W19186 STRATEGIC PARTNERSHIPS FOR GROWTH1
STRATEGIC PARTNERSHIPS FOR GROWTH1
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W19186
STRATEGIC PARTNERSHIPS FOR GROWTH1
Ken Mark wrote this case under the supervision of Professor Cara Maurer solely to provide material for class discussion. The authors
do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain
names and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208;
Copyright © 2019, Ivey Business School Foundation Version: 2019-05-03
In January 2018, Tesla Inc. (Tesla) was a key player in the global luxury automobile industry. The company
had once been seen as a niche player in a small industry segment, but those days were in the past. It was now
beginning to deliver its mass-market Model 3 sedan, and this milestone marked its move from a niche producer
of eclectic and expensive electric cars to a major American automobile manufacturer.2 Tesla had grown
through a combination of managerial talent, led by chief executive officer (CEO) Elon Musk and his team;
capital from the public and private markets; and key partnerships that provided complementary technology.3
In the past, the company had partnered with future rivals such as Daimler AG and Toyota Motor
Corporation (Toyota) and with multinational firms such as Panasonic Corporation (Panasonic). Tesla had
pursued partnerships, even though the record showed that Musk preferred to maintain complete control of
his companies’ destinies, avoiding outside collaboration and mergers. Musk himself was on record as
saying he did not like partnerships in general because they were complicated and they seldom worked.4
The stakes were high as Tesla moved into regular production of its Model 3. Worldwide demand for electric
vehicles was set to soar after reaching the 2 million milestone in 2017—up 60 per cent from 2016. The
International Energy Agency estimated that there would be 140 million electric cars globally by 2030.5 The
challenge for Musk was to define Tesla’s future partnership strategy and to determine what would become
of its tie-ups with its global partners.
THE GLOBAL VEHICLE INDUSTRY
Since its adaptation for the automotive market in 1879 by Karl Benz,6 the internal combustion engine (ICE)
had been the dominant technology in the global vehicle industry. The ICE generated power by igniting a
mixture of petroleum or oil and air inside chambers and using the hot gases to power pistons. In turn, pistons
and gears transferred this energy into forward motion. The ICE was inefficient at converting fuel into usable
energy, achieving only about 20 per cent thermal efficiency—the measure by which the industry calculated
the percentage of the total energy in fuel that was actually converted into motive power.7
The search for a more efficient engine began with the oil crisis in 1973, when members of the Organization
of the Petroleum Exporting Countries (OPEC) imposed an oil embargo against the United States. The first
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electric-powered car was the EV1, launched in 1996 by the General Motors Company (GM). Unfortunately,
the EV1’s short range and long recharging time earned it a spot on Time’s 2008 list of the “50 Worst Cars
of All Time.”8 The next year, 1997, Toyota launched the Prius, which would become the first successful
energy-efficient vehicle. The Prius was a petrol–electric hybrid car that combined an ICE with a high-torque
electric drive motor, a separate generator, and a nickel-metal hydride battery pack.9
The race to develop a commercially viable battery electric vehicle (BEV) began in the early 2000s as battery
technology improved. BEVs worked by using electricity stored in powerful batteries to power electric
motors. As there was no ICE, a BEV was significantly less complicated than a hybrid car, and it produced
no exhaust. A BEV incorporated additional technology to minimize energy waste. For example, the car
would be switched off when it was stopped, and regenerative braking technology allowed energy to be
recovered during the braking process.10
Worldwide, 79.5 million passenger cars were sold in 2017:11 6.3 million cars were sold in the United States12
and 24.7 million cars were sold in China.13 When including the other types of passenger vehicles
available—light-duty trucks, sport utility vehicles, and cross-over vehicles—the market for passenger
vehicles in the United States totalled 24.4 million vehicles in 2017.14 Global sales of BEVs were expected
to break the 1 million unit mark for the first time in 2017.15
THE GROWING DEMAND FOR ELECTRIC VEHICLES
Electric vehicles were becoming more viable and more popular due to advances in technology. Starting in
2009, battery costs declined by a factor of four and battery energy density increased six times. In addition, an
estimated 2.3 million charging stations were available globally in 2016. These charging points allowed owners
of electric vehicles to recharge their cars during visits to shopping malls or doctors’ offices, for example.16
Approximately 200,000 electric cars were sold in the United States in 2017.17 China was the world’s biggest
market for electric cars, with 600,000 units sold in 2017, up 71 per cent in one year.18 The Chinese market
was dominated by local brands including the BAIC EC-Series, the market leader with 78,079 units sold,
and the Zhidou D2 EV, with 42,342 units sold.19
In September 2017, China indicated that as part of a change in industrial policy, it would require foreign
automakers with manufacturing locations in China to build electric vehicles by 2019. Large automakers set
their targets high: GM planned to offer 10 models of electric vehicles in China by 2020; Volkswagen Group
stated a target of selling 1.5 million electric cars in China alone by 2025; and Ford Motor Company and the
Renault-Nissan-Mitsubishi Alliance announced Chinese joint ventures to build electric cars.20 In 2016,
China accounted for one-third of global car sales—about 28 million units—an increase of 13.7 per cent
over the previous year.21 In the first half of 2017, the best-selling electric cars in China sold between about
6,000 and 18,000 units each (see Exhibit 1).
