Strategy enterprise and innovation Tesla Motors

Strategy enterprise and innovation Tesla Motors Strategic capabilities Internal resources and competencies Core competencies (VRIN) PESTEL Porters RBV Value chain

Entrepreneurship in the current world economy is dependent on innovation and creativity (Koellinger 2008). An analysis of the strategic capabilities and external environment can identify a range of strategic options and hence the entrepreneurial capability and opportunity of the organisation especially in leveraging its innovativeness and creativeness. The following report considers the strategic capabilities, external environment and develops two strategic options for Tesla motors.



Table of Contents

Introduction. 3

Tesla Motors. 3

Strategic capabilities and external environment 3

Internal resources and competencies. 3

Core competencies (VRIN) 3

Swot Analysis. 5

External environment 6

PESTEL. 6

Porters five forces. 7

Question 2 – Strategic choices. 10

Strategic option 1 – Market Expansion. 10

Suitability. 10

Acceptability. 10

Feasibility. 11

Strategic option 2 – Diversification. 11

Suitability. 11

Acceptability. 11

Feasibility. 12

Conclusions. 13

References. 15

Appendices. 18

Appendix – I Resource-based view (RBV) 18

Appendix – II Value Chain Analysis. 21

Appendix – III Share price of Tesla Motors. 23

Appendix – IV Tesla charging stations. 24

 


Introduction

Entrepreneurship in the current world economy is dependent on innovation and creativity (Koellinger 2008). An analysis of the strategic capabilities and external environment can identify a range of strategic options and hence the entrepreneurial capability and opportunity of the organisation especially in leveraging its innovativeness and creativeness. The following report considers the strategic capabilities, external environment and develops two strategic options for Tesla motors.

Tesla Motors




Tesla motors, U.S.-based electric vehicle and powertrain designer and manufacturer have disrupted the automobile industry through its battery-powered electric vehicles. It introduced Tesla Roadster, a fully electric sports car targeted at the niche segment and has moved down the market segments by introducing a luxury sedan (Model S) and a cross-over (Model X) and has introduced the mid-segment Model 3. It also has diversified into home and office battery power packs with a vision of its CEO (Elon Musk) to offer electric vehicles at affordable prices.

Strategic capabilities and external environment

Internal resources and competencies

Core competencies (VRIN)

In analysing an organisation’s internal resources and competencies, resource-based view (RBV) developed by Birger Wernerfelt (1984) and popularised by Prahlad and Hamel (2013), based on the idea that competitive advantage is dependent on configuration of the resources available to the management; forms the basis for competitive advantage. In other words an organisation gains competitive advantage when applying tangible and intangible resources which can be identified from RBV analysis (refer appendix I). However according to Barney (2015) competitive advantage could be short term in nature and to ensure it is sustainable, the resources have to be heterogeneous and not perfectly mobile. Consequently those resources neither perfectly imitable nor substitutable without effort contribute to sustainable competitive advantage (Priem and Butler 2001). Based on this idea Barney (1991) developed VRIN framework (valuable, rare, inimitable and non-substitutable) to measure the ability of the resources to contribute to sustainable competitive advantage.

  • Valuable – a resource is valuable when it enables the organisation to contribute to a value creating strategy, outperforming competitors and reducing own weaknesses (Barney 1991).
  • Rare – in perfectly competitive markets, a resource have to be rare in order for it to be valuable (Barney 1991).
  • Inimitable – control of a valuable (in-imitability) resource contributes to competitive advantage. The resource is inimitable when others cannot duplicate this perfectly and without significant effort (Barney 1991).
  • Non-substitutable – competitor’s inability to counter the valuable, rare and inimitable resource is a further consideration for sustainable competitive advantage (Barney 1991). In other words even if the resource is rare, provides value and imperfectly imitable, it should also be non-substitutable or develop a substitute resource.

Battery technology and power train (tangible) and brand image (intangible) are the most important resources of Tesla motors based on the RBV analysis (refer appendix I). Tesla’s unique resource is its innovative Battery Pack and the powertrain, which needs to be analysed with VRIN framework to analyse its ability to provide sustainable competitive advantage.

