University of Western Australia Tesla Inc Strategic Management Essay Read the case study that I uploaded below and answer the following questions. 5-7 page

University of Western Australia Tesla Inc Strategic Management Essay Read the case study that I uploaded below and answer the following questions. 5-7 pages

Tesla Inc. The Strategic Partnership for a New Gigafactory in China Case Questions:

Q1: Should Tesla have taken a partner for its new Shanghai facility? If so, should it have been a battery supplier? If so, which battery suppliers could be potential partners?

Q2: What was the overall competitive situation of Tesla and its partnership with Panasonic? Analyze the mission and the vision, as well as the external and internal environments, using various analytic tools.

Q3: How did Tesla overcome entry barriers in the established automotive industry and rise to become one of the top selling EV manufacturers?

Q4: How should Tesla and Panasonic strategically manage their partnerships to optimize its mutual benefits?

Q5: What were the challenges for Tesla investing in China, the world`s largest automotive market?

Don`t forget to add recent updates about the company when preparing your cases! W19405
TESLA, INC.: THE STRATEGIC PARTNERSHIP FOR A NEW
GIGAFACTORY IN CHINA1
Wiboon Kittilaksanawong and Viktor Johann Winkler wrote this case solely to provide material for class discussion. The authors do
not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names
and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Our goal is to publish
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Copyright © 2019, Ivey Business School Foundation
Version: 2019-08-09
Tesla could in the future launch full-fledged production in China—and we could produce jointly. Though
Elon’s comments are unpredictable, we will continue to monitor Tesla’s operations to ensure no chaos
there and will work in step with the company.2
Kazuhiro Tsuga, president and chief executive officer (CEO) of Panasonic Corporation
In October 2018, Tesla, Inc. (Tesla), an American automotive and energy company, received an approval
from the Shanghai government to acquire a plot of land to build a new electric-vehicle (EV) factory. The
factory was planned to produce the first cars within three years, with an initial annual capacity of 250,000
vehicles.3 Discussions leading to the deal began in July 2018 in response to the rise of the Chinese EV
market and the additional tariffs imposed on imported vehicles by the Chinese government during the 2018
trade war with the United States.4 In 2013, Tesla partnered with Panasonic Corporation (Panasonic), the
consumer electronics company and world leader in battery technology, to build “Gigafactory 1” in Nevada,
United States, to manufacture batteries—the most critical component in electric vehicles 5 —and this
partnership resulted in significant mutual benefits.6
Panasonic hoped to launch full-fledged battery production in China in partnership with Tesla but first wanted
Tesla to give priority to building additional capacity at Gigafactory 1.7 Because there was no obligation for
either company to not collaborate with other companies,8 Tesla and Panasonic could each be worried that the
other would collaborate with a third company, which would threaten their respective markets and large
investments in Gigafactory 1. In fact, Tesla announced that it was considering partnership with several battery
cell suppliers for its first overseas factory in China, and Panasonic was also considering collaboration with
other battery suppliers and automakers to strengthen its competitive position in the country.9
Management at Tesla had many decisions to make and questions to answer for the near future: What should
be Tesla’s growth strategy in China, the world’s largest automotive market? Could Tesla establish a whollyowned subsidiary in China on its own? Should Tesla continue its partnership with Panasonic in China or
should it look for other Chinese or non-Chinese suppliers or partners? Could Tesla still be successful
globally if it were not successful in China?
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TESLA AND ITS DEVELOPMENT
History
Tesla was founded in 2003 by Martin Eberhard and Marc Tarpenning with the vision to produce fully
electric sports cars designed to offer performance, aesthetics, and sex appeal. Within a short history of 15
years, the company had mastered many challenges and experienced soaring growth. Although the
impressive growth had not resulted in significant profits, by 2018 Tesla had managed to become one of the
most valuable car companies in the world with a market capitalization of about US$59 billion 10 and
approximately 46,000 employees.11
Elon Musk joined the company in 2004 as chairman, and took a decisive role in the design and development
