Avoidance of Second Bankruptcy

Strategic Case Analysis
Part One-Case Study

Avoidance of Second Bankruptcy
_____________________________________________
Case Study: Tesla’s strategy to avoid second
bankruptcy at 2020.
Executive Summary
This study case was to give a deep dive into Tesla’s cash flow challenges during different
transforming periods. Since 2008, Tesla had struggled with cash flow shortage during the
development of its electric vehicles (EVs). The United States government and investors played a
critical role to provide cash to support Tesla’s technology innovation and product delivery. Tesla’s
business strategy did not follow any traditional business models to date. With Elon Musk’s
leadership, Tesla operates under a “No dealership model” by marketing its products exclusively
online and in Tesla’s showrooms. As a result, operational cost added up quickly as more stores
opened to meet the high demand of the Tesla Model 3. Additionally, operation cost also increased
as Elon Musk insisted on having robots in-house to automate the production process. Tesla faced
technical difficulty with the production line, which delayed the delivery of Model 3 and resulted in a
1
higher loss in Q3 of 2018. The low-profit margin of Model 3 also contributed to the cash-burning
process due to the high operation cost in the production line.
Elon Musk had stated that Tesla is a long-term investment that requires cash to support each of its
milestones. The company’s goal is to generate high volume and low-cost EVs to help preserve our
environment. However, during each milestone, Tesla has constantly missed deliverable targets and
reported greater loss each quarter due to the poor financial planning and unexpected—internal and
external—events, such as production line difficulty and the trade war with China. The question is
how can Tesla reach its goal with sustainable cash flow?
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Table Content
Table of Contents
Introduction ..................................................................................................................................... 6
Motivation behind the Brand .......................................................................................................... 6
Business Strategy ............................................................................................................................. 6
First Bankruptcy Tendency............................................................................................................... 7
Model S Delivery .............................................................................................................................. 7
Model 3 Delivery Delay .................................................................................................................... 8
Federal Tax Credit Impact for Sales ................................................................................................. 9
Tesla Challenge Highlight ................................................................................................................. 9
Opportunity –Global expansion ..................................................................................................... 12
Q2 2019 conference call-The Critical Year of 2020 ........................................................................ 12
Exhibits ........................................................................................................................................... 13
Exhibit 1: Stock performance ..................................................................................................... 13
Exhibit 2: Loss chart 2016 to 2019 ............................................................................................. 13
Exhibit 3: Capital raise timeline ................................................................................................. 14
Exhibit 4: Cash Flow Losses ........................................................................................................ 14
Exhibit 5: Europe Car EV Sales 2019 .......................................................................................... 15
Exhibit 6: Tesla Income Statements (2014 to 2018) .................................................................. 15
Exhibit 7: Tesla Balance Sheets (2014 to 2018) ......................................................................... 17
Exhibit 8: Tesla Cash Flow (2014 to 2018) ................................................................................. 21
3
Introduction
Founded in 2003 by two Silicon Valley engineers—Martin Eberhard and Marc Tarpenning, Tesla
Motors positioned itself as a technology company that specialized in electric cars to prove that
electric cars could be better and more efficient than gasoline-powered cars1. Elon Musk joined the
team in 2004 and later became the CEO and product architect after the financial crisis in 2008. Due
to the low car demand during the economic recession, the very first financial crisis hit the company
in 2008. Cash flow liquidation problems put Tesla at a high bankruptcy profile. The government
stepped in and helped Tesla raise $465 million by issuing low-interest rate loans to avoid company
bankruptcy2.
Tesla went public in 2010 with the initial public offer price of $17 per share3. By the end of 2010,
Tesla lost $154.33 million, which was more than double its losses the previous year, at $55.74
million. Despite the growth of revenue, losses continued until today. In Q2 2018, the available cash
was down from $2.67 billion to $2.23 billion compared to the previous quarter. In Q2 2019, Tesla
exceeded the number of car delivery of 91,000 EVs with higher operational cost. Even so, Tesla
reported a loss of $408 million lower than market expectation. The stock was down by 10% and
traded below $2004. Even so, Tesla continued to invest aggressively in R&D of EV technologies, such
as full driving and production line automation5.
Motivation behind the Brand

In 2003, General Motors withdrew its EV1 electric car prototype due to low mileage per charge.
Martin Eberhard and Marc Tarpenning carried the electric car dream to the next step and formed
1
Amy Wu, “The Story Behind Tesla’s Success (TSLA),” Investopedia, June 25, 2019, accessed September 2019,
https://www.investopedia.com/articles/personal-finance/061915/story-behind-teslas-success.asp.
2
Tesla Motors Inc., “Tesla Repays Department of Energy Loan Nine Years Early,” May 22, 2013, accessed
September 2019, https://www.tesla.com/blog/tesla-repays-department-energy-loan-nine-years-early.
3
Aaron Hankin, “Tesla IPO: 7 Years On,” Investopedia, June 25, 2019, accessed September 2019,
https://www.investopedia.com/news/tesla-ipo-7-years/.
4
Brad Moon, “Tesla Stock Dives on Q2 Loss, Departure of CTO,” Yahoo! Finance, July 26, 2019, accessed
September 2019, https://finance.yahoo.com/news/tesla-stock-dives-q2-loss-165658709.html.
5
I. Wagner, “Tesla's research and development expenses from FY 2010 to FY 2018 (in million U.S. dollars),”
August 23, 2019, accessed September 2019, https://www.statista.com/statistics/314863/research-and-
development-expenses-of-tesla/.
4
Tesla Motor, named after Nikola Tesla—an electrical engineer who invented the induction motor
and AC power. 6 The company vision statement is “to create the most compelling car company of the
21st century by driving the world’s transition to electric vehicles”, which emphasized on the
renewable energy focus of its products7. The idea attracted $60 million in capital which Tesla
invested in its very first prototype car – The Tesla Roadster. The car can accelerate from zero to 60
mph in just four seconds, with improved charging technology to last 250 miles per charge8. The car,
however, sold at a premium price of $109,000, which was not affordable for most consumers.
Business Strategy
Tesla’s goal was to become the most promising car company of the 21st century by transforming the
world’s transition to EVs, and delivery of high volume affordable electric cars. Tesla’s corresponding
business strategy was to deliver a high-performance electronic vehicles for high-profit margin, then
use this cash to invest in technology to develop low-cost electric cars with high volume. The Tesla
Roadster and Model S were the first part of the strategy. Under the assumption of the high sales
revenue, Tesla would continue to invest in research and development for longer mile range battery,
auto-drive technology, and deliver the lower-cost electric car that aims to be wildly adopted by the
market in 2019. In the next stage, Tesla directly sold cars through its website and showrooms to
avoid the profit cut from franchised dealerships and gain better control with customer experience.
Unlike most traditional vehicle service centers, Tesla provided support remotely and roadside
assistance if a technician is required. To overcome the obstacle before mass adoption of electronic
vehicles, Tesla created its own supercharging network across United States and overseas. The super
charging technology allowed drivers to fully charge their vehicles as quickly as 30 minutes.
First Bankruptcy Tendency

The first electric sports car was released in 2008 with only 1300 car sales due to the financial crisis of
20089. With the unexpected low demand for luxury cars during the economic downturn, Tesla did
not make enough revenue to deliver the next luxury sedan. Elon Musk decided to cut the production
cost by laying off workers. In the company blog, Musk wrote that the company would “reduce
activity on detailed production engineering, tooling and commitments to suppliers for the Model S
until a loan funding from the Department of Energy is received.” U.S. Secretary of Energy offered
$465 million to Tesla to continue to release more fuel-free vehicles10. Tesla had spent $365 million to
develop the Model S and used the remainder of the fund for electric powertrain manufacturing plan
in San Jose, California.
Model S Delivery
With the successful delivery of Model S, Tesla files IPO (initial public offer) on January 29th, 2010 to
raise more funds11. In May 2010, Toyota Motor Corporation invested $50 million in Tesla and
6
Wu, “The Story Behind Tesla’s Success (TSLA)”.
7
Tesla Motors Inc., “Tesla’s mission is to accelerate the world’s transition to sustainable energy,” accessed
September 2019, https://www.tesla.com/about.
8
Tesla Motors Inc., “Tesla Roadster,” accessed September 2019, https://www.tesla.com/roadster.
9
Blake Martin, Caroline Clothiaux, and Peter Lund, “Driving Off a Cliff: The Case Against Tesla,” The Economist,
2019, accessed September 2019, https://www.economist.com/sites/default/files/tesla_motors.pdf.
10
Department of Energy, “Secretary Chu Announces Closing of $465 Million Loan to Tesla Motors,” Energy.gov,
January 21, 2010, accessed September 2019, https://www.energy.gov/articles/secretary-chu-announces-
closing-465-million-loan-tesla-motors.
11
Hankin, “Tesla IPO: 7 Years On.”
5
announced a strategic joint venture to build EVs12. In the same month, Tesla announced the new
Tesla Factory to produce the Model S in Fremont, California. With Toyota’s joint venture, Tesla’s IPO
was launched at NASDAQ on June 29, 2010 with a price of $17 per share for 13.3 million shares. The
stock was up by 40% by the end of the trading day.
External environmental factors also played a key role in Tesla’s financial health to ensure the success
of the Model S. In 2011, United States President Barack Obama proposed for the U.S. to become the
first country with one million EVs on the road by 201513. In 2012, the Governor of California, Jerry
Brown, issued an executive order to line up the same goal of getting 1.5 million zero-emission
vehicles (ZEVs) on California roads by 202514. Zero-emission vehicles credit system was established
and Tesla became one of the direct beneficiaries. The ZEV program assigned each automaker ZEV
credits. Each car sold earned credits based on the type of ZEV and its battery range. Automakers,
could also carry the exceeded credit from the previous year, or trade the ZEV credits with other
automakers. Since Tesla only produced emission-free vehicles, it exceeded the ZEV credits, which
added extra funding for Model S’s development.
In 2013, Tesla announced that 3,100 Model S vehicles were sold the previous year15. With the
advanced supercharging technology, Model S became the car of the year by Automobile magazine.
In Q3 2016, Tesla presented investors with positive cash flow for the very first time when the Model
S was fully in production. It reported a $21.9 million profit under the GAAP rule versus the 55 cents
loss forecast of each share16. Though Tesla has sold a significant amount of ZEV credits to other
automakers to increase the revenue at Q3 2016, during Tesla’s earnings report, Elon Musk said, “The
Tesla third quarter results reflect strong company-wide execution in many areas. Furthermore, we
expect this to continue into Q4 and project positive GAAP net income despite ZEV credit sales in Q4
likely being negligible.”17In the same quarter, Tesla paid down about 600 million debts, which
includes $127 million for its facilities, and $422 million convertible notes that would settle in 2018.
This led to the cash and cash equivalents down from $3.2 billion to $3.1 billion along with other
operational costs. Tesla could finally take a break from raising additional capital to develop the
affordable version of electronic vehicle – Model 3.
Model 3 Delivery Delay

