How Tesla Utilized Strategic Alliances
A new paradigm that is changing the nature of business competition calls to mind two kids prepping for a street fight, gathering friends, older siblings, and allies. Suddenly, “me against you” becomes “me and all my friends against you and all your friends.”
A rough analogy, perhaps, but not so different from an emerging model in which companies are competing less firm-to-firm and more on an alliance based network-to-network basis.
Alliances are key to entrepreneurial success, potentially playing a role in every stage of startup evolution, according to Professor Stevan Holmberg.
Innovative firms use alliances to overcome weaknesses ranging from insufficient funds to gaps in distribution channels. The right alliances can even boost a firm’s reputation, if it partners with a well-known brand whose participation yields a stamp of approval.
Holmberg analyzed the alliances used by Tesla Motors, an entrepreneurial company well outside the automobile manufacturing establishment, to develop and launch its electric vehicle (EV) Roadster in 2008. For his next project, he is working on a comparative study of EVs and HEVs in the United States and Scandinavia, which has been a global leader in adopting innovative and clean vehicle technologies.
According to the US Department of Energy’s alternative Fuels and advanced Vehicles Data Center, 15 auto manufacturers offer alternative fuel vehicles or hybrid electric vehicles (HEVs) in 2012, up from two in 1991.
America’s current interest in EVs marks the fourth time in history such cars have been on the market. According to the Electric auto association, more than 100 years ago, electric cars actually outnumbered gas-fueled cars, thanks to Thomas Davenport’s 1834 invention of a battery-powered car. But the rise of the internal combustion engine and the scarcity of electricity outside cities pushed electrics off the road. EVs enjoyed short-lived resurgences in the energy-conscious late 1960s and early 1970s, and in the early 1990s.
Now, however, a confluence of factors is taking shape that may enable EVs to take hold once and for all. Holmberg’s work analyzes this landscape in which companies like Tesla, trying to put down a very different kind of root in an entrenched industry, might actually have a chance to succeed.
As far as startups go, breaking into the car business is one of the tougher roads to follow. According to Holmberg, vehicle startups compete against huge, global firms with a mature infrastructure, established supply and distribution systems, and strong ties to customers and political entities. Auto manufacturing is expensive, and the business is sensitive to economic cycles. Another recession could be the death knell for a fledgling EV or HEV manufacturer.
At the same time, a number of things have happened to make it easier for entrepreneurs to develop green vehicle technologies. Holmberg describes a kind of perfect storm of “push” and “pull” factors that both drive entrepreneurs toward EV innovations and draw them in. Previous research identified three factors in eco-innovation—a technology push, a regulatory push, and a market pull—but Holmberg expanded that to encompass six factors that facilitate eco-innovation by entrepreneurs inside and outside the auto establishment.
“Push” factors are technology, the federal government, and state or local governments—the latter through carrots, such as tax rebates, and sticks, such as regulations setting stricter emission and fuel economy standards.
“Pull” factors include entrepreneurs’ demonstrated success (Toyota’s success with the Prius spurred others to follow suit), market demand, and a growing infrastructure for EV cars—for example, the battery recharging stations on the American University campus.
These factors are in keeping with those that traditionally have set the stage for entrepreneurial growth, Holmberg said. Innovations often emerge from industries experiencing a technological discontinuity, or a technology so new that it spurs a different way of looking at an industry: say, the vast shift from a car that runs on gas-powered internal combustion to a car that runs partially or wholly on electricity.
Substantial shifts in public policy and societal attitudes, both on the upswing, also drive green vehicle innovation. Societal attitudes are a market “push,” exemplified by early adopters of EV technology who flocked to the Toyota Prius because it was neat, different, cost-effective, and appealing to environmentally conscious consumers. Cost-conscious government buyers who purchase low-maintenance EVs for car fleets also are a market driver, Holmberg pointed out.
“There’s a growing awareness of the impact of vehicles, both on the cost of individual ones as well as the environment,” Holmberg noted. “And then you have that reinforced by all of the public policy initiatives, and you have that reinforced by the general growing awareness of sustainability issues.”
Together, these events have catalyzed the growth of EV vehicles.
Figuring out how to take advantage of these events is another story, and Holmberg believes Tesla has a unique story to tell—one that is becoming more common for innovative entrepreneurial firms.
One reason Tesla stands out is that its founders by and large came from outside the auto industry. In their own words, Tesla was founded “by a group of intrepid Silicon Valley engineers who set out to prove that electric vehicles could be awesome.” Chairman and CEO Elon Musk had previous success as the co-founder of SpaceX and PayPal.
“They don’t have the paradigm that legacy manufacturers have, so they think about a vehicle or a car in a very different kind of way,” Holmberg said.
That includes Tesla’s approach to production and rollout. Its strategy more closely resembles that of the consumer electronics industry: start with a high price, low-volume model and move to lower prices and higher volume as technology improves and manufacturing efficiencies increase.
