MBA 665 Final Project Impact of Government Action on Tesla Motors Inc

MBA 665 Final Project Impact of Government Action on Tesla Motors Inc

Impact of Government Action on Tesla Motors Inc.

TO:  Jack Harris, President of Crisis Consulting

FROM: First name Surname, Vice President of Government Affairs

DATE: September 5th,

SUBJECT: Company Overview and government issues

Tesla Motors Inc.

Tesla Motors is an American company that specializes in automotive design and manufacture. Its competitive advantage in the market is its focus on energy storage and electric vehicles. Founded in 2003, the company is in the automotive and renewable energy storage systems industry. The company enjoyed widespread popularity with the launch of the Tesla Roadster, which was the first sports care entirely powered by electricity. With sales of over 2,000 Roadsters to 30 countries in the last quarter of 2012, Tesla reported a profit in the first quarter of 2013, which was the first time for the company to report a profit since inception in 2003. The production of the battery electric vehicles (BEV) made the company eligible for several government incentives in numerous nations around the world.

According to Forbes (2014), Tesla Motors suffers the risk of being a market leader in a niche market segment within the overall automotive industry. The company’s unique positioning as the only manufacturer to produce BEVs for the consumer market sets it apart from competitors. The all electric ‘Model X’ SUV retailed at the US $132,000 and critiques questioned the exceptionally high selling price of the car model. The luxury vehicles brands like BMW, Lexus, Audi and Mercedes-Benz sell approximately 5 million vehicles annually which total to $220 billion worth in sales. Considering the segment accounts for 6% of the total sales volume of cars in the industry and 10% of the total industry revenue, there is a huge profit margin from every unit sold. Despite the high selling price of the Model X, Tesla is working on a third generation Model III that will hopefully be launched in 2017 that will retail at $35,000. The CEO, Elon Musk is confident that the launch of this affordable make will ensure Tesla competes on a common front as the BMW 3Series and Audi A4 (Welch, 2016).

In promotion of the Tesla electric cars, the company has set up multiple supercharging stations that provide motorists with ample charge within a reasonable radius. The supercharger network includes a record worldwide 3,000 individual superchargers and more than 500 supercharger stations. They can charge up to 80% of a Tesla battery in an hour. The company, however, needs to build more charging stations if it is to emerge a market leader in the industry by 2020. According to automotive researcher Edmunds.com, Tesla customers exclusively research on Germany luxury cars before making a final purchase decision. Porsche announced its desire to build its Mission E fast-charging sports car to counter the popularity of Tesla’s Model S sedan with Audi’s electric E-tron Quattro SUV to rival Tesla’s Model X SUV. Tesla stands to revolutionize the automotive and oil industry with the Model III vehicle launch in 2017, and although major competitors plan to counter their market niche, Tesla is well ahead of the game (Welch, 2016).

Current Environment

Tesla is on a mission to reinvent models of car dealership by selling their cars directly to consumers. The strategy, however, requires the company to convince legislators to allow several exceptions to the dealer-franchise laws. The company is keen on customer satisfaction and by eliminating the dealer franchise system; Tesla has the power to promote store networks where potential customers get to see the cars, take test drives and receive order services. Tesla aims to incorporate the concept behind Apple stores where the company controls the retail customer experience.

Tesla is a market leader from different fronts. Being the first company to manufacture electric cars for the consumer market gained the company immense popularity. The brand equity is fairly high with the consumer market considering Tesla as an innovative brand based on the new model launches the company constantly demonstrates. The company is also in responsible for building charging stations for its cars and aims to control the retail environment (Trefis, 2016). For most companies, these would be too many ventures for a single company that is relatively young in the automotive industry. Tesla, however, targets to beat all odds and manufacture affordable electric cars with stores that enhance the shopping experience and enough charging stations to keep customers content. Elon Musk is a reputable CEO that has seen the company through different milestones.

The company can expand into the international market that is eager to embrace the new technology. By colluding with different international governments, Tesla can increase the demand for their cars by lobbying for lower import duty tax due to the clean energy solution that such cars offer. A major threat is that luxury car manufacturers like Porche and Audi are slowly catching up in the innovation with electric cars scheduled to be launched in 2021. There are also plug-in hybrids that use both gas and electricity. Considering the limited charging stations networks, most consumers may consider this a suitable alternative to fully-electric vehicles (Trefis, 2016).

Government action

Tesla recently repaid its low-interest US $465 million loans from the Department of Energy. The announcement was well received in the market with the stock price doubling overnight. Tesla has enjoyed a series of state and federal subsidies where the government rewards the company $7,500 tax credit for every car purchased for personal use. Other states like Colorado and West Virginia also offer additional income-tax credits which have made the subsidies an integral component in its business model (Koopman, 2013). According to Washington Press (2016), there have been reports and postings in the company websites where different customers complain of suspension failures in the Tesla Motors’ Model S sedan. The concerns have triggered the interest of the National Highway Traffic Safety Administration (NHTSA) that insists customers may compromise their safety by committing to sign the nondisclosure agreements with the company. Despite the concerns, the Tesla has no intention of dissuading customers from reporting safety issues to the government.

