Tesla Business Strategy Analysis

To understand Tesla’s business model it’s critical to look at a few key ingredients.

To appreciate those elements listen to the full history of Tesla in our podcast.

In-house manufacturing

Founded in 2003, by Eberhard and Tarpenning, eventually, the initial co-founders left the company, and by 2004, Musk first became the main investor, and thereafter, by 2008, he took over as CEO of the company. Tesla would go through many near-death experiences, until 2018. And yet, by 2021, Tesla became a trillion-dollar company.

When Tesla started to execute its business model, back in the early 2000s, it thought it could mostly outsource parts of the car, and create an electric vehicle, out of those.

Yet, they soon realized this assumption was completely off.

Not only they didn’t manage to secure proper parts for the vehicles, but none wanted to risk having electric vehicles that could have caught fire.

Instead, if Tesla wanted to make its business plan viable it had to build its own manufacturing centers. It took years for the company to do that, and it’s starting to pay off today.

Now Tesla has various manufacturing facilities, called Gigafactories.

Over the years Tesla managed to open various Gigafactories: in Texas, Shangai, and Berlin.

The Gigafactory is a key ingredient to enable Tesla to mass scale the supply side. Meaning that the company will be able to manufacture potentially millions of cars, to distribute across the world.

Energy storage and generation

Another key element to making the Tesla business model scalable is the ability of drivers to find electric stations around the country and to quickly charge their cars.

That is why, over the years, Tesla has been ramping up its electric generation and storage arm.

The energy part is critical because it will enable Tesla to build the underlying infrastructure to power up its whole business model.

Just like AWS has been developed, initially, by Amazon to power up its infrastructure. Over time, AWS grew into an enterprise platform, powering up a good chunk of the web.

And for the same token, when the Tesla energy storage and distribution infrastructure grows to the point of enabling third-party to get energy, this part will become a key ingredient of Tesla’s business model success.

Direct distribution

Tesla is vertically integrated. Therefore, the company runs and operates the Tesla’s plants where cars are manufactured and the Gigafactory which produces the battery packs and stationary storage systems for its electric vehicles, which are sold via direct channels like the Tesla online store and the Tesla physical stores.

Another key element of the Tesla business model which the company started to build early on, is the direct distribution or the ability to sell Tesla vehicles either through its online stores or via its Tesla stores.

Tesla started to open its direct stores, very soon, as the company borrowed Apple’s direct sales playbook.

This wasn’t easy to set up, and actually pretty controversial for the auto industry, as most car sales went through dealerships, yet Tesla set to do just that.

And financing models

A real-time insurance business model enables Tesla to build its own insurance arm, by dynamically adjusting the premiums, based on real-time driving behavior. Reduced insurance premiums hooked with the leasing arm, enable Tesla to scale its demand side of the business.

As explained in real-time insurance, a combination of lower insurance premiums, and better leasing rates has the potential to ramp up Tesla’s demand side, making it possible for many millions of Americans to own a Tesla.

This is critical, because Tesla, on the one hand, can use its cars to gather the driving data.

This will enable the company to build its own database of drivers, which can be dynamically scored, to assess their insurance premiums.

If drivers, can adjust their driving behaviors, by improving their scores, they cal also see their insurance premiums reduced.

In addition, this might also make the whole lease, less expansive, thus enabling more people to afford to buy a Tesla.

And by enabling Tesla to build another valuable business unit, which can be used to further scale its operations, in the long run!

Key takeaways

In 2021, Tesla generated over $53.8 billion in revenues, compared to the $31.5 billion in 2020. The largest segment in the automotive sales (comprising regulatory credits revenues), followed by leasing (as part of the automotive), generated $1.6 billion in 2021. Outside the automotive sales, services (non-warranty after-sales vehicle services, sales of used vehicles, retail merchandise, and more) accounted for $3.8 billion. And energy generation and storage accounted for $2.8 billion. US and China are the primary markets, with almost $24 billion and nearly $14 billion respectively, in 2021. In 2021, Tesla generated $5.6 billion in Net Income, a net margin of over 10%.
  • Manufacturing, together with energy storage and generation, and direct distribution are some of the key ingredients of Tesla’s business model.
  • Tesla produces its cars, in-house, controlling the supply side of the business.
  • Tesla also produces the parts for energy storage, and generation, which is part of the energy infrastructure, critical to power up Tesla vehicles, and makes the whole network of electric cars more valuable. While, on the other hand, also working as an infrastructure for third-party electric players, in the future.
  • Tesla also directly distributes its cars, through its e-commerce or physical stores, thus cutting middlemen and dealerships.
  • Lastly, Tesla leverages real-time driving data from its customers, to build a database, and dynamically adjust insurance premiums, which also makes Tesla more affordable. Thus, giving the chance to more people to buy a Tesla in the future. If the manufacturing helps Tesla push its supply-side to mass scale, real-time insurance rates combined with in-house leases, enable the company to scale the demand-side of the business!

Read Next: Business Model, Tesla Business Model, Tesla Mission Statement.

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