Tesla Motors: Innovation Ecosystem

Lauren Fraser Kyle Khasigian Amanda Lynch Frank Madden Hans Reichstetter Catherine Sharp
EIS Section 2
October 12, 2009
Introduction
Though todays electric vehicles (EVs) are commonly viewed as a nascent technology, their
roots trace back to the 1830s
1
, predating those of the now-standard internal combustion engine
(ICE). Moreover, by 1912 America boasted nearly 34,000 registered electric vehicles and 20 EV
manufacturers, as wealthy buyers took advantage of improving electric infrastructure to use EVs
as city transportation
2
. But despite this early success, electric vehicles were inherently limited by
expensive batteries offering limited ranges, long charge times, and middling performance. With
the advent of the highway system and cheap gas, the economics and practicality of ICE vehicles
came to dominate, relegating EVs to non-highway applications and making true electric cars
little more than novelties.
A century later, EVs still hold a trivial at best share of automotive sales, but the mass production
of hybrid electric vehicles (HEVs) by manufacturers such as Toyota, Ford and Honda have
helped open the door once again for the electric car. GM and Toyota are among the major
manufacturers readying plug-in hybrids (PHEVs) capable of running 20-40 miles on pure
electricity, while Nissan is preparing to release its mid-priced Leaf EV in late 2010.
However, perhaps the most interesting EV story thus far is that of Tesla Motors. As of
September 2009, the California startup had sold more than 700 of its $109,000 Roadsters, which
are still the only serial-produced highway-ready EVs available in the US. Overall, the
companys innovation ecosystem highlights the myriad challenges of introducing new
technologies into well-established, highly capital-intensive industries. And while Teslas long-
term success is far from certain, the companys evolving product strategy and ambitions for
broad adoption of EVs underscore the need to continually reassess ecosystem dynamics.
Initially, capital constraints, IP protection, and a lack of manufacturing expertise were the
predominant drivers of the companys ecosystem strategy. Lithium-ion cell commoditization and
a high-end product strategy shielded the company from significant interdependence and
integration risk, while Tesla gained significant industry expertise from its relationship with niche
sports car maker Lotus.
But as the company has sought to move beyond its current niche market of high-end sports cars,
it has necessarily had to adapt to achieve profitability. On the one hand, Tesla is pursuing a more
vertically-integrated strategy in the production of its proposed $60,000 Model S sedan, which the
company hopes can extend EV adoption into more mainstream cars buyers. But acknowledging
the huge challenges of building a global car brand, Tesla also realized that its relationship with a
small manufacturer such as Lotus would be less helpful in breaking into more mainstream
segments. In January 2009, Tesla sold an equity stake and agreed to a non-exclusive powertrain
supply contract with automotive giant Daimler, signaling that its future could also be as a
supplier rather than competitor to major manufacturers.

1
Timeline: Life & Death of the Electric Car. PBS. June 9, 2006. http://www.pbs.org/now/shows/223/electric-
car-timeline.html
2
Early Electric Automobiles. Encyclopedia Britannica.
http://www.britannica.com/EBchecked/topic/44957/automobile/259061/Early-electric-
automobiles#ref=ref918099
Prologue: The 1990s California Experiment
In many ways, the roots for Tesla and modern electric vehicles began twenty years ago. In 1990,
GM unveiled its all-electric Impact concept vehicle, which had been developed largely by
AeroVironment and Hughes Electronics, with AC Propulsion providing power electronics. GM
CEO Roger Smith quickly announced the Impact would be a production vehicle
3
, lending instant
credibility to the long-dormant notion of everyday EVs. Given Californias continued struggles
with air pollution and optimism over GMs progress with the Impact, the California Air
Resources Board shortly thereafter passed its Zero Emission Vehicle (ZEV) standard, mandating
that 2% of the California sales of the seven largest automakers be zero emission vehicles by
1998, rising to 10% by 2003
4
.
By mid-decade, GM, Toyota and Honda had released their first ZEVs, but sales were
disappointing despite largely positive reviews and waiting lists for the limited production
vehicles. The automakers also showed little enthusiasm for their new products, and successfully
campaigned the CARB to delay and eventually abandon the ZEV mandates altogether. Years
later, the documentary Who Killed the Electric Car? cast a shadow over the California
experience, suggesting automakers, oil companies, and the entrenched ICE value chain had
conspired to submarine EVs from the start. Still, there was little doubt that battery cost, range,
and the lack of support infrastructure were fundamental issues that would limit the production
volumes required for profitable production by major manufacturers.
Part I. Launching Tesla: The Roadster Ecosystem
Before starting Tesla in 2003, cofounders Martin Eberhard and Marc Tarpenning found practical
inspiration in a meeting with AC Propulsions Alan Cocconi and Tom Gage
5
. Over a decade
after its involvement with GM, AC Propulsion had developed a prototype EV called the tzero: a
sports car capable of sprinting from zero to 60 in less than four seconds while driving 200 miles
on a single charge. Eberhard and Carpenning saw the kind of halo car that could shatter public
misconceptions about EVs and usher them into the mainstream. But Gage and Cocconi
expressed little interest in starting a car company to produce the tzero, viewing its market as too
limited. Instead, they connected Eberhard with Elon Musk, the PayPal founder who had also
expressed interest in helping Gage and Cocconi produce the tzero.
With Eberhards electrical engineering experience, Musks financial backing, and a handful of
licenses for AC Propulsion technologies in tow, Tesla Motors was born. Its goal was
undoubtedly ambitious: to profitably manufacture a $100,000 sports car that replicated the
tzeros performance while delivering total well-to-wheel efficiency of over twice that of a Prius.
In light of the new companys lack of experience building cars and the failures of previous EVs,