Value Competitors sourcing power train components from Tesla due to superior performance. Gigafactory expected to reduce battery Power Pack cost (Coren 2016). Battery and powertrain contributes to the main value creating strategy as the combination outperforms competition mainly through extended range and performance, along with environmental friendliness (no competitor offers the same capabilities).
Rare Products are rare and no competitor has the capability to offer the range, safety, efficiency and luxury as a result of technology (Battery and power train). The technology is expensive to design, develop and produce. However rarity is so far as the ability of competitors to put financial resources and effort,
Imperfectly imitable Competitors have created different models of alternative powertrain, but none able to match the performance and efficiency of Tesla gained from its Battery technology and power train technology. Technology is patented by Tesla and hence controlled; however modifications of technology are possible in future.
Non-Substitutable Tesla battery pack and powertrain has unique capabilities and the competitors with hybrid models and electric vehicles have been unable to match (substitute) the combined capabilities of Tesla.

Swot Analysis

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SWOT (strengths, weakness, opportunities and threat) is a structured planning framework evaluating the favourable and unfavourable factors of a business venture, project, product or even a person (Hill and Westbrook 1997). Strengths and weaknesses are internal (characteristics of business) giving advantages and disadvantages (respectively) over competitors. Opportunities and threats are external environmental elements that could be exploited and causing trouble (respectively).

 

Strengths Weaknesses
·       Vertically integrated value chain (refer appendix II) – controlling cost and quality

·       Own branded stores – improve brand awareness (refer appendix I)

·       Unique proprietary technology

·       Strong brand perception

·       Less marketing spend

 

·       High capital and operational expenditure

·       Long term liquidity risk

·       Low volume of sales – poor economies of scale

·       Slow growth of market

·       Limited ability to scale production

 

Opportunities Threats
·       Product expansion to mass-market

·       Product diversification to other industries segments (aviation, railway, shipping)

·       Increasing awareness about the need for environmentally sustainable transportation

·       Government subsidies, tax credits

·       Increasing demand from international markets

·       Established large manufacturers competing to develop alternatives

·       Entering of new competitors with improved technology

·       Lower oil prices denting the operating cost advantage



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External environment

PESTEL

PESTEL analysis scans the external environment that could affect the competitive landscape (Johnson et al., 2011). The political, economic, social, technological, environmental and legal aspects are crucial for an industry and business organisation.

  • Political
    • Role of governments in regulating automobile industry, mainly energy and environmental policies and legislation can have an impact on the industry (Rodrigue 2016). Green initiatives, tax credits, research and development assistance depends on political landscape and initiative.
  • Economic
    • Operating cost of conventional vehicle depends on fuel cost which has been highly volatile (AFDC 2016). Increasing demand for more efficient transportation. Automotive industry is dependent upon the economic cycle (Hawkins et al., 2013).
  • Social
    • Changing attitudes of consumers to environmental issues. Increasing awareness about climate change and alternative technologies. Green consumerism, social status based on environmental activism and ageing population affects automobile industry (O’Rourke and Lollo 2015).
  • Technological
    • New technology is set to reduce the cost of batteries and power packs. Alternative technology (hybrid vehicles) might increase the life cycle of conventional fuel-based automobiles. New technology can improve the efficiency of batteries and the range of electric vehicles.
  • Environmental
    • Climate change, increasing awareness of consumers, Green consumerism, environmental activism are all contributing to a shift away from conventional fuel-based transportation (Mont and Power 2013).
  • Legal
    • Legislation regarding emissions is set to increase. Automobile industry could witness increasing regulation (Portney 2016).

PESTEL analysis indicates an overall positive external environment for electric vehicle manufacturers such as Tesla. The main factors could be social, environmental, technological and political which could all be positive in the long term. However economic conditions and disruptive technology could impact the electric vehicle market negatively.

Porters five forces

Porter’s five forces analysis evaluates industry rivalry and contributes to the development of business strategy (Porter 2008). It is based on the principles of industrial organisations economics where the five forces determine the competitive intensity and consequently the attractiveness or profitability. The five factors are, bargaining power of buyers, threat of new entrants, threat of substitutes and internal rivalry. These forces are referred to as the micro environment, closely affecting the organisation (Grundy 2006). Porter’s five forces model is used to analyse the attractiveness of the general automobile industry, but also considers battery-powered electric vehicle industry.

