Editor's Choice

Does Tesla Motors have a Competitive Advantage?

Simon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There is a case to be made that Tesla Motors (NASDAQ: TSLA) is one of the most entrepreneurial companies of our time. 

After all, the electric-car company has accomplished in a few years what has taken the traditional auto manufacturing industry decades.  Their launch in 2008 of the completely-electric Tesla Roadster sports car was a huge success.  The company completely sold out of production (even with a North American price tag of $109,000) and is now focused on developing vehicles more suited for the mainstream consumer market.

<img src="/media/images/user_13126/capture_large.JPG" />

The Tesla Roadster in action.  Photo credit: Tesla Gallery on www.teslamotors.com

But can Tesla's high-octane race continue?  It's clear that Tesla has appealed to the early-adopters, but do they have what it takes to endure the test of time in the brutally competitive auto industry?

To determine this, we can run Tesla through a thorough Competitive Analysis.  In this, we should analyze four distinct categories, with particular company-specific attributes to look for in each:

1) Intangibles - Brand recognition, Patents, Leadership and Vision, Culture

2) Stickiness - Recurring/Habit Forming, High Switching Costs, Distribution Network

3) Customer Experience - Network Effect, Word-of-Mouth Advertising, NPS Positive

4) Cost Advantage - Resource Location, Process/Scale

We can then give out points for advantages in any of the sub-components, for a total possible score of 12 points.  We can consider a company that scores at least 3 points to have a competitive advantage, and at least 5 points to have a strong competitive advantage.

Intangibles

It could be argued that Tesla is building a brand closely associated with quality, though it's unlikely that customers are buying the cars specifically because of the Tesla brand. 

Regarding patents, Tesla has designed some very innovative electric powertrain components that they are now developing and producing for Daimler and Toyota.  And these aren't exactly chump-change purchases.  Toyota (NYSE: TM) signed a deal for $100 million for drivetrains in its RAV-4 electric vehicle.  Daimler wants Tesla to create the entire electric powertrain for a new Mercedes-Benz, which could be worth more than $280 million.  Tesla might be the new kid on the block, but the established automakers are already asking them for help in producing electric vehicles.  I find that to be an incredible vote of confidence.  Tesla is taking the lead into electric vehicles, and the industry is following behind them.

For leadership, Tesla has one of the best entrepreneurs around.  Elon Musk is a visionary with a relentless work ethic, who strives continually to push the limit of what is possible.  He already has a successful track record as the co-founder of PayPal, which he sold to eBay for $1.5 billion in 2002.  Amazingly, he is now not only the CEO of Tesla, but also CEO of Space-X and the Chairman of Solar City.  Musk is a perfectionist about the tiniest of details, which is arguably an important quality for a luxury car manufacturing CEO.  He also has committed a significant portion of his own savings into Tesla stock, which indicates his confidence in the company's future success.  To learn more about what makes Elon Musk tick, I highly recommend reading this humorous and insightful interview he did with AutoblogGreen.  It's well worth the time.

The culture of Tesla is extremely driven (pun intended?).  Employees work 6 days a week and 10-12 hours per day.  Although those hours don't have me rushing to drop my resume, it's very clear that Tesla has a very dedicated employee workpool.  Their Chief Technical Officer and co-founder JB Straubel has an established history of designing energy systems.  Chief Financial Officer Deepak Ahuja has 15 years of experience in Manufacturing, Sales, and Financial with Ford (NYSE: F).  His most recent position was as the Controller of Small Cars Product Development, which was responsible for bringing fuel-efficient automobiles to the North American market.  Even with a strong pipeline of future Ford electric vehicles, Ahuja must have found something compelling enough about Tesla that pulled him from his larger corporate roots into a smaller startup.

Tesla scores 3 of 4 for Intangibles - one for Patents, one for Leadership, and one for Culture.