Due to the preparation of Model 3 production line and acquisition of Solar City, Tesla posted a loss
of 0.79 per share than expected of 0.13 loss per share at Q4 201618. Solar City, a specialized solar
12
Michael Gauthier, “Toyota to invests $50 million in Tesla, co-develop EV technology,” motor1.com, May 21,
2010, accessed September 2019, https://www.motor1.com/news/21845/toyota-to-invests-50-million-in-tesla-
co-develop-ev-technology/.
13
Department of Energy, “One Million Electric Vehicles by 2015,” Energy.gov, accessed September 2019,
https://www1.eere.energy.gov/vehiclesandfuels/pdfs/1_million_electric_vehicles_rpt.pdf.
14
Governor Edmund G. Brown Jr. “2013 ZEV Action Plan,” accessed September 2019,
http://opr.ca.gov/docs/Governors_Office_ZEV_Action_Plan_(02-13).pdf.
15
U.S. SEC, “Tesla Motors, Inc. – Fourth Quarter & Full Year 2012 Shareholder Letter,” SEC.gov, accessed
September 2019,
https://www.sec.gov/Archives/edgar/data/1318605/000119312513067177/d462441dex991.htm.
16
Tesla Motors Inc., “Financials & Accounting,” accessed September 2019, https://ir.tesla.com/financial-
information/quarterly-results.
17
Jay Cole, “Tesla Reports Larger Than Expected Profit For Q3 2016 Earnings,” insideevs.com, October 26,
2016, accessed September 2019, https://insideevs.com/news/329487/tesla-reports-larger-than-expected-
profit-for-q3-2016-earnings/.
18
Tesla Motors Inc., “Tesla Motors – Third Quarter 2014 Shareholder Letter,” November 5, 2014, accessed
September 2019, https://ir.tesla.com/static-files/53e161cf-e04f-495c-9fa5-60dcd79231fd.
6
energy service, adds $77 million of cash to its business in the six weeks after the completion of the
deal. However, Elon Musk invested $85 million of solar-related operating expenses, aimed at long
term investment. Deepak Ahuja, the retired CFO of Tesla from 2015, stepped back in the CFO role
and led the finance operation to ensure the success of Model 319. To avoid the delay of delivering
Model 3, Ahuja and Musk raise an additional $300 million cash, making the cash reserve to $3.4
billion by the end of 2016. “Tesla plans to produce 5,000 Model 3 vehicles per week before the end
of the fourth quarter of this year, and reach 10,000 per week at some point in 2018,” Tesla said in its
shareholder letter.
Model 3’s first production was delayed until July of 2017 due to complication with the automation of
the production line. 20 Elon Musk also tried to automate the final assembly of the vehicle, which was
aimed at increasing efficiency but came with a high initial cost. To ease the cash flow constraint,
Musk came up with three strategies. The first one was to gain more cash from rolling out a newer
version of Roadster in 2020. The key feature of the new model is the performance, which can go
from 0 to 60mph in just 1.9 seconds compared to 3.7 seconds previously. The new Roadster would
cost $250,000 with a $50,000 initial deposit21. Another strategy was increasing the other model
prices to offset the production cost of Model 3 and new Tesla stores. And additionally, Tesla started
accepting pre-order of Model 3 with $1000 deposit. Early success had been observed with these
strategies. By April 2016, 276,000 pre-order had been placed worldwide for the Model 3, which
forecasted $9.7 billion sales Tesla could deliver according to the targeted schedule22.
After the struggle of Model 3 production line, Tesla finally unrevealed Model 3 with the promised
price of $35,000 in July 2017. “All Model 3 cars will include support for Tesla's high-speed
Supercharging network, because it's about going where you want to go," according to Musk23. By
November 2017, there were more than 400,000 pre-orders for the Model 3, however, the
production line could not keep up with the demand. After July’s launch, Tesla only produced 260
vehicles, which is less than 20 percent of its target of 1,500 vehicles. “We continue to make progress
resolving early bottlenecks related to these issues, and there remain no fundamental problems with
our supply chain or any of our production processes,” Tesla said in its Q4 2017 shareholders letter24.
Tesla took actions to increase the capacity of Model 3 production lines, expanded supercharging
stations, and opened more stores as a channel to increase the sell volume of the Model 3. To
remove the bottlenecks, Tesla imported equipment from directly from Germany to speed up the
production line25. Additionally, the company opened a new production line outside of Fremont
19
U.S. SEC, “Notice of 2019 Annual Meeting of Stockholders,” accessed September 2019,
https://www.sec.gov/Archives/edgar/data/1318605/000156459019014268/tsla-def14a_20190611.htm.
20
Tom Randall, “Tesla Rolls Out Its First Model 3, and It’s Elon’s,” July 9, 2017, accessed September 2019,
https://www.bloomberg.com/news/articles/2017-07-10/tesla-rolls-out-its-first-model-3-and-it-s-elon-s.
21
Jim Motavalli, “The New Tesla Roadster Aims to Astonish,” Barrons.com, February 7, 2019, accessed
September 2019, https://www.barrons.com/articles/the-new-tesla-roadster-aims-to-astonish-01549558591.
22
Alex Hern, “Tesla Motors receives $10bn in Model 3 pre-orders in just two days”, The Guardian, April 4,
2016, accessed September 2019, https://www.theguardian.com/technology/2016/apr/04/tesla-motors-sells-
10bn-model-3-two-days.
23
Joinfo, “Tesla Model 3 release set for 2017,” joinfo.com, January 4, 2016, accessed September 2019,
https://joinfo.com/en/tech/1015775_tesla-model-3-release-set-for-2017.html.
24
Tesla Kor, “Tesla shares down 5% after reporting bigger than expected loss of $2.92 per share,” November
2017, accessed September 2019, https://teslakor.blogspot.com/2017/11/tesla-shares-down-5-after-
reporting.html.
25
Dana Hull, “Key to Tesla Battery Manufacturing Is Still in Germany,” February 7, 2018, accessed September
2019, https://www.bloomberg.com/news/articles/2018-02-07/tesla-slows-red-hot-cash-burn-on-model-3-
progress-deposit-boost.
7
California to reach the goal of 5000 vehicles per week. In the final quarter of 2018, Tesla delivered
63,150 Model 3s, meeting its goal for the year 26.
Federal Tax Credit Impact for Sales

Taxpayers who purchased a qualified plug-in electric drive motor vehicle, such as Tesla and General
Motors, were eligible for a tax credit of up to $7,500 until electric vehicle makers sold 200,000
qualified vehicles27. By the end of 2018, Tesla delivered its 200,000th vehicle, which signaled a slow
phase-out of the tax credit has begun. According to IRS:
This triggers a phase out of the tax credit available for purchasers of new Tesla plug-in
electric vehicles beginning Jan. 1, 2019. Qualifying vehicles by the manufacturer are eligible
for a $7,500 credit if acquired before Jan. 1, 2019. Beginning Jan. 1, 2019, the credit will be
$3,750 for Tesla’s eligible vehicles. On July 1, 2019, the credit will be reduced to $1,875 for
the remainder of the year. After Dec. 31, 2019, no credit will be available.28
Elon Musk had tried to push the sales at the end of 2018 by posting at Tweet: “US tax credit of
$7500 drops in half by Jan 1st, 2019. Order online in a few mins at Tesla.com. Return in 7 days for full
refund.”29 The sale strategy helped the revenue generation of $7.23 billion, which is more than
double compared to the same quarter of 2017 with $3.29 billion. Tesla made $139.5 million, or 78
cents a share, compared with a loss of $675.4 million, or $4.01 a share, during the last quarter of
2017. Its cash position had substantially improved by $1.45 billion, despite spending $230 million to
repay convertible bonds at the last quarter of 201830.
While Elon Musk tried to focus on the long-term goal to deliver affordable renewable energy
product, and the financial health of the company was an obstacle without further federal tax break
policy. In the first quarter of 2019, Tesla reported cash and cash equivalents of $3 billion. Sales
suffered due to the reduction of federal credit tax credits during the first quarter of 2019. To target
this concern, Tesla announced a $2,000 price cut on its U.S. product lineup in January 201931. Tesla
also had to lay off 7 percent of its workforce while increasing Model 3 production rate and
continuously improve manufacture processes32. At the same time, Tesla discontinued the cheapest
versions of Model S and their referring program at the end of January 2019, which included six
months of free charging for both parties. Elon Musk communicated this message through Twitter
26
Tesla Motors Inc., “Tesla Q4 2018 Vehicle Production & Deliveries, Also Announcing $2,000 Price Reduction
in US,” January 2, 2019, accessed September 2019, https://ir.tesla.com/news-releases/news-release-
details/tesla-q4-2018-vehicle-production-deliveries-also-announcing-2000.
27
IRS.gov, “First plug-in electric vehicle manufacturer crosses 200,000 sold threshold;Tax credit for eligible
consumers begins phase down on Jan. 1,” irs.gov, December 14, 2018, accessed September 2019,
https://www.irs.gov/newsroom/first-plug-in-electric-vehicle-manufacturer-crosses-200000-sold-thresholdtax-
credit-for-eligible-consumers-begins-phase-down-on-jan-1.
28
Ibid.
29
Chris Isidore, “Time is running out on a tax credit for Tesla buyers,” CNN Business, June 28, 2019, accessed
September 2019, https://www.cnn.com/2019/06/28/business/tesla-tax-credit-loss/index.html.
30
Tesla Motors, Inc., “Tesla Fourth Quarter & Full Year 2018 Update,” accessed September 2019,
https://ir.tesla.com/static-files/0b913415-467d-4c0d-be4c-9225c2cb0ae0.
31
Matthew Debord, “Tesla’s $2,000 price cut doesn’t mean it has a demand problem,” Business Insider,
January 3, 2019, accessed September 2019, https://www.businessinsider.com/tesla-price-cut-doesnt-mean-it-
has-demand-problem-2019-1.
32
Ryan Browne, “Tesla cuts 7% of its workforce, and Elon Musk sees a ‘very difficult’ road ahead as investors
hammer the stock,” CNBC, January 18, 2019, accessed September 2019,
https://www.cnbc.com/2019/01/18/tesla-to-cut-its-workforce-by-around-7-percent.html.
8
and pushed the sales again for the first quarter of 2019. Tesla’s share dropped by 13 percent at the
same date as the message delivered. At the first quarter of 2019 earnings report, Tesla reported the
loss of $702.1 million with revenue of $5.19 billion33.
Tesla Challenge Highlight

