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Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
Apple tesla-pitch-book-v0 5
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Apple tesla-pitch-book-v0 5

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  • 1. The Tesla Acquisition Archit Lohokare (archit_lohokare@mba.berkeley.edu)Sam Kanakamedala (sam_kanakamedala@mba.berkeley.edu) Shone Tran (shone_tran@mba.berkeley.edu)
  • 2. TABLE OF CONTENTSExecutive Summary ........................................................................................................2 Market and Competitive Landscape ............................................................................2 Product and Technology Mix .......................................................................................3 Core Competencies .....................................................................................................3 Culture-Fit and Talent Acquisition................................................................................3Why Should Apple Enter the Automobile Market? ........................................................4 Strengths: Why is Apple the right company to redefine the in-car experience? ...........4 Product Development..............................................................................................4 Brand and Consumer Loyalty ...................................................................................4 Innovative Marketing...............................................................................................4 Leadership ...............................................................................................................5 Ecosystem ...............................................................................................................5 Weaknesses: What is preventing Apple from entering this market? ............................5 Partnership Development........................................................................................5 Expertise in the Automotive Market ........................................................................5 Opportunities: Why should Apple invest in this market? .............................................5 Are consumers asking for a change? ........................................................................6 Are the consumers willing to spend? .......................................................................7 What are the current solutions and what are consumers willing to adopt?..............8 Threats: Apple’s Competitors in the Car Market ..........................................................9Building Blocks: The Apple Ecosystem in the Car..........................................................11Why Tesla? ...................................................................................................................12 Culture Fit and DNA ...................................................................................................12 Growth Market..........................................................................................................12 Controlled Platform and Ecosystem...........................................................................13 Strategic Partnerships................................................................................................14 Product and Technology Fit .......................................................................................14Tesla’s Financials ..........................................................................................................15Conclusion ....................................................................................................................16 1
  • 3. Executive SummaryOn October 18th 2010, Apple© (NASDAQ:AAPL) announced record revenues of $20.34billion for its fiscal year ended September 25th 2010 with over $51 billion in cash on itsbalance sheet, begging the question: “What is Apple going to do with all that money toreturn the most shareholder value?” One immediate option is to start issuing dividendsagain, but that would be inconsistent with Apple’s strategy over the last 15 years. Thefirm has clearly proven that plowing cash back into R&D to continue leading the packhas yielded generous returns for shareholders in the long-run. Vertical integrationwould not generate much value because there is little margin left for Apple to gain bybringing its supply chain in-house. Beefing up R&D and product development further forcurrent or roadmap products realistically would not push Apple much ahead of thetechnology curve than it already is, and their existing R&D strategy is clearly on the righttrack.The