of the Tesla Roadster, a battery-powered sports car that was introduced to the public in July 2006. After
many production delays and financial troubles, the board of directors dismissed the two founders, and Musk
took over as CEO in October 2008. At that time, Tesla was producing less than 200 Roadsters, filling a
niche in an industry that produced several million vehicles per year.12 Tesla was facing serious liquidity
problems with cash reserves reaching a critical level during the financial crisis of 2008, but the company
eventually managed to secure financing to keep its business going.13
Beginning of the Turnaround
In 2010, several events turned out to be in favour of Tesla’s growth. First, Daimler AG (Daimler), a German
multinational automotive company, bought a 10-per-cent stake in Tesla for $50 million, while also
providing the company with engineering supports and parts for the its planned new Model S. Meanwhile,
Tesla continued to provide battery packs and battery integration and management services for Daimler’s
smart electric cars.14 Second, the U.S. federal government granted Tesla a loan of $465 million to produce
and market its Model S. Third, Toyota Motor Corporation (Toyota), due to the financial crisis, sold its
production facilities—with a capacity of 500,000 vehicles a year—to Tesla, which then shifted its
production sites from Lotus in England to Fremont in California.15 Fourth, Tesla announced its initial public
offering (IPO), while establishing an agreement with Toyota to jointly develop EVs. Toyota also purchased
$50 million worth of Tesla stocks at the IPO, even though Tesla had increasingly accumulated losses of
$154.3 million, compared to $55.7 million in 2009.16
Tesla’s success continued in 2012 with the delivery of the Model S; Tesla reported the first quarterly profit in
2013 of $11.2 million.17 Tesla then unveiled a prototype of the Model X, a sport-utility vehicle (SUV) built on
the platform of the Model S. The company also announced the Model 3—an affordable car to serve the mass
market. It also planned to introduce superchargers, which would allow a car to replenish 50 per cent of its
batteries in 30 minutes, along with the accompanying charging network to reduce the owner’s “range anxiety.”18
Tesla also ventured into the stationary energy field by introducing solar panels and home batteries (e.g., the
“Powerwall”).19 In 2017, the company introduced the Tesla Semi, an all-electric battery-powered truck.20
Batteries were the most critical component in all battery-powered vehicles. Since 2013, Tesla partnered with
Panasonic, the consumer electronics company and a world leader in battery technology, to build Tesla’s
Gigafactory 1 in Nevada, and then Gigafactory 2 in Buffalo, New York. In 2018, the company planned to
enter the world’s largest automotive market, in China, with a local production site. After building Gigafactory
2 in Buffalo, there was a chance that Tesla might partner with Panasonic again to build Gigafactory 3 in
Shanghai.21 However, Tesla was also considering other local and overseas potential partners.
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OVERVIEW OF THE ELECTRIC-VEHICLE MARKET
Significant Rise of the Global EV Market
The EV market had grown globally at a compound annual growth rate of 32.57 per cent and was on track
to grow from an estimated 1.50 million units in 2018 to an expected 10.79 million units in 2025.22 This
trend was in response to a massive decline of urban air quality, volatile global oil and fuel prices, and the
public’s attempts to de-carbonize transportation to reduce greenhouse gas emissions. Countries in Asia
Pacific, especially China, were the largest markets for EVs. The alarming levels of pollution in these
countries had prompted their governments to provide incentives to promote the sales of EVs.23 Globally,
governmental subsidies, grants, and tax rebates contributed to the EV market’s growth, as did improved
charging infrastructures, increased EV battery range, and reduced battery costs.24
In 2017, the total number of EVs in circulation worldwide exceeded 3 million, an increase of 50 per cent
from 2016, with the United States, Europe, and China consuming approximately 0.76, 0.82, and 1.23
million vehicles, respectively. The number of new vehicles sold around the world—both battery-powered
and plug-in hybrid types—was over 1 million. China had the largest number of sales at 579,000 vehicles,
while the second largest market—American customers—bought 198,350 vehicles (see Exhibit 1). The
market share of EVs in the highly competitive Chinese market was around 2.2 per cent, compared to 1.2
per cent of the U.S. market. Norway had the most impressive market share of 39 per cent, with sales of
62,260 vehicles. The sales figures in emerging economies like India and Brazil, where road and electrical