Threat of new entrants – (Low)

  • Huge capital expenditure required.
  • Need to develop manufacturing plants and distribution network (capital and operational expenditures are high).
  • Need to develop strong brand image and perception.
  • Most advanced technology to disrupt the existing market is required.
  • Most modern technologies patented and held by existing players.
  • A huge learning curve

The threat of new entrants is relatively low, especially for completely new novice players. Existing, established large mass-market automobile manufacturers are entering electric vehicle segment; however till now has been unable to compete on technology (Lewis 2016). Tesla and other existing electric vehicle manufacturers have developed or have strong brand image and perception.

Threat of substitutes – (moderate)

  • Threat of complete substitution is low, no significant substitutes apart from public transportation.
  • Indirect substitutes are hybrid cars, conventional fuel powered cars and new technology based automobiles (hydrogen); however the range, quality and performance is not yet at par with Tesla.
  • Substantial product differentiation available in the automobile market. Tesla differentiates its products based on environment/ecology, luxury, performance, range, technology and quality.

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Indirect substitutes like hybrid, hydrogen powered, dual fuel are a threat for battery-powered electric vehicles. New disruptive technology would have a moderate threat on the electric vehicle market.

Bargaining power of suppliers – (Low)

  • Large number of suppliers for the end product manufacturer in the automobile industry.
  • Existing mass-market manufacturers have internalised large part of production.
  • High competition among suppliers to cater to the end product manufacturers.
  • Low cost of switching majority of suppliers.

Bargaining power of suppliers is low as there is huge number of suppliers all over the world and new ones are emerging. Suppliers are dependent on end product manufacturers. Internalisation of new technology manufacturing can further reduce the bargaining power of suppliers.

Bargaining power of buyers – (Moderate)

  • Huge competition in the automobile market provides a range of choices for the buyers.
  • However the electric vehicle manufacturers and environmentally friendly technology based automobiles (hybrid) are low in number and not available in every geography and customers looking for specific type (modern technology) have low bargaining power.
  • Product differentiation in the automobile industry and emergence of new technology contributes to low to moderate bargaining power of buyers.

Bargaining power of buyers is low in the industry. Tesla has a unique set of products, highly differentiated from direct and indirect competitors and there is currently a long waiting period for potential customers (Fehrenbacher 2016).

Industry competition – (high)

  • High competition in the overall automobile market, but low in electric vehicle market.
  • Automobile market (demand) is dependent on economic conditions.
  • Differentiated products (high-class, luxury, modern technology) limit the impact of competitiveness.
  • Existing manufacturers have consolidated, are huge, with low growth rates.

There is huge rivalry in the automobile market in general, but differentiated products has offered by Tesla does not have significant direct competitors. However existing manufacturers are entering Electric vehicle market is contributing to potential future competition (Lewis 2016).

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Question 2 – Strategic choices

Tesla has adopted a strategy of differentiating its products based on the range, performance, luxury and technology, initially developing products for a niche segment (very small market segment, technology enthusiast, early adopters, high income, environmentally sensitive). With the development of technology, increasing economies of scale and cash flow from the niche product segment, Tesla has increased its market to the mid-segment, but still the products are high-priced. Competition is increasing and there are huge capital and operational expenses needed for further expansion. The present competitive advantage is through internalisation of value chain, core competency is in the advanced battery technology and powertrain. Consequently the following two options are proposed as strategic choices for Tesla.



The two options suggested are analysed based on a SAF analysis (suitability, acceptability and feasibility). According to Jeffs (2012) suitability is based on overall rationale and ability to address key strategic issues, acceptability is based on the expectations of the stakeholders and feasibility is based on the resources available with the organisation.

Strategic option 1 – Market Expansion

Maintain the existing niche range of products, utilised the cash generated to enter mass-market segment. Continuing with the focused differentiation (focused on battery-powered electric vehicles, differentiated based on range, performance, safety and luxury) would be a strategy at the business level. Entering mass-market segment requires dilution of differentiation (performance and luxury.