3
Jamerson, Frank. EV1 Electric Car Timeline. EV World. http://www.evworld.com/article.cfm?storyid=1053
4
Cogan, Ron. 20 Truths About the GM EV1 Electric Car. GreenCar.com. May 26, 2008.
http://www.greencar.com/articles/20-truths-gm-ev1-electric-car.php
5
Siry, Darryl. Will the Real Tesla Founder Stand Up? Wired. June 25, 2009.
http://www.wired.com/autopia/2009/06/tesla-founder/
Tesla set about assembling a product strategy and supply chain meant to address the significant
innovation risks it was about to face.
Tesla Roadster Ecosystem Risk Assessment
Initiative Risk:

Increasing eco-consciousness amongst consumers, favorable legislature, and
strong sales of hybrid vehicles suggested a robust market for the Roadster.
Niche targeting further shields Tesla from risk. Though AC Propulsions
development of the comparable tzero is encouraging, the ability of the
company to successfully exploit its innovation remained a concern, given its
capital constraints and manufacturing inexperience.
Interdependence Risk:

Given that Tesla is the primary innovator within the Roadster ecosystem, the
level of interdependence risk is relatively low. The commoditized nature of Li-
ion batteries minimizes potential lags in supply. In addition, Lotus experience
with chassis design and manufacturing suggest a stable relationship on this
front, at least for small volume Roadster production. The primary delays
related to interdependence came as a result of transmission delays, a
problem which the company eventually solved internally.
Integration Risk:

Tesla has largely mitigated integration risk from the Roadsters ecosystem by
completing final Roadster assembly in its own facility. By retaining control
over the purchase process through the elimination of franchise dealerships as
intermediaries, Tesla ensures uninterrupted market access, though
establishing the network has required time. Moreover, combining premium
performance and green efficiency attributes meant the company developed
substantial brand awareness well before its first Roadsters came to market.

Relationship with Lotus
While Tesla initially had no internal expertise in exterior and chassis design, its requirements for
the Roadster were largely indistinguishable from that of a regular gasoline-powered car,
significantly lessening interdependence risk. After preliminary work with a number of car
designers, Tesla eventually agreed to a multi-faceted agreement with Lotus, which provided
design services, certain technology licenses, and also agreed to manufacture the rolling car
chassis on a contract basis
6
. After Lotus built the rolling chassis at its plant in England, Tesla
would then integrate the electric powertrain and perform final assembly in California. By
installing its proprietary Energy Storage System (ESS) in the final step, Tesla also designed out
most concerns over IP.
Benefits to Lotus
Thus far, the relationship would appear to have been a successful one for both parties, providing
near-term benefits as well as the flexibility for both companies to pursue divergent strategies as
Tesla matures. Lotus was well-positioned for the smaller production volumes Tesla was
planning for and had a history of diverse collaboration with other manufacturers, working with
GM on its Ecotec engines yet relying on Toyota-sourced engines for its own Elise and Exige