infrastructure still needed further improvement, were only 2,000 and 360 vehicles respectively.25
Importance of Lithium-Ion Batteries for the EV Industry
Batteries accounted for over one-third of the total vehicle price. Sourcing the right suppliers was therefore
crucial for vehicle manufacturers, and the market for lithium-ion batteries was expected to grow strongly to
$50 billion in 2020.26 In 2018, the major lithium-ion battery makers were Panasonic, Contemporary Amperex
Technology Co. Limited (CATL), BYD Auto Co., Ltd. (BYD), LG Chem Ltd. (LG Chem), and Samsung
Group (Samsung). These makers held over 60 per cent of the global market share (see Exhibit 5).27
Primarily located in Asia, these manufacturers created an oligopolistic industry structure with a relatively
high bargaining power toward vehicle manufacturers. To reduce its dependency on battery makers, in 2014
Tesla, in partnership with Panasonic, began the construction in Nevada of Gigafactory 1—the world’s
largest production plant for lithium-ion batteries. This factory, expected to be completed in 2020, would
eventually cost Tesla around $5 billion. Tesla estimated that this plant would reduce the battery price by
roughly 30 per cent by using economies of scale and having the production plant on its doorstep.28 Through
the $2.6-billion acquisition of SolarCity Corporation (SolarCity) in 2016, the companies built Gigafactory
2 in Buffalo to produce photovoltaic components.
TESLA’S BUSINESS MODEL
The Sustainable Solutions for the World’s Transport and Energy
Tesla’s business model was different from that of traditional car manufacturers (see Exhibit 2). The
company did not set goals of producing high-end EVs for the affluent to make money and move up in the
business rankings. Instead, its value proposition was to offer sustainable solutions for the world’s transport
and energy needs.29 The initial target customers were in the premium segment, and the company planned
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to make its cars more affordable in the future. In 2014, Tesla’s typical customers lived in California and
earned more than $100,000 a year.30 However, its Model S and Model 3, introduced respectively in 2012
and 2017, were designed to be affordable cars for the mass market.31 To keep this value proposition, Tesla
had established strategic partnerships in various sectors.
Growth through Strategic Partnerships
In 2010, Tesla acquired Daimler as a shareholder and strategic partner with whom it exchanged knowledge
in research and development (R&D), production processes, supply-chain management, and battery
technologies. Tesla also partnered with Toyota on the development and production of Toyota’s EVs, and
Toyota aimed to learn from Tesla’s decision-making and management style.32 Tesla established partnerships
with mobile communications operators, such as AT&T Inc. for installing wireless connections in its cars to
enable machine-to-machine communications for safety diagnostics, as well as for remote monitoring and
repair.33 Tesla collaborated with Nvidia Corporation early during the development of its Model S in 2012—
all Tesla’s vehicles, including the Model S, Model X, and Model 3 were equipped with Nvidia’s
supercomputer, which could provide full self-driving capability.34
In the energy sector, Tesla established strong partnerships with Panasonic and SolarCity. Panasonic became
Tesla’s shareholder in 2010 when it invested $30 million in the company.35 Tesla partnered with SolarCity,
an active enterprise in the solar energy field, to exploit its battery know-how to develop a complete off-thegrid kit for storing solar power.36 This backward integration would enable Tesla to become more than just
a car manufacturer. The close collaboration with SolarCity, and the eventual acquisition of the company in
2016, allowed Tesla to diversify into solar energy services. In 2015, Tesla announced the release of the
Powerwall—an energy storage unit targeting niche households that already had a solar panel—to store
surplus energy that could be used when a home’s solar panel was not producing enough energy.37 Financial
services and sales or leasing of the Powerwalls were also added to Tesla’s revenue model.38
Key Resources, Activities, and Revenue Sources
Some of Tesla’s strategic resources were its patents, which included expertise in software and battery
technology. The charging infrastructure for its vehicles, plus their energy management and storage, were
also counted among Tesla’s strategic assets.39 Located in Palo Alto, California, a part of the Silicon Valley,
Tesla could attract highly qualified employees, which were its key human resource. Musk was also regarded
as a key resource. By using Twitter for marketing activities, Musk had made Tesla’s overall business highly
dependent on him.40
The biggest change in Tesla’s key resources was the transfer of all of its patents to become open-source