Ever since Tesla’s IPO in 2010, Tesla had raised funds through stocks and convertible-bond offerings
every year except 2018, which totaled more than $12 billion. Tesla faced about $920 million
in convertible senior notes expires on March 1, 201934. Tesla could convert the senior notes to stock
if the stock traded at $359.87 per share. However, the stock was trading between $289 and $320 per
share in the first two months of 2019. Without much choices, Tesla paid it off by using part of the
$3.7 billion cash. Unexpected loss from the first quarter of 2019 and debt payment decreased cash
from $3.7 billion to $2.2 billion. Elon Musk mentioned, “We have sufficient cash on hand to
comfortably settle in cash our convertible bond that will mature in March 2019.”35 However, Tesla
needed extra cash for manufacture cost not only for Model 3, but also need extra cash to start the
new production line for Model Y SUV, Tesla Semi, and Tesla Roadster before the end of 2020.
Moreover, in the second quarter of 2019, Tesla also had to pay off $180 million in debt that carried
over from last year for SolarCity. In November 2019, it must repay $566 million in bonds that used to
fund SolarCity’s operation36. Failure of paying the debt could lead to the bankruptcy of SolarCity.
With around $2 billion debts that needed to pay in the next few years, Tesla had to raise more funds
to cover their capital expenditures with major projects, such as expansions of supercharging station
and service stores. As a result, Tesla sold $642 million Tesla stocks and offered $1.35 billion in
convertible senior notes that gave the lenders an option to take Tesla stock or cash at loan maturity,
which led the cash and cash equivalent to $5 billion at May 201937.
In January 2019, Tesla’s CFO, Deepak Ahuja announced that he intends to retire from his position38.
To assure investors and shareholders confidence, Zachary Kirkhorn, Tesla’s new CFO, said in Q2 2019
earning conference:
Operating expenses, net of restructuring continues to improve as well, despite the increases
in volume, reflecting the amends focus on improving our operating efficiency. And while
operating expenses and capital expenses may appear to be a naturally low this quarter,
33
Lora Kolodny and Dawn Kopecki, “Tesla misses big on first-quarter earnings as demand fell for its electric
cars,” CNBC, April 24, 2019, accessed September 2019, https://www.cnbc.com/2019/04/24/tesla-earnings-q1-
2019.html.
34
U.S. SEC, “Prospectus Supplement to Prospectus dated May 15, 2013,” SEC.gov, accessed September 2019,
https://www.sec.gov/Archives/edgar/data/1318605/000119312514077288/d678614d424b5.htm.
35
Ruth Reader, “Can Elon Musk juggle Tesla out of debt?,” fastcompany.com, January 30, 2019, accessed
September 2019, https://www.fastcompany.com/90299621/can-elon-musk-juggle-tesla-out-of-debt.
36
U.S. SEC, “FORM 10-K,” SEC.gov, accessed September 2019,
https://www.sec.gov/Archives/edgar/data/1318605/000156459017003118/tsla-10k_20161231.htm.
37
Timothy Lee, “With cash dwindling, Tesla seeks to raise $2 billion in debt and equity,” arstechnica.com, May
2, 2019, accessed September 2019, https://arstechnica.com/cars/2019/05/tesla-seeks-to-raise-another-2-
billion-after-unprofitable-quarter/.
38
U.S SEC, “FORM 8-K,” SEC.gov, accessed September 2019,
https://www.sec.gov/Archives/edgar/data/1318605/000156459019001597/tsla-8k_20190129.htm.
9
that's not the case, rather these reflect continued progress on cost efficiency and ability to
scale our core technologies and processes. 39
While investors were optimistic about Tesla’s long term profitability, Tesla still faced financial
stability in the short term regarding its high targets, complex operation technology, and large debt
due in the next few years.
Macroeconomic environment instability could also bring another big challenge for Tesla. The United
States declared a trade war with China, which was a huge market for electronic vehicles. The trade
war limited the sale channels for the Model 3. According to Bloomberg, New China tariffs to hit $75B
in U.S. imports, including extra 25% car duty40. The new tariff lowered the profit margin for Tesla
electronic cars in general. Given the Model 3’s high production cost and low margin, Tesla had to
raise the price for Model 3.
Opportunity –Global expansion

After Tesla caught up with production line, the spotlight moved to the demand. Investors were
concerned about the lack of demand in the United States due to the low incentive with zero federal
tax credit and a high price point. There were potential channels for Tesla to grow its business, such
as global expansion. Europe was highly aware of the environmental pollution issue that caused by
traditional fuel-powered vehicles. For example, Norway has an egregious incentive for low emission
vehicles and high taxation on gas-fueled vehicles41. In July 2017, European car sales data revealed a
positive growth trend in Norway. By July 31, Tesla was by far the leading EV sold worldwide42, which
proves that it can continue to dominate the global EV market and bring profit back, as promised to
investors.
Q2 2019 conference call-The Critical Year of 2020

In Q2 2019, Tesla had produced 87,048 cars and sold 95,200 cars where the majority were Model 3.
The revenue was $6.3 billion as stated in the second quarter of earnings report conference43. With
increased Model 3 demand and lower attraction of Model S, the average sale price declined to
$50,000 in North America. A net loss of $408 million was reported. The production line was capable
to generate 7,000 Model 3 in a week and aimed to increase the number to 10,000 as weekly
39
Motley Fool Transcriber, “Tesla, Inc. (TSLA) Q2 2019 Earnings Call Transcript,” fool.com, July 24, 2019,
accessed September 2019, https://www.fool.com/earnings/call-transcripts/2019/07/24/tesla-inc-tsla-q2-
2019-earnings-call-transcript.aspx.
40
Bloomberg, “New China tariffs to hit $75B in U.S. imports, including extra 25% car duty,” autonews.com,
August 23, 2019, accessed September 2019, https://www.autonews.com/automakers-suppliers/new-china-
tariffs-hit-75b-us-imports-including-extra-25-car-duty.
41
Mark Lewis, “With government incentives, Norway sees electric car sales boom,” December 19, 2018,
accessed September 2019, https://www.csmonitor.com/Environment/2018/1219/With-government-
incentives-Norway-sees-electric-car-sales-boom.
42
Brooke Crothers, “Car Buyers May Not Prefer Electric Vehicles But They Prefer The Tesla Model 3,” Forbes,
August 4, 2019, accessed September 2019, https://www.forbes.com/sites/brookecrothers/2019/08/04/car-
buyers-may-not-prefer-electric-vehicles-but-they-prefer-the-tesla-model-3/#6dacd83d6761.
43
Tesla Motors, Inc., “Tesla Q2 2019 Vehicle Production & Deliveries,” July 2, 2019, accessed September 2019,
https://ir.tesla.com/index.php/news-releases/news-release-details/tesla-q2-2019-vehicle-production-
deliveries.
10
productivity by the end of 201944. The strategy improved the factories within the United States, and
aimed another production line in China. In parallel, Tesla was also preparing the Model Y production
in its Fremont plant45. It planned to leverage the existing manufacturing designs on the Model Y
production line. Tesla mentioned it expects a return to profitability in the third quarter.
On July 24th, 2019, Elon Musk and his team informed the plan of 2020:
As we look ahead to the rest of the year and into 2020, we remain focused on launching new
vehicle as new programs further expanding our manufacturing operations and continuing to
improve customer service. We remain focused on international expansion because local
production is essential to being cost competitive.46
Since the technology had a large portion of overlap with Tesla 3, Elon Musk expected the Model Y to
roll out smoothly, and predicted to grow at an exponential rate. With $5 billion in cash and cash
equivalents in hand, would Tesla be able to hit the target as promised without running out of cash?
Even the current business strategy sets Tesla apart from competitors, should Tesla adjust the
business strategy to fit the current global trend? How can Tesla position itself as an electronic
vehicle pioneer in the auto industry?
44
Jameson Dow, “Tesla Model 3 update: production gets more efficient, 10k/wk and China by end of 2019,”
electrek.co, January 30, 2019, accessed September 2019, https://electrek.co/2019/01/30/tesla-model-3-
production-update-7k-week-china-end-of-2019/.
45
Fred Lambert, “Tesla is working on 5th assembly line at Fremont factory ahead of Model Y production,”
electrek.co, September 10, 2019, accessed September 2019, https://electrek.co/2019/09/10/tesla-new-
assembly-line-fremont-factory-model-y-production/.
46
Motley Fool Transcriber, “Tesla, Inc. (TSLA) Q2 2019 Earnings Call Transcript.”
11
Exhibits
Exhibit 1: Stock performance
Source: Yahoo Finance, 2011 - 2019 stock price of Tesla, accessed July 15, 2019
Exhibit 2: Loss chart 2016 to 2018
Source: Tesla Official website, 2008 - 2018 Annual Reports, accessed June 15, 2019
12
Exhibit 3: capital raise timeline
Exhibit 4: Cash Flow Losses
13
Exhibit 5: Europe Car EV Sales 2019
Source: The Driven, Model 3 leads battery electric car sales in Europe, accessed June 19, 2019
Exhibit 6: Tesla Income Statements (2014 to 2018)
14
Fiscal year is January- 2014 2015 2016 2017 2018
December. All values USD
millions.
Sales/Revenue 3.2B 4.05B 7B 11.76B 21.46B
Cost of Goods Sold 2.32B 3.12B 5.45B 9.54B 17.42B
(COGS) incl. D&A
COGS excluding D&A 2.08B 2.7B 4.5B 7.91B 15.52B
Depreciation & 231.93M 422.59M 947.1M 1.64B 1.9B

Amortization Expense
Depreciation 228.92M - - - -
Amortization of 3.02M - - - -
Intangibles
Gross Income 881.67M 923.5M 1.55B 2.22B 4.04B
SG&A Expense 1.1B 1.64B 2.24B 3.85B 4.29B
Research & 498.5M 717.9M 834.41M 1.38B 1.46B
Development
Other SG&A 603.66M 922.23M 1.41B 2.48B 2.83B
Other Operating - - - - -
Expense
Unusual Expense - - (74.03M) (7.19M) 113.68M
EBIT after Unusual - - (616.51M (1.63B) (366.52M

Expense ) )
Non Operating 1.81M (41.65M) 60.45M (126.97M 308,000
Income/Expense )
Non-Operating 1.13M 1.51M 8.53M 19.69M 24.53M
Interest Income
Equity in Affiliates - - - - -
(Pretax)
Interest Expense 100.89M 118.85M 198.81M 471.26M 663.07M
Gross Interest Expense 113.69M 160.35M 245.51M 596.16M 717.97M
Interest Capitalized 12.8M 41.5M 46.7M 124.9M 54.9M
Pretax Income (318.44M (875.62M (746.35M (2.21B) (1B)

