Tesla's challenges

Abhijeet Pratap

February 20, 2024

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Tesla’s dominance in the EV market continues driven by its strong focus on innovation and excellent product design. However, the company has experienced a decline in market share in recent quarters, primarily due to the rise of China based BYD. Tesla is still the highest valued company in the automobile sector. It has achieved a strong competitive edge through innovation in electric mobility and battery technology. However, its autopilot technology is facing regulatory investigation. The company is also facing some operational hurdles impacting faster growth.

Tesla faces several challenges that could impact its long-term success. Overcoming these challenges requires strategic adaptation, innovation, and effective management. Here are some key challenges for Tesla and potential strategies for overcoming them.

What challenges is Tesla likely to face in the long and the short run?

1. Competition in the Electric Vehicle Market:

Challenge: Increased competition from traditional automakers entering the electric vehicle (EV) market. This is an important challenge before Tesla as the legacy automakers have increased their focus and investment in electrical mobility technology. The number of Tesla’s competitors has increased and they too are pushing hard to grow their market share. Competitive pressure is going to be among the most significant challenges before Tesla in the longer term.

BYD of China has become the biggest rival of Tesla. Its market share of the global EV market has grown to 17% in