t

os
MH0002
0 0 7 7645065

Michae l J ano v ec
F ra nk T. R othaermel

rP
Tesla Motors (in 2011) and the U.S. Auto Industry (Case B)

Elon Musk, CEO of Tesla Motors, sped past the security guard in his brand new Tesla Roadster

yo
without waving. Despite his reputation as a brash leader, Mr. Musk normally took the time to exchange
pleasantries in the morning. Today, however, Mr. Musk’s mind was traveling a mile a minute. The
company had just filed its first annual 10-K with the U.S. Securities and Exchange Commission (SEC),
and Musk had an important meeting with Tesla’s board of directors at the end of the week to discuss
the company’s future.

As Mr. Musk walked into his office, a photo caught his eye. It was a picture of him ringing the open-
ing bell at the NASDAQ on June 29, 2010, the day that Tesla went public. As he looked at the picture, he
op
thought about how that day had changed his life and the life of his fledgling company. Tesla had gained
a much-needed capital injection, but along with the financial boost also came increased scrutiny from
the board of directors. Now instead of answering only to himself, Musk faced questions from the board
about how he planned to reverse a troubling decline in Tesla’s share price over the past five months.
What would be Tesla’s short-term plan? What would be its long-term plan? How did Elon Musk fit in
with those plans? Mr. Musk was scheduled to meet with the board in just two days, and time was of
tC

the essence. . . .

Going Public
On January 29, 2010, Tesla Motors filed an S-1 form (a preliminary prospectus) with the SEC, indicat-
ing its intention to file an initial public offering (IPO).1 The S-1 was underwritten by Goldman Sachs,
No

Morgan Stanley, J.P. Morgan, and Deutsche Bank Securities.2 Many analysts and investors perceived
the IPO filing as a sign that Tesla’s financial troubles were deeper than anticipated.3 Despite these
concerns, the underwriters’ road show went extremely well, resulting in an initial offering price of $17
per share, up from the target range of $14 to $16. The number of initial shares also increased, from 2.2
million to 13.3 million. Tesla’s NASDAQ debut on June 29, 2010, marked the first IPO by an American
automaker since Ford in 1956. On the first day of trading, Tesla’s shares closed up 40 percent at $23.89—
on a day when the NASDAQ dropped 3.85 percent and the Dow fell by 2.65 percent.4 The IPO raised
$226.1 million, money that Tesla urgently needed.
Do

Despite an initial drop in share price post-IPO, Tesla’s stock quickly rebounded and rose as high as
$35.42 by November 2010. By April 2011, shares had corrected back down to $25 a share (Exhibit 1).
Investors’ initial positive outlook regarding the future of the electric car seemed to have given way to a
more realistic estimation of recent market developments. Insufficient infrastructure, slow public accep-

Research Associate Michael Janovec (GT MBA ’11) and Professor Frank T. Rothaermel prepared this case from public sources. It is developed for the
purpose of class discussion. It is not intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient manage-
ment. All opinions expressed, and all errors and omissions are entirely the authors’. © Janovec and Rothaermel, 2013.

This document is authorized for educator review use only by Anirudh Agrawal, O. P. Jindal Global University until October 2017. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 Tesla Motors and the U.S. Auto Industry (Case B)

t
os
tance, and a lack of cheap batteries with adequate capacity had kept electric vehicles in their niche and
prevented them from becoming much more than a technology used for company utility-truck fleets.
This, together with the fact that the Tesla Roadster (still the only Tesla model available) cost more than
$100,000, had kept Tesla from turning a profit. In its first annual report, Tesla reported an operating loss
of $146.8 million.5 As of June 2010, Tesla had lost a total of more than $400 million (Exhibits 2 and 3).6

rP
Strategic Partnerships
Despite financial setbacks, Tesla continued to improve its current model, the Roadster, and announced
the Roadster 2.5, a spiced-up version of the original with several improvements. As of June 2010, Tesla
had sold more than 1,200 vehicles.7

yo
Tesla also managed to strike some remarkable deals with big players in the automotive industry.
In 2009, German automotive engineering powerhouse Daimler purchased a nearly 10 percent stake in
Tesla, worth an estimated $50 million.8 Musk and his team wowed the skeptical Daimler executives by
modifying an off-the-shelf Daimler Smart car into an all-electric vehicle in only six weeks.9 The part-
nership with Daimler provides Tesla with access to Daimler’s engineering expertise and global supply
chain, and could also improve Tesla’s ability to raise capital. Daimler, meanwhile, could profit sig-
nificantly from its investment in the nimble startup that lies on the forefront of technological develop-
ment. In addition, Daimler has reportedly experimented with Tesla’s battery technology,10 but has since
op
stated that it will use its own in-house-developed products for its Smart electric vehicle (EV) program.11