) ) )
Income Tax (24.4M) 13.04M 26.7M 31.55M 57.84M
15
Income Tax - Current 257,000 525,000 568,000 (7.52M) 1.89M
Domestic
Income Tax - Current 9.2M 10.34M 53.96M 42.72M 23.62M
Foreign
Income Tax - Deferred - - - - -
Domestic
Income Tax - Deferred -56,000 2.17M (27.83M) (3.65M) 32.32M
Foreign
Income Tax Credits 33.8M - - - -
Equity in Affiliates - - - - -
Other After Tax - - - - -
Income (Expense)
Consolidated Net (294.04M (888.66M (773.05M (2.24B) (1.06B)
Income ) ) )
Minority Interest - - (98.13M) (279.18M (86.49M)
Expense )
Net Income (294.04M (888.66M (674.91M (1.96B) (976.09M
) ) ) )
Net Income After (294.04M (888.66M (674.91M (1.96B) (976.09M
Extraordinaries ) ) ) )
Preferred Dividends - - - - -
Net Income Available (294.04M (888.66M (674.91M (1.96B) (976.09M
to Common ) ) ) )
EPS (Basic) -2.36 -6.93 -4.68 -11.83 -5.72
Basic Shares 124.54M 128.2M 144.21M 165.76M 170.53M
Outstanding
EPS (Diluted) -2.36 -6.93 -4.68 -11.83 -5.72
Diluted Shares 124.54M 128.2M 144.21M 165.76M 170.53M
Outstanding
EBITDA 11.44M (294.04M 256.56M (1.68M) 1.65B
)
Exhibit 7: Tesla Balance Sheets (2014 to 2018)
16
Fiscal year is 2014 2015 2016 2017 2018
January-
December. All
values USD
millions.
Cash & Short 1.92B 1.22B 3.5B 3.52B 3.88B
Term
Investments
Cash Only 1.92B 1.22B 3.5B 3.52B 3.88B
Short-Term - - - - -
Investments
Total Accounts 226.6M 168.97M 499.14M 515.38M 949.02M
Receivable
Accounts 226.6M 168.97M 499.14M 515.38M 949.02M
Receivables,
Net
Accounts 226.6M 168.97M 499.14M 515.38M 949.02M
Receivables,
Gross
Bad - - - - -
Debt/Doubtful
Accounts
Other - - - - -
Receivables
Inventories 953.68M 1.28B 2.07B 2.26B 3.11B
Finished Goods 397.32M 476.51M 1.02B 1.01B 1.58B
Work in 56.11M 163.83M 233.75M 243.18M 296.99M

Progress
Raw Materials 500.24M 637.5M 816.98M 1.01B 1.23B
Progress - - - - -
Payments &
Other
Other Current 94.72M 115.47M 193.97M 268.37M 365.67M
Assets
Miscellaneous 94.72M 115.47M 193.97M 268.37M 365.67M
Current Assets
Total Current 3.2B 2.78B 6.26B 6.57B 8.31B
Assets
17
Net Property, 2.6B 5.19B 15.04B 20.49B 19.69B
Plant &
Equipment
Property, Plant 2.97B 5.77B 16.05B 22.44B 22.89B
& Equipment -
Gross
Buildings 154.36M 521.54M 1.08B 2.52B 4.05B

Land & 49.48M - - - -
Improvements
Computer 98.97M 175.51M 275.66M 395.07M 487.42M

Software and
Equipment
Other Property, 526.18M 2.03B 8.62B 11.61B 14.06B

Plant &
Equipment
Accumulated 375.65M 571.13M 1.02B 1.94B 3.19B

Depreciation
Total 11.37M 31.52M 268.17M 441.72M 398.22M
Investments
and Advances
Other Long- 11.37M 31.52M 268.17M 441.72M 398.22M
Term
Investments
Long-Term Note - - 506.3M 456.65M 421.55M
Receivable
Intangible - 12.82M 376.15M 421.74M 350.65M
Assets
Net Goodwill - - - 60.24M 68.16M
Net Other - 12.82M 376.15M 361.5M 282.49M

Intangibles
Other Assets 43.21M 47.06M 217.25M 273.12M 571.66M
Tangible Other 7.61M 46.86M 216.75M 273.12M 571.66M
Assets
Total Assets 5.85B 8.07B 22.66B 28.66B 29.74B
18
ST Debt & 632.13M 629.23M 1.21B 978.76M 2.71B
Current Portion
LT Debt
Short Term - - - - -
Debt
Current Portion 632.13M 629.23M 1.21B 978.76M 2.71B
of Long Term
Debt
Accounts 777.95M 916.15M 1.86B 2.39B 3.4B
Payable
Income Tax - 101.21M 152.9M 185.81M 348.66M
Payable
Other Current 697.09M 1.16B 2.61B 4.12B 3.53B
Liabilities
Dividends - - - - -
Payable
Accrued Payroll 54.49M 86.86M 218.79M 378.28M 448.84M
Miscellaneous 642.6M 1.08B 2.39B 3.74B 3.08B

Current
Liabilities
Total Current 2.11B 2.81B 5.83B 7.67B 9.99B
Liabilities
Long-Term Debt 1.85B 2.27B 7.39B 11.15B 11.12B
Long-Term Debt 1.81B 2.07B 5.9B 8.83B 8.41B
excl. Capitalized
Leases
Non- 1.81B 2.07B 5.9B 8.83B 8.41B

Convertible
Debt
Convertible - - - - -
Debt
Capitalized 43.67M 201.39M 1.49B 2.32B 2.71B
Lease
Obligations
Provision for 96.7M 1.29B 2.21B 2.31B 413.07M
Risks & Charges
Deferred Taxes - - - - -
19
- Credit
- Debit
Other Liabilities 825.29M 609.69M 1.34B 1.89B 1.9B
Other Liabilities 533.02M 146.25M 446.83M 662.45M 854.61M
(excl. Deferred
Income)
Deferred 292.27M 463.45M 888.76M 1.22B 1.05B

Income
Total Liabilities 4.88B 6.98B 16.76B 23.02B 23.43B
Non-Equity 58.2M - - - -
Reserves
Preferred Stock - - - - -
(Carrying Value)
Common 911.71M 1.08B 4.75B 4.24B 4.92B
Equity (Total)
Common Stock 126,000 131,000 161,000 169,000 173,000
Par/Carry Value
Retained (1.43B) (2.32B) (3B) (4.97B) (5.32B)
Earnings
Total 911.71M 1.08B 4.75B 4.24B 4.92B
Shareholders'
Equity
Accumulated - - 1.15B 1.4B 1.39B
Minority
Interest
Total Equity 911.71M 1.08B 5.91B 5.63B 6.31B
Liabilities & 5.85B 8.07B 22.66B 28.66B 29.74B
Shareholders'
Equity
Exhibit 8: Tesla Cash Flow (2014 to 2018)
20
Fiscal year is January- 2014 2015 2016 2017 2018
December. All values
USD millions.
Net Income (294.04M) (888.66M) (773.05M) (2.24B) (1.06B)

before
Extraordinaries
Depreciation, 231.93M 422.59M 947.1M 1.64B 1.9B
Depletion &
Amortization
Depreciation and 228.92M - - - -
Depletion
Amortization of 3.02M - - - -
Intangible Assets
Deferred Taxes & - - - - -

Investment Tax
Credit
Investment Tax - - - - -
Credit
Other Funds 261.6M 434.86M 395.98M 1.04B 1.2B
Funds from 199.49M (31.21M) 570.03M 435.95M 2.04B
Operations
Extraordinaries - - - - -
Changes in (256.83M) (493.29M) (693.86M) (496.6M 57.95M
Working Capital )
Receivables (183.66M) 46.27M (213.1M) (24.64M (496.73
) M)
Accounts Payable 252.78M 263.35M 750.64M 388.21M 1.72B
Other 562.24M 770.96M 1.23B 841.25M 69.84M

Assets/Liabilities
Net Operating (57.34M) (524.5M) (123.83M) (60.65M 2.1B
Cash Flow )
Investing Activities
2014 2015 2016 2017 2018
Capital (969.89M) (1.63B) (1.44B) (4.08B) (2.32B)
Expenditures
21
Capital (969.89M) (1.63B) (1.44B) (4.08B) (2.32B)
Expenditures
(Fixed Assets)
Capital - - - - -
Expenditures
(Other Assets)
Net Assets from - (12.26M) - (114.52 (17.91M)
Acquisitions M)
Sale of Fixed - - 415.05M 789.7M 437.13M
Assets &
Businesses
Purchase/Sale of (16.71M) (26.44M) (189.48M) (223.09 -
Investments M)
Purchase of (205.84M) (26.44M) (206.15M) (223.09 -
Investments M)
Sale/Maturity of 189.13M - 16.67M - -
Investments
Other Uses (3.85M) - - - -

Other Sources - - - - -
Net Investing (990.44M) (1.67B) (1.21B) (3.63B) (1.9B)
Cash Flow
Financing
Activities
2014 2015 2016 2017 2018
Cash Dividends - - - - -
Paid - Total
Common - - - - -
Dividends
Preferred - - - - -
Dividends
Change in Capital 489.62M 856.61M 1.87B 712.17M 295.72M
Stock
Repurchase of - - - - -
Common &
Preferred Stk.
Sale of Common & 489.62M 856.61M 1.87B 712.17M 295.72M

Preferred Stock
22
Proceeds from - 20M 1.7B 400.18M -
Stock Options
Other Proceeds 489.62M 836.61M 163.82M 312M 295.72M

from Sale of Stock
Issuance/Reductio 1.69B 683.94M 1.72B 3.39B 89.14M

n of Debt, Net
Change in Current - - - - -
Debt
Change in Long- 1.69B 683.94M 1.72B 3.39B 89.14M
Term Debt
Issuance of Long- 2.3B 887.72M 3.62B 7.65B 6.18B
Term Debt
Reduction in Long- (614.61M) (203.78M) (1.9B) (4.26B) (6.09B)

Term Debt
Other Funds (31.88M) (17.03M) (41.29M) (472.6M (248.25

) M)
Other Uses (35.15M) (17.03M) (41.29M) (759.82 (248.25
M) M)
Other Sources 3.27M - - 287.21M -
Net Financing 2.14B 1.52B 3.54B 3.63B 136.62M