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Suitability

Moving down from the niche market to mass-market based on leveraging technology, economies of scale and cash flow is a suitable strategy recommended by Kotler et al., (2015) and Phillips (2013). The initial product “Roadster” was low-volume high-priced, Model S and X are mid-price, mid-volume, Model 3 is high volume at mid-price and there is potential for high volume mid-priced, mass-market model as the market expands overseas. Considering the strategic capabilities and external environment of Tesla, moving down the market segment and increasing the market scope would obtain economies of scale and scope.

Acceptability

Shareholder wealth has increased in the last few years, but share price has stagnated and there is apprehension from the shareholders about the overall profitability for the long-term (Lippert 2015). The promoter (Elon Musk) has signalled a strategy in the direction of introducing mass-market electric vehicle. The risk of failure is moderate as there is increasing awareness of consumers about the need for environmentally friendly transportation. There is adequate support from the overall external environment (political, technological and social) for a mass-market electric vehicle.

Feasibility

Tesla has recently raised money by selling new equity, has still the ability to raise new debt, even if the financial parameters are not at par with the industry segment (Welch et al., 2016). The experience, resources and present competitive advantage can be leveraged to enter the mass-market segment. The main competitive advantage is in the revolutionary battery technology. Tesla is increasing the number of supercharging stations across the world and utilising its human resources to design and develop innovative and creative ideas which can be leveraged to enter the mass-market.

Strategic option 2 – Diversification

Diversify into other industry segments (aviation, railway, shipping). Elon Musk has already entered other industry segments (home battery – Power Wall), Space Technology (SpaceX), has envisioned high-speed transportation system (Hyper Loop), aircraft technology (electric fan propulsion). The present learning curve and experience, brand image and core competencies can be leveraged to diversify into other markets, especially development and customisation of the powertrain (battery-powered) to other industry segments such as aviation, railway, shipping and space transportation. Tesla has already partnered with competitors to supply powertrain for their electric vehicles (Coren 2016).

Suitability

Diversification into other industry segments make economic sense as the economies of scale at the new factory (Gigafactory) in terms of manufacturing powertrains can be utilised especially with the present partnerships and new developments. With present experience in developing innovative and creative technology and available human resources can be utilised to improve the economies of scope. Similar to the niche segment of high-class, luxury electric vehicle (Roadster), Tesla a highly innovative company has huge potential to expand into untapped industry segments by leveraging its existing technology, experience and the competitive advantage it currently has in the electric with the market.

Acceptability

The larger stakeholders (employees, customers and society) are expecting miracles from Tesla as it is a highly innovative and creative company that has disrupted the automobile market. There is already the experience of the leadership in space transportation (SpaceX) and home battery products (Power Wall) and hence the experience of diversification. The main shareholders (promoters) and huge number of employees have risk taking mentality whereby the acceptability of diversification into new industry segments has high potential.

Feasibility

The present resources available with Tesla (competitive advantage in terms of technology, human resources and experience) contribute to the possibility of diversification. Tesla is at the breakeven point with respect to its present industry segment (mid-segment electric vehicles) and hence an appropriate stage in its life cycle to diversify into new markets and industry segments.


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Conclusions

The report analysed the strategic capabilities and external environment of Tesla using RBV, VRIN, swot, PESTEL and porters five forces. The battery and power train technology are the main resources and when combined with supercharging terminals across US, contributes to extended range, performance and environmental friendliness; all due to the creative and innovativeness of Tesla. However the VRIN framework indicated that while the battery and powertrain technology is valuable and non-substitutable, the rarity and inimitability are not forever. Hence even if Tesla enjoys competitive advantage it may not be sustainable for ever.

The brand image of Tesla as a creative and innovative company, offering superior quality products, much differentiated from the competitors is also a source of competitive advantage. There are opportunities for product expansion and diversification. High capital expenditure is a weakness and possible entry of new players with substitute or alternate technology can be a threat. The social, environmental, technological and political factors are positive in the long term. However economic conditions and disruptive technology could impact the electric vehicle market negatively. While the threat of new entrants is relatively low, established large mass-market automobile manufacturers are entering electric vehicle segment and indirect substitutes like hybrid, hydrogen powered, dual fuel are a threat for pure battery-powered electric vehicles. With low bargaining power of suppliers and buyers the high rivalry in the automobile market is countered by the differentiated products offered by Tesla.