Another breakthrough came in May 2010, when Toyota announced that it would buy $50 million
(roughly 3 percent) of Tesla’s stock in the upcoming IPO.12 With this deal, Tesla got ownership of the
NUMMI automotive factory plant in Fremont, California.13 For Toyota, this deal served as advertising
for the company’s commitment to alternative-vehicle technologies, while Tesla’s benefits were similar
tC

to those received from the Daimler venture. The first fruits of collaboration between the two companies
were evident when Tesla announced that it would deliver two EV prototypes based on existing Toyota
models in July 2010.14 Both companies have also signed a joint vehicle-development agreement. Toyota
has since announced that it plans to develop an electric SUV based on its RAV4 model, using Tesla battery
technology.15, 16

In addition, Tesla managed to bring Panasonic, one of the world’s electronic giants, on board.
Panasonic’s aim is to combine its experience in battery technology with Tesla’s capabilities in elec-
No

tric power-train development. The goal for Panasonic is to become the number one Green Innovation
Company in the electronics industry by 2018, the 100th anniversary of its founding.17

International Expansion
At the same time that Tesla was pursuing strategic relationships with leading electronic and auto-
motive companies, it started to expand its network of company-owned stores. Previously, all sales had
been conducted either via the phone or Internet or in person at corporate events or company head-
Do

quarters. By February 2011, Tesla had opened 17 new sales locations, spanning North America, Europe,
and Asia. The company targeted major metropolitan areas including Chicago, New York, Los Angeles,
London, Munich, Madrid, Tokyo, Hong Kong, and Sydney (Australia). In conjunction with the 2012

This document is authorized for educator review use only by Anirudh Agrawal, O. P. Jindal Global University until October 2017. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 Tesla Motors and the U.S. Auto Industry (Case B)

t
os
rollout of the Model S, Tesla anticipates establishing nearly 50 stores worldwide over the next several
years, at a cost of $5 to $10 million annually.

To differentiate itself from its competitors and provide superior customer experience, Tesla has
opted not to create franchised dealers, but instead maintains all sales and service operations in-house.
The company also created a wholly owned subsidiary, Tesla Motors Leasing Inc., to provide a leasing

rP
alternative to its customers starting in 2010.18

Price Pressure
Importantly, a study conducted by Nielsen found that in the United States, 72 percent of people
polled have considered buying or would buy an electric vehicle. However, 65 percent of Americans

yo
would not pay more for an electric vehicle than for traditional car models. Of those who said they
would be ready to pay more, most were willing to pay no more than an additional $1,000 to $5,000.19
Thus, electric vehicles will need to compete heavily on price, and not on technology alone.

The contents of the Nielsen report may spell trouble for Musk’s second generation of electric vehi-
cles, the Model S. Tesla plans to deliver approximately 5,000 Model S sedans in mid-2012 and an addi-
tional 20,000 in 2013. Buyers will have the option to purchase a model with either a 160-mile or 230-mile
battery life. The 160-mile edition’s sticker price will be $57,400 ($49,900 after a $7,500 federal tax credit);
op
the 230-mile edition will sell for $67,400 ($59,900 after tax credit). In addition, Tesla is developing a 300-
mile model slated for production in 2013. While cheaper than the Roadster, the Model S will still retail
at a premium to current electric vehicles such as the Nissan Leaf, which sells for $25,280 after the tax
credit.20 Critics are skeptical that Tesla can get its prices down to a competitive level21 and still produce
the Model S on time and have it be able to perform as promised.22
tC

