How did Tesla outsmart the legacy car manufacturers?
- .straxQ Academy
- Aug 23, 2023
- 2 min read
Updated: Jul 16, 2024
Tesla was able to overcome the lack of complementary assets by engaging with strategic partners, which could provide know-how, technology, large-scale manufacturing and much needed investments.
.credits: Ha Hoang and Frank T. Rothaermel / Mellisa A. Schilling
It was an insurmountable task to grow as an early stage car manufacturer, reach the global scale needed for profitability and successfully implement a radical innovation. However, Tesla found the solution in a strategy based on collaboration and international strategic alliances. As a small company you simply can not possess all complementary assets needed for successful implementation of such innovation as electric cars. (1,2) Therefore, partnering up with enterprises, which could provide know-how, technology, large scale manufacturing and much needed investments, was a crucial aspect in Tesla’s success.
.storyline of Tesla’s partnership strategy (1/3)
Daimler AG
Two years after the introduction of the Roadster, Tesla has decided to establish the first one of several game-changing alliances. Daimler AG provided engineering expertise & $50 million in investments. In exchange for shares and probably an access to R&D. (3,4,5).
Toyota
Just a few days after Tesla’s IPO, which raised $226 million (6), the company announced a strategic partnership with Toyota. (7) This was an incredible catch for Tesla, since they were able to acquire a perfect manufacturing plant in California. Not only was it in a near proximity to Tesla’s HQ in Palo Alto, but it also provided a production capacity of 1000 cars per week, which was enabling future growth.
The plant was a heritage from a former Toyota & GM joint venture (New united motor manufacturing, Inc.) and was available only for a fraction of its original value. Moreover, Toyota provided a state of the art manufacturing process, quality management and know-how associated with electric cars. All of which was later used for large scale manufacturing of the model S, production of batteries for Toyota & chargers for Daimler AG. (3,4,12)
Successful launch of the model S and relational rents gained from partnerships with Toyota & Daimler AG set the company on a growth trajectory. In addition, cost efficiencies generated through learning, process optimization and scale helped Tesla to finally become profitable in 2013. (3,4,12)
"Individual companies may not need to own all of the resources, skills and knowledge necessary to undertake key strategic growth initiatives. When conditions are uncertain and the stakes are high, partnerships can be an attractive alternative to going it alone or to M&A."
Ha Hoang & Frank T. Rothaermel
.storyline of Tesla’s partnership strategy (2/3)
Panasonic
Yet another crucial complementary asset needed for the future of electric vehicles are batteries. In this case, Tesla partnered up with Panasonic and established a JV, which resulted in a $5 billion lithium-ion battery plant in Nevada aka the first "Gigafactory".
Such financially irreversible investments are more risky, though they provide more incentives for long-term and mutually beneficial actions. The Gigafactory is also used for production of battery packs & storage units for Solar City. (Company managed by Elon’s relatives & acquired in 2016). (3,4,10,12)
Mobileye
Benefits & experiences obtained from strategic alliances, did encourage Tesla to engage with another partner, this time with Mobileye. The objective was to develop a self-driving system and the Israel-based company possessed necessary knowledge & technology. (i.e. cameras, sensors, software etc.). However, Tesla has quickly recognized the importance of such technology in the future of the automotive industry and as a possible source of their sustainable competitive advantage. Due to Tesla’s desire to develop a vertically integrated system (and other unfortunate events), the partnership ended only 2 years later in 2016. (4)
Nevertheless, Tesla has proven their excellent absorptive capacity during this partnership (i.e. their ability to acquire, assimilate, transform and exploit external knowledge). (11). Established routines & efficient processes enabled Tesla’s R&D team to acquire the external knowledge & technology from Mobileye and transformed it into a fully integrated system aka the Autopilot. (4)
How to achieve company’s growth
via strategic alliances?
A closer look on the succession of Tesla's partnerships reveals an evolving approach which could be generally applicable for collaborative business models and growth strategies. In sum, different types of arrangements are suitable for different stages of the overall company development process. In fact, companies have to be cautious about the appropriateness of collaborative approaches in the first place and in some cases preemptively define the termination guidelines. (i.e. Mobileye lost their unique know-how and partnerships with Toyota ended in 2016)
Early stage companies might be willing to exchange shares for technological know-how and investments. While growing companies could seek JV’s partners for scale and control over complementary assets. Finally incumbents prefer acquisitions and industry-wide alliances. Which brings us to the latest stage of Tesla’s partnership story.
.storyline of Tesla’s partnership strategy (3/3)
Acquisitions and other agreements
In addition to above-mentioned partnerships, in 2016 Tesla did acquire several technologically advanced companies - Riviera, Grohmann, Perbix, Compass, Maxwell, DeepScale, Hibar Systems, SilLion, ATW, Wiferion - to further advance Tesla’s expertise in automation and battery technology. (4)
Furthermore, Tesla is developing battery technology also in partnership with South Korea’s LG Chem and China’s Contemporary Amperex Technology Co Ltd (CATL) though on a smaller scale which cannot be compared to Panasonic (only external suppliers for manufacturing). Tesla is also working with international strategic partners on securing direct supplies of the key and very rare battery materials, such as nickel, lithium, cobalt etc. (4)
North American Charging Standard
The implementation of electric cars has reached a new stage in the innovation process, a stage which requires collaboration across the industry. Building a coalition around a shared standard was necessary in order to develop the charging network. While automakers in the EU developed the CCS standard, Tesla has released their Supercharger patents and hoped that others would adopt it. (12). Due to the critical mass of drivers and strategic focus on complementary assets, Tesla was able to scale their network and naturally became the North American Charging Standard (NACS).
Significant investments into the development of the Supercharger network, paid off in 2023, when several automakers including GM, Ford, MB, Nissan, Volvo, Polestar, Rivian announced an adoption of the NACS. Even though Tesla is using the CCS standard in Europe, it was a major win for the company since it provides exploitable lock-in effects and a sustainable income.
Conclusion
Successfully implementing radical innovation & growing into profitability may be often a challenging task. Tesla was able to overcome the lack of complementary assets by engaging with strategic partners, which could provide know-how, technology, large-scale manufacturing and much needed investments.
Decision makers have to identify the appropriate occasions and governance models for collaboration in order to be beneficial for all engaged organisations and thus successful. Last but not least, enterprises also have to be decisive and recognize when to say NO and when to terminate the partnership.
References
Dyer, J.H.; Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review 23(4): 660-679.
Teece, 1986. Profiting from technological 'innovation: Implications for integration, collaboration, licensing and public policy. Research Policy.
https://sloanreview.mit.edu/article/how-to-manage-alliances-strategically/
https://www.reuters.com/article/us-tesla-batteryday-technology-insight-idUSKBN2680K4
https://www.tesla.com/it_IT/blog/strategic-partnership-daimler-acquires-stake-tesla
https://ir.tesla.com/press-release/tesla-announces-pricing-initial-public-offering
https://www.ft.com/content/130a937a-48fd-11e7-919a-1e14ce4af89b
https://www.atlantis-press.com/proceedings/icemed-22/125975507
Zahra, S., and George, G. (2002) Absorptive Capacity: A Review, Reconceptualization, and Extension. Academy of Management Review, 17 (2): 185-203.
Schilling M. A. (2020). Strategic management of technological innovation (Sixth). McGraw-Hill Education.
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