How Tesla Reinvented the Automobile Industry?

The growth story of Tesla is no ordinary story. It is a testimony to what a start-up can achieve if it’s given an adequate amount of funding and good leadership guidance. It would be wrong to classify Tesla as a start-up company now. Tesla is now one of the most popular automobile companies in the world. It is also the most valuable automotive company in the entire world.

The total market capitalization of Tesla is now more than $1 trillion dollars! This number becomes even more astounding when it is seen in context. Tesla, by far, has the largest market capitalization among all automobile companies. The next ten automobile behemoths such as Ford, General Motors, Volkswagen, Honda, BMW, etc all have a combined valuation of close to $1 trillion. This is amazing given the fact that traditional automobile companies have been around for more than a century. On the other hand, Tesla was founded less than twenty years ago in 2003!

Tesla was once a start-up that drew the attention of investors such as Elon Musk who has now become the face of the company. It is one of the few companies which has dwarfed the incumbent companies in its market space.

In this article, we will have a closer look at what the Tesla model is. We will try to understand and uncover what makes Tesla the most valuable automobile brand in the world.

• Low Sales: The fact that Tesla’s valuation is so high becomes all the more astounding when one considers the number of cars that Tesla sells. In the year 2021, Tesla produced and sold close to one million cars. Now, even though one million might appear to be a big number, it is actually quite small, if we consider the number of cars produced by the global automobile market. Tesla’s market share hovers around 1% of the overall market.

• High-Profit Margin: Tesla has been able to create a brand image that resonates with the end consumers. This can be seen from the fact that Tesla is able to sell a large number of cars even though it has a high-profit margin. The average high-end car companies are able to generate a gross margin of around 15% to 20%. However, in the case of Tesla, the profit margin is close to 30% i.e almost double that of traditional car companies.

  The ability of Tesla to sustain its sales even with a higher price tag speaks volumes about the marketing capability and consumer connection of the company. This fact becomes more commendable if we take into account the fact that Tesla does not spend any money on advertising its products whereas its competitors have massive advertising budgets.

• Multiple Sources of Revenue: Tesla has a diverse product line. If one views the product line which Tesla offers, one may believe that Tesla is a player in many industries. For instance, the company produces cars and also services them. This is the main source of revenue for the company. However, Tesla is in the electric energy business. Hence, they also offer solutions for using solar energy to power one’s home.

  Tesla has created solar panels, which are fixed on the roof and help in the generation of electricity. Also, Tesla has created a unique product called power wall. Power walls store solar power so that it can be used on days when enough energy is not produced.

• Regulatory Credits: Regulatory credits can be considered to be another important source of revenue for Tesla. Governments all over the world provide an incentive for companies to produce electric cars. Since Tesla only produces electric cars, it obtains all these regulatory credits. There are many other car companies that do not produce enough green cars. Hence, they have to purchase these regulatory credits from Tesla at the market rate. Since Tesla gets these credits for free, they can sell them in the open market for a 100% profit!

• Focus on Research and Development: Tesla, like many other start-ups of its generation, is not in a rush to make money. Even though Tesla was a very valuable brand in the past as well, the company did not generate any profit till 2019! 2020 has been the first year when Tesla has generated a profit.

  Tesla is known for spending three to four times more on research and development as compared to its competitors. This research and development spending is what is propelling Tesla ahead of its competition. Tesla regularly introduces revolutionary features such as self-driving cars. The end result is that traditional media houses as well as social media are forced to provide coverage to their vehicles. This acts as free word-of-mouth publicity which helps increase the sales of the company in the long run.

• Start with Expensive Cars: Tesla decided to take a different approach to the electronic vehicles market. Most companies were trying to produce lower-end electric cars and were unable to do so because the costs of production were too high. Companies were not able to compete with fossil fuel-powered vehicles based on price. Tesla approached the market from the opposite direction.

  Tesla first made electric cars popular in the expensive cars segment. The money from these expensive cars is being funneled into research and development to reduce the price of entry-level vehicles. Once Tesla enters the lower segments of the market, it will do so with a compelling value proposition. Also, the success of Tesla in the high-end car market has made the idea of electric cars more palatable to the masses.

The bottom line is that Tesla has used a combination of technology and business acumen to completely transform an old industry. It is definitely a model which other start-ups can learn from.

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.