6
Eberhard, Martin. Lotus Position. Tesla Motors official website. July 25, 2006.
http://www.teslamotors.com/blog2/?p=7
models. The relationship was thus consistent with previous contract design work and also
allowed the company to leverage similarities between the Roadster design and its own Elise.
For Lotus, producing up to 1,000 Roadsters a year meant guaranteed utilization of its
manufacturing capacity, which has historically produced approximately 3,000 cars per year
7
. As
a contract manufacturer, Lotus would not be directly entitled to the long-term upside they helped
build at Tesla, but they did retain the guaranteed revenues associated with the Roadsters design
and manufacturing.
While Lotus has not had direct access to Teslas powertrain technologies, the relationship has
also undoubtedly improved its green car credibility. In 2008, Lotus supplied the chassis for
Chryslers Dodge EV concept vehicle, which not coincidentally bears a close resemblance to the
Roadster. As noted below, the relationship also provided additional context for developing
Lotus own green car.
Benefits to Tesla
From Teslas perspective, Lotus engineering and design departments were obvious partners
given their expertise in designing sports cars with superior handling characteristicsa must
given the competition the Roadster would be facing. Moreover, many of the Roadsters parts
and safety systems carried over from the Lotus Elise, which significantly streamlined component
sourcing
8
.
Lotus expertise allowed Tesla to bring the Roadster into serial production ahead of any other
EV, while attaining the handling characteristics expected of a sports car. In the process, Tesla
was also able to develop internally its own design and manufacturing expertise. As a result,
Teslas new Model S (due in 2011) was designed in-house, while this summer the company also
received a $465 million DOE loan to build both a powertrain facility and an assembly plant for
the Model S. The collaborations non-binding structure has also provided both companies
flexibility. Teslas desire to become less reliant on outside manufacturing and expand into larger
segments is evident in its relationship with Daimler as well as the decision to manufacture the
Model S itself.
Conflicts and Risks
The relationship has not been without controversy. Tesla was forced to recall 345 Roadsters in
May 2009 when it was revealed that Lotus had failed to properly tighten chassis bolts, a flaw that
also affected Lotus-branded cars
9
. The collaboration also led to a series of high-profile
defections from Lotus to Tesla, with Lotus eventually demanding that a no-poaching clause be
written into the companies manufacturing contract
10
.

7
Lotus Targets Tesla With EV of its Own. Wired. January 9, 2009.
http://www.wired.com/autopia/2009/01/lotus-targets-t/
8
Ibid
9
Ritch, Emma. Tesla recall: Good for the electric car industry? Cleantech Group. May 29, 2009.
http://cleantech.com/news/4517/tesla-recall-good-electric-car-indu
10
Davis
In January 2009, Lotus revealed that it was working with a major manufacturerrumored to be
GMto develop a PHEV that could compete with the Roadster
11
. Thus, the companies
collaboration has not eliminated the possibility of the two eventually competing against each
other.
Future Collaboration
Following Lotus PHEV announcement, Musk quickly noted that Lotus had informed Tesla well
in advance of its intentions, and Tesla has stated its hopes of possibly supplying powertrain
components should Lotus go ahead with the project
12
. Though their collaboration continues, it
appears both companies are clearly preparing for life after the Roadster: Tesla by going after
bigger markets and Lotus by competing directly against the Roadster it designed.

Beyond Lotus: Other Key Aspects of the Roadster Ecosystem
Though it outsourced much of the Roadsters production to Lotus and various component
suppliers, Tesla overall maintained its independence. Indeed, much of its strategy was based on
the ability to utilize existing battery and automotive technologies to avoid innovation risk.
Batteries
Developing cost-effective batteries that provided the power and range needed to satisfy
customers had long proven an Achilles heel of EV development. Yet the explosion of laptops
and battery-powered consumer electronics beginning in the late 90s had turned lithium-ion cells
into near commodity products, eliminating the need for Tesla to spend money developing its own
battery cell solution. Instead, Tesla developed a solution for patching 6,831 battery cells
together in its proprietary ESS, while leaving it to the big PC makers to invest in improving