only real way for Apple to substantially grow is to expand into new markets. Theyare fundamentally a consumer technology company with products that have alreadygained significant mindshare of consumers at home, school, work, and the gym. In eachof these settings, Apple has created paradigm-shifting products that completelyrevolutionize user experiences for TV, video, personal computing, reading, phone,music, and fitness. The one remaining avenue that Apple captures little consumerawareness, and which could make the Apple experience truly omnipresent, is the car.We propose that Apple strategically acquire Tesla Motors (NASDAQ:TSLA), leveraging itscash position to make a foray into the automotive industry for future top-line growthand profitability. This summary discusses the synergies of such an acquisition.Market and Competitive LandscapeAutomobiles can be envisioned as a hardware platform, much like computers andsmartphones. The automobile market is still relatively untapped by large consumertechnology companies like Apple, although that is rapidly changing. Google’s alliancewith Toyota in developing an unmanned Prius and Ford’s alliance with Microsoft todevelop Sync, an in-car communications and entertainment system, indicate thismarket’s promise and readiness for disruptive innovation. Apple’s minimal participationin this market to date can be effectively jumpstarted by this acquisition. Tesla’s strategicalliances with Toyota and Daimler, who are also investors in Tesla, give Apple access to alarge new market it does not serve today.According to iSuppli, smartphone-based systems are increasingly taking over the in-carnavigation and dashboard systems. This year’s projections are nearly 81 million unitsand iSuppli forecasts a tenfold increase by 2014 with an explosion to 297 millionunits. This market represents a significant opportunity for Apple to redefine theconsumer experience much like it did with the mp3 player, smartphone and tablet. Tesla 2
  • 4. would be the ideal launch pad for Apple to bring a fresh perspective on human-carinteraction. By taking the “Apple approach” at redefining contemporary dashboardsystems, Apple can embed its ecosystem into the automobile to act as a channel forselling more of its devices, software, ads, and multimedia.Product and Technology MixThe increasing intertwining of a car’s mechanical systems with computing systems isevidenced by the advanced dashboard communications and electronics in modern cars.The electric car is a new platform to host Apple’s iOS based devices and can serve as agateway to the iTunes and Apps Store. Additionally, geo-location based applications andservices, led by Foursquare and GoWalla, present a natural fit with the car, the mostpervasive tool of personal mobility today. These products point to increased revenueopportunities for Apple and developers through Ping, the Apps store and iAds network.Additionally, iTunes in the car is sure to give a big boost to Apple’s ventures into musicin the cloud and give it a leg-up over emerging competitors like Pandora and traditionalones like FM and satellite radio. The Apple TV platform, modified for the car,revolutionizes passenger entertainment which is currently a fragmented market and farbehind home entertainment. Bringing products to the automobile truly completes theApple experience, with Apple at home, in the office, in the car, and on the go. There isundoubtedly an immediate synergy between Tesla’s cars and Apple’s products that willtranslate into higher growth and profitability for both companies.Core CompetenciesApple’s demonstrated track record of innovative design and ability to rethink userexperiences shows great potential for enhancing the in-car experience. The Tesla brandbolstered by its superbly-designed customer focused products in the burgeoning electriccar market draws a parallel to Apple’s brand in consumer technology. Tesla hiringGeorge Blankenship, one of the key players responsible for Apple’s enormouslysuccessful retail strategy, also points to a commonality in the companies’ marketing anddistribution philosophies, which are Apple’s core competencies.Culture-Fit and Talent AcquisitionTesla’s strong culture of disruptive product innovation resonates with Apple’s culture.Both Tesla and Apple boast risk-taking industrial designs and marketing teams that fitnaturally together. The acquisition will also bring with it Elon Musk, co-founder ofPaypal, SpaceX and Tesla Motors. Musk has a history of developing and bringing to themarket game-changing ideas, much like Steve Jobs. His success with Paypaldemonstrates familiarity of software and the Internet, making him effective incollaborating with Jobs to revolutionize the in-car experience and bring growth to Apple. 3
