As of 2009, vehicle companies worldwide have been hit hard by the global economic slowdown with many firms experiencing double-digit percentage sales declines. U.S. car companies have received extraordinary government assistance, including bail-outs and bankruptcy protection. Major manufacturers, including the Big Three and Toyota, have implemented creative marketing strategies to entice reluctant consumers to purchase new vehicles, or at least trade-in their “clunkers for cash.” This is the classic “red ocean” battle for a shrinking pool of profits in a zero-growth market space.
But one U.S. car company is navigating into “blue ocean” waters through low-cost innovation designed to satisfy unmet consumer needs. Unlike other U.S. car companies, this company experienced double-digit growth and profitability. This company is called Tesla Motors Inc.
In traditional “red ocean” market space, vehicles are targeted at different buyer groups, such as subcompact, compact, midsize, sport utility, premium/luxury, hybrid and sports/performance drivers. In comparing traditional “green” car drivers with sports/performance drivers, few product attributes overlap in these two distinct market segments. These two groups have traditionally been mutually exclusive: the characteristics of a green vehicle (high gas mileage, high reliability, low horsepower) are generally not shared with a premium sports car (low gas mileage, lower reliability, high horsepower).
But Tesla Motors has changed all of that. Tesla Motors is the first automobile company to combine the attributes of the green vehicle with those of the premium sports vehicle; i.e., a fast vehicle with plenty of torque with zero emissions. The Tesla Roadster, the company’s first vehicle, is the first production automobile to use lithium-ion battery cells and the first production EV to travel more than 200 miles per charge. The Tesla Roadster has performance characteristics competitive with high-end sports cars, including 0-60 acceleration in 3.9 seconds and a top speed of over 120 mph. Competitors EVs to date have rarely gone faster than 25 miles per hour and are a far cry having sports car characteristics.
Tesla Roadster
Tesla’s unique driver benefits include:
– 244 miles per charge
– Never need to visit a gas station
– No oil changes
– No exhaust system work
– No sales, luxury or use taxes
– Commuter lane privileges
– Free parking
– Free battery charging
In blue ocean terminology, Tesla Motors races past the competition with a superior hyper-dimensionalized feature set, creating a new “green performance vehicle” market space. Here is a sports car with high mileage capabilities (>220 miles per charge), high acceleration, high torque, high safety, excellent manuerverability, low emissions and low maintenance. High cost components associated with a gas-engines and emissions systems are completely eliminated from the vehicle and pave the way for future vehicle cost reductions after economies of scale are reached.
The Tesla Roadster has a base price of US$109,000, prompting criticism in the media that the company is catering exclusively to affluent consumers But Tesla purposely aimed its first production vehicle at “early adopters” so that the company could optimize the technology before cascading it down to mainstream consumers. The company’s second car, the Model S sedan, is anticipated to begin production in late 2011 with a base price of around $45,000 after the U.S. tax credit. This approach is common in the technology industry, where prices for cellular phones, laptop computers and flat-screen televisions drop dramatically every product cycle. However, this approach has been rare in the auto industry, where the prevailing business model has been one of mass production in assembly plants optimized to build hundreds of thousands of vehicles per year with comparatively low sticker prices.
In June, Tesla Motors was award $465 million loan from the U.S. Energy Department to manufacture EVs as part of the $789 billion economic stimulus package the federal government passed in January. The loan will be used to build a factory to product Tesla’s next generation vehicles. In July, Tesla Motors announced Roadster financing programs available through Bank of America, which will make the vehicles more affordable for “average” consumers and vastly advance EV adoption. So if you hadn’t heard of Tesla Motors before reading this blog, you will undoubtedly hear a lot more about them in the coming months and years as they continue to build out their new blue ocean market space. Value Innovation, coupled with substantial commercial and consumer financial backing, are the key elements of a winning blue ocean strategy.
Carrie Halle's Blue Ocean Blog 
Wow Tesla’s getting a lot of press and attention! I agree with Paul’s perspective however I believe the short answer is ‘yes’ rapidly followed by a ‘but . . .’ Looking at basic business principles, Tesla Motors does not have a ‘walk in the park’ ahead of it. The points of the premise are all sound as stated in the question. However they’ve just delivered their 500th vehicle recently. Even if we multiply an educated guess of gross margin x 500, that’s not a lot of investment capital for a manufacturing entity that would feed the world’s appetite for EVs. While the Model S is clearly intended to be more mainstream, Tesla is still a ’boutique manufacturer’ (not being critical here) with a limited capital pool relative to market potential. What is also interesting to note is the agreement Tesla entered into with Daimler and the open statement of seeking to work with other OEMs. Tesla has technology, but limited manufacturing capacity. The ‘Big 6’ (Honda, Fiat, Ford, PSA, Toyota, VW) have more than adequate capacity resource. Barring some type of technology licensing agreement between Tesla and one of the ‘Big 6’ or other OEM, Tesla is unlikely to have the capacity to fill the void. And again, within the realm of being pragmatic, if Tesla were able to suddenly ramp up to a production level of 50% of Daimler’s capacity, what would happen in the industry generally. The ‘Big 6’, if they survive, will in principle be lean and mean enough to tenaciously defend their market shares.