China’s goal was for 11 per cent of all cars sold, or about 3 million vehicles per year, to be electric models
by 2020.22 The country was also building out the infrastructure necessary to support the growth of electric
vehicles. In March 2017, China had 156,000 charging points across the country, compared with 43,000 in
the United States. By 2020, China intended to have 4.8 million charging points.23
In a sign that Chinese firms were looking beyond local automotive players, Tencent Holdings Limited
(Tencent), a large Chinese technology firm, acquired a 5 per cent stake in Tesla on March 28, 2017.
Tencent’s investment served to reinforce the importance of strategic partnerships in Tesla’s founding and
emergence as only the fourth major American automaker in the last century. With Chinese interest in
electric cars on the rise, Tencent’s investment seemed timely.24
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TESLA’S HISTORY OF PARTNERSHIPS
Tesla was founded by Martin Eberhard, Marc Tarpenning, J. B. Straubel, and Ian Wright. Tarpenning
observed that, by the early 2000s, car makers had outsourced the majority of their parts development and
sourcing, keeping just three technologies in-house: “internal combustion research, sales and marketing and
final assembly.”25
In January 2004, the co-founders looked to raise a round of capital in support of their plan to build a
powerful electric car around licensed drivetrain technology from AC Propulsion. AC Propulsion had
created a prototype car called the tzero but had decided to focus instead on another electric car project based
on a Toyota model, the Scion xB.26 Musk, who had been excited by the prospects for electric cars ever since
building models as a child,27 became both the start-up’s largest investor by contributing $6.35 million28 and
the firm’s chairperson.29 In 2006, Eberhard explained the partnership with Lotus Engineering Inc. (Lotus):
For those of you who don’t know, the Lotus Elise’s chassis is a work of genius. Some have
suggested that the Tesla Roadster is built on a Lotus chassis. This is not true. Tesla licensed the
Elise chassis technology, but Tesla’s UK-based chassis engineering team designed the Roadster’s
chassis using that technology. . . .
Tesla has built a strong, friendly relationship with the team at Lotus, focused primarily on bringing
a great new sports car to the market quickly and efficiently. . . .
• Tesla has licensed key technology from Lotus, principally related to structure and safety
• Tesla has contracted Lotus Engineering for various engineering and styling jobs
• Lotus Cars is the contract manufacturer for the Tesla Roadster, with Tesla as a key supplier to
the factory in Hethel [England]30
However, Eberhard’s goals for Tesla—to be selling Roadsters by 2006 and to be profitable by 2008—were
overly optimistic. Eberhard’s original plan was to drop Tesla-designed drivetrain components into a stock
Lotus Elise “glider,” or chassis, and then finish the car with customized technology and body panels. Tesla
itself was to have been responsible for just five subassemblies in the Roadster, with Lotus providing the
rest of the parts and installation. But attempts to improve the Roadster—by adding customized headlights
and a carbon-fibre body, for example—meant that Tesla took responsibility for hundreds of subassemblies,
introducing complex processes—such as reworking engineering, sourcing materials, and retooling so that
new parts could be made—which a start-up could not handle.31
By August 2007, Musk realized his venture was at stake, ousted Eberhard, and appointed himself as
president of technology. He took steps to assert his authority over Tesla, even working to recast his role as
a key contributor at the firm, even though he had been the chairperson:32
The way that my role has been portrayed to date, where I am referred to merely as “an early investor”
is outrageous. That would be like Martin [Eberhard] being called an “early employee.” Apart from
me leading the Series A & B and co-leading the Series C, my influence on the car itself runs from the
headlights to the styling to the door sill to the trunk, and my strong interest in electric transport
predates Tesla by a decade. Martin should certainly be the front and center guy, but the portrayal of
my role to date has been incredibly insulting. I’m not blaming you or others at Tesla—the media is
difficult to control. However, we need to make a serious effort to correct this perception.33