  • 5. Why Should Apple Enter the Automobile Market?The hardware technology that Apple brings to the Automobile industry is notparticularly revolutionary or even really on the very cutting edge. In fact, there isalready a $38.3B infotainment & telematics market in 2011 that Apple has no part of,which uses similar technology. However, the existing market is very fragmented withsolutions that do a poor job of enabling consumers to achieve the connected lifestyles ina car, which they have become accustomed to at the home, office, and gym.To answer the question of why Apple should enter the automobile market, consider firstthe strengths which enable Apple to redefine the user experience in a confused market,and then follow up with what challenges might prevent Apple from succeeding.Strengths: Why is Apple the right company to redefine the in-carexperience?Product DevelopmentApple, in essence, is a consumer technology company with a consistent and superlativetrack record of revolutionizing consumer experiences in existing markets. The Macintoshredefined people’s interactions with the computer and what they expect functionallyand aesthetically from a computer. The iPod and iTunes consolidated the portable musicexperience to a fragmented portable music market. The iPhone, close on iPod’s heels,has opened new vistas in mobile communications, providing direction and drivingforward a refreshed vision for mobility. The initial success of the iPad brought freshperspective to the tablet market, revitalizing what has time and again been labeled as a‘dead market’. Apple’s strength lies fundamentally in its mastery of redefining the wayhumans interact with technology through superiorly designed hardware and softwareproducts.Brand and Consumer LoyaltyThese successes have helped create an aura around the Apple brand and spurred ageneration of die-hard loyalists. A large percentage of these individuals are early in thetechnology adoption curve and their enthusiasm in evangelizing new technology hasgiven them an unparalleled sphere of influence in the market. The Apple brand itself willgo far in convincing consumers that the Apple in-car experience is what they’ve beenwaiting for.Innovative MarketingThe ‘Apple-reality-distortion-effect’, a term sometimes used in jest, nevertheless sumsup Apple’s expertise in marketing its products to the end consumer. The coherence andthe sheer brilliance of its product definition, distribution and retail strategies, andconsumer communications and advertising are known to be legendary in thecontemporary technology industry. The company has consistently been able to weave 4
  • 6. the marketing mix with complete perfection, from the consumer buying experience tocustomer satisfaction and retention.LeadershipLarry Ellison, founder and CEO of Oracle Corporation, famously described Steve Jobs asan individual with the mind of an engineer and the heart of an artist. Jobs, undoubtedly,is one of the greatest visionaries the technology industry has seen till date. That coupledwith Apple leadership’s in product design and strategy execution is a strongdifferentiator and a definite strength.EcosystemProbably one of the most compelling strengths Apple possesses is the ecosystem it hasin place to monetize almost all aspects of consumer lifestyles, including music, radio,and video entertainment, email and mobile communications, computing, reading,fitness, etc. This ecosystem, if brought to the car, opens up unlimited revenue potentialfor Apple, all by leveraging and repurposing existing products and infrastructure.Weaknesses: What is preventing Apple from entering this market?Partnership DevelopmentHistorically, Apple’s go-to-market initiatives have included few partners or OEMs thatcan potentially accelerate product penetration in the consumer space, albeitinorganically. In the car market, this might be a shortcoming considering the difficultyto booting up product sales without the support of existing carmakers.Expertise in the Automotive MarketThe introduction of new technology in the car is characterized by a lengthy and intricatequalification process. Building the right technology and navigating through this processrequires industry knowledge and experience, which Apple presently does not have.Additionally, Apple’s location away from the automobile hub in Detroit could impedehow quickly and effectively it could penetrate the automobile market becauseautomotive talent is not abundant in Silicon Valley.Opportunities: Why should Apple invest in this market?To gauge the attractiveness of the automotive infotainment market to Apple, threeimportant questions to ask are: • Are the consumers asking for change from the current solutions? • Are the consumers willing to pay for it? • What are they currently paying for, and what will they buy in the future? 5