Negative Press
Adding to potential troubles, Tesla Motors and Elon Musk have received some negative press. In
December 2008, the BBC show Top Gear featured a race between a Tesla Roadster and the Lotus Elise.
During the episode, the Tesla Roadster ran out of charge after just 55 miles, far below its advertised
200-mile range. In response, Elon Musk filed a libel suit against the show in March 2011 claiming that
No

the scene was faked. The filing stated that Top Gear’s claim “grossly misled potential purchasers of the
Roadster.”23, 24

In addition to the Top Gear disaster, a CNBC show entitled Divorce Wars featured Justine Musk, Elon
Musk’s ex-wife, in an episode that aired in April 2011.25 The episode discussed the couple’s split and
bitter court battle, during which time Mr. Musk claimed that his bank account was empty and that he
was living off loans from his rich friends. His financial situation was further complicated by the fact
that a loan from the U.S. Energy Department requires Mr. Musk to retain at least a 65 percent stake
in Tesla, limiting his access to cash. As the largest shareholder of Tesla stock, Mr. Musk’s purported
financial position raised eyebrows among investors about the future of the company. Continued nega-
Do

tive press of this kind could potentially weigh down the share price and erode the board of directors’
confidence in Elon Musk as CEO.26

This document is authorized for educator review use only by Anirudh Agrawal, O. P. Jindal Global University until October 2017. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 Tesla Motors and the U.S. Auto Industry (Case B)

t
os
On the Positive Side
Despite Mr. Musk’s personal and business troubles, not all is doom and gloom at Tesla. On March
31, 2011, Tesla shares received a boost after President Obama stated that he would direct federal agen-
cies to purchase alternative-fuel vehicles by 2015. In his address, the President remarked, “There are
few breakthroughs as promising for increasing fuel efficiency and reducing our dependence on oil as

rP
electric vehicles.”27

Along with Obama’s statements, Morgan Stanley analyst Adam Jones upgraded Tesla’s stock, saying
that Tesla could become “America’s fourth automaker.”28 Morgan Stanley further projects that plug-in
hybrids and pure electric vehicles will account for 7 percent of U.S. car sales and 5.5 percent of global
sales by 2020, increasing to 15 percent of global sales by 2025.29 In line with his growth predictions,
Jones projected that Tesla shares may rise to $70 over the next year. In order to achieve these goals, how-

yo
ever, Jones believes that Tesla will need to mass-produce a vehicle with a sticker price around $30,000.30
Analysts from J.P. Morgan are likewise bullish on Tesla, setting a target share price of $40 to $50 over
the next three years provided Tesla can realize a lower cost structure.31

Takeover Target?
op
Despite bullish forecasts, analysts warn that liquidity could remain a challenge for Tesla. Morgan
Stanley estimates that Tesla could spend 75 percent of its current liquidity by 2013.32 In fact, Tesla’s
liquidity crisis has led some analysts to suggest that the company may become a takeover target. As a
leader in electric-vehicle technology, Tesla could provide a larger, more traditional automaker an entry
into the alternative-fuel market as oil prices rise.

Alternatively, Tesla’s elite brand image may appeal to luxury automakers. Analysts cite Tesla’s part-
tC

nership with Daimler as evidence that Daimler may be considering Tesla as a potential takeover tar-
get. Under their existing deal, Musk is barred from voting for a sale to any car manufacturer other
than Daimler, without Blackstar’s (an affiliate of Daimler) consent.33 Nevertheless, Musk has fervently
insisted that Tesla will remain independent. Musk told Bloomberg, “Their analysis of Tesla is incredibly
bad. Tesla is of course a potential takeover target, like almost all public companies. However, I’m also
highly confident that we can succeed as an independent company.”34
No

Decision Time—Again
As Elon Musk stared at the photo on the wall, he wondered, What should I recommend? Could the
firm produce a car priced to compete with manufacturers such as Nissan? And if so, by when? Could
Tesla remain independent? If so, how will Tesla address liquidity concerns? Given the distractions in
his personal life and the negative publicity from the Top Gear suit, would the board remain confident in
his leadership? More importantly, how would Tesla reach long-term profitability?
Do

This document is authorized for educator review use only by Anirudh Agrawal, O. P. Jindal Global University until October 2017. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 Tesla Motors and the U.S. Auto Industry (Case B)

t
os
EXHIBIT 1  Tesla Stock Price, Compared to the DJIA, NASDAQ, and S&P 500 Indices