Cash Flow
Exchange Rate (35.53M) (34.28M) (7.41M) 39.46M (22.7M)
Effect
Miscellaneous - - - - -
Funds
Net Change in 1.06B (708.81M) 2.2B (25.3M) 311.43M
Cash
Free Cash Flow (1.03B) (2.16B) (1.56B) (4.14B) (221.71
M)
23
Part Two-Case Analysis
Avoidance of Second Bankruptcy
_____________________________________________
Case Study: Tesla’s strategy to avoid second
bankruptcy at 2020.
Abstract
The study case is aimed to evaluate Tesla’s current strategy and analyze cash flow problems
based on part 1’s factual information. The key challenges are financial stability, organization
structures, production line efficiency, macro-economic factors, and competitors. Several
frameworks, theories, and analytics tools are leveraged to analyze both internal and
external factor that shape Tesla’s performance. In this study case, key data and information
are extracted from Tesla’s official website and Elon Musk’s twitter post to avoid bias
information. Interview content with Head of Tesla’s global HR is utilized as primary source.
At the end of the paper, alternate strategies are recommended to enhance internal business
operation structure to solve immediate cash flow shortage and expand its market share
globally as a way to resolve Tesla’s long term financial stability issue as well as become more
competitive in electric vehicle industry.
24
Contents
Introduction ............................................................................................................................. 26
Tesla’s key challenge – High Operation cost............................................................................ 27
Literature review...................................................................................................................... 27
Strategy Literature Review .................................................................................................. 28
Strategy Concept development ....................................................................................... 28
Examine existing Strategy ................................................................................................ 29
Strategy Sustainability ..................................................................................................... 29
Reflection on Tesla’s Strategy .............................................................................................. 30
Financial Statement Literature review................................................................................. 31
Analytic Tools ........................................................................................................................... 32
SWOT analysis ...................................................................................................................... 32
25
Strengths .......................................................................................................................... 33
Weaknesses ..................................................................................................................... 34
Opportunities ................................................................................................................... 35
Threat ............................................................................................................................... 36
Porter’s five force analysis ................................................................................................... 37
Competition Analysis ........................................................................................................... 37
Financial Performance ............................................................................................................. 38
Short Term liquidity analysis ................................................................................................ 39
Long term liquidity analysis ................................................................................................. 40
Profitability analysis of Tesla................................................................................................ 40
Bankruptcy Risk analysis ...................................................................................................... 41
Strategic recommendation ...................................................................................................... 43
External expansion - Global expansion ................................................................................ 44
Internal expansion - lower operation cost........................................................................... 45
Conclusion: ............................................................................................................................... 45
Reference: ................................................................................................................................ 46
Appendix A ............................................................................................................................... 48
Appendix B ............................................................................................................................... 48
Appendix C ............................................................................................................................... 48
Introduction
Tesla positioned itself as an electric vehicle pioneer in automaker industry with advanced
auto-drive technology to provide zero emission car. Elon Musk, CEO of Tesla, acted as a
transformational leader to guide Tesla not only to become an electric vehicle company, but
also provide sustainable products while maintaining environment for future generations. He
led the production of Roadster, Model S, Model X, and Model 3. By the end of 2018, Tesla
had delivered 286,000 cars since inception. Similar to young technology companies, Tesla
not only face competitions, but also cash flow shortage due to high operational cost, such as
production line automation and Tesla stores. At 2008, Tesla was at a tough financial
situation, and had to get financial assistance from government to avoid bankruptcy.
Negative net profit margin quarter over quarter raised investor’s concern regarding Tesla’s
long term profitability. The objective of this paper is to analyze Tesla’s current strategies
effectiveness and difference challenges. Different frameworks, theories, and analytic tools
are utilized to evaluate Tesla’s current situation, specially emphasize at its cash flow
problems. The study goal is to provide strategic suggestions with as a young disruptive
technology company regarding its immediate issue and long term challenges.
26
Tesla’s key challenge – High Operation cost
Tesla’s operation cost had increased as the business expanded. The strategy of avoiding
third party dealership by opening large number of Tesla stores and revamping the whole
production line resulted in general and administrative expenses. While Tesla’s free cash flow
was shrinking quarter over quarter, operation cost ate up a large portion of its revenue, and
reported negative profit for most of its quarterly reports. It was a crucial factor to determine
the profit margin for each unit of car sales. In the long run, Tesla had to shift the variable
cost per car unit to fix cost in order to reduce the operation cost. As Tesla reported losses
quarter over quarter, investors are worried about Tesla’s profit margin in the near future. If
investors decide to withdraw their investment, Tesla would run out of cash and likely to go
bankrupt again.
Literature review
In the case analysis, two important conceptual frameworks were utilized to reflect Tesla’s
current strategies from external perspective and internal cash flow management level. The
conceptual frameworks are aimed to help understanding the current challenges that Tesla is
facing during the rapid change of global corporate landscape and unstable financial
situation. Clearly, Tesla stays very creative and innovative. But stay flexible with cash flow as
part of its strategy is required to ensure Tesla’s success.
The conceptual framework provides the content to explain how Tesla’s existing strategy
were following the concepts of “good strategy”. The strategy framework cannot fully
demonstrates the bankruptcy risk within Tesla. Hence, financial theories also involve in this
study to help understanding Tesla’s core issue. While Elon Musk has a strategic mindset, he
also need to be mindful about operational cost efficiency during strategy execution which
explains under financial ratio analysis.
Figure 1: Conceptual Framework to cross check Tesla’s core challenges
27
From Author’s own work
Strategy Literature Review
The strategy literature review explains the fundamental concept of strategy, and also
mentioned the sustainability of a strategy. The literature provides a set of behaviors to
examine the strategy is sustainable or slowly losing the credibility among customers,
investors, and stakeholders. On the other hand, the conceptual framework offers the
characteristics of a true disruptive innovator. The details are displayed in the Figures below.
It describe a disruptive innovator only require small amount of profit margin to survive in
the market. The point itself challenge Tesla’s self-positioning in the auto industry.
Strategy Concept development
Strategy is claimed as the grand idea to purposively help ones to reach their destination by a
plan (Mintzberg, 1994). It is also a pattern that made up of a serious of actions and decision
makings to gain competitive advantage over others. Michael Porter(1980), a researcher for
strategic filed for more than 4 decades, had introduced the concept of competitive
advantage thought the “Competitive Strategy”. Porter mentioned a company’s competitive
advantage could only focus on one of three areas: Product differentiation, cost
minimization, and market segmentation. The strategic theory had expanded 15 years later
by Cliff Bowman's and David Faulkner called “Strategy Clock” (Bowman, 1996). The model of
corporate strategy explains the cost and perceived value by using 8 different positions to
identify the likelihood of each strategy. At 2013, McGrath's has carry the thought of
competitive advantage and extensively explain sustainable competitive advantage in a
transient advantage economy (McGrath, 2012). Leaders have to capture the opportunity
quickly and take action accordingly before it is gone. Most of these literature reviews are
highlighting an organization’s strategy should reveal its competitive advance and grow
among competitors while meeting the expectation of customer, investors, and stakeholders.
Figure 2: Enhanced from Bowman’s Strategy Clock
28
Examine existing Strategy

Rumelt‘s study regarding “good strategy or bad strategy” has provided a clear distinction
between good and bad existing strategy when leaders tackle under different situations. A
good strategy should be an action to overcome a tough situation along with the value that
sets itself apart from competitor while generating profit to continue its mission (Rumelt,
2011). He clearly engage the solid academic foundation of strategy and create a framework
of developing successful strategies in action. Prior to Rumelt’s business strategy insight,
Osterwalder and Yves (2010) had proposed a business model – “Business Model Canvas” to
outlines nine segments that reflects systematically regarding a business’s value proposition,
infrastructure, customers, and finances to help leaders to analyze if their current strategy
align with the company’s mission and vision. He linked the conventional business model and
an organization’s strategy that requires to react to internal and external changes. Cost
structure, one of the nine segments, focus on the operation cost and potential monetary
consequences for an organization, and Tesla’s strategy is required to focus on cost structure
to balance the margin growth. One way of resolving the issue is to visualized cost
management as a way to align with Tesla’s vision and mission. The company can take
actions to cut bad costs and reallocate resource to invest in development to show their
greatest advantages (Leinwand & Couto, 2017).
Strategy Sustainability
Strategy sustainability become one of the essential indicators to evaluate a good strategy,
especially when a company is constantly facing external threads (Blowfield, 2013). Since
strategy falls with the general assumption that it can be predicted and it does not
specialized in certain subjects. In other words, the strategy making process can be
formalized and evaluate its sustainability (Mintzberg, 1994). Epstein mentioned the nine
principals of suitability, ethics, governance, transparency, business relationships, financial
return, community involvement and economic development, value of products,
employment practices, environmental protection, should be integrated in leader’s daily
strategy execution (Epstein 2008). Ideally, when a company’s business objective is alight
with sustainability benefits, the strategy itself would maximize the sustainability
performance (Savitz, 2006). For example, a cost reduction for a company would favor board
members while external stakeholders would interest in the sustainability of the cost
reduction impact for company’s product or services. If a strategy could satisfied both
parties’ interest, then it address the sustainability issue within a strategy. On the other
hand, it is also important to build a sustainable strategy could be offensive and defensive to
address competitions and alter the company’s future success (Blowfield, 2013). To enhance
the sustainability, a company can leverage outsource as their own capability to expand
business and capture more market shares. As a company grow, the degree of involvement
for global expansion in strategy could increase the competition in major markets (Yip G.
2002).
29
Reflection on Tesla’s Strategy
In Porter’s articles, he argues that the secret source of success strategy is to choose
different activities compare to rivals (Porters, 1996). Tesla’s mission is to provide
environmentally sustainable transportation with advanced technology. With the different
mission compared to rivals, Tesla’s business model did not follow the traditional models. For
example, Tesla does not partner with third party dealership to enhance operation chain
effectiveness and avoid profit cut in a long run. It opened Tesla stores and showroom to
demonstrate its product with quality control. The high supercharging network coverage
created the marketing effect to help with sales. On the other hand, Tesla shares the electric
vehicle patens with public to help others creating better electronic vehicles (Tesla blog,
2014). The strategy would help the wide adoption of electronic vehicles globally, which
mutually benefit Tesla’s electronic vehicles sales in a long run. In Savitz’s article, he
highlights the sweet spot for sustainability of a strategy while maintaining high profit (Savitz,
2006). Currently, Tesla’s strategy allows itself to generate high revenue but it is not
sustainable due to high operation cost. To ensure Tesla’s success, it needs to shift the
strategy to be operation efficient in order to stands an excellent chance of success for the
future.
Figure 3: Enhanced from Savitz’s sweet spot theory

Tesla’s strategy issues were discussion in recent literature by Stringham et al.(2015).

The article reinforces the Porter’s (1996) Five Forces theory that leads to Tesla’s
current market influence with strong competition advantages. On top of Porter’s
theory, he also points out the strategy allows Tesla to overcome market barrier of
30
electronic auto industry by starting from small scales and focused on preproduction
with limited capital fund. The operation efficiency causes the loss of free cash flow
over years. Similarly, Porter’s (1996) theories also mentioned the relationship
between a company’s strategy and operation efficiency where operation
effectiveness could slow down the strategy implementation and loss completive
advantage in a long run. However, the theories with proper asset, operation
management, and positive profit don’t apply at Tesla’s case very well since Tesla’
business model is unique at the very beginning. With the constant loss of profit over
the last 10 years, tesla still manage to raise more and more capital funds to cover the
mature debts while continue to maintain operation to develop better electronic
vehicles. The main reason is due to the faith that investors have in Tesla’s leading
edge technology and electronic vehicle’s wide adoption in the future. While Tesla is
still struggling with high operation cost, further financial evidences are required to
analyze Tesla’s strategy effectiveness.
Financial Statement Literature review
Financial statements provides factual and meaningful financial ratios of a company that
reveal its financial strengths and weakness (Nuhu, 2014). Within a company’s financial
statement, Cash flow is a key indication of the money that is paid or received in a period of
time that is required to maintain business operation on a continuous basis (Ijeoma, 2016).
Daily business operations require cash as the basic input source. A company’s operations
can be disrupted without sufficient cash flow and could lead to insolvency or bankruptcy
(Akinyomi, 2014). A company can become insolvent when its income does not generate
enough cash from internal income or external sources to sustain daily operation, investment
and financing activities of the firm (Keige,1991). To avoid insolvency, proper monitoring,
cash flow management and accurate allocation of cash is needed to enable the business to
stay financially stable (Olowe, 1998).
Besides cash flow, financial ratios can also help to inform examine a company’s financial
health. In the financial ratio analysis, the primary objectives is to analyze the probability of
making profit and paying debt (Hermanson et al, 1992). To achieve the goal, a company has
to maximize the benefit by efficient resource allocation through budgeting, controlling,
forecasting, and making right decisions, such as lay off during economic down turn.
Understanding accounting ratios allows ones to peak at the hidden relationship between
financial statements and inform the truths (Essien, 2006). According to Choate’s financial
stamen study, he mentioned financial statement analysis’s main objective is to unfold the
change in performance compare to previous quarters or years and forecast the future
performance, mainly for investors (Laitinen, 2002). Common financial statement analysis
includes comparative, trend, and ratios analysis. Among these approaches, ratio analysis is
one of the most strong way to understand the relationships between key financial data
(Igben,1999). Financial statements are highly regulated by standard accounting associations.
31
The standard reporting format helps to prevent fraud data or manipulation of a company’s
performance (Gnanarajah,2017). Investors or researchers could rely on the financial
statement analysis to make comparisons with relevant information. Tesla can also leverage
financial statement analysis to make better decision and planning when it comes to strategy
formation. In most of Tesla’s existing literatures, they have not been able to explain the
coexistence of Tesla’s poor financial performance and high stock performance. In next
selection of the study, one of the goal is to analyze Tesla’s financial report details and
propose a better strategy for future endeavors.
Analytic Tools
The literature review framework gives a strategic view from high level that allows to analyze
Tesla’s current strategy and the potential strategy direction that could lead the organization
to the next level. In the next section, several analytic tools are leveraged to further analyze
Tesla from difference scale by using trusted sources, such as government publications and
Tesla’s official website. Both qualitative and quantitative data is leverage during the
analysis. The analysis tools are intended to analyze internal and external challenges to cross
check the core problem within Tesla. Since bankruptcy is the main symptom that the study
case focus on, multiple financial analysis methodologies are utilized to deep dive into Tesla’s
case flow problem before strategy alternative suggestion.
Figure 4: Analytic Tool overview with data source