Many would argue that Tesla has a love-hate relationship with the government. The company is considered cool and innovative and despite their popularity, very few individuals own the cars. Being a leading campaigner for zero emission vehicles (ZEV), Tesla has managed to be part of the campaign by governors from specific states pledging to have 3.3 million ZEV by 2025. The company also plans to help the states set up supporting infrastructure that will ensure the ZEV are fully operational on US roads. Tesla’s move to revolutionize auto-dealership has been faced with many criticisms with some being of the opinion that the company cannot afford to stretch out its resources and have exclusive retail stores for their vehicles. The business model that will enable Tesla to sell their cars directly to consumers is aimed at enhancing customer experience when exploring the brand (Press, 2016). Tesla hopes to improve customer satisfaction to create a pool of loyal customers that will recommend their products to other consumers. For Tesla to own their retail system, numerous exceptions in the dealer franchise laws set up by the government. Auto dealers insist that manufacturers selling their products directly to the customer could result in poor quality products reaching unsuspecting customers. The company hopes to sway state regulators to their side due to their power to control who is eligible to sell cars in their states (DeBord, 2015).

The biggest issue facing the company is the marketplace bills that stand to dictate the mode of selling cars in the state. The main concern for the company is that some states may ban the sale of Tesla cars especially considering the direct selling to customers’ model (Obrien, 2016). The bills stand to limit both modes of selling being internet sales and sale via the showrooms and retail stores owned by the company. With this challenge, the company stands to lose market share potential since their cars will not be accessible to potential customers in states that prohibit the sale of Tesla model cars. Tesla cannot currently sell their cars in five states in the US; Maryland, New Jersey, Texas, Virginia and Arizona. The automotive marketplace has been relatively stable over the years with auto franchise-dealers controlling the retail industry. Despite the merits that Tesla cars present to the environment, job market and technological advancements in the form of constant innovation, most legislators fear the distress and mistrust with local businesses seeing the new Tesla business model as a threat to their business and opportunity to infringe on customer rights.

To embrace the innovation that Tesla presents in the market, states are adapting pro-Tesla legislation that hopes to integrate the cars into the market. Georgia’s HB925 makes a distinct exception to the franchise law to promote the distribution of Tesla cars in the state. The bill, however, limits the production of ZEVs in the event the sales fall below 1,500 cars per annum. The strategy ideally satisfies both the conflicting parties in the automotive retail business by allowing Tesla a certain capacity of market share. New York Governor signed the NY A07844 which allows the company to continue operations in the already existing five showrooms while restricting the opening of more dealers (Obrien, 2016). Tesla has entered negotiations with Ohio Senate panels to limit the expansion of showrooms to reduce anti-Tesla amendments in State bills. Washington State has a progressive law that promotes Tesla’s direct selling model while preventing the practice by other manufacturers.

The matter of ZEV and direct customer sales is fairly new to both regulators and state legislators. The complexities of policy making and the argument considerations from both parties explain why most state officials choose to remain neutral on the matter. Politics plays an important role in whether Tesla will earn exclusive rights to distribute their products with most politicians being keen to ensure they remain popular among the majority business owners in their states (Obrien, 2016). Despite the efforts by states like Arizona and Texas to ban the direct selling of cars to consumers, their efforts to woo Tesla jobs prove that Tesla has a lot to offer all states if legislators and regulators are willing to compromise. Massachusetts has both pro-Tesla bill (S129) and the anti-Tesla bill (H241). The Massachusetts Auto Dealers Association recently sued a town in Nadick for licensing Tesla as a car dealer. Considering the ambiguity in state legislation, the court will have a hard time determining the suit. New Jersey State Motor Vehicle Commission recently restricted the sale of Tesla cars in the state but the NJ A3216 passed by the Assembly offer Tesla a temporary solution to the distribution problem. Tesla incorporates a new technology in the automotive industry, legislators and regulators need to reconcile their options and work towards making a stand in the Tesla issue of direct selling.

