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Tesla's Singularly Focused Approach

Dec. 29, 2014 10:01 AM ETTesla, Inc. (TSLA)AAPL, GM, TM
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Summary

  • Tesla Motors has begun to disrupt the auto industry not only with its electric cars, but also with its business model.
  • Tesla Motors has an extremely focused product line, which has allowed the company to perfect its products.
  • A more streamlined fleet in the auto industry could be the future norm.

For the past few years, Tesla Motors (TSLA) has been revolutionize the auto industry. The company's spectacular achievements have confounded critics and industry experts alike. After all, the U.S. has not seen a successful automaker for decades, let alone an electric car startup. While many have attributed this success to the brilliance of the company's CEO Elon Musk, the company's focused production approach has in fact been one of the main driving forces behind the company's success.

While Tesla had initially been forced to focus on only a few product lines due to monetary constraints, this approach has paid off handsomely. By perfecting its cars, the company has effectively put a premium on it's products. The Model S, in particular, has been crafted to near perfection. For instance, the Model S is Consumer Reports' highest rated car ever, a feat especially impressive because of Tesla Motor's relative youth. While the majority of automakers around the world have a huge array of products in their portfolios, Tesla has focused all of its attention on only a select few products. Without the company's obsessive attention to only a few cars, it is unlikely that Tesla would be enjoying the success it has today. This focused approach could potentially change the paradigm of the car industry.

Focused Product Lines

Tesla Motor's has only had 2 models for sale during its history, i.e. the Roadster and the Model S. As a point of comparison, the largest automakers such as the Toyota Motor Corporation (TM) or the General Motors Company (GM) have dozens of products under their banners. While diversity in product offerings is seen as a plus, Tesla Motors may be changing this paradigm.

Elon Musk has stated that the company prefers "to forgo revenue, rather than bring a product to market that does not delight customers. Doing so negatively affects the short term, but positively affects the long term." This type of perfectionism can only be achieved through focused attention on a few products. A great parallel to Tesla's products are Apple Inc's (AAPL) iPhones. While Apple's iPhones are extremely limited in variety, the company focuses so intently on its yearly iPhone product offering that its profits from its iPhones dwarf that of it's competitors. It is this intensity of focus that has made Apple the most valuable company in the world, and it is this intensity of focus that Tesla Motor's is mimicking.

Tesla's extremely focused, but nearly flawless product line(the Model X has not yet been released).

Source: xk9.com

Of course, cars are not smartphones, but many of the same principles can cross over. There is no reason to think that Tesla can't evolve down a path similar to that of Apple's. While diversity in the car market has always been present, this could just be a result of result of the old and unchallenged automobile business model. No company has emerged in modern times(save for Tesla) to challenge the notion that a diversity of mediocre offerings is better than limited, but superior offerings.

Brand Premium

It is not so absurd to think that the future of the automobile industry will be dominated by a few models/brands. Tesla has already affirming this notion with its almost cult-like following. It's Model S has been more popular than almost anyone had expected, and has fostered among the most zealous and loyal followers. Again, this type of fanatical obsession is reminiscent of Apple's huge fan base.

Cars are becoming much more complex due to technological growth. With all the extra variables that come with better technology, such as the possibility of integrating computers into cars, the standard for cars are ever increasing. It is easy to see how the intense focus on a few products could become an increasingly superior approach, given the added complexities of cars. Tesla's singular focus on a few product lines has allowed to company to produce cars with some of the most advanced technologies, including a touch screen that can act like an iPad, sensory handles, etc. The Model S product line even has constant software updates, truly signifying it as a 21st century car. Rather than focus on multiple lines at once, Tesla's strategy to devote all its time and effort into perfecting a few products have paid off handsomely.

Because Tesla singular focus on a few products, the company has developed a brand premium virtually unheard of in the car industry. Many have praised to car as being unlike any other car they have driven, and have even stated that it was like being inside of an iPhone. Even though battery technology has not yet matured (keeping Tesla's products at unnaturally high costs compared ICE cars), the company's demand is still far outstripping its supply.

Given the extremely high demand of the Model S despite its high costs, it would not be inconceivable to think that an extremely disproportionate amount of individuals would be willing to buy the company's cheaper future Model 3. The Model 3 vehicle will essentially have the same design as the Model S, but at a much cheaper price of around $35,000. With this release of this car, we could very well see huge mainstream adoption of Tesla's electric cars. Even though Tesla is just getting started, its brand name is already transcending the car industry.

Risks

The only real threat to Tesla's business model is the risk that battery cost reduction goals cannot be met. This would throw a wrench in the company's entire future, as much of its plans are dependent on reducing battery costs. With the construction of the Gigafactory, this outcome is highly unlikely. The Gigafactory's logistical cost savings and economies of scale alone would likely account for the entire 30% cost reduction goal by 2017. In fact, Elon Musk predicts that with the natural technological advancements in battery technology that would occur between now and 2017, a cost reduction of 50% is more likely.

In addition, if large automakers were to start putting a more concerted effort into developing electric cars, we could potentially see the company's competition increase. Even if this were to happen, and it very likely will, Tesla would still have such a technological advantage and talented management team that true competition would be unlikely. Elon Musk has proven himself over and over again, and will likely continue to keep Tesla ahead of the curve.

Conclusion

The company is making a good case for a more streamlined future for car products. Instead of seeing a fleet of literally hundreds of different car models on the highway, the automobile industry could very well move in a more focused direction, with only a few superior brands/models on the road(much like the smartphone market). If the future is indeed moving in this direction, Tesla has positioned itself extremely well by spearheading this trend.

With the inherent advantages of electric cars, Tesla's brand premium, and Elon Musk's focused business model, the company has barely started scratching the surface of its true potential. If Tesla could successfully develop its Gigafactory, the sky is truly the limit for this company. Not only would the company be able to maintain a grip on the electric car industry, but also the potentially huge electric storage industry.

Even though Tesla's current market capitalization of $28.5B is high by any GAAP standards, it is arguably undervalued on the basis of the company's future potential. If the company keeps producing cars of superior quality and meets its lithium-ion goals, Tesla could potentially be one of the most valuable car companies in the world. Although the stock will likely experience volatility in the short term due to its highly levered nature, the company's valuation still has tremendous potential upside in the long term.

Analyst's Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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