platforms in 2014. Tesla believed that technology leadership was not defined by patents; rather, that they
were small protection against a determined competitor.41 Tesla applied the open-source philosophy to its
patents, arguing that it would strengthen, rather than diminish, its competitive position. It might be argued
that Tesla intended its patents to become industry standards for networks of charging infrastructures—to be
used by its customers and competitors. The wide adoption of such standards could help Tesla sell more of
its cars and other innovative products, and could become the foundation that would support its future
business models.42
Tesla’s three key activities and main revenue sources were R&D, sales and service activities of its cars and
energy storage products, and its charging infrastructure. 43
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GROWTH STRATEGY IN CHINA
Attempts to Enter the World’s Largest EV Market
Tesla began to enter the Chinese market in 2014 and 2015, but failed to gain traction. In 2016, however, its
sales in China exceeded $1 billion—three times more than 2015 sales. In 2017, the company failed to
maintain this growth rate, but still doubled its sales to surpass $2 billion.44 China was the largest automotive
market in the world and the fastest growing EV market as of 2016 (see Exhibit 3). The market potential
was attributed to the rise of a middle class—people who were willing and able to spend on innovative and
sustainable cars.45 Importantly, the Chinese government offered a substantial subsidy for electric cars that
was worth up to $15,000 per vehicle in 2016 (see Exhibit 4).46
To fully penetrate the Chinese market, Tesla decided to establish a manufacturing plant in Shanghai to sell
cars directly, without having to ship them from the United States. 47 Tesla could significantly leverage
China’s lower labour costs and proximity to rare minerals—especially lithium—that were required to build
the batteries. While markets for EV batteries were predominantly located in Europe, the United States, and
Japan, an increasing shift toward China was predicted for the near future. These location advantages would
lower Tesla’s production costs, allowing the company to sell its cars at a more competitive price in the
Chinese market. The China location would also lower the risks and expenses of shipping components by
air, especially flammable and heavy batteries from the United States.48
A more recent aspect, which influenced Tesla to make the relocation decision, was the ongoing trade war
between the United States and China. The Chinese market contributed 17 per cent to Tesla’s revenue in
2017. In response to the trade war, which had raised the tariff on imported American cars, Tesla had to raise
the prices of its cars in the Chinese market by an average of $20,000 to maintain its profit margin. An
additional tariff of 25 per cent on imported American products imposed by the Chinese government could
be bypassed if Tesla produced the cars in China.49
Construction of the Shanghai Gigafactory 3
In July 2018, Tesla announced a deal with Chinese authorities to build the battery manufacturing plant—
Gigafactory 3—in Shanghai to accelerate production and to avoid increasingly expensive import tariffs. The
government approved the acquisition of an 864,885-square metre plot in Shanghai’s Lingang area, where
several auto manufacturers with foreign ties had facilities. In March 2019, the Chinese authority also
approved that part of the production line would begin operation by the end of the year. Tesla was advancing
its plan to produce around 500,000 vehicles per year for Chinese customers by 2022–23, which would
double the size of global electric car manufacturing.50
In March 2019, Musk confirmed that Tesla would also produce battery cells in the Chinese factory, which
had not been included in his initial plans for China, thereby returning to the goal of producing everything
at the same place in a “one-stop shop.” Tesla manufactured its lithium-ion batteries in Nevada and its
vehicles in Fremont, California. According to Musk, “Things are moving fast. This will actually be, once
complete, the equivalent of our Fremont factory plus our Nevada battery Gigafactory combined. It’s
integrating the two, which kind of make sense.”51 The new factory was expected to cost around $5 billion.
Meanwhile, Tesla secured as much as $521 million in loans from Chinese banks, bringing the carmaker a
step closer to producing the Model 3 sedans at its first overseas plant.52
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STRATEGIC PARTNERSHIP WITH PANASONIC
Synergistic Benefits
Panasonic was engaged in the development of electronics technologies and solutions for the consumer
electronics, housing,…
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