50%
40%
30%

rP
20%
10%
0%
210%

220%

230%

yo
240%
Mar 24, 2011: TSLA 22.33 ^DJI 12,170.55 ^IXIC 2,736.41 ^GSPC 1,309.66

2010 Aug Sep Oct Nov Dec 2011 Feb Mar Apr
Volume 462,200
15M
10M
op
5M

1D 5D 1M 3M YTD 6M 1Y 2Y 5Y Max From: Jun 29 2010 To: Apr 13 2011

2010 2011
tC

Source: Yahoo Finance.

No
Do

This document is authorized for educator review use only by Anirudh Agrawal, O. P. Jindal Global University until October 2017. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 Tesla Motors and the U.S. Auto Industry (Case B)

t
os
EXHIBIT 2 

Tesla Motors, Inc., Statement of Income (in thousands, except share and per share data)
2010 2009 2008 2007 2006
Revenues

rP
Automotive sales $ 97,078 $111,943 $ 14,742 $    73 —
Development services   19,666 —  —  —  —
Total revenues 116,744 111,943 14,742 73 —
Cost of revenues
Automotive sales 79,982 102,408 15,883 9 —
Development services   6,031 —   —   —      —

yo
Total cost of revenues    86,013   102,408 15,883 9  —
Gross profit (loss) 30,731 9,535 (1,141) 64 —
Operating expenses
Research and development 92,996 19,282 53,714 62,753 $ 24,995
Selling, general and administrative    84,573   42,150 23,649 17,244   5,436
Total operating expenses   177,569   61,432 77,363   79,997   30,431
op
Loss from operations (146,838) (51,897) (78,504) (79,933) (30,431)
Interest income 258 159 529 1,749 938
Interest expense (992) (2,531) (3,747) — (423)
Other income (expense), net    (6,583)   (1,445)   (963)     137    59
Loss before income taxes (154,155) (55,714) (82,685) (78,047) (29,857)
tC

Provision for income taxes   173   26 97 110   100

Net loss $(154,328) $     (55,740) $(82,782) $(78,157) $(29,957)
Net loss per share of common stock $(3.04) $(7.94) $(12.46) $(22.69) $(10.18)
Weighted average shares used in
computing net loss per share of
common stock 50,718,302 7,021,963 6,646,387 3,443,806 2,941,411
No

Source: Tesla Annual Reports (www.sec.gov).

Do

This document is authorized for educator review use only by Anirudh Agrawal, O. P. Jindal Global University until October 2017. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 Tesla Motors and the U.S. Auto Industry (Case B)

t
os
EXHIBIT 3

Tesla Motors, Inc., Selected Consolidated Balance Sheet Data (in Thousands)
2010 2009 2008 2007 2006
Cash and cash equivalents $    99,558 $   9,627 $   9,277 $   17,211 $  35,401

rP
Restricted cash—current 73,597 — — — —
Property, plant and equipment, net 114,636 23,535 18,793 11,998 7,512
Working capital (deficit) 150,321   43,070 (56,508) (28,988)   8,458
Total assets 386,082     130,424         51,699        34,837  44,466
Convertible preferred stock warrant liability —   1,734   2,074   191   27
Common stock warrant liability 6,088 — — — —

yo
Capital lease obligations, less current portion 496 800 888 18 —
Long-term debt 71,828 — — — —
Convertible preferred stock — 319,225 101,178 101,178 60,173
Total liabilities and stockholders’ equity (deficit) 207,048 (253,523) (199,714) (117,846) (43,923)

Source: Tesla Annual Reports (www.sec.gov).

op
tC
No
Do

This document is authorized for educator review use only by Anirudh Agrawal, O. P. Jindal Global University until October 2017. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 Tesla Motors and the U.S. Auto Industry (Case B)

t
Endnotes

os
1.  “Tesla Motors files for an IPO, by the numbers,” The Wall Street Journal, January 29, 2010.

2. www.sec.gov/Archives/edgar/data/1318605/000119312510017054/ds1.htm.

3.  “Tesla Motors files for IPO – So much for the profits,” The Wall Street Journal, January 29, 2010.

rP
4. www.businessweek.com/news/2010-06-29/tesla-posts-second-biggest-rally-for-2010-u-s-ipo.html.