11
Lotus Targets Tesla with EV of its Own.
12
Abuelsamid, Sam. Tesla CEO Comments on Lotus EV Report. AutoBlog.com. January 3, 2009.
http://green.autoblog.com/2009/01/03/tesla-ceo-comments-on-lotus-ev-report
battery cell performance
13
. The company reportedly sources batteries from a number of Japanese
cell manufacturers while maintaining its own state-of-the-art battery testing facility.
Of course, the development of the li-ion battery market did not mean putting an EV battery
system into a car would be cheap, but as a startup Tesla did not have the credibility, production
bandwidth, and distribution network to sell mass market cars anyway. Instead, building a low-
volume, high-performance piece of eye-candy seemed the obvious path around the battery
limitation issue. If the wealthy were willing to buy the slow, oddly-shaped Toyota Prius to park
next to their Porsches, then getting the best of both worldsperformance and environmental-
friendlinessseemed to fit an obvious market niche that no gasoline-powered car would ever be
able to satisfy.
However, Teslas CTO J.B. Straubel also admitted in 2009 that Teslas piggybacking strategy
was practical largely because of its limited scale: "There is no question that we can make 10
million cars. The motors are not a problem. Power electronics the same. But with batteries,
you're beyond the existing manufacturing base. You need to build a whole new industry to make
the batteries, as big as the industry that is making the cars themselves."
14
Concerns over long-
term capacity were likely at least part of the motivation for the eventual Daimler transaction, as
detailed later.
Electric Motors and Powertrain
Among Tesla Motors key innovations was the production of high-yield, high performance
copper rotors for its ESS, which serve the crucial purpose of converting the motors AC current
into the mechanical energy used to drive the wheels
15
. GMs rotor design had suffered from low
efficiency for the sake of scale production, while AC Propulsion had developed a more labor-
intensive process for its very low volume, higher performance rotors. Demanding the best of
both worlds, Tesla established its own rotor manufacturing facility in Taiwan to develop this key
competitive advantage, while also sourcing motor and controller assembly from multiple
manufacturers on the island-nation
16
.
Tesla faced significantly more challenges in developing a transmission robust enough to handle
the motors massive power output. From the outset, Teslas powertrain was designed around the
target of reaching 0-60 in four seconds, which required a new two-speed transmission instead of
the simpler one-speed reductive design used in the tzero and other EVs. However, after a
number of false starts with outside designers, the company found a solution while doing work for
the Model S
17
. Rather than adapt the transmission to fit the motor, Tesla switched the motor to a

13
Davis, Joshua. Batteries Included. Wired. August 2006.
http://www.wired.com/wired/archive/14.08/tesla.html
14
Mufson, Steven. Batteries Drive Everything. Washington Post. January 31, 2009.
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/30/AR2009013003741_pf.html
15
Eberhard, Martin. Motor City. Tesla Motors official website. http://www.teslamotors.com/blog2/?p=30
16
Electric Vehicle Maker Tesla to Expand Procurements in Taiwan. Taiwan Economic News. July 9, 2009.
http://news.cens.com/cens/html/en/news/news_inner_28382.html
17
Wojdyla, Ben. Tesla Finalizes Single Speed Transmission, Ups Output, Range. Jalopnik. September 11, 2008.
http://jalopnik.com/5048606/tesla-finalizes-single+speed-transmission-ups-output-range
liquid-cooled design that allowed for increased power production while still using a traditional
one-speed transmission. To avoid further delays of the initial vehicles, the company opted to
deliver the first Roadsters with a lower-performance interim transmission and then replace the
powertrain once the new transmission was ready. Despite the significant costs associated with
the plan, the company clearly felt pressure to avoid another production delayboth for PR
reasons as well as the need to bring in some of the cash tied up in its order book.
Sales, Distribution and Service
Tesla has also taken a decidedly independent approach to distribution of the Roadster,
establishing its own network of dealerships that provide sales and maintenance. The company
currently has eleven Tesla Stores located in major metro areas in the U.S. and Europe, and
provides on-site service anywhere in the U.S. and Canada through its mobile Tesla Ranger
service
18
. This is in contrast to the strategy being pursued by rival Fisker Automotive, which has
signed up 32 existing dealerships to sell the $90,000 Karma PHEV it plans to debut in mid-
2010
19
.
Teslas model is again suited towards low-volume, high-margin products, allowing the company
increased control over customer interactions and vehicle service at the expense of up-front
investment and broader market access. Though EVs should have far less maintenance than
traditional vehicles, the lack of mechanics capable of servicing the cars means customers need
access to company-approved service. Teslas approach thus limits interdependence risk
associated with educating and equipping a broad dealer network to sell and service a new type of
car, but increases their cost of selling a car.
Charging Infrastructure
The lack of electric recharging infrastructure for EVs has always been a fundamental barrier to
entry that has protected ICE dominance. Though electrician-installed home charging systems
mitigate this concern for everyday commuting and trips to the grocery store, most buyers remain
uncomfortable having their primary car be incapable of long road trips, while city dwellers who
park in the street would appear out of luck entirely. The problem is further complicated by limits
on charging speed, with even the fastest high-voltage charger systems requiring 20 minutes to
boost a battery to 80% capacity
20
. Better Place, a company developing EV services in
conjunction with the governments of Israel and Denmark, has proposed battery swapping
stations as part of a leasing model in which EV drivers would not own their batteries, but instead
subscribe to a service entitling them to switch out their batteries at Better Place-owned swapping
stations
21
. Needless to say, this model would significantly complicate the EV ecosystem.

