Unveiling Events

Tesla usually holds unveiling events anytime it’s introducing a major new product. The events are usually attended in person.

The company sends out official invitations for the events, then bookings are being made by interested parties, after which Tesla sends a confirmation email to fortunate people on the waitlist that have been allocated an available space.

It’s in these events, in the presence of attendees who are mostly Tesla fans, that it introduces new products. Mainstream media who are normally present for these events, gives Tesla’s product free publicity along with Tesla fans and haters, some of which have huge social media following.

Why spend millions on advertising when you can achieve better results for free? That’s the Tesla way.

Elon Musk Media Marketing

The CEO of Tesla, Elon Musk, has millions of social media followings, on Twitter alone, he has over 33 million followers. With such a huge following, every Elon Musk’s tweet is guaranteed to reach a lot of followers sparking a chain of retweets.

Musk strategically use his tweets to create awareness on Tesla’s moves, promotes its products and spark discussions about Tesla, ensuring Tesla stay in the media (social and mainstream).

A friend of controversies, Musk does not shy away from controversies. He draws the attention of Tesla lovers and haters, always looking to put the company in the spotlight.

Aside his social media marketing strategies, musk often deploy an indirect emailing strategy to further advance Tesla’s positions in the media. Sometimes he sends emails to Tesla’s employees, knowing that these will eventually be leaked; consciously trying to draw attention to Tesla.

He often send this emails to give shareholders a sense of what’s going on, on the inside. Moves like this has not only help Tesla stay in the news and get free publicity, it often also help boost its stock price as excited investors buy more Tesla stocks if the email suggests something positive is going on, on the inside.

For reference, around 11am on the 1st of July 2020, a day before Tesla was expected to deliver its second quarter report. Elon Musk sent an email to his employees, part of which he states:

“Just amazing how well you executed, especially in such difficult times. I’m so proud to work with you”.

Note, that for the previous three quarters Tesla had posted a profit and if it reported a profit in that quarter, it will be eligible to be included in the S&P 500. And that will be good news for Tesla and its shareholders.

Moreover, Wall Street expected Tesla to deliver 72,000 vehicles for that period and Elon Musk being aware of all this fact, sent that email to his employees.

Sending that email gave shareholders a clue on what to expect in Tesla’s quarterly report the next day and judging from the email, shareholders were expecting a positive report.

There was a lot of excitement around Tesla’s stock the day before the quarterly report as a result of the leaked emails. This excitement made a lot of people to buy more Tesla stock, increasing demand on the stock and driving its stock price up.

The following day, Tesla’s report beat Wall Street’s expectations and another round of excitement, increased demand for Tesla’s stock, consequentially driving Tesla’s stock price further up.

By sending that email, Elon Musk was able to leverage the report of a good quarter, twice.

Musk is a key personality in Tesla’s marketing strategies and overall success. Where he trends, Tesla trends. Hence, it’s in line to say that Musk’s personality is an integral part of Tesla marketing strategy.

Regulatory Credits

Tesla receives regulatory credits from environmental emission programs that gives out credits to automakers that produce and sell electric vehicles.

The revenue generated from these regulatory credits has helped Tesla report profits for four consecutive quarters.

According to Tesla’s Q2 Report (its latest quarterly report), it received $111 million, $134 million, $133 million, $354 million and $428 million in Q2-2019, Q3-2019, Q4-2019, Q1-2020, and Q2-2020 respectively.

In Q2-2020, Tesla reported a net income of $104 million. Evidently, without the regulatory credits, Tesla’s net income would have seen it report a loss of $324 million.

Looking way back, without the regulatory credits, Tesla wouldn’t have reported profit in the last three consecutive quarters. Entailing that it will still not be eligible for inclusion in the S&P 500.

Regulatory credits for the foreseeable future will play key roles in Tesla’s Revenue generation. And Tesla has a business model that makes it eligible for these credits deservedly while it lasts.

Wrapping Up

Tesla is indeed creating the most compelling car company of the 21st Century. Not to exaggerate, I honestly think it has already created the most compelling car company of this century thus far. There’s no other car maker that is nearly as compelling as Tesla.

The company has an efficient business model that in time will see it become ultra-profitable without regulatory credits.

From zero dollars spending on advertisements to developing advanced technologies that disrupts markets, Tesla’s business model is currently winning and is likely to continue winning for the foreseeable future.

Its development of self-driving technology in-house that can potentially reach level 5 self-driving capabilities in the next five years, will see it become a major player in the next big thing of the auto industry.

So, while Tesla cements its position in the big thing of today’s auto industry (electric vehicles), it is not forgetting to secure a prominent position in the future of the industry.

Tesla! What a darling of a car company.

Leave a Comment