The realities of being a truly mass-production capable OEM company are profoundly challenging. Perhaps the most recent real efforts are Saturn and Smart. Granted I wouldn’t say that either had a true USP like Tesla has at the moment, but never-the-less both these examples serve well to highlight the real challenges ahead of Tesla should the aspiration be to ‘beat out’ the top OEMs.
If we were to look at a supplier strategy (e.g. there are quite a few common suppliers amongst all the OEMs. This is where the real economies of scale are.), then perhaps Tesla Technology evolves into a sort of Siemens Automotive?
No, they won’t. Tesla is boutique business – low volume and very high margins. It’s very hard to break out of that business. Scaling down into the incumbents’ high margin business is very difficult, and likewise convincing investors to address lower margin markets is very difficult.
Market disruption comes from below. New entrants eat away at the incumbents’ low margin business because they have better means of addressing that business and because the incumbents don’t spend much to defend their low margin markets. This is how the Japanese auto manufacturers came into the US, it’s how the Korean auto manufacturers followed them, and I’d say that Tata and new Chinese auto manufacturers will most likely follow that path as well.
Technology helps new entrants meet their cost goals at the low end of the market and may provide feature differentiation to prospective customers, but success fundamentally depends on all of the rest of the attributes of a solid business model. Better technology doesn’t assure a win, and it doesn’t assure that you’ve addressed all of your target markets’ feature requirements.
As a sports car enthusiast, this car would not be something I would consider. A big part of the thrill with a sports car is the sound it makes with its exhaust, engine and running through the gears. Tesla definately has an excellent marketing as most people think of this car when discussing electric powered vehicles. Even when you have some alternatives like the Fisker Karma or for something radical, the SSC Ultimate Aero EV.
Tesla is a niche product that has been getting a great deal of press because it combines great performance with the perceived benefits of an electric car. It cannot, however, challenge Toyota for sales, quality of product, or even technical innovation.
A couple general comments regarding electric only vehicles are in order. First, they are not zero emissions. The emissions are simply shifted to electric generation plants (often coal in the US). Second, with the US power grid already tapped-out and difficulty in bringing new electric generation plants online due to government regulations and opposition from environmental groups, any significant market penetration by electric only vehicles would put a huge strain on an already fragile system.
The Roadster is has the performance of a car twice the price. I think it is an awesome machine. I don’t care about the roar of an engine, with the Roadster it’s an instant response to your foot. And you can charge your car with solar panels!
high-price too…out of reach for the average folks…at least for the forseeable future…
Actually Joseph, the Tesla Roadster IS a zero-emissions vehicle. No tailpipe, no emissions. You are correct in that there are still emissions created when the electricity for the car is generated, but this is several times more efficient and a better use of resources than any gas powered car or hybrid. Also, it is much easier to control and monitor pollution from a single large source rather than thousands of small, mobile sources. On top of that, clean sources of electric power (solar, hydroelectric, wind and others) are becoming more and more prevalent. With an electric car, as your power source gets cleaner, so does your car. Try THAT with a gas powered car. 🙂 As far as electric cars stressing the electric production grid, this is yet another popular misconception. Large numbers of electrics will come into the market over a period of several years, so utilities have quite a bit of time to prepare. More importantly though, is the fact that the vast majority of electric car owners will recharge their cars at night, when most of the capacity on the grid goes unused. Studies by PG&E in Northern California show that the existing grid can support several hundred thousand electric cars charging at night without any significant upgrades. Don’t get caught up in all the negative thinking and “well, we’ve always done things a certain way, and any change from that is bad” mindset. Electric cars might not be the perfect solution for every transportation need, but for the average consumer doing the average daily commute (about 75% of all the driving done in the U.S. every day) an electric with a range of 100 to 200 miles is a great solution.
have more faith in the Chinese electric. Their company seems to have more money behind it.
Apple meet orange.
Being able to turn a healthy profit at $110,000 a unit is not an indicator that they can turn any profit at $20,000 a unit.
Exactly. That is why I think the prize will to go the Chinese company. They make money at less than $20K per unit, or so I am told.
Additionally, see commentary below I had regarding EMs (Electric Motorcycles), and in particular my comments on the Scooter Market.
