Tesla Motors faces both short-term and long-term challenges to its growth and leadership in the electric vehicle market. In the short-term, safety concerns over its lithium-ion batteries have hurt its stock price following a car fire. Additionally, increased competition from other automakers launching electric cars threatens Tesla's first-mover advantage. Long-term, Tesla must ramp up production quickly to fulfill pre-orders before competitors gain market share. However, Tesla's focus on customer experience through its supercharging network and battery swaps could help maintain its edge if production increases as planned. Significant further investment will still be needed to solidify Tesla as a leader in the emerging electric vehicle industry.

1. Tesla Motors Inc.
Entrepreneurial Finance
Ioli Macridi, Anastasia Hassiotis, Hubert Cromback, Mehmet Ugurluoglu
12/10/2013

2. Introduction
Tesla Motors is a company that manufactures electric vehicles and electric vehicle parts.
It sells its innovative cars through specialized Tesla stores or the internet and also sells parts to
other car manufacturers. It was founded in 2003 by the visionary and business magnate, Elon
Musk, who is also the CEO and Chief Product Architect of the company. Tesla Motors has
managed to create a niche market, especially since fuel costs are constantly on the rise, because it
has manufactured a car that is 100% reliant on electric power, with remarkable features and the
added advantage of support from the government in an attempt to promote green products.
Owning a Tesla car versus a gas-powered vehicle also offers great cost benefits since the cost of
charging an electric car is estimated to be at $5 amounting to an annual fuel cost of $279, as
opposed to an annual cost of $1,625 for gas-powered cars (Exhibit 2). However, despite the
positive appraisal of the brand, there are several negative and alarming issues about the company
that should not be overlooked. To begin with, the concept of an electric car is not original and
there are many challenges involved with owning an electric car, such as the limited battery life
and travel range as well as the lack of charging stations and other infrastructure needed to
support electric vehicles. In addition, it is questionable whether Tesla is able to finance its
projected growth because it is incredibly ambitious and there are increasing concerns due to the
company’s unstable and dropping stock price.
Despite the unique technology that Tesla uses for its vehicles, a big asset of the company
is the experience its cars provide. Tesla’s competitive advantage lies in the vertical integration of
the ownership experience. Their focus is entirely on the customer and resolving any conflicts or
concerns so that each and every potential customer has a personalized and consistent experience
that strengthens his/her commitment to the brand. Nonetheless, as competitors, such as BMW,

3. Lexus, Audi etc. are starting to catch up with Tesla using advanced technology to build similarly
innovative cars, the future of Tesla vehicles as the industry leaders is largely at stake. Finally,
although electric cars are environmentally friendly to use, not the same can be said for their
manufacture. In order to produce the lithium-ion batteries that these vehicles use, huge amounts
of energy are required, which if added to the energy needed for the entire vehicle it amounts to
more than what is needed to manufacture a Toyota Camry, for example.
Customers are increasingly interested in green products that benefit the environment.
This trend is now affecting the car industry to a great extent, which is why the market for hybrid
and electric cars is estimated to increase to 5-10% of the entire automobile manufacturing
industry by 2020. According to Joshua Brown, an automotive analyst for JPMorgan, Tesla
Motors currently has a competitive advantage due to its low-cost battery technology as well as its
range when compared to competition. According to IBISWorld, Tesla only has an estimated
market share of less than 1.0%. Nonetheless, in 2012 it reported revenues of $413.3 million and
the company’s Model S was the “top selling luxury car in the first quarter of 2013, with an
estimated 4,750 vehicles sold.” (IBISWorld)
Infrastructure
In the past year a lot of hope has been placed in Tesla as it is entering a new market. As a
matter of fact the company is responsible for developing a novel concept in the motor industry
that involves the use of rechargeable batteries in the electric sports vehicle. Even though Tesla is
one of the first companies to manufacture high-end electric cars, they need to have a very
specific strategy in order to deal with the demand for this target market. One of Tesla’s main
challenges is dealing with customers’ doubts about electric technology and the life of the battery.