SWOT analysis
SWOT analysis is a common business model that provides a high level insight of a company’s
strengths, weakness, opportunities, and threat. It can be a tool to help a company to
develop a strategy to increase its own competitive advantage based on its own strength and
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potential opportunities from internal and external perspective (Ferrell, Hartline, & Luck,
1998). The model provides a simplified overview for a company’s current situation.
Figure 5: SWOT analysis for internal and external analysis

Strengths
A company’s strengths analysis states the characteristics of a company’s competitive
advantages over other competitors in the same industry. Tesla’s major strengths and
advantages in the electronic vehicle industry includes brand equity, leading-edge
proprietary technologies, expanding network, government support, and innovation.
Brand equity
Brand equity is defined as the premium value that a company generates from a product or
service with a well-recognized name within a specific industry (Investopedia, 2019). Tesla
has established its brand name in electronic auto industry over the past 10 years. Unlike
other electric cars, such as BMW, customers are impressed with the innovative technology
and the attractive styling without compromising. Customer experience and satisfaction with
Tesla leads to increasing sales over years, especially with lower price model cars. The strong
brand equity is also due to the great user experience of product quality. It helps to link the
name Tesla and the brand image together to add strengths among competitors. The brand
name has carried tesla to achieve the next milestone.
Leading-edge proprietary technologies

Tesla is always the pioneer in full electronic vehicle industry because of its leading edge
proprietary technologies. Tesla has been invest heavily in research and development to
make Tesla a better electronic car with a longer mileage battery. Compared to other
competitors, Tesla has proven the best mileage coverage with their current battery
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technology, especially in the luxury models – Model S. In Model S, a full battery charge can
allow the car to travel up to 373 miles. The closest competitor’s mileage coverage is still 15%
lower compared to Model S. Tesla is aiming to provide fully autonomous feature by 2019
that promise drivers can sleep during Tesla’s drives. Other competitors has similar goals, but
have not release any solid information regarding the self-driving technology yet (Motor
Trend, 2019). In terms of production line, Tesla has pushed the production line to utilized
artificial intelligence to product better quality control cars while increasing productivity to
catch up with demand. Based on the resource allocation to research and development,
Tesla remains as a tech-focus carmaker company in 2019.
Innovation
Tesla does not put all eggs in one basket. It invested in diverse products while leveraging its
own competitive advantages. For example, Tesla has invested in the world’s first fully
electric pickup truck – tesla Semi. Tesla tries to target different segments within the auto
industry. At the same time, Tesla has also invested in high speed train. Elon Musk claims the
train will allow you to get from London to Edinburgh or LA to San Francisco in under 30
minutes, which can resolve the transportation issue that government was tried to
implement for many years (Tesla, 2013).
Network expansion
In one of Tesla’s expansion strategy, it opens more super charging stations across United
States as well as serval oversea counties. At April 2019, Tesla reported over 12,000
Superchargers are established in North America, Europe and Asia (Tesla blog, 2019). Tesla’s
map can show drivers the closest charging station to make Tesla more reliable during long
distance journeys. The super charging station can charge the car in as little as 30 minutes. As
a marketing strategy, Tesla has expand stores and galleries across different regions for user
to test drive and shop for cars. Tesla hired sales to show the product quality and technology
on site not only to enhance user experience, but also avoid third party dealership cost.
Government support
Government policy has a direct impact for electronic cars. Tesla has been in one of
government’s support zone due to green environmental policies. Government does not only
plays a role to support Tesla during cash flow crisis, but also rolls out electric car credits that
can be sold within auto industry, and Tesla has generates more than enough credits due to
the nature of its business. Moreover, Government gives out incentives to electronic car
buyers with tax deduction to reduce overall purchase costs.
Weaknesses
Similar to any company, Tesla has disadvantages due to the business model and self-
positioning in the market. Tesla’s primary weaknesses includes high operation cost,
immature electronic vehicle industry, Limited oversea presence, and high prices.
High operation cost

Tesla has been losing profit almost every quarter since the first electronic vehicle delivery
due to the high operation cost. The cost is increasing over the years since 2008. Since Tesla
is a technology focus company, it invests heavily at research and development for advance
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technology, such as full autonomous and spaceship. As the demand grows, Tesla does not
control the variable costs, such as opening more Tesla stores, show rooms, and super
charging stations to meet the demand. Unlike most of the competitors, Tesla insists to
leverage AI technology to automate their production line in one of the expensive city in
California. While operation costs are keep increasing, Tesla still targets to roll out new
versions of Roadsters and Model Y at the end of 2020. In another word, more cash is
needed to invest in these new model production lines.
High price
As part of Tesla’s strategy, it sells luxury electronic vehicles to raise capitals for cheaper
model generation. Model Rosters is priced as high as $200k, while Model S and X are priced
with the minimum of $70K. Even Tesla is offering Model 3 at the price of $35k, it is
struggling to make a profit by selling the car at this price point. In order to support Model Y
and new version of Roadster, Tesla would increase Model 3’s price to avoid cutting down
operation cost, such as closing stores and show rooms. While Tesla is maintaining high
quality product with low selling price, the business model itself does not seem profitable in
a long run.
Opportunities
Opportunities analysis would list the potential grow of a company at the current macro
environment. Once these external factors are identified, it help Tesla to form a more
competitive strategy plan and improve business model. As macro environment is constantly
changing, Tesla’s strategy also required to evolve along with the raise of opportunities and
maximize profit. These external changes occur primarily within the competitive, economic
trend, government politics, technology, or sociocultural environments. These opportunities
includes sharing ride service, fully autonomous technology, green environment awareness,
and global expansion.
Environmental awareness
Car emission has been contributing nearly thirty percent to global warming in United States
(UCSUSA, 2019). As the awareness raises, the demand for electric cars has been increasing
over the years. People are favored over sustainable energy products. The opportunity is
spotted not only for higher demand of electronic vehicles of various sizes, but also a
potential market for other energy sustainable products, such as solar power. Tesla can
diversify their product portfolio as part of the expansion strategy.
Global expansion
Tesla has tested the market demand in the United States, and apparently it is a great
success. Global expansion could be the next significant opportunity for Tesla. As the second
largest economy, China could be a major market to lead Tesla’s future sale volume. Other
Asia counties, such as India and Vietnam, are also growing in a fast pace that could forecast
the high demand of electronic cars as their affordability increases. Tesla can partner with
local governments or dealerships to expand the network in a timely manner.
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Threat
External factors could be challenges or threat that prevents the company from reaching its
maximum potential, such as economic trend, political events, competitions, and
government regulations.
Political Events
International relations could be extreme favorable to Tesla’s global business or the other
way around. Political events, such as trade wars between the United States and China, are
adding additional financial pressure to Tesla. China plans to increase tariffs on U.S cars.
Along with the stronger dollar, Tesla is forecasting a lower revenue from China. As a result,
Tesla has to hike the price on their cars in China to compensate the increase of tariff. As a
result, potential Chinese car shoppers might consider other electric car options.
Competitions
The electronic vehicle industry is very competitive. Some mature auto makers, such as
BMW, has been heavily invested in research and development and marketing to prepare
themselves to step in the competition. Since all competitors are aiming to roll out electronic
vehicles with similar features near 2020, Tesla’s might observed a slow growth since
consumers has more choices in terms of price, brand, and features of the cars. The intense
competition could result in the loss of market shares. As a strategy, Tesla has been
expanding super charging stations to establish the networks. On the other side of the
equation, operational cost is increasing over the years and reduce profit margin.
Government Regulation
Electronic cars is highly regulated under government’s regulation for safety and political
interests. Tesla is not in the game of franchised distributors. In traditional car selling model,
most automakers cooperates with franchised distributors instead of selling cars directly to
consumers. Some regions are not embracing Tesla’s sales model. For example, some states
in the United States have ban direct vehicle sales. These laws restrict the growth potential
for Tesla. On the other hand, Government incentives for Tesla and consumers could lead to
sales volume fluctuation. For instance, government cut down income tax credit from $7500
to $1500 for Tesla consumers at the end of 2018. As a result, higher sales was reported at
Q4 2018, but Tesla’s sales at Q1 2019 has been dropped significantly.
In the content of SWOT analysis, Tesla shows the strength of leading the electric car sales in
the United States market. The robust self-driving technology and innovation helps to gain
popularity of Tesla cars and increase competitive advantage in a long run. However, Tesla
should come up with a strategy mitigate the risk from weakness and threats. The primary
focus is to lower the operation cost while maintaining the quality of product to meet
stakeholders’ expectation. It is obvious that Tesla is leading the electronic car market with
its innovation, Elon Musk should also hedge external environment factors and take
advantage of current market opportunities. If Tesla could accelerate growth in Asia and
Europe, it is likely to generate more free cash flow to invest in new products and avoid cash
flow problems again. The model itself does not give a deep dive detail at external risk
factors. Further external analysis models are required to understand where Tesla stands in
the current market.
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Porter’s five force analysis
To compensate the over simplification of SWOT analysis, Porter’s five force analysis
highlights the external risk factors from new entrants, competitors, substitutes, suppliers,
and buyers by combing industry rivalry to determine a company’s competitive intensity and
positioning (Porter, 1979). These forces are focus on microenvironment that could impact
Tesla’s strategy. The five forces has clearly lay out Tesla’s strategy has been address most of
its external threats from microenvironments. The bargain power is low from supplier
because Tesla realized the supply chain risk and take action to develop most of items in-
house. Tesla used to partner with suppliers for battery and engines. Later, Tesla has slowly
move away from these dependency. Due to the nature of electronic car development, high
cost is need, which impose new entrants from starting. Bargain power from buyers has been
increasing over time as new competitors increases. Pressure from competitors is a greater
concerns that shows in the figure below. Large automaker companies, such as BMW and
Mercedes, are aggressively investing in electric vehicles and marketing their products. Tesla
has to strength the competition as a high priority in strategic management to respond to the
raise of competitions over time. Overall, Five force analysis has shown Tesla’s success
strategy of tackling external risk factors in automotive industry.
Figure 6: Enhanced from Porter’s Five Force Analysis