The two options suggested are enter mass-market (market expansion) and diversification into other industry segments (aviation, railway, shipping).

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  • Expanding the market segment and increasing the market scope would obtain economies of scale and scope and there is a moderate risk of failure with need for environmentally friendly transportation and support from the overall external environment. However financial parameters of Tesla are not favourable even though the experience, resources and present competitive advantage can be leveraged to enter the mass-market segment.
  • Diversification into other industry segments (aviation, railway, shipping) can be through leveraging experience, brand image and core competencies. There is already experience diversification to space exploration (SpaceX) and home battery products (Power Wall) and is at an appropriate stage in its life cycle to diversify into new markets and industry segments.

References

AFDC (2016) Benefits and Considerations of Electricity as a Vehicle Fuel, [online] available at http://www.afdc.energy.gov/fuels/electricity_benefits.html, accessed on 06 September 2016

Barney, J.B. (1991) Firm Resources and Sustained Competitive Advantage, Journal of Management, 17 (1): 99–120.

Barney, J., (2015). 15 Firm resources and sustained competitive advantage. International Business Strategy: Theory and Practice, p.283.

Bessant, J., and Tidd, J. (2011) Innovation and Entrepreneurship. 2nd Edition, Prentice Hall.



Coren, M.J., (2016) Tesla’s entire future depends on the Gigafactory’s success, and Elon Musk is doubling down, [online] available at http://qz.com/745278/teslas-entire-future-depends-on-the-gigafactorys-success-and-elon-musk-is-doubling-down/, accessed on 03 September 2016

Fehrenbacher, K., (2016) 7 Reasons Why Tesla Insists on Selling its Own Cars, published by Fortune Magazine, [online] available at http://fortune.com/2016/01/19/why-tesla-sells-directly/, accessed on 03 September 2016

Ghose, T., (2014) Elon Musk’s Vision: 5 Innovative Ideas That Could Change the World, [online] available at http://www.livescience.com/45992-elon-musk-innovations.html, accessed on 02 September 2016

Grundy, T., (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change15(5), pp.213-229.

Hawkins, T.R., Singh, B., Majeau‐Bettez, G. and Stromman, A.H., (2013) Comparative environmental life cycle assessment of conventional and electric vehicles. Journal of Industrial Ecology17(1), pp.53-64.

Hill, T. and Westbrook, R., (1997) SWOT analysis: it’s time for a product recall. Long range planning30(1), pp.46-52.

Hilts, V., (2013) Editorial: Why Tesla Needs To Sell Cars Through The Franchised Dealer Network, [online] available at http://www.thetruthaboutcars.com/2013/09/editorial-why-tesla-needs-to-sell-cars-through-the-franchised-dealer-network/, accessed on 02 September 2016



Hull, D., (2016) Tesla Motors Inc to sell US$1.4 billion worth of shares to help fund expanded Model 3 production, [online] available at http://business.financialpost.com/investing/trading-desk/tesla-motors-inc-to-sell-us1-4-billion-worth-of-shares-to-help-fund-expanded-model-3-production?__lsa=5869-683f, accessed on 04 September 2016

Jeffs, C., (2012) Strategic Management, SAGE Publications Ltd

Johnson, G., Scholes, K. & Whittington R. (2011) Exploring corporate strategy: Texts and cases (9th edition). Pearson Ltd

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Lippert, J., (2015) Will Tesla Ever Make Money?, published by Bloomberg, [online], available at http://www.bloomberg.com/news/articles/2015-03-04/as-tesla-gears-up-for-suv-investors-ask-where-the-profits-are, accessed on 04 September 2016

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O’Rourke, D. and Lollo, N., (2015) Transforming Consumption: From Decoupling, to Behavior Change, to System Changes for Sustainable Consumption. Annual Review of Environment and Resources40, pp.233-259.

Phillips, F.Y., (2013) Market-oriented technology management: innovating for profit in entrepreneurial times. Springer Science & Business Media.