18
http://www.teslamotors.com/teslastore/
19
Blanco, Sebastian. Fisker Signs Up 32 Dealers in 17 States. AutoBlog.com March 24, 2009.
http://www.autoblog.com/2009/03/24/fisker-automotive-signs-up-32-dealers-in-17-states/
20
Loveday, Eric. Quick Charge Stations To Become Primary Means For Away From Home Fill Ups?
AllCarsElectric.com. October 8, 2009. http://www.allcarselectric.com/blog/1036338_quick-charge-stations-to-
become-primary-means-for-away-from-home-fill-ups
21
http://www.betterplace.com/solution/
While Tesla sells both home ($3,000) and mobile ($1,500) charging equipment
22
, the company
has thus far mitigated its interdependence and integration risk mostly through its choice of
market segmentation, rather than innovation. Though Tesla touts the everyday practicality of the
Roadster, it is clearly targeted at wealthy buyers who have several cars at their disposal and will
never need the Roadster for a 500 mile drive. Moreover, the Roadsters high price point also
means Tesla can outfit the car with a large battery storage system capable of ranges up to 250
miles, approaching that of comparable gasoline-power cars. Tesla and California utility PG&E
announced in 2007 a joint effort to develop vehicle-to-grid smart charging technologies
23
, but
there is no evidence that the effort has tangibly impacted end users.
However, for mass-market cars the costs of large battery systems become prohibitive. It is thus
not surprising that Nissans Leaflikely to be priced in the range of $30,000will reportedly
offer a range of only 100 miles
24
. Thus, the issue of charging infrastructure becomes
significantly more important for cheaper mass market cars. The need for affordability dictates
they use smaller battery packs, and consumers increased reliance on them makes the issue of
range limitations more acute. For many, this means that current EVs cannot be true substitutes
for their gasoline-powered everyday car.
Summary: The Roadster Experience
Despite initial delays, Tesla has largely delivered on the expectations it set for itself when the
Roadster was unveiled in 2006. In July, the company announced it had become profitable for the
first time, selling 109 Roadsters and earning $1 million on revenues of $20 million
25
. But the
process was not without its casualties: Eberhard was ousted as CEO in late 2007 following a
power struggle with Musk, who eventually took over the CEO role himself.
In 2006, Eberhard had been confident that successful product and process innovation, as well as
continued improvement in battery technologies, would help the company drive down costs far
enough to make more affordable cars possible: Were going to ride that technology curve all the
way home.
26
Growing Tesla into more than a niche manufacturer necessarily would require the
company to leverage its learning and move into larger, lower-priced segmentseither by
expanding its own product portfolio or selling powertrains to other carmakers. In early 2009,
Tesla made its move on both fronts.


22
http://www.teslamotors.com/electric/charging.php
23
PG&E and Tesla Motors Co-Pilot Vehicle-to-Grid Research. PG&E press release. September 12, 2007.
http://www.pge.com/about/news/mediarelations/newsreleases/q3_2007/070912.shtml
24
Squatriglia, Chuck. Nissan Turns Over An Electric Leaf. Wired. August 2, 2009.
http://www.wired.com/autopia/2009/08/nissan-electric-leaf/
25
Schonfeld, Erick. Tesla Says It Is Now Profitable, Ships 109 Roadsters In July. August 7, 2009.
http://www.techcrunch.com/2009/08/07/tesla-says-it-is-now-profitable-ships-109-roadsters-in-july/
26
Davis
Part II. Looking Forward: EVs for the Masses?
In moving to these different markets and developing its product line with the Model S, Teslas
ecosystem shifted and the company needed to find a new partner to provide experience, capital
and credibility. Teslas expertise lies in building powertrains using its battery technology.
While Lotus was the appropriate partner for the Roadster to help establish its strategy and build
awareness for EV technology, an experienced automaker could bring experience in building the
other parts of a car at volume with lower costs. Enter Daimler. The Mercedes parent company
has allowed Tesla to move on to the next part of its strategy, building the more affordable,
practical Model S and selling its powertrains to other carmakers, namely Mercedes own Smart
brand.
Tesla Model S/Powertrain Sales Ecosystem Risk Assessment
Initiative Risk:

While the success of the Roadster suggests a reduction in initiative risk, the
introduction of Daimler as a partner presents a potential conflict between
Teslas own Li-ion technology and the Daimler-Evonik joint venture.
Additionally, the proposed mass nature of the Model S initiative and the
required scaling up of facilities present substantial risks not present in the
Roadsters ecosystem.

The powertrain risks are limited given the companys expertise is largely in
this area, though it may have difficulties adapting its technologies to different
types of cars and adapting to new battery technologies.
Interdependence Risk:

In addition to leveraging its Roadster experience, Tesla has moved a
significant amount of product design and manufacture in-house for the Model
S. Using a Daimler chassis or working with Evonik on a new battery platform
necessarily increases interdependence risk, and the company could not have
moved forward without its DOE loan guarantee.

On the powertrain side, Tesla necessarily is dependent on other automakers
willingness to develop EV platforms to use their technology. While Daimler is
already buying powertrains, this has only occurred on a limited basis.
Integration Risk:

Tesla continues to shield itself from integration risk in the Model S ecosystem
by completing final assembly in its own facility. Should it choose to leverage
Daimlers distribution network in order to cope with volume sales, however, it
will face additional risk as it relinquishes control over the sales process.

For powertrains, Tesla will be reliant on other manufacturers being able to
successfully assemble, distribute and sell the final products.

Relationship With Daimler
While Tesla and Daimler had been in talks since the fall of 2007, the two companies announced
their partnership in January of 2009. In the deal, Tesla agreed to provide Daimler with the
battery technology to get 1,000 electric Smartcars on the road by the end of 2009. Specifically
Tesla will be providing Daimler with the battery packs and chargers for the Smart EV. This non-
exclusive deal positioned Tesla as a supplier to Daimler. However, by May of 2009, the two
companies decided to embark on a more strategic partnership.
This past spring, Daimler announced it was taking a 10% stake in Tesla estimated to be worth
about $50 million. Beyond simply supplying battery systems, this partnership allowed Tesla to
focus on its value proposition of bringing high performance electric vehicles to mainstream
consumers while helping Daimler navigate the nascent electric car industry.
Benefits to Daimler
When announcing the partnership, Daimlers Chairman Dieter Zetsche acknowledged a
paradigm shift [in the automotive industry and the need] to reinvent itself ultimately to be
independent of petroleum and without CO2 emissions.
27
Daimler can leverage Teslas existing
technology and knowledge and more quickly incorporate technological changes into their
vehicles. Additionally, the scale of the automotive industry, and more specifically Daimler,
inhibits it from undergoing rapid transformation. Working with a start-up allows Daimler to
benefit from Teslas agility without completely transforming its internal structure.
From a more long-term perspective, Daimler hopes to introduce an electric Mercedes Benz by
2010. Working with Tesla on their lithium-ion batteries may help Daimler bring this vehicle to
market more effectively.
Benefits to Tesla
While funding might be the most obvious benefit for Tesla, the start-ups partnership with
Daimler is largely strategic. Though Musk claimed he had bigger offers from two other
investors, he cited Daimlers supply chain and production expertise as the deciding factor: The
investment is about cementing the strategic relationship. Daimler felt it needed to be at least a
part-owner of Tesla and were interested in expanding the strategic relationship, so we agreed to
take an investment.
28

Teslas first product, the Roadster, attracted a great deal of media attention; however, its
introduction was fraught with cost overruns and delays. Working with a renowned automotive
company like Daimler instantly injects credibility into Teslas pursuits. Additionally, as Tesla
works on the mid-range Model S, it can utilize Daimlers knowledge to power through potential
roadblocks. Tesla will also have access to the Mercedes-Benz CLS parts bin, which would help
the company develop certain parts like brakes, suspensions and safety systems that are not only
expensive to develop but also require expertise that Tesla currently lacks
29
.
The Daimler partnership will also provide Tesla with access to Evonik Industries, Daimlers
advanced battery venture. Evoniks technology has the potential to eventually outperform and
outlast the common laptop cells currently used by Tesla. Tesla could also tap into Daimlers