Competition Analysis
As part of Tesla’s strategy, it has well positioned in high end luxury car segment to capture a
significant market share. The market share has been increasing from zero to 2.03% over the
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past ten years. Through the competition analysis in the table below, Tesla has been catching
up with competitors that produced partial electric vehicles. Competitors, such as Toyota and
GM, are not directly threating Tesla since the software technology and performance is far
from Tesla’s products. Tesla’s competitive advantage focus at leading edge software
controlling technology, such as fully autonomous experience. The Unique advantage placed
tesla at a well brand recognition and competitive position without much marketing
investment. Besides a few well established automakers, the barrier to enter electric vehicle
market is high due to the high capital investment. Tesla is unlikely to be threaten by new
electronic vehicle startups. On the other hand, Tesla has built the relationship with
competitors, and slowly turning to partnership. For example, Tesla has corporate with
Toyota for electronic vehicle developments since Toyota has the infrastructure ready while
Tesla could offer the leading technology at electric vehicle field (Tesla blog, 2010). In the
near future, Tesla could leverage its advance technology as a key selling point to boots the
sales to the next level. The rapid technology development can leave the competitors behind
to secure Tesla’s unique positioning. At the same time, strong alliance with well-established
brand could allow Tesla to develop its new products by gaining infrastructure support
through partnership.
Figure 7: Competition Analysis from main competitors

Financial Performance
Tesla’s financial performance has been the spotlight for all investors, especially during
quarterly earning conference. While Tesla has strategically hedge the risk from external
environments, the financial performance could reflect the resource allocation effectiveness
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under Elon Musk’s leadership. The main objective of financial statement analysis is to
provide an insight of Tesla’s losses over the last five years even with increase revenue. The
ratio analysis could help to detect the source of the cash flow problems, resource abuses,
and lack of budget control. Some data is gathered from U.S security and exchange
commission to ensure the quality of the research. All numbers are expressed in U.S
currency. The financial data is downloaded from Tesla’s official website including financial
statements, balance sheets, and cash flow statements from 2014 to 2019. These years has
been selected to better represent the well-establish strategy at stable sales period.
Short Term liquidity analysis

From standard accounting perspective, short term liability is the sum of all liabilities
classified as the debts matures in less than one year (Investopedia, 2019). Tesla’s total short
term short term liability has raised nearly 2 times over the past 5 years and stands at
$9.589B. The total current asset has also increased from $6.26B to $10.18B, results in a
stable current ratio of 1.06. The current ratio shows Tesla just have the enough asset to
cover short term debt. Ideally, the healthy ratio would be from 1.5 to 2, which essentially
implies that the current ratio can be liquidated to cover short term liability with additional
buffer. Another short term indicator is cash ratio, which measures the company’s ability to
pay off short term liability with highly liquid asset, such as cash (Investopedia, 2019). Tesla’s
current cash and cash equivalents is $4.95B, which is ready for investment or pay off part of
its debts. With cash and equivalents, Tesla’s cash ratio becomes 0.51 at 2019. The ratio does
not indicates a healthy sign for Tesla’s financial health, which indicates the lack of cash
operation of efficiency, especially in high growth sector standards. Another indicator to
measure short term financial health is Acid Test ratio. It measures the ability of a business to
pay its short-term liabilities by having assets that are readily convertible into cash. The
current asset at Q2 2019 is $6.8B, leading the Acid Test Ratio to be 0.71 to indicate Tesla
does not meet its current debt obligation. The average Acid Test ratio in auto industry is
approximately 2.5 since the nature of business involves heavy capital investment. It raises
the concern for investors whether Tesla is exposed in high bankruptcy risk or not. The short
term liquidity indicators does not seem to be encouraging from investor’s standpoint. On
other words, Tesla does not have enough resources to meet all its short term obligations.
Current Ratio Graph
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Figure 8: Current Ratio Trend from 2015 to 2019
Long term liquidity analysis

Besides short term liquidity ratios, long term debt paying ability also can help to estimate
the company’s ability to leverage in borrowing. From Tesla’s financial data, it shows the
surge of long term debt from $1.95 to $11.23B over the past five years, leading the debt-to-
equity ratio to 1.71. The ratio reflects the inability to pay off the debt by the current
incomes. With the assumption of further borrowing to cover the short term debts, Tesla will
faces higher bankruptcy risk or financial instability of cash flow shortage in the future.
Compared to average debt to equity ratio of 2.5 in auto industry, Tesla’s ratio is low due to
overvalued market valuation. Another indicator for long term debt is debt ratio, which
measures the extent of a company’s leverage (Investopedia, 2019). Tesla’s debt ratio is 0.41
at June, 2019. The ratio is lower than one. In another words, Tesla still have capacity to raise
more capital funds from public for new production development. Cash flow debt coverage
ratio is a health check for current operation cash flow to cover Tesla’s long term debt.
According to the balance sheet, Tesla’s cash to debt coverage ratio is 0.35 at June 2019,
which indicates Tesla cannot pay off the total debt by using the cash in hand. The ratio us
ranked 58% lower than the average in auto industry (Guru, 2019). The significant low cash
coverage implies a higher default risk due to in terms of debt paying in the future. For Tesla
to pay off the debt, it has to raise more funds or devote its capital to pay debt interest.
Profitability analysis of Tesla

Investors are keeping a close eye at Tesla’s business model and doubting if it is profitable in
a long run. At the last quarter of 2018, Tesla had produced positive net income of
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$139.48M. The positive net profit margin was due to the higher sale volume results from the
expiration of the U.S federal government tax credit for Tesla’s consumers. However, at
2019, Tesla continued to face earning pressure with negative net profit margin is observed
at 2.37 percent. It reflects the business model is not profitable in the short term. Compared
to the same sectors with average net profit margin of 11.45 percent, Tesla is
underperforming. The high operation cost ate most of the revenue. As a result, Tesla’s stock
slumped 13.6 percent at the earning reporting date. While Tesla continued to invest heavily
in research and development, revenue had increased 47% compared to last year. It is a good
indication for healthy segment expansion. In order to be profitable, Tesla needs to operate
the business with a more effective resource allocation strategy.
Figure 9: Tesla’s quarterly net profit from 2015 to 2019

Bankruptcy Risk analysis

Tesla has been expanding its research and development over the year with available cash
and cash expenditures on hand without diluting the shares. Elon Musk is overly confident
about the future free cash flow generation. The capital expenditure had been covered by
the company’s limited cash. As a result, Elon Musk have to raise more capital to maintain
normal operation. Tesla issued convertible debts to public by unrealistic promises. The
increase of funding is mainly due to investor’s faith in Tesla’s future forecast, but it can be a
short-lived phenomenon. As Model 3 delivery had been delayed, Tesla stock slumped more
than ten percent at 2018. Moody’s rating agency has downgraded Tesla from B2 to B3 due
to it speculative grade liquidity rating. Tesla faced liquidity pressure due to the pending
maturity convertible bonds at 2019. The liquidity asset does not adequate to cover debts
(Moodys, 2018). The rating agency also clarify the expectation of Model 3 sales expectation.
If Tesla cannot meet the sales target and raise more funds to cover the mature debts,
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further downgrade could happen. Furthermore, Tesla has announced Model Y production
line at the end of 2019. More cash are needed to roll out the new model. Investors are
actively following up with Model 3 sales. If the low margin model, Model 3, misses the
expectation, investors will lost their confidence at Tesla’s high target, cash flow will stop
flowing in to cover the upcoming debt repayments and capital expenditures. Tesla would
not be able to pay the debt or interest expense by their negative cash flow. After burning all
the available cash in hand, Tesla would not be able to manage interest payment for the
bond. In this situation, Tesla have to bail out by government again to avoid bankruptcy for
the second time.
Figure 10: Tesla’s funding history since inception

For further analyze the bankruptcy likelihood, Altman Z-score methodology is applied.
According to Investopedia, Altman Z-score is the output of a credit-strength test to help
identify the probability of bankruptcy where a company cannot meet the obligation of pay
off its own debt (Investopedia, 2019). Based on historical data regression cases, the model is
found to be 72% accurate in predicting the bankruptcy even two years in advance (Altman,
1968). The Z score is calculated based on 5 financial ratios from a company’s annual
financial report. The ratios are listed below:
Ratio 1 = working capital / total assets
Ratio 2 = retained earnings / total assets
Ratio 3 = earnings before interest and tax / total assets
Ratio 4 = market value of equity / total liabilities
Ratio 5 = sales / total assets
After obtaining these ratios, Z-score is calculated by respecting Altman’s regression
coefficients as following (Altman, 1986):
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Z-Score = 1.2 x Ratio 1 +1.4 x Ratio 2 + 3.3 x Ratio 3 + 0.6 x Ratio 4 + 1.0 x Ratio 5
Bankruptcy range indication (Altman, 1986):
Z′ > 2.9 – “Safe” Zone

1.23 < Z′ < 2.9 – “Grey” Zone
Z′ < 1.23 – “Distress” Zone
Figure 11: Altman Z-score calculation factors

