There was a time when the Tesla business model was more a promise than a reality. A company born in Silicon Valley that wanted to change how the world moved from point A to point B. In a cleaner, safer and cooler way too.
As Tesla Motors started to ship in 2012 its truly mainstream vehicle, the Model S, people began noticing it. The forward looking vision of its founder Elon Musk has frequently been compared to that of Steve Jobs and Apple.
Before going any further, let’s start with some bad news: despite building and selling cars profitably since around 2009, Tesla is losing more money with each quarter.
But let’s rewind a little bit and go with what very few companies have managed to successfully build: brand.
The Tesla Brand
Every company wants to build a brand around it. Some kind of positive perception of the company. Whether it is due to quality, product, convenience, price or after sales service.
The best brands are built around several or all of these attributes. Conveniently, most of them can’t be measured or valued in an objective way, making them a matter of opinion.
The Tesla business model relies on these attributes to attract clients and aficionados.
Tesla has mixed the right amount of a sexy product with high tech and after sales support. This has made the brand immune to the occasional flaws in its products, several product recalls and continuous production delays.
Here is the thing: Tesla’s vehicles are expensive, but what matters is that comes with the package. It makes clients feel like they are part of something bigger. Of a tech revolution that cares about the planet. And doesn’t look hideous while doing it. They actually look cool.
It is this combination of attributes that Tesla’s competitors don’t understand.
Earlier this year, Wired wrote a piece about the Chevy Bolt. It praised the electric vehicle’s 320-kilometers range and spelt some doom for Tesla. The car is set to start shipping later this year, beating the estimated delivery date of the newest and affordable Tesla Model 3.
But Wired and General Motors are missing the point:
Technology alone isn’t enough – Steve Jobs.
It is not enough for the Bolt to have a good range (320 kilometres is not exactly great, but it is an electric vehicle after all). Neither it is great to deliver a car on schedule as Tesla has proved several times.
What matters is the brand that is delivering it. A brand with:
- Cool design and looks.
- Great tech inside.
- Excellent after sales service.
- Successful marketing.
- The best performance.
- An aspirational status.
All this adds up to a story. A tale to which the client can feel related to and wants to be a part of. Very similar to how Netflix’s business model builds its own around user proximity.
Nobody wants to be a part of the Bolt story. For consumers, it is nothing more than a Chevy. And an ugly one at that.
This is the same reason why the iPhone is successful. There are competing smartphones that deliver great specs at half the iPhone price or less. But, somehow, the iPhone keeps selling like hotcakes.
Tesla has managed to build a great brand. If you wonder how big it is, just take a look at the Model 3 reservations: over 400,000 at 1,000 dollars a pop. Some 100,000 of those were placed before even knowing what the Model 3 would look like.
The caveat, of course, is that these are not sales. The reservations are fully refundable and clients can cancel the order at any time.
Of course, Tesla’s vehicles are expensive. As we saw with the Cannibalisation of the iPhone and the Ultimate Sacrifice of Apple:
If you are good at something, never do it for free – The Joker in The Dark Knight.
Although being expensive was a means to an end, as Elon Musk eloquently stated in his secret plan: finance the development of cheaper and affordable vehicles to change the world of transportation.
That’s an ambitious plan. That is why the Tesla business model is frequently compared to Apple’s.
Except for one thing.
The Tesla Business Model
In a company, money should be a means to an end. Not the other way around. I’ve seen what making-money-as-an-end does to a company from the inside. And it’s not pleasant.
At the end, you just start cutting corners, the product is not finished and customers notice.
The first thing one should know about the Tesla business model is that it has a money problem. Elon Musk got the money-as-a-means part right, but that doesn’t mean that a company should forget about it.
It matters. A lot.
This is Tesla’s net revenue vs net income (in thousands of dollars):
Tesla started selling the Roadster, an expensive sports car. Its sales made possible the development of the Model S. This vehicle was released to the public by the end of 2012, which is the reason for the spike in net revenue. But as soon as the Model S started to sell in quantity, Tesla’s minute profits vanished.
The company started reporting its financial results ever since Q1 2009, meaning that we have 30 quarters of historic results. 29 of those have losses and only 1 quarter had a profit of 11 million dollars.
I’ll say it again: 29 out of 30 quarters have losses. A stunning 96,6%.
At a profit and loss level, everytime Tesla sells a car it loses money:
But this is kind of an unfair comparison, just like the ones I wrote about in a post titled The Strategic Importance of Apple Music.
So here it is. Tesla’s gross margin per vehicle sold:
Meaning, Tesla business model is successfully able to sell its premium brand cars and earn some money with them. If you take a look at the gross margin, the picture looks even better:
With these figures, an unavoidable question arises: Why is Tesla losing money if it sells its cars at a profit?
The Tesla Business Model Short Term Threat
The reason of being able to sell cars at a profit since 2009 almost every quarter but losing money is its vast R&D budget:
Elon Musk was not kidding when he said back in 2006 that he would reinvest the money in the development of future vehicles.
Tesla’s biggest short term threat to its business model is not some competitor like the Chevy Bolt. Or some other electric car that is sold at a record low price tag. Or a fancy new Chinese startup. No.
It’s running out of money.
Tesla has a brand that can withstand external attacks from the lower end. Just like the iPhone. But unlike Apple, Tesla has a funding problem. It doesn’t earn money. It needs money to continue developing new and innovative cars, that is why Elon Musk has gone creative.
Those reservations we talked about earlier amount to more than 400 million dollars (400k reservations at 1k each). That will buy some time to Tesla. But he has also issued debt and a stock sale.
All these point to the lack of self funding of the Tesla business model.
This is a threat that can kill Tesla in the short term. But what about the long term?
The Room of Requirement Transportation Model
In a less dramatic tone, getting stuck in a traffic jam sounds like the fate of every car owner. It won’t matter if you have a brand new Lamborghini or a Jaguar. A BMW M3 gets stuck in traffic just like a SEAT Ibiza or a cheap Dacia Logan.
The only difference is the price tag.
That is why when people refer to Tesla as the company that will revolutionise transportation, I smile to myself remembering the Traffic Jam Conundrum. A Tesla Model S, even with all the technology breakthroughs assembled within it, won’t change the fact that its driver will get stuck in traffic.
Just like a BMW. Just like a Volkswagen.
This excerpt is from an article titled The Apple Car strategy and the Room of Requirement. In it, I argue that no matter the kind of car you drive (you don’t even need to own it), a traffic jam will level you to everyone else.
It is the traffic jam conundrum, a puzzle that no one has been able to solve yet.
There are lots of evidence that point to Apple trying to solve this problem. Apple is looking at this from a different perspective, creating what I call The Room of Requirement (from the Harry Potter saga):
It is a room that a person can only enter when they have real need of it. Sometimes it is there, and sometimes it is not, but when it appears, it is always equipped for the seeker’s needs.
A car where the passenger is at the center of the experience. Not “Built around the driver” as Tesla claims. Apple wants to put all the traditional attributes of a car upside down. Making the travel time spent in our commutes worthwhile, not a waste of time.
This is the long term threat to Tesla business model.
Maybe that’s why Elon Musk’s Grand Plan includes SUVs in its pipeline. That’s stunningly similar to the 1957 Fiat Multipla Apple bought a while back.
Everytime Elon Musk is about to reach its dream, it seems to fade again in the distance.