Organization and Team

Tesla manipulates the traditional form of business organization to develop a structure that supports continual business growth. The systems design incorporate different patterns that are integrated into the company strategy. The company’s vision and mission place specific emphasis on market leadership in the electric automotive industry. The functional organization structure focuses on centralization and global hierarchy with minimal regional division (Meyer, 2016). The model guarantees effective operation control which facilitates the implementation of new strategies consistently throughout the enterprise. The minimal regional division simplifies financial analysis enabling the company to focus on regionalized strategies that promote international growth (Menguc & Auh, 2010). The structure, however, has its limitations like rigidity which limits flexible adjustments in the company. The Tesla team includes the following top ranking individuals who are ideally responsible for the operations of the company; (CEO) Chief Executive Officer, (CFO) Chief Financial Officer, and (CTO) Chief Technology Officer. There are several vice presidents that operate under the executives, and they are; VP Vehicle Engineering, VP Powertrain Operations, VP North America Sales, VP Manufacturing, VP Autopilot Hardware Engineering and VP Worldwide Services and Deliveries. The global hierarchy at Tesla has provided it with a systematic format of dealing with the recent legislation issues that arise in most states (Liao et al., 2011). Negotiations and compromise are the major tools used by Tesla to curb any negative publicity on the brand as it strives to gain market share in the US and internationally.

Stakeholders

CSR Corporate Social Responsibility is a major concern for stakeholders of Tesla by offering a sustainable business solution in the transport sector that is friendly to the environment. Stakeholders are often categorized based on their degree of interest in the business and the level of control in company matters. The most influential stakeholders are given priority in matters of decision-making to ensure they are pleased and continue vouching for the company (Ditlev-Simonsen & Wenstop, 2013). The community is a priority stakeholder according to Tesla’s CSR plan which should benefit the immediate communities where the manufacturing plants are situated. Customers come in second, with Tesla going the extra mile to meet their demand and expectations when it comes to new car models. Company employees are an integral part of the company’s success and should be well compensated and motivated to ensure they remain committed to their role in the company growth forecasts (Greenspan, 2016). Investors and shareholders fund the company projects with the hope of gaining a sustainable ROI. Tesla owes its shareholders due diligence when organizing its operational strategies to guarantee their support. The government is a crucial stakeholder that can adversely affect the success rate of the company (Werther Jr. & Chandler, 2010). The recent marketplace bills prove that anti-Tesla legislations stand to limit the company’s ability to explore the US market in its entirety. The government, however, is in full support for Tesla’s CSR plan that revolves around sustainability and development.

References

DeBord, M. (2015). Tesla has 2 major problems, and they have nothing to do with its cars. Businessinsider.com. Retrieved 5 September 2016, from http://www.businessinsider.com/teslas-problems-are-not-its-cars-2015-10

Ditlev-Simonsen, C. D., & Wenstop, F. (2013). How stakeholders view stakeholders as CSR motivators. Social Responsibility Journal, 9(1), 137-147.

Greenspan, R. (2016). Tesla Motors, Inc. Corporate Social Responsibility, Stakeholders – Panmore Institute. Panmore Institute. Retrieved 5 September 2016, from http://panmore.com/tesla-motors-inc-stakeholders-corporate-social-responsibility

Koopman, C. (2016). Tesla Is No Success Story. US News & World Report. Retrieved 5 September 2016, from http://www.usnews.com/opinion/blogs/economic-intelligence/2013/06/03/teslas-success-is-the-result-of-political-favoritism

Liao, C., Chuang, S. H., & To, P. L. (2011). How knowledge management mediates the relationship between environment and organizational structure. Journal of Business Research, 64(7), 728-736.

Menguc, B., & Auh, S. (2010). Development and return on execution of product innovation capabilities: The role of organizational structure. Industrial marketing management, 39(5), 820-831.

Meyer, P. (2016). Tesla Motors, Inc.’s Organizational Structure, Characteristics (An Analysis) – Panmore Institute. Panmore Institute. Retrieved 5 September 2016, from http://panmore.com/tesla-motors-inc-organizational-structure-characteristics-analysis

OBrien, M. (2016). Tesla and Their Love-Hate Relationship With State Government | Political Eye Candy. Billtrack50.com. Retrieved 5 September 2016, from http://www.billtrack50.com/blog/in-the-news/tesla-and-their-love-hate-relationship-with-state-government/

Press, A. (2016). US government investigating Tesla suspension issues. The Washington Times. http://www.washingtontimes.com/news/2016/jun/9/us-government-investigating-tesla-suspension-issue/

Trefis, T. (2016). Why Tesla Struggles To Gain Market Share. Forbes.com. Retrieved 5 September 2016, from http://www.forbes.com/sites/greatspeculations/2015/11/17/why-tesla-struggles-to-gain-market-share/#3899abaf4fed

Welch, D. (2016). Why Tesla’s Mass-Market Car Should Scare Mercedes and BMW – Bloomberg. Bloomberg.com. Retrieved 5 September 2016, from http://www.bloomberg.com/news/articles/2016-05-12/why-tesla-s-mass-market-car-should-scare-mercedes-and-bmw

Werther Jr., W. B., & Chandler, D. (2010). Strategic corporate social responsibility: Stakeholders in a global environment. Sage Publications.