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Appendices

Appendix – I Resource-based view (RBV)

The concept of resource-based view was developed by Birger Wernerfelt (1984) and popularised by Prahlad and Hamel (2013) is based on the idea that competitive advantage is dependent on configuration of the resources available to the management.

Figure 2 – Competitive advantage through the deployment of resources and capabilities

Resources
Tangible Intangible
Capital Innovative and Experimental Culture
Manufacturing Plants Brand Image and Value
Dealerships Intellectual Property Rights
Electric Charging Stations Reputation and Awards
Technology

Table 1 – Resource based view analysis

 

Resources
Tangible Intangible
Capital Innovative and Experimental Culture
Automobile manufacturers require huge amounts of capital. Tesla has expanded by leveraging debt and is currently at around US$2 billion (Hull 2016). However Tesla has raised additional capital recently by selling new shares (Welch et al., 2016). Nevertheless it would require additional capital, which probably would come from long-term debt and hence a possible deterioration in capital structure. Tesla has a tag of innovativeness and creativity, resulting from the vision of the founders including Elon Musk (Ghose 2014). The technology used by Tesla motors is quite innovative.
Manufacturing Plants Brand Image and Value
State of the art manufacturing plant at Fremont, California, which was previously NUMMI a JV between GM & Toyota (Tesla 2016a). Tesla is planning a Gigafactory in Nevada with battery cell production expected by year end (Tesla 2016b). Tesla has a differentiated brand image as it controls the brand perception through integrated stores, service centres and charging stations controlling customer experience. Tesla represents luxury, innovation, environmental consciousness and the product exceeds customer expectations (Waters 2016).
Dealerships Intellectual Property Rights
Unique dealership model. Tesla owns its own branded stores, mostly in cities and in shopping malls; unlike independent dealers located outside towns. Dealership margins converted as profits for Tesla (Fehrenbacher 2016). Tesla has developed proprietary technology, especially battery, superchargers, safety systems, durability, motor design and software and has an extensive intellectual property portfolio (Waters 2016). The core competency in designing the battery pack system is unique.
Electric Charging Stations  
716 supercharging stations, proprietary direct current (DC) technology, fast-charging in less than an hour, free for all current Tesla cars except a few of the early Model S (Ramsey and Proper 2015)
Technology  
Battery technology and the powertrain of Tesla is unique, offer significant performance in terms of range, charging, life and power (Waters 2016).





Appendix – II Value Chain Analysis

Value chain according to Porter (2001) is a set of activities conducted by an organisation in industry to deliver product or service value for the customer.

Figure 2 – Value chain analysis

Source Porter (2001)

Unlike competitors, all primary activities and support activities of Tesla value chain is controlled and managed internally.

Primary activities

  • Inbound logistics – All critical components are designed and manufactured by Tesla internally and hence control inbound logistics, reducing waiting times.
  • Operations – Lesser number of components requires less assembling operations and with highly automated assembly systems, Tesla controls the assembling operations leading to superior quality.
  • Outbound Logistics – Tesla controls the retailing through its own stores unlike franchise model of competitors and hence connects directly with customers (Hilts 2013). Assembly is based on demand and personalisation.
  • Marketing and Sales – Tesla, unlike competitors have limited marketing and sales program, but have own employees to interact with customers with the sole focus on building brand awareness contributing to customer loyalty (Fehrenbacher 2016).
  • Service – Similarly the Tesla has its own service centres, supercharging stations and improved warranty policy.

Support activities

  • Firm Infrastructure – Tesla with horizontal structure and a lean organisation is able to take fast decisions, improving communication due to strong leadership.
  • Human Resources – Tesla has innovative and creative employees, able to design, manufacture and market the products.
  • Technology – Tesla has unique competencies in new technology development and innovation and creativity is an essential part of the culture of the organisation (Ramsey and Proper 2015).
  • Procurement – Tesla has strategic partnerships with major suppliers and even with competitors


Appendix – III Share price of Tesla Motors

Figure 3 – Share price of Tesla Motors

Source – Google finance


Appendix – IV Tesla charging stations

Figure 4 – Tesla charging stations

Source – Tesla (2016c)