4. This leading automobile company has heavily invested in different ways to charge batteries and
they are continuing to do so in order to build a credible network.
Tesla motors had an obligation to implement strategies that will facilitate the process of
recharging batteries, as potential customers will often drive more than the 240 miles maximum
range. The first option is to charge the battery at home by simply plugging the car to an electric
outlet, which will approximately take 9 hours to obtain full capacity. (Exhibit 4) However, this is
not possible for people not owning a garage for their car. Tesla also developed supercharging
stations, which allow customers to have a fast charging option. It takes 20 minutes for the battery
to charge half way through, which translates to a capacity of around 200 miles (Exhibit 4). Those
supercharging stations are Tesla’s answer to the numerous attacks on their lack of investments in
their infrastructure. This solution offers a convenient and free way for Tesla car owners to charge
their cars. Even though, the wait time can seem significant (40 minutes for full capacity) it is
important to remember that this service is free and therefore appreciated by customers. In May,
Tesla had 40 supercharging stations in the US, but as they are massively investing in those
stations, they are planning to cover the main metropolitan areas as coast-to-coast travel by the
end of 2013. (Exhibit 3) However, Tesla is going to continue to invest in those supercharging
stations in order to cover 80% of the United States and parts of Canada by 2014 and 98% of the
United States by 2015. (Exhibit 3)
Finally, in order to create another fast charging solution for customers, and to capitalize
on the supercharging stations, Elon Musk and his engineers came up with a worldwide
innovation. As a matter of fact, they came up with a genius concept, which consists of replacing
the empty batteries with fully charged ones. This ‘battery swap’ would be available in every
supercharging station and would allow customers to replace their batteries in less than 90

5. seconds, which is in fact faster than fueling a regular car. However, this solution will have a cost
for customers, as a battery swap will cost between $60 and $80. It is also important to recall that
the battery swap service is only a concept at this point in time, and Tesla has not announced
when this service will be introduced and used.
There is no doubt that Tesla is one of the leading players in the electric car industry. They
are constantly innovating and finding new solutions in order to fit their high-end customers that
are willing to spend a high price as long as they are provided with an efficient service. Even
though the organization is making remarkable progress in this industry they now have to deliver
on their promises. Developing the supercharging stations is going to be a huge expense for Tesla.
As a matter of fact, Tesla said that they will pay for all the supercharging stations, and that the
cost will vary from $100,000 to $175, 000 per station depending on the location and size of the
station (Exhibit 6). Besides, they are probably not going to initiate the battery swap concept until
demand grows, as it is going to be a substantial investment as well.
Finally, even though Tesla annually outsells most of its luxury competitors in the US with
a 10% market share of the high-end sustainable vehicles (Exhibit 5), they need to be extremely
cautious of competition. Although Tesla is the leader of this market, competitors are also
aggressively entering the market and launching 100% electric vehicles that will compete with
Tesla. An example is BMW who is in the process of manufacturing the BMW i3. Therefore,
even though Tesla Motors have a competitive advantage due to being the innovators of the
industry, they need to be quite cautious with the emerging competition, as it can prove to be a
dangerous threat.

6. Tesla is currently expanding exponentially its infrastructure through the development of
supercharging stations. However, this development come as a very expensive price for Tesla,
approximately 34 million (exhibit 6), therefore we can wonder if Tesla demand will grow at the
same rate and if there will be able to achieve a sustainable growth.
Financials
Tesla Motors has been highly questioned with regards to its financials. More specifically,
as of September 2013, Tesla has revenues of $1.7 billion. As seen on exhibit 8, almost 90% of
the company’s revenues in 2012 were located within the U.S, following Europe at 12% and Asia
at 2%.
As for Tesla’s growth, interestingly, the yearly percentage revenue growth has been
growing for the past 5 years. As seen on exhibit 9, the company shows a rather unusual growth
as in 2010 its growth was at 4.3%, in 2011 increased and reached 74.9%, whereas in 2012, it
outstandingly reached 102%. It is well known that the company has been fully exposed to the
media and has gotten the attention of many people in the business world and beyond. This great
interest has been mirrored in the company’s continually increasing revenues and thus to such
growth.
Even though there has been a great increase in revenues and orders of the Model S that
the company needs to meet, the cost/revenue ratio calculated for the past years, raises questions
about the operational efficiency of the company. More specifically, the ratio on 2012 was 0.927
and in 2011 at 0.698. These ratios come in contradiction with the company’s revenues and show
that even though revenues increase the cost of goods sold increase at a faster pace, resulting at
the ratios indicated (Exhibit 10).