Stickiness

Customer stickiness is not the luxury automobile's strong suit.  Unless you really have too much money on your hands and make a habit of buying cars for the fun of it (ahem... Jay Leno), Tesla is not habit-forming and does not appeal to repeat buyers.  There are no switching costs, as purchasers could freely and easily buy a different car as their next vehicle.  And all of Tesla's cars are shipped directly from the factory floor, so there is no distribution network that could lock competitors out.

Tesla scores 0 of 3 for Customer Stickiness.

Customer Experience

One attribute that Tesla excels in is word-of-mouth advertising.  Tesla sold the Roadster to prominent individuals, who proudly displayed them in valet parking spots as a status symbol for the populous to gaze at in awe.  This is an extreme benefit to Tesla.  It allows them to promote their high-end brand for free.  In other words, they are able to raise awareness of the Tesla name without having to spend any money to do it.

Additionally, the customer reviews from the Roadster have been fantastic.  Blogger reviews have painted the Roadster to be a precision driving machine that sounds more like a roller coaster ride than a mundane commuter vehicle.  This further promotes Tesla's image of being a quality, fine-tuned vehicle.  The network effect does not really apply, as there is no benefit to exisiting Tesla owners of having more people purchase the vehicles (except for maybe having a racing buddy).

Tesla scores 2 of 3 for Customer Experience.

Cost Advantage

Lastly, Resource and Scale Advantages are actually some of Tesla's biggest weaknesses.  Musk has stated that the new Tesla cars are "98% new."  This means that he is not leveraging traditional parts, but is redesigning 98% of the car to have the latest-and-greatest components.  Although this might sound innovative and sexy, the downside is that he is constantly having to manage not only the supply chain of his own company, but that of his suppliers as well.  When parts don't perfectly match spec or perform as expected, they're going to run into roadblocks and fall behind multiple different schedules. 

This is exactly the opposite of what companies are trying to establish with economies of scale.  Because I consider this to be a significant disadvantage that the company will have to overcome, I am giving Tesla a negative one point for Process/Scale advantage.  This is an issue that could continually be a nightmare for them as they are trying to increase production and break into the mainstream market.  The upcoming Model S will be the key to Tesla's profitability.  They can't let supply chain issues be a roadblock for that.

Tesla scores (negative) 1 out of 2 for Resource/Cost Advantage.

The Results and a Few Risks

Pencils down!  Let's see how TSLA stacks up in their Competitive Advantage: 

<table> <tbody> <tr> <td>Category</td> <td>Points Awarded/Possible</td> </tr> <tr> <td>Intangibles</td> <td>3/3</td> </tr> <tr> <td>Stickiness</td> <td>0/4</td> </tr> <tr> <td>Experience</td> <td>2/3</td> </tr> <tr> <td>Cost</td> <td>(1)/2</td> </tr> <tr> <td>Total</td> <td>4/12</td> </tr> </tbody> </table>

Tallying up 4 points, there are clear signs of a Tesla Competitive Advantage.  The company is very dependent upon the health, leadership, and (at this stage) financial contribution of founder and CEO Elon Musk.  Any distraction of Musk into his other company ventures could be a red flag.

Tesla's success is also highly correlated to the macroeconomy.  If the banking issues of Europe boil over and send the world into another recession, it's unlikely that consumers will shell out $100-grand for luxury automobiles.  And the final risk is that battery technology is in a state of change.  Technical improvements are still occurring annually.  Tesla will have to stay ahead of the technology curve if it wants to maintain its best-in-class reputation. 

Long seen by many as a science project, electric vehicles are being pulled by Tesla into the mainstream automotive market.  Musk is a visionary leader who has inspired a dedicated following around him.  And the Roadster's sleekness has been well-received and is building future anticipation for the Model S and Model X.  Tesla is clearly in the driver's seat of revolutionizing electric vehicles.


TXinvestor82 has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford and Tesla Motors. Motley Fool newsletter services recommend eBay, Ford, General Motors Company, and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus