Tesla & BMW: An Electric Opportunity
By: Kieran Bovingdon & Caleb Guo
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Driving Change
Tesla is an electric vehicle (EV) and energy storage manufacturer that has grown to be the world’s seventh-largest company with a market capitalization over $1 trillion, despite having only posted positive net earnings in 2021. Historically, Tesla’s success has resulted from its first-mover advantage in the luxury EV market. As investors and consumers seek to decarbonize road transportation worldwide, Tesla must position itself for the mass market by increasing production output without compromising quality.
Shocking Capacity
Tesla first entered the EV market as a premium manufacturer with the release of the original Tesla Roadster in 2008 (not to be confused with the as-yet-unreleased Roadster announced in 2019). The company’s initial business strategy was to establish a foothold in the niche EV market and expand its production capabilities to lead to mass adoption. In 2014, with the Gigafactory, Tesla created the infrastructure needed to increase production capacity for batteries and electric motors. In 2018, the Gigafactory became the highest-volume battery plant in the world. Even in the wake of this success, Tesla’s recently announced goal of reaching a production capacity of 20 million electric vehicles per year by 2030 is ambitious. It produced just 237,823 vehicles in Q3 of 2021, which annualizes to around 1 million cars per year; at this rate, a 1,900 percent increase in production is required to meet the 2030 target.
Tesla’s push to automate about 75 percent of its factories in an effort to save costs and increase production of existing models has had unintended consequences. This ambition to automate the production line was driven by company goals of reducing factory lead times by 13.5 percent, reducing factory overhead, and increasing worker safety.
Despite the anticipated benefits, research analysts have pointed out several problems associated with Tesla’s affinity for automation. Notably, robots are poorly equipped to correct unanticipated errors compared to their human counterparts. Furthermore, as complex assembly phases become increasingly automated, the margin of error rises significantly. Thus, without the flexibility of human employees, excessive automation can lead to large problems. By CEO Elon Musk’s admission, these issues are a consequence of a premature attempt to ramp up production. While Tesla still retains considerable brand loyalty, persistent quality control issues may lead consumers to take a pause, especially when competing offerings begin to become available.
Re-Volting Geographic Constraints
In recent years, Tesla has had difficulty expanding into markets outside of China and the US. To remedy these challenges, Tesla aimed to strengthen its position within the established European market. As of April 2021, electric vehicles accounted for 22 percent of all car sales in Germany, compared to just 7.2 percent of global car sales in the same period.
One such expansion effort was Germany’s Berlin-Brandenburg plant, known as Giga Berlin. However, citizens and environmental groups have raised concerns regarding the factory’s environmental impact and compliance with German regulations. As a result, plant operations were suspended in mid-2021 and are still awaiting regulatory approval. This delayed expansion presents a key concern for Tesla’s entrance into the European market, particularly as incumbent manufacturers begin turning their attention towards EVs as well.
In 2020, the Audi E-Tron outsold Tesla’s Model X, which has historically been one of the best-selling electric cars. Additionally, 2020 saw Tesla’s premium cars, the Model S and Model X, fall out of Europe’s Top 20 in sales. Only in September 2021 did Tesla regain its position as the number 1 EV seller with Audi and Renault following closely behind. Capturing consumer demand is essential as Europe is a key battleground market of EVs.
Capacity is King
The lack of production capacity and persistent quality control issues could threaten Tesla’s market share as other large-scale automakers shift to manufacturing EVs.
Large manufacturers already have the infrastructure to produce electric vehicles, with Volkswagen capable of manufacturing over 900,000 electric vehicles annually. With its newly announced Wolfsburg plant, Volkswagen is expected to add another 250,000 to its existing EV production capacity. Indeed, companies are still consolidating their share within the burgeoning EV market, as electric vehicles only account for 2.6 million of the 66 million sales the auto industry is projected to make in 2021. In this nascent market, competitors with established international supply chains and superior internal quality control mechanisms threaten Tesla’s reception in Europe. Therefore, if Tesla cannot upscale production in time, it will lose its lead and allow companies like Volkswagen and Toyota to displace brand loyalty and gain market share.
Europe is superseding China as the global leader in EV demand, and the EU is aiming to see 30 million vehicles on the road by 2030 for climate-related goals. If Tesla does not balance its ambition for a twenty-fold increase in production with consistent quality controls, the auto manufacturer risks missing out on the opportunity to build considerable brand loyalty in a high-growth market. Ultimately, if Tesla wishes to be the “driver of the world’s transition to electric vehicles” as proclaimed in its corporate vision, a market-leading position in Europe is crucial in reaching this goal.
B-ehind MW
Bayerische Motoren Werke AG, more commonly called BMW, is a German luxury automaker known for its strong motorsports history. However, BMW has fallen behind in the electric vehicle race in recent years with its flawed and outdated i3 model, which compares poorly against the Tesla Model 3 in almost every metric, including range, acceleration, and recharge time. This is reflected in its low popularity — US sales had declined rapidly from a peak of 11,000 units in 2015 to a new low of 1,502 units in 2020. In comparison, over 200,000 Model 3s were purchased in America that same year. After selling just 1,278 units in the first half of 2021, BMW quietly pulled the i3 from the US market in July.
While BMW has revealed a new EV, the i4, and plans to release its first EV SUV next year, market experts at the Financial Times have been skeptical about BMW’s commitment to overhaul its internal combustion engine fleet with EVs. BMW needs to improve existing offerings and demonstrate its commitment to EVs to earn its place in a carbon-neutral future, and in doing so, capitalize on a rapidly expanding EV market to achieve consistent sales and increase brand loyalty.
Introducing the Omniverse
While BMW’s EV sales are stagnating compared to its rivals, its approach to automated assembly lines involves advanced technological capabilities that Tesla should implement. Importantly, BMW has developed strong quality control capabilities. Digital twins are used throughout BMW’s operations to virtually simulate manufacturing processes in computers using artificial intelligence technology. For example, BMW’s new plant in Regensburg, Bavaria, uses digital twin technologies to replicate robotic drivetrain production. By partnering with NVIDIA to simulate 31 factories, BMW’s centralized machine learning platform, called Omniverse, enables iterative retraining of robots to reduce planning time by 30 percent and automates more complex tasks.
Collaboration with BMW
In light of its struggles, Tesla should develop a mutually-beneficial partnership with BMW. Information sharing and partnerships are central to Tesla’s goal in enabling mass EV adoption, as Tesla openly states that all its patents are free to use. Additionally, Tesla has partnered with several other car manufacturers in the past, previously supplying electric powertrains for the likes of Toyota and Daimler.
Given the precedence of collaboration between automotive manufacturers, a prospective partnership between Tesla and BMW could help Tesla ramp up EV production to meet forecasts without quality assurance issues. At the same time, BMW could benefit from additional data from Tesla’s plants for its Omniverse technology and subsequently improve its EV manufacturing processes. In a potential partnership, Tesla would provide royalty payments to BMW in exchange for access to BMW’s digital twin technology, enabling Tesla to pre-test and train robotic production sequences for complex automation. In addition to royalties, Tesla would exclusively share its relevant digital twin data with BMW, creating a more extensive training dataset for BMW to use in optimizing its own manufacturing process.
Even with its capable engineering team, buying into BMW’s Omniverse is a better alternative to developing a similar system internally. Omniverse will enable Tesla to access considerably more data from over 30 facilities while avoiding substantial R&D costs. Furthermore, a shorter integration and development period is crucial, as Tesla is under a time constraint to meet its forecasted sales figures.
German Geographies
As a leading German car manufacturer, BMW is naturally experienced in navigating German regulations and factory approval processes. Tesla obviously recognizes the value of becoming a regional manufacturer and supplier in Germany. However, this requires efficient navigation through the complex European legal frameworks. To prevent more regulatory hurdles from barring the construction of new factories like Giga Berlin, Tesla would benefit from BMW’s experience in dealing with European regulation processes. The geographic benefit of this partnership is realized through the more efficient navigation of regulatory hurdles and greater community buy-in.
Conclusion
To reach the mass market by 2030, Tesla has to increase production over twenty times while avoiding quality control issues. Increasing automation has resulted in quality control limitations and vehicle recalls, yet it does offer Tesla the potential of cost savings and efficiency if properly implemented. Further, expansion into Europe has been an uphill battle, with Tesla still facing legal hurdles with Giga Berlin. Simultaneously, BMW has been slow in its commitment to an overhauled EV fleet. A Tesla-BMW partnership offers substantial benefits to both as Tesla can gain access to BMW’s automation expertise, including its digital twin technology, while BMW can gain another revenue stream through royalty payments and valuable data from Tesla’s contribution to the Omniverse’s dataset. In the race for EV market leadership, this partnership can provide the shock that each company needs to take pole position.