27
Palmeri, Christopher and John Carey Electric. Connection: Tesla, Daimler. Business Week. 19 May 2009,
http://www.businessweek.com/bwdaily/dnflash/content/may2009/db20090519_566476.htm?campaign_id=rss_daily
28
Miller, Claire Cain. Tesla Finds a New Investor in Daimler. The New York Times. May 19, 2009,
http://bits.blogs.nytimes.com/2009/05/19/tesla-finds-a-new-investor-in-daimler/
29
Voelcker, John. Teslas New BFF (And Savior?) is Mercedes-Benze. Green Car Reports. May 19, 2009.
http://www.greencarreports.com/blog/1020813_teslas-new-bff-and-savior-is-mercedes-benz
distribution system. Although there are potential issues with this as outlined below, this
collaboration could be beneficial in the long-term, even if only in Europe.

Conflicts and Risks
There are several potential issues that could arise over the course of this partnership. Daimler
has interests in Li-Tec, its joint venture with Evonik Industries to create automotive batteries. If
other battery companies prove to be more efficient than Teslas suppliers, Daimler might not use
Teslas battery technology and may even pressure the company to switch to another battery
supplier. In general, as the market for electric vehicles expands and if Daimler successfully
brings an electric Mercedes Benz to market, the two companies may find themselves in
competition.
Additionally, Teslas method of distribution deviates greatly from the overall automotive
industry. Currently, Tesla sells its vehicles through company-owned showrooms. Typically,
auto dealerships have contractual relationships with manufacturers creating a largely inefficient
sales model.
30
While Tesla is a relatively small scale automotive company at present, as they
potentially grow, they may need Daimlers help with distribution. Given Teslas commitment to
cutting out existing inefficiencies in the way automobiles are sold, working with Daimler on
distribution could be difficult.
As Daimler and Tesla enter additional partnerships, it may become difficult for the companies to
agree on a strategic direction. In July, Daimlers major shareholder Aabar Investments of Abu
Dhabi took an equity interest in Tesla as well. Moving forward it may become difficult for Tesla

30
Weinstein, Dave. Test-Driving the Tesla. Business Week. 6 October 2009.
http://www.businessweek.com/lifestyle/content/oct2009/bw2009106_470083.htm

to balance the competing interests of all of their partners, especially if the company continues to
pursue powertrain sales to competing manufacturers.
Conclusion: Teslas Route to EV Success
With EV development still in its infancy, Tesla has utilized an evolving ecosystem to help
further the penetration of EV technology. In each phase of development, Tesla has leveraged its
technological advancement with its partners capabilities to grow demand for the overall EV
market. From the beginning, like in the Vallourec case, a feasible product did not exist and proof
of concept fell on the shoulders of Tesla. First, by partnering with Lotus, Tesla was able to
create a product that could compete with the best production sports cars in the world, proving the
capability of its EV powertrain while redefining the tradeoffs required between performance and
efficiency. However, the ecosystem that brought the Roadster to life could never support Teslas
development into a major global carmaker. Teslas partnership with Daimler has added further
credibility to the EV story, increasing exposure and providing access to industry expertise in
manufacturing, component sourcing and distribution.
Tesla is now faced with defining the companys business strategy for the future, whether as a
powertrain manufacturer or a traditional carmaker. The $465 million loan from the Department
of Energy earmarked for the construction of both a powertrain facility and Model S production
plant leaves the door open for both opportunities. It still remains to be determined how Teslas
technological expertise will transfer to physical car manufacturing, how it will leverage
Daimlers competencies to achieve its goals, and whether the Smart EV collaboration will create
additional opportunities as a powertrain supplier.
At present, CEO Musk considers Tesla a car company, not a component supplier. Musk is
hoping to diversify into further product lines after the introduction of the Model S, which would
serve as a platform for vans, sports utility vehicles, and other industrial/civic applications.
Nevertheless, the challenges of building an independent, global carmaker are undeniable. An
eventual acquisition by Daimler or specialization in powertrain supply seems far more likely, and
either strategy will depend on the continued legitimization of EV technologiesfar from a
certainty. Whether Tesla achieves its goals with the Model S remains to be seen, but it is
obvious that how it constructs its ecosystem in the future is essential to its survival.