‘. . . Another consideration to your question is basic economics. To Mike’s point, look at the arrival / resurgence of scooters in the States when fuel prices were at their peak (was a key PR line for scooter OEMs). Changed the structure of the US market, albeit likely to be brief. And this had nothing to do with being driven by regulation, but by commodity pricing. Again, looking at fuel prices in Europe (3 times that of the U.S.!), there are lots and lots of scooters out there bought and ridden due to their significant fuel efficiency.’
Recent MIC figures show the scooter sector at a greater rate of sales decline than other sectors of the PTW (powered two-wheel) market. So when I mentioned likely to be brief . . .
Sorry.
The Tesla, hybrids and electric cars needing batteries will go the way of the Stanley Steamer (the car not the carpet cleaning company named after the car).
Electricity in the US is generated mostly by coal — creating carbon emissions that are greater than internal combustion engine cars.
The Tesla takes SIXTEEN hours to charge…and televised tests show it does not get the claimed range between charges.
Also — the batteries are toxic, can not be recycled, are a hazardous material situation in a major collision…They are also extremely expensive and need to be replaced every 24-36 months regardless of how many miles you drive. How many people would be driving cars today if they had to replace the engine and transmission every couple years?
Hydrogen powered cars are the wave of the future and Honda has nailed it with the Clarity: An electric car with no batteries that runs on hydrogen and has a range of 270 miles.
@Mike Lacy;
I’m sorry sir, but your ‘facts’ are largely incorrect. According to US Gov’t info, about 50% of the electricity in the US is generated by coal. The percentage of energy generated by clean / renewable sources (wind, hydroelectric, solar, etc.) gets larger every year. However, even if the electricity comes from a coal powered plant, it is several times more efficient and cleaner to use that electricity in an electric vehicle (as opposed to the resources used and the pollution generated to refine, transport and use gasoline). Look up the “Well to Wheel” efficiency studies at the Tesla website. With an electric car, as your energy source becomes cleaner, so does your car. So your assertion that electrics “create carbon emmisions that are greater than internal combustion engine cars” is false. I can back this up with links to studies proving this.
Secondly, the Tesla can charge in 3.5 hours from a 220VAC/70A outlet. This is capability that can be wired into almost any home in the country in a few hours by a qualified electrician. The charge time with ‘standard’ 220VAC/40A power (like your washer and drier use) is only slightly longer. You are quoting the WORST possible charge time scenario (a FULL charge from a 110VAC/15A outlet), just like the idiots at Top Gear did (they and the BBC had to later issue a retraction). In most cases, the battery will not be completely discharged, so average daily charging times will actually be much lower. The mileage rating on the Tesla is based on an EPA cycle. As with gas powered cars, this number is meant for comparison between similar types of cars (how many people do you know who actually get the listed EPA mileage in their gas powered cars? Not many, I would bet). Still, the range of the Tesla is reported by customers to be in the 150 to 200 mile range in real world conditions. In fact, a Tesla Roadster set a new world distance record at a rally in Monte Carlo of 241 miles, with charge to spare still left.
Thirdly, where are you getting your information on the batteries? Do a little research before you post. The contents of lithium ion batteries are NOT classified as toxic and contain no heavy metals. I’m not saying they’re harmless, but the batteries CAN BE RECYCLED and in fact, the cost of recycling is already built in to the cost of the Tesla battery pack. The battery pack in the Tesla Roadster is guaranteed to last AT LEAST 3 years, and should go much longer than that. The end of the warranty period doesn’t mean that the part needs to be replaced, and extended warranties are available. Granted, the batteries will EVENTUALLY need to be serviced, but in the meantime, the Tesla Roadster DOESN’T require oil changes, belt changes, tune ups, filter changes, or the other maintenance required for a gas car. Also, battery technology is getting better and more reliable all the time.
And finally, Hydrogen is one of those things that sounds good until you really look into the details. Hydrogen is difficult to refine and transport. The main drawback however, is the amount of energy required to produce usable hydrogen. Although it is the most abundant element, it likes to combine with other elements and is only rarely found by itself. For example, to “liberate” hydrogen from water (the most common refining method), actually requires MORE energy than you get from burning the hydrogen! Why not just use that energy in a FAR more efficent manner and use an electric car? The big oil companies like hydrogen because they can will change over to selling you that instead of gas. You will also end up paying for creating the infrastructure required to refine, transport, store and pump hydrogen (whereas a distribution network for electricity already exists and is highly efficient). The big car companies like hydrogen because it gets you back to a more complicated system (fuel cells, or even internal combustion motors, etc.) that will require more parts and service. I’m not trying to sound like a conspiracy nut, but hydrogen is FAR from an ideal solution to our transportation problems, and companies like Chevron and Honda don’t seem to want to talk about the realities of using hydrogen for large scale use.
Sorry, but you’re really really wrong on a lot of points here. Do a little research and I think you’ll find that electrics are a great solution, especially for the vast majority of commuting that is done in this country every day.