Why Tesla has captured the world’s imagination5 min read . Updated: 03 May 2016, 02:21 AM IST
The business strategist analyses how environment-friendly Tesla's Model 3 really is
Tesla Motors captured the world’s imagination when it announced the launch of its “affordable" electric car Model 3, due in 2017. It will also be available in India. Even though a full prototype isn’t ready yet, it has managed to garner 400,000 bookings and collected an advance of $400 million, which translates into potential revenue of $14 billion, provided no order gets cancelled before the Tesla Gigafactory can start delivering it towards the end of 2017.
How did it achieve this feat? An obvious answer would be that Tesla cars are perceived as clean and green cars, even though Tesla’s (and other electric carmakers’) environment-friendly credentials may lie in the grey zone—more on that later.
The triggers for customer preference
The new generation of customers strongly believe in sustainability, but are often at a loss on how to engage in activities through which they can support this cause. So when they come across a brand that supports this cause, they vote for it with their wallets.
These customers care about the carbon footprint of their chosen means of transport. This means that value has migrated from mere transportation towards clean transportation.
Traditional car companies, led by General Motors, Ford, Toyota and others, still operate predominantly in the earlier value zone, though many offer electric vehicles (EVs). Whereas Tesla operate in the new value zone (clean transportation) as it makes only EVs.
Tesla does not depend on this perception alone to clock up bookings. It puts other compelling factors into play.
The price of the Model 3 starts from $35,000 before any incentives, which is a bargain compared with the $75,000 for Tesla Model S.
A Tesla car by design is not a car—it is an iPhone on wheels. It is powered by software, so it has neither heavy machinery nor too many moving parts, due to which it is lighter and is likely to have fewer breakdowns.
In case of a breakdown, it does not have to be carted to a garage. The problem can be diagnosed remotely and a software patch can be sent over the Internet to rectify it. This drives down maintenance cost.
The brand marketing strategy
Then there is the way it markets itself. Its showrooms, called Tesla Stores, are designed not for selling cars on the spot, but for building a brand. Tesla engages with people who walk into the stores and introduces them to the wonders of its technology by offering them interactive screens devoted to four major themes:
2. Auto-pilot features
3. The company’s battery charging network
4. Technology which powers Tesla
The consumer insight behind this strategy is that a well-informed customer is likely to take decisions in the brand’s favour.
How green is Tesla—and EVs in general?
It is powered by battery and not fossil fuel. Therefore, it does not spew carbon dioxide and other pollutants.
But if you look at Tesla’s Product Life Cycle Assessment, the picture turns grey. (Product Life Cycle Assessment assesses the environmental impact at all stages of a product’s life—from raw material extraction, manufacturing, to its use and maintenance, and its disposal at the end of its useful life.)
Let’s start with the Model 3’s battery. It gives the car a range of 215 miles (346km) per charge. It has to be frequently charged by plugging into the local electricity grid and at the end of its useful life it has to be disposed of.
The battery has to be able to store large quantities of energy without adding weight. It uses lithium, a rare element which is superlight and a superconductor.
Being a rare earth element, extracting even a small quantity requires deep and extensive mining, which causes disproportionate damage to the local environment.
While the batteries are in use, they need to be frequently charged. If the power plant which feeds the local grid is coal-fired, it—and indirectly the battery—is causing pollution.
In India, 62% of power generated is from coal-based power plants. This figure is not likely to reduce in the foreseeable future, because we are blessed with one of the largest coal reserves in the world.
In Asia, 59% of power is coal-based. Even in the US, 38% of power is coal-based.
Finally, when the useful life of the battery is over, will it be efficiently recycled to extract the rare earth elements?
At the moment, the recycling ecosystem for batteries is weak given the small quantity of batteries that are in use and which come up for recycling. Therefore, the recycling is being done by Tesla itself. But as EVs become a preferred way of transportation, many more batteries will come up for recycling. This will lead to a large-scale ecosystem for recycling batteries and the safe disposal of what is left over. Till then, the harm that these batteries will cause to the environment could be significant.
The Model 3 still scores as an environment-friendly option. Among the cars currently available, it can be counted among the cleanest and greenest options—despite the carbon footprints being generated upstream (sourcing of raw materials and manufacturing) and downstream (during charging and battery disposal).
Of course, if the power plant uses renewable energy, Tesla will live up much better to the image it has created among its brand advocates.
But Tesla is not leaving that to chance. Last year, it introduced Powerwall, a home battery that charges using electricity generated from rooftop solar panels. This would ensure that a Tesla owner can charge her car in her garage. Tesla is also working with government agencies and organizations including in Europe and China to install public charging stations.
If Tesla can successfully execute this strategy, it will move closer to delivering on its promise of providing clean transportation.
Rajesh Srivastava is a corporate consultant, entrepreneur and academic.
This abridged article is part of a series, New Rules of Business, where he analyses the strategic intent behind business events and the interesting solutions companies are finding to the challenges they face. To read more, visit www.foundingfuel.com