Tesla’s Roadster 2.5, an upgrade of the Roadster it launched in 2008, carried a starting price tag of $101,500. The Model S, now in production with its first deliveries scheduled for June, can be had for $49,900 after a $7,500 tax credit.
According to Holmberg, that approach has more in common with apple’s strategy in launching the iPad than with automakers, which traditionally start with mass volume and large-scale production.
“The whole product, design, development, manufacturing, and rollout strategy was not an automobile vehicle manufacturing strategy,” he explained. “It was a computer tech and consumer electronic strategy, and that’s part of where alliances become a critical strategic factor.”
Tesla has served itself well, Holmberg said, by creating a strategic portfolio of alliances that helped it overcome the “liability of newness” that plagues all entrepreneurs. Faced with insufficient capital, knowledge gaps, or a need for product components, often a company’s best option is to seek out others who hold the missing pieces.
“There are all kinds of alliances in the traditional auto industry today, but I think there are more compelling reasons for entrepreneurs to look at alliances,” he said. “It’s an amazing opportunity to leverage and get resources that, frankly, are almost impossible to initially develop internally in a capital-intensive industry.”
As an example, he pointed to Vizio, maker of high-definition TVs and other consumer electronics. The company launched in 2002 and one year later signed a deal with Costco to sell Vizio products; two years later, Vizio signed a similar deal with Sam’s Club. Just three years after its founding, Vizio TVs were in two of the largest distribution channels in the country.
“That’s what put them on the map to be successful,” Holmberg said.
The growth didn’t stop there, by the way: in 2006 and 2007, Vizio signed on with Circuit City, Sears, BJ’s, Kmart, and Wal-Mart.
Tesla’s alliances include suppliers, research and development experts, and original equipment manufacturers, or OEMs.
Supplier alliances are crucial to entrepreneurs using new technologies, and they can take a variety of forms. Tesla’s alliances range from a non-equity arrangement with the French company Sotira, which manufactures the cars’ carbon fiber bodies, to an equity alliance with Panasonic, which provides battery cells for the Tesla battery pack.
Holmberg pointed out that even as it partnered with other companies, Tesla protected its core technology by assembling the cars at its own manufacturing facility in California. Companies that fail to create alliances wisely can put proprietary innovations at risk.
Tesla also has created R&D partnerships. The Dana Holding Corporation, for example, helped it overcome a technological obstacle by designing a system that could control heat buildup in the cars’ batteries.
In some cases, Tesla has served as the OEM for other companies, providing battery packs and chargers for Daimler’s Smart fortwo, or “Smart car.” For Tesla, the benefits were both financial—according to Holmberg, Daimler gave Tesla a reported $50 million for a 10 percent stake in the startup’s equity—and reputational.
“The Daimler alliance represented an endorsement by a premier automotive manufacturer that further enhanced and verified for the broader market Tesla’s competencies, technologies, and ability to deliver results,” Holmberg wrote.
Although alliances are critical for early-stage entrepreneurs, Holmberg emphasized that they also have a role to play as a company matures. alliances can help companies survive the “valley of death” that strikes many middle-stage companies, when they have gained some traction but lack funding for full-scale production. If a company survives that phase, alliances can help it grow.
One of Tesla’s most significant alliances is with Toyota. In a series of deals, Tesla agreed to help Toyota create a plug-in EV version of its RaV4 SUV and to develop the electric powertrain for the RaV4. In turn, Toyota has helped Tesla source parts and provided production and engineering expertise for Tesla’s Model S. The Toyota alliance also enabled Tesla to secure its manufacturing facility, Holmberg noted.
He described Tesla’s alliance with Toyota as a perfect example of a partnership that can push the company forward: “This is a huge, transforming kind of alliance for this stage of Tesla. They couldn’t have done it early on. It wouldn’t have been appropriate, and Tesla didn’t have the pieces put together to be attractive at that point.”
Entrepreneurs whose alliances work tend to do two things correctly, Holmberg said. The first is to think strategically, from the beginning, about a portfolio of alliances. They ask two questions: What are the critical success factors for my entrepreneurial venture? What are the roles of alliances in those critical success factors? The second is to choose partners carefully, performing due diligence to ensure that conflicts in culture, resources, or relationships do not cause an alliance to implode.
“It’s not an uncommon strategy, but it is one that’s fraught with a lot of problems, and a high proportion of alliances fail,” Holmberg said. All alliances are not created equal, but Holmberg believes that Tesla has figured them out. When it comes to going head-to-head, or network-tonetwork, with the big car guys, Tesla just might prove itself to be the scrappy new kid on the block who wins the day.
“Emerging Green-Technology Entrepreneurs: Entrepreneurial Pathways to Growth in the Hybrid and Plug-In Hybrid/Electric Vehicle Space” was presented in June 2011 at the International Council for Small Business World Conference in Sweden.