  • 7. Are consumers asking for a change?Consumers today want to stay connected in the car. Strong data exists from CEA1showing that consumers are broadly interested in the following features built into a car: Figure 1. Activities using Smartphone-integrated systemsAdditionally, as smartphones and mobility computing become more pervasive, driverand passenger expectations from in-vehicle electronics have been evolving. CEA alsodescribes the results of a survey administered to driver and passengers separately fortheir expectations of what activities can be performed with in-vehicle systems:1 Consumer Electronics Association, Sep 2010, “Staying connected on the Go: A Look At In-VehicleSmartphone Integration Systems” 6
  • 8. Table 1. Driver & passenger activity preference in the carAs Table 1 illustrates, the driver and passenger requirements today range from basicnavigation and audio/video entertainment to complex activities such as socialnetworking, gaming, and location-based services over the Internet. People are clearlylooking for a richer, more holistic, revolutionary in-car experience that does not disrupttheir ongoing activities outside of the vehicle.Are the consumers willing to spend?Data shows that consumers are willing and ready to spend. In a survey by CEA onconsumers readiness to spend on in-vehicle integration systems, over 64% ofrespondents said that they would buy the system within 2 years, and about 45% saidthat they would buy it within 1 year. 7
  • 9. Electronics Source: Consumer Electronics Association Figure 2. Time frame of consumer’ intent to spendWhat are the current solutions and what are consumers willing to adopt?Having established that the car consumers are increasingly getting vocal aboutdemanding to stay connected in the car, the next logical question is, “Are the customerstoday actively buying alternatives, even though they do not fully address their needs?What are they spending their money on?” The following table shows the currentfactory-to-dealer sales which does not even include the mammoth after-market andportable systems. This market is alone expected to generate about $9B in 2011. Figure 3. In-Vehicle Technologies Market of Factory-Dealer Sales 8
  • 10. Additionally, according to ABI Research2, the global automotive telematics 3 market isexpected to generate over $38B in 2011, and grow from 37 million users to more than211 million by 2015. The following histogram shows how the consumers are addressingtheir needs in this market and what they are spending on: Source: ABI Research Figure 4. Current Telematics MarketThreats: Apple’s Competitors in the Car MarketResearch shows us that a number of major technology companies have alreadyrecognized the potential in the car market and have taken steps towards penetrating it.Considering the “Winners take all” phenomenon in the technology industry as aptlydemonstrated by Google Search, Facebook Social Networking, Microsoft Windows andinnumerable other examples, this could be a potential lost opportunity and a futurethreat for Apple if ignored today.Microsoft has just released Windows Embedded Automotive 74 operating system for in-car telematics and infotainment systems. Additionally, its partnership with Ford torelease SYNC5 and with Nissan to revamp its touch screen information hub in the newLEAF electric car is a clear step in that direction. Fiat is also bringing its Microsoft-powered Blue&Me6 system to North America for the first time in Fiat 500.2 Wireless News: NA, September 02, 2010, “ABI Research: Global Number of Consumer Telematics Usersto reach 211 Million by 2015.3 Automotive telematics is the idea of integrating a car as completely as possible. Automotive telematicsincludes putting cellular services, GPS systems, weather displays, and dozens of other technological ideasinto a car to serve all the potential needs of a driver – eHow.com, 2010.4 http://www.microsoft.com/windowsembedded/en-us/products/windows-embedded-automotive/default.mspx5 http://www.ford.com/technology/sync/6 http://www.blueandme.net/blueandme/index.aspx?brand=fiat&lang=en 9
