identify the key issue from the case.

Production: Can Tesla Achieve Economies of Scale and Keep Its Promise? With more than 350,000 preorders for its first mass market car, the Tesla Model 3 Sedan, Tesla Motors will need to boost production to 500,000 cars by 2018. That’s ten times the 50,000 cars it produced in 2015. The presale numbers would seem extraordinary, but Tesla has been “extraordinary” from the beginning, fueled by the vision of CEO Elon Musk and a cultural determination to revolutionize the car industry. Electric Vehicles Make a Comeback Electric vehicles were popular in the late 19th and early 20th centuries until Henry Ford began mass-producing gasoline-fueled cars with internal combustion engines. It took high oil prices, environmental concerns, and advances in battery technology in the late 20th century to bring electric cars back into the mainstream. Now, with these changes in the market, the major car companies including Ford, GM, BMW, Toyota, Honda, and Nissan have released electric or electric/gasoline hybrid cars to accommodate for these changes. Yet these new innovations were conservatively tied to existing models, attempting to retrofit and revise existing models to a newer format. On the other hand, in 2013, Tesla, a small automotive start-up from California, began not only winning several design awards but also proving a profitable model for electric cars that might challenge the traditional car companies. Tesla opened a new market segment— luxury electric cars with a longer battery life and longer range that were designed to excite discerning motorists and sold through its own stores, not dealerships. It wasn’t offering the battery version of a gas-powered car with fewer extras, but a new sought-after trend in upscale motoring. Tesla Making Good on Affordable Car Promise When Tesla made its first profit in 2013, Elon Musk said his company’s goal had always been to mass-produce fully electric cars at a price affordable to the average consumer and would do it “within five years.” Musk was standing by his product life cycle strategy—entering at the high end where customers will pay more and then driving down costs and building volume. Improving battery technology leading to increase in driving range will lower costs in coming years. Additionally, suppliers have begun demonstrating that they can revamp their own production and reduce the cost of parts leading to more efficient manufacturing. Indeed, Tesla claims it is steadily cutting the number of worker hours necessary to build each car in lieu of robotic automation and more efficient design processes. Tesla isn’t stopping there either, as they expand their overall capacity, by pumping money into a Gigafactory and additional production capacity in order to be ready to fill orders with significantly higher volume than before. Altogether, these factors strongly tip future balance of the market in Tesla’s favor. “Musk was standing by his product life-cycle strategy—entering at the high end where customers will pay more and then driving down costs and building volume.” Challenges Ahead The traditional car-making giants, however, are not sitting idly by while Tesla is muscling into their space. Improved battery technology itself is replicable, plus they already have experience in mass manufacturing. Recognizing the value of experience, Tesla hired a long-time Audi executive to lead its vehicle production team—a departure from the company’s practice of hiring from the technology and energy industries. 142 • Comprehensive Business Review Concepts and Cases with Capstone® Business Simulation Perhaps Tesla’s biggest advantage is the strong support it enjoys from its investors. By mid-2016, Tesla’s market cap was $32 billion with sales of just over 50,000 vehicles in 2015. GM’s market cap was $50 billion, less than twice Tesla’s, and it sold 9.8 million cars. As said, “Something is wrong with this picture.” Forbes calls Tesla’s share price “a cult-like valuation,” and critics suggest that without generous US government loans and subsidies that the company has received, it may not survive. Tesla’s performance in the next few years will prove whether the beliefs of the Tesla faithful are well-founded or whether the
challenge of economies of scale for mass market vehicles was too tough for the new market entrant.?

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