After gathering the financial data from tesla’s financial report, Z-score is calculated based on
Altman’s formula. A Z-score of 1.57 is generated. The assessment shows Tesla is currently in
distress zone, which implies the bankruptcy possibility in the next two years. Taking a
deeper look at the factors that drive Altman’s Z-score calculation, retain earning is negative,
which lower the Z-score in the regression formula. The profitability question remain in the
current strategy that is required to shift attention to positive cash flow.
With the overall financial analysis, Tesla does not reflect the strength to carry the business
forward. In reality, Tesla is capable at raising additional capital funds as needed to show the
investors’ confidence at Tesla product. The public media has been projecting negative
impression about Tesla based on the traditional business model and theories. The analysis
of Tesla’s strategy is quite effective to leave competitors behind with advance technology.
Based on Tesla’s stock performance, the price has been up by 1400% since IPO. Despite the
continuous profit loss and high valuation in stock, I find Tesla is very similar with technology
companies, such as Square, a financial technology company that specialized at payment
solution, has reported negative profit margin for the past ten years, but stock is soared up
to 600% (Yahoo Finance, 2019). It clearly shows investor’s faith in Tesla’s future outlook.
Strategic recommendation
After the strategic review, Tesla is effectively executing the strategic vision that is
established in 2004 –Target luxury model customers to generate cash and invest in cheaper
models with high volume production. Model 3 is a millstone at Tesla’s strategic roadmap
that demonstrate Elon Musk’s leadership effectiveness. Tesla’s strategy has focused on
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innovation and sustainable products over profitability. From the financial perspective, Tesla
is struggling to generate positive cash flow over the years. Even Tesla’s bright outlook could
leverage the fund raising capability to cover debts, Tesla should transform the business
model with a sustainable one. It is time for Tesla to factor in operation cost or profit into the
strategic plan.
External expansion - Global expansion
Tesla has surpassed most of its competitors by the leading edge technology at electronic
vehicles sector. As a strategy to secure the leading position at electronic vehicle industry,
Tesla should focus on expansion to wider demographics to increase the brand visibility and
capture potential sales. Business growth would increase the complexity and challenges for
Tesla. To convert the expansion plan to reality, specific strategy is needed. Currently, Tesla is
operating under traditional corporation structure that is functional-based. It definitely
enables Tesla to have better control and support for business management. However, the
centralized hierarchy system have limits on rapid adjustments in large organizations
(Vernimmen, 2018). Global expansion success requires quick responses to regional issues to
provide better custom experience or regional strategy adjustment. The delay response of
strategy would loss the competitive advantage, especially in oversea regions where
domestic electronic vehicle brand dominates the local market share. In discussion with the
manager of Tesla’s global HR, she mentioned the Tesla’s organization structure is constantly
adjusting. After the departure of high profile presidents of global sales and marketing, these
departments start to report to Elon Musk directly. Communication has been more effective
compared with the heavy reporting process before. She expressed her strong preference at
merging different departments horizontally to improve communication. As a suggestion,
Tesla should decentralize the management structure and trim unnecessary communication
process as part of the strategy to manage oversea business.
During global expansion, Tesla has to meet the demand with supply. In another word, high
volume orders are expected. Currently, Tesla’s only factory is located at Fremont, California.
The production rate of Model 3 still have not hit the target yet, creating a long waiting line
for Model 3. As a suggestion, Tesla should seek for new factory to fit the “Just-In-Time”
strategy. “Just-In-Time” is an inventory strategy where materials is ready only when it is
needed during production process to avoid inventory expense (Investopedia, 2019). The
strategy is widely adopted by major auto manufactures, such as Toyota and BMW, to take
advantage of the synchronized production line. Tesla can leverage this advantage of supply
management system to save the inventory cost. At financial performance analysis,
operation cost is one of the high cost that eats up Tesla’s revenue. Tesla can take global
expansion as a chance to restructure the supply chain management by consider factory
location around the world. Moreover, Tesla should consider cheaper locations for factories,
such as China and Vietnam, to lower the labor cost and overhead expenses. As the variable
cost decrease per car unit, Tesla should observe higher profit margin over time. Expanding
Tesla factories to other regions is also a solution to ease public relationship tensions, such as
trade war between United States and China. From legal perspective, if Tesla opens
production line in China, additional tariff cannot impose at Tesla since the cars are mainly
produce in China. As a result, higher revenue for Tesla and lower price for customers.
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Furthermore, local government should be pleased with more job creation to mutual benefit
both parties.
Internal expansion - lower operation cost
From financial performance review, Tesla’s negative cash flow indicates its inability to pay
off the debt by the current income. The financial ratios reflects the liquidation problem. If
Tesla cannot raise more funds to cover short term debts, it is likely to file bankruptcy. Tesla
have to lower the operation cost that is mainly from production line and Tesla stores. As a
suggestion, Tesla can allocate resource to enhance production line and reduce inefficiencies
at supply and management china. With an efficient internal management strategy, higher
quality control, lower material cost, and better production chain would observed to build a
stronger foundation for high growth globally. On the other hand, Tesla should partner with
large companies who have existing infrastructure to assist Tesla to build new products, so
Tesla does not have to reinvent the whole production line. Another way to lower operation
cost is to partner with well-established third party car dealers. Car dealer companies has
larger network coverage not only in the United States, but also in other oversea regions. It
helps to expand the business and attract more sales. After executing the partnership
strategy, Tesla should observe lower operation cost with high sales volume. As a result, net
profit margin is expected to increase and turning Tesla into a profitable business.
Conclusion:
As one of the most technology advanced electric vehicle company in the world, Tesla has
been struggled with negative cash flow and creates worries among stakeholders and
investors. The study finds Tesla’s revenue is growing aggressively each year as business
grows. But the high operation cost, heavy research and development investment, and
general administrative expense have pressure its net profit margin. Furthermore, Tesla’s
long term debt interest expense adds further burden at its liquidity. Most of the financial
ratios from Tesla’s official reports have highlighted the financial outstanding issue that could
impact Tesla’s future. The public has watching closely and questioning Tesla’s bankruptcy
possibility similar to 2008’s event. However, encouraging investors firmly believe in Tesla’s
low-price model strategy and innovative thinking culture under Elon Musk’s leadership.
More capitals has been raised to maintain Tesla’s production plan. With the current
strategy, Tesla has slowly capture market share in auto industry with energy sustainable
products. Thanks to the heavy investment at research and development, the leading edge
technology and performance become Tesla’s core competitive advantage. It is important for
Tesla to stay innovative and technology focus as part of its strategy to differentiate itself
from competitors. Meanwhile, I recommend Tesla to stay objective focused in global
expansion to bring in more cash flow to secure the leading position of electronic vehicles in
auto industry. At the same time, Tesla should strategically improve product adaptability and
control unit cost to stay flexible and price competitive among competitors. As Tesla has
been invested in-house production line and materials, I believe the operation cost will be
lower and help to maximize Tesla’s long term profitability. Based on Tesla’s growing revenue
each year, we can see the business is growing aggressively. The government’s new
regulation on free emission vehicles, advanced technology, and shifting customer needs for
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environmental friendly products have been helping Tesla to break through electronic vehicle
industry. In conclusion, Tesla’s case has proved bankruptcy likelihood cannot be judged
based on pure financial data. Company’s clear vision, innovative culture, leadership,
effective strategy, and future bright outlook of the business nature would carry Tesla to
success.
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Appendix A
Table to support Figure 1: Tesla’s funding history since inception
Year 2004 2005 2006 2008 2010 2012 2013 2014 2015 2016 2017 2019
Each Year 7.5 13 40 40.17 50 192.7 450 2700 1100 1460 1700 2000
Accumulative 7.5 20.5 60.5 100.67 150.67 343.37 793.37 3493.37 4593.37 6053.37 7753.37 9753.37
Appendix B
Table to support Figure 8: Current Ratio from 2015 to 2019
Tesla Current Ratio Historical Data

Date Current Assets Current Liabilities Current Ratio
6/30/2019 10.18 9.59 1.06
3/31/2019 7.68 9.24 0.83
12/31/2018 8.31 9.99 0.83
9/30/2018 7.92 9.78 0.81
6/30/2018 6.7 9.14 0.73
3/31/2018 6.38 8.65 0.74
12/31/2017 6.57 7.68 0.86
9/30/2017 7.07 6.47 1.09
6/30/2017 6.36 6.55 0.97
3/31/2017 7.03 6.25 1.13
12/31/2016 6.26 5.83 1.07
9/30/2016 5.17 4.08 1.27
6/30/2016 5.2 3.77 1.38
3/31/2016 3.24 3.19 1.02
12/31/2015 2.78 2.81 0.99
9/30/2015 3 2.55 1.17
6/30/2015 2.63 2.38 1.1
3/31/2015 2.92 2.19 1.33
Current Ratio = Total Current Asset/Total Current Liability
Appendix C
Data to support Figure 9: Tesla’s quarterly net profit from 2015 to 2019
48
Quarter Net Profit
Q2 2019 -408.00
Q1 2019 -702.00
Q4 2018 139.00
Q3 2018 312.00
Q2 2018 -718.00
Q1 2018 -710.00
Q4 2017 -675.00
Q3 2017 -619.00
Q2 2017 -336.00
Q1 2017 -330.00
Q4 2016 -121.00
Q3 2016 22.00
Q2 2016 -293.00
Q1 2016 -282.00
Q4 2015 -320.00
Q3 2015 -230.00
Q2 2015 -184.00
Q1 2015 -154.00
49

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Strategic Case Analysis

Part One-Case Study

Motivation behind the Brand

First Bankruptcy Tendency

Model 3 Delivery Delay

Federal Tax Credit Impact for Sales

Tesla Challenge Highlight

Opportunity –Global expansion

Q2 2019 conference call-The Critical Year of 2020

Exhibit 2: Loss chart 2016 to 2018

Exhibit 4: Cash Flow Losses

Exhibit 6: Tesla Income Statements (2014 to 2018)

Depreciation & 231.93M 422.59M 947.1M 1.64B 1.9B

EBIT after Unusual - - (616.51M (1.63B) (366.52M

Gross Interest Expense 113.69M 160.35M 245.51M 596.16M 717.97M

Interest Capitalized 12.8M 41.5M 46.7M 124.9M 54.9M

Pretax Income (318.44M (875.62M (746.35M (2.21B) (1B)

Exhibit 7: Tesla Balance Sheets (2014 to 2018)

Work in 56.11M 163.83M 233.75M 243.18M 296.99M

Buildings 154.36M 521.54M 1.08B 2.52B 4.05B

Computer 98.97M 175.51M 275.66M 395.07M 487.42M

Other Property, 526.18M 2.03B 8.62B 11.61B 14.06B

Accumulated 375.65M 571.13M 1.02B 1.94B 3.19B

Net Other - 12.82M 376.15M 361.5M 282.49M

Miscellaneous 642.6M 1.08B 2.39B 3.74B 3.08B

Non- 1.81B 2.07B 5.9B 8.83B 8.41B

Deferred 292.27M 463.45M 888.76M 1.22B 1.05B

Exhibit 8: Tesla Cash Flow (2014 to 2018)

Net Income (294.04M) (888.66M) (773.05M) (2.24B) (1.06B)

Deferred Taxes & - - - - -

Other 562.24M 770.96M 1.23B 841.25M 69.84M

Other Uses (3.85M) - - - -

Sale of Common & 489.62M 856.61M 1.87B 712.17M 295.72M

Other Proceeds 489.62M 836.61M 163.82M 312M 295.72M

Issuance/Reductio 1.69B 683.94M 1.72B 3.39B 89.14M

Reduction in Long- (614.61M) (203.78M) (1.9B) (4.26B) (6.09B)

Other Funds (31.88M) (17.03M) (41.29M) (472.6M (248.25

Net Financing 2.14B 1.52B 3.54B 3.63B 136.62M

Figure 1: Conceptual Framework to cross check Tesla’s core challenges

Figure 2: Enhanced from Bowman’s Strategy Clock

Examine existing Strategy

Figure 3: Enhanced from Savitz’s sweet spot theory

Tesla’s strategy issues were discussion in recent literature by Stringham et al.(2015).

Financial Statement Literature review

Figure 4: Analytic Tool overview with data source

Figure 5: SWOT analysis for internal and external analysis

Leading-edge proprietary technologies

High operation cost

Figure 6: Enhanced from Porter’s Five Force Analysis

Figure 7: Competition Analysis from main competitors

Short Term liquidity analysis

Current Ratio Graph

Long term liquidity analysis

Profitability analysis of Tesla

Figure 9: Tesla’s quarterly net profit from 2015 to 2019

Bankruptcy Risk analysis

Figure 10: Tesla’s funding history since inception

Z′ > 2.9 – “Safe” Zone

Figure 11: Altman Z-score calculation factors

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