  • 11. The Google Andriod platform is also making in-roads into the in-vehicle infotainmentmarket. The Chevrolet Volt, GM’s much anticipated plug-in hybrid, will be one of thefirst cars to connect with Andriod applications. Also, recent news7 about Google workingwith Toyota to develop a self-driving artificially intelligent vehicle is evidence of thecompany’s ambitious plans in this space.Research in Motion (RIM) recently acquired QNX software systems and Dash NavigationSystems, two companies specializing in in-car telematics and infotainment systems. QNXSoftware Systems is the creator of Neutrino an operating system that is deployed acrossa range of markets and is licensed for use in more than 17 million car systems.Lastly, Nokia and Intel have teamed up to create MeeGo8 for a new era of mobilecomputing. The European car industry alliance GENIVI9 has officially chosen MeeGo asits reference release for in-car infotainment system.These examples are testament to the fact that there is a revolution of the in-carexperience taking place where connectivity and integration with consumer lifestyles is alucrative problem to be solved by consumer technology companies.7 http://www.nytimes.com/2010/10/10/science/10google.html8 http://meego.com/devices/in-vehicle9 http://www.genivi.org/ 10
  • 12. Building Blocks: The Apple Ecosystem in the Car Location based iAds App Store/Local iOS devices & Apps/Electric Vehicle dashboard Management Apps system ITunes in the Driver-Safe Cloud/Internet Radio communication Siri-VR based PA AppleTV, Games Figure 5. The Apple ecosystem’s synergies with the carApple’s entry into this market is natural considering that the company already has mostof the building blocks for this system in place and already monetized. The Appleecosystem, embedded into the car platform via its iOS devices will serve to consolidatethe fragmented consumer experiences that exists today.For instance, the consumers’ entertainment needs could be addressed by iTunes in thecloud, the AppleTV platform, and Games on the iOS. Requirements related tonavigation, car management, security and such could be addressed through thephenomenon of the App Store.Driver safety is being increasingly being compromised by usage of smartphones in thecar to SMS, check directions, conduct phone conversations, etc. A recentlyreleased study10 by the VirginiaTech Transportation Institute found that truck driverswho were texting were 23 times more at risk of a “crash or near crash event” than “non-distracted driving.” As per talking on a cell phone, the same study found no increasedrisk for truck drivers and 1.3 times the risk for car drivers. Apple could make the driverexperience safe through innovating a new experience using its resources like Siri VoiceRecognition based Personal Assistance and Facetime.10 http://www.vtti.vt.edu/PDF/7-22-09-VTTI-Press_Release_Cell_phones_and_Driver_Distraction.pdf 11
  • 13. IAds, a very recent addition to this ecosystem, has the potential of leveraging themobility of the car with location based advertising. Not only is this a future revenuesource for Apple, but also presents a strong value proposition to developers, retailers, aswell as the thrifty consumer.Why Tesla?Culture Fit and DNAElon Musk, Tesla’s founder and CEO, believes Tesla is closer to Apple or Google than toan automobile company like GM or Ford. The electric car is, for all practical purposes,consumer technology and Tesla, like Apple, is in the business of redefining theconsumer’s experience interacting with and using technology. Both Apple and Teslaboast versatile industrial design and consumer marketing teams that haveentrepreneurial streak in them. The close culture and value fit is further evidenced byTesla hiring George Blankenship, Apple’s former retail executive, to apply the Applevalues at transforming the consumer buying experience.Growth MarketThe nascent electric vehicle market is positioned for explosive growth over the nextdecade. IDC Energy Insights11 estimates that by 2015, there will be greater than 2.7million plug-in electric vehicles (PEV) on the road worldwide, with 885,346 vehicles inNorth America alone. This translates into a market in excess of $81B. Source: IDC Figure 6. PEV annual sales growth11 IDC Energy Insights “Business Strategy: The Coming Plug-In Electric Vehicle Rollout – Forecasting theMarket” 12
  • 14. Government subsidies and local market’s requirements for zero emissions will furtherpropel Asian annual sales to eclipse North American by 2015, and by the end of 2020,there could be in excess of 8.9 million PEVs driving across the globe. That represents amarket of over $270B. An important date to note in Europe for PEVs is 2020, as the EUcommission has set for itself to cut greenhouse gas emissions by 20%, increase share ofrenewable energy to 20% and improve energy efficiency by 20% by 2020. This is sure tointroduce a new urgency in adopting the PEV in the coming decade. Using IDC EnergyInsights aggressive growth scenario for PEVs shown below, the PEV penetration into theworldwide automobile market could potentially be in excess of 10 million, translatinginto a $300B revenue opportunity.Figure 