5.  Tesla 10-K filing, March 3, 2010, www.sec.gov/Archives/edgar/data/1318605/000119312511054847/d10k.

htm#tx151489_8.

6.  Compiled from Tesla’s 10-K filing, March 3, 2010, www.sec.gov/Archives/edgar/

data/1318605/000119312511054847/d10k.htm#tx151489_8.

7. www.teslamotors.com/about/press/releases/tesla-unveils-roadster-25-newest-stores-europe-and-north-
america.

yo
8. www.wired.com/autopia/2009/05/daimler_tesla/.

9. www.wired.com/magazine/2010/09/ff_tesla/all/1.

10. www.wired.com/autopia/2009/01/tesla-motors-jo/.

11. www.wired.com/autopia/2009/01/tesla-deal-help/.

12. www.ft.com/cms/s/0/433ddb64-653a-11df-b648-00144feab49a.html.
op
13. NUMMI was a joint venture by Toyota and GM. GM withdrew from the JV as part of its bankruptcy reorga-
nization in 2009.

14.  “Tesla to deliver prototypes to Toyota this month,” The Wall Street Journal (online), July 12, 2010.

15.  “Toyota plans electric SUV with Tesla,” The Wall Street Journal (online), July 16, 2010.
tC

16.  “Toyota plans 2 electric autos in the U.S. and 6 hybrids by 2012,” The New York Times, September 14, 2010.

17.  “Tesla Motors; Panasonic invests $30 million in Tesla: Companies strengthen collaborative relationship,”
Energy Weekly News, November 19, 2010.

18.  Tesla Motors 2010 Annual Report (Form 10-K), http://ir.teslamotors.com/secfiling.

cfm?filingID=1193125-11-54847&CIK=1318605.

19.  “Buyers loath to pay more for electric cars,” The Financial Times, September 20, 2010.
No

20.  “Tesla to release a Model S with 300-mile range,” The Oakland Tribune, March 7, 2011.

21. www.wired.com/autopia/2009/05/daimler_tesla.

22. www.nytimes.com/2010/07/25/business/25elon.html?_r=1&adxnnl=1&adxnnlx=1281139208-CSLYpD-
V6HTnlBaA/DbnqUg.

23.  “Top Gear, hot water,” The Daily Telegraph, March 31, 2011.

24.  “Tesla (TSLA) sues BBC’s Top Gear for libel, falsehood in Roadster review,” StreetInsider.com, March 30, 2011.
Do

25.  “Is divorce different for the rich?” SmartMoney, March 29, 2011.

This document is authorized for educator review use only by Anirudh Agrawal, O. P. Jindal Global University until October 2017. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 Tesla Motors and the U.S. Auto Industry (Case B)

t
os
26.  “Elon Musk, of PayPal and Tesla fame, is broke,” DealBook, The New York Times, June 22, 2010, http://deal-
book.nytimes.com/2010/06/22/sorkin-elon-musk-of-paypal-and-tesla-fame-is-broke/.

27.  “Tesla shares cruise after Obama backs clean-fuel cars,” Dow Jones News Service, March 31, 2011.

28.  “Morgan Stanley says Tesla Motors could become ‘America’s fourth automaker’; Shares jump,” Associated
Press Newswires, March 31, 2011.

rP
29.  “Tesla shares cruise after Obama backs clean-fuel cars.”

30.  “Morgan Stanley says Tesla Motors could become ‘America’s fourth automaker’; Shares jump.”

31.  “Tesla shares could reach $50 in 3 years – Analyst,” Reuters, January 24, 2011.

32.  “2nd update: Tesla shares rise after Obama backs clean-fuel cars,” Dow Jones News Service, March 31, 2011.

33.  “Tesla’s future: Will another company be in the driver’s seat?” StreetInsider.com, March 28, 2011.

yo
34.  “Tesla Motors CEO: ‘We can succeed as an independent company,’ Bloomberg says,” Theflyonthewall.com,
March 29, 2011.
op
tC
No
Do

This document is authorized for educator review use only by Anirudh Agrawal, O. P. Jindal Global University until October 2017. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860