7. Moving along, recent updates on the company’s valuation place Tesla at a worth of $16.7
billion. There has been much skepticism regarding this valuation and whether the company is
overvalued given its current situation. The TEV/Sales ratio and its comparison to other major
players in the car industry fuel these thoughts further. In particular, the TEV/Sales ratio of Tesla
is 9.8, whereas that of BMW is 1.45, followed by Toyota at 1.34 (Exhibit 11). This ratio
indicates that Tesla is currently valued almost 10 times more than its recent revenues. This
overvaluation is, to a great extent, attributed to the involvement of Elon Musk in the company as
founder, CEO and Chief Product Architect.
So far the financial situation of Tesla Motors analyzed, raises even bigger concerns about
Tesla’s growth and its potential further growth. More specifically, Tesla has a total debt of $660
million, while as of September 2013, the company’s debt ranks at 55% of its total capital. At the
end of the year 2012, the debt was at 80% (Exhibit 12).
A typical evaluation of the situation concerning the approval or not of any additional
financing would most likely lead to rejection, since the numbers do not show great promise.
However, once a more thorough investigation of past financing is conducted, there are two main
reasons that justify the continuous flow of funding given to Tesla. The first is that the U.S.
government has identified the opportunity that lies behind the concept of these electric vehicles.
As reported in a study of the Automobile Industry’s advantages, “Due to its deep forward and
backward linkages with several key segments of the economy, the automobile industry is having
a strong multiplier effect on the growth of a country and hence is capable of being the driver of
economic growth. It plays a major catalytic role in developing transport sector in one hand and
help industrial sector on the other to grow faster and thereby generate a significant employment
opportunities. Also as many countries are opening the land border for trade and developing

8. international road links, the contribution of automobile sector in increasing exports and imports
will be significantly high.” Put simply, the automobile industry is a fundamental contributor to
the U.S. economy because it boosts the country’s revenue, exports and employment rate, while
fueling growth. This can be exemplified by the $465 million loan by the US department of
Energy to Tesla Motors, which was given in order to produce, engineer and assemble the Model
S as well as to invest in Property, Plant and Equipment (PPE).
The second reason is that loans by Goldman Sachs and Morgan Stanley Smith Barney
LLC are given directly to Elon Musk and the Elon Musk Revocable Trust. The terms of the loan
are discusses entirely by Elon Musk and the financial institutions. Collateral for the loan will be
provided by Elon Musk either by selling his own shares of commons stock of the company or
using his own personal funds. Being the business magnate and innovator that he is, there is great
trust in Elon Musk. Apart from the great success of Tesla, Elon Musk is also involved in a
number of other successful ventures, such as PayPal, a Solar Energy venture and a new project
called Hyperloop. Consequently, banks reduce the risk of not getting the loan back because even
if Tesla Motors is unable to pay back the loan as a company, Elon Musk will be the one who will
take full responsibility.
Challenges
Tesla has both short and long term challenges that they need to overcome. One of the
biggest current concerns is about if the battery that they use in the car is safe or not. Lithium-ion
batteries, which Tesla uses in the car, are really dangerous since they are high-energy density. In
the beginning of October 2013, a Model S Tesla car caught fire and this event made the stock
price of Tesla went down by 4% the next day (Healey). Even though the CEO, Elon Musk

9. announced that the battery exploded because of a metallic object on the road hitting the battery
under the car and gave about statistics on how the situation would have been much worse with a
car that works with gasoline (Musk), this incident proves that general public still have a lot of
uncertainties in their minds about electric cars.
One other challenge that Tesla faces is that their competitors such as Bmw and Audi are
going to be releasing electric cars. Even though Tesla has the first-movers advantage to the
electrical vehicle industry and the best technology for electronic vehicles, they need to hurry up
in increasing their manufacturing process before competition start eating diminishing their pre-
orders sales. In 2013, Tesla produced and sold 21,500 cars (Herron). However, they will be
increasing their capacity with new deal that they made with Panasonic which will provide Tesla
enough battery for 300,000 vehicles within the next 5 years (Richard). The long-term challenge
is that if competition increases and big car manufacturers such as Bmw or Audi reaches a point
where they start producing cheaper cars by reaching economies of scales or finding a new
technology to lower the cost of the battery, the Tesla sales would go down. If we also consider
that Tesla is reinvesting all of the money that they make into supercharging stations and
company’s infrastructure, it is obvious that they won’t be making any money soon and going to
be needing much more external financing in the near future. In order to be able to get this
financing and not to go bankrupt, they need to keep on being the leader in the electrical vehicle
industry. Otherwise, companies who have more cash and financial stability such as General
Motors will take over Tesla’s market.
The future of Tesla Motors is very uncertain. However, Elon Musk and Tesla have the
passion and drive required to become the next leader in the automobile industry. Despite all the

10. negative issues with the company, there are a number of very substantial reasons why Tesla may
beat the odds and grow into a multi-national, successful company.
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