7. Cumulative growth of PEVs on the roads worldwide assuming three scenariosControlled Platform and EcosystemThe current in-vehicle telematics and infotainment market is fragmented with a numberof point solutions solving differing customer needs. As such, the entire user experienceleaves a lot to be desired. Additionally, the installation process for these devices oftenincludes modifying the vehicle interiors and attaching contraptions to the car thatdiminish the experience.This draws strong parallels with the traditional MP3 player market and to some extent,the smart phone with its fragmented applications market. Apple, through control overthe iPod and iPhone platform, revolutionized the user experience and redefined the waypeople interact with these devices. Apple can bring this expertise to Tesla through anacquisition maintaining control over the underlying platform, the Tesla car. 13
  • 15. Strategic PartnershipsTesla brings with it several strategic partnerships with automakers like Toyota andDiamler. Tesla plans to collaborate with these companies, who use Tesla’s electric drivetrain and battery technology in their cars, to bring out an entire generation of newvehicles such as eRAV4, Smart, Roadster, Model S, etc.Apple, through Tesla’s acquisition, can penetrate the in-vehicle telematics andinfotainment market more effectively leveraging these partnerships.Product and Technology FitThe Plug-In Electric Vehicle (PEV) presents the ideal platform to serve as a showcase forthe confluence between vehicle and computing technology. Figure 8. The future EV Telematics PackageThe above diagram from a Frost and Sullivan12 whitepaper on the Electric Vehicle (EV)market shows how the ideal EV Telematics package is the confluence of four distinctpackages, viz., Navigation Package, Points of Interest (POI) Package, Vehicle to Grid(V2G) Communication, and Other value added services.12 Frost & Sullivan, 2010, “Outlook of the Global Telematics and Infotainment Market -2010 and Beyond” 14
  • 16. A number of these services or package components are, in all essence, Apps that canbenefit from the wide Apple App developer network, and the App store infrastructure.The EV market, thus, has the potential to spur an entire generation of EV vehiclemanagement Apps. Frost & Sullivan further goes on to summarize its key findings intofive points, as described below: Figure 9. Key findings and conclusions for EV marketTesla’s FinancialsWhile this paper doesn’t aim to provide a valuation recommendation for Tesla, some ofthe important multiples and their comparisons have been displayed in the key financialstatistics below. Statistic Tesla GM Toyota HondaMarket Cap $3.29B $50.70B $122.87B $66.40BPrice/Earnings N/A 142.62 18.42 9.02Price/Cash Flow 34.07 0.99 2.53 4.51EV/Revenue 33.01 0.19 0.91 0.92EV/EBITDA -30.09 3.53 9.54 8.02Enterprise Value (EV) 3.27B 25.31B 220.52B 101.36BRevenue 99.04M 131.04B 243.63B 109.88BEPS -1.27 0.24 4.25 4.08ROA -28.53% 0.39% 1.31% 3.71% 15
  • 17. ROE -82.20% 5.30% 5.49% 14.63%Debt/Equity 26.11 28.8 118.15 92.9Book Value per share 2.36 15.17 78.44 29.23 Table 2. Tesla’s key financial statisticsThe table gives a quick snapshot of some important Tesla financial statistics13 incomparison with the major automobile manufacturers today. The table also providesfour critical ratios that can be used in valuation analysis: • Price/Earnings or P/E Ratio • Price/Cash Flow Ratio • Enterprise Value/Revenues or EV/Revenues Ratio • Enterprise Value/EBITDA RatioTesla’s excellent fourth quarter, 2010, results have caused its market cap to increase byapproximately 61% in the past three months, as shown in the chart below sourced fromYahoo Finance. Figure 10. Tesla’s 3 month stock performanceConclusionThe car industry today is at the cusp of a revolution, one that marries together theconsumer’s desire for continuous connectivity with the inevitable transformation oftoday’s automotive technology. The present in-car experience is fraught with a range ofissues ranging from an incoherent and stressful buying experience to safety risks andinconsistent user experience. The timely advent of the electric drive train and electricvehicles in general has reignited the consumer’s need and expectation of a clean and13 th Snapshot taken on 28 November, 2010. 16
  • 18. sustainable transportation experience. The intelligent nature of electric vehiclesfundamentally urges the need for connectivity and integration which Apple is bestpositioned to provide through its ecosystem. Acquiring Tesla presents Apple with theunique opportunity to address these consumer needs and revolutionize the field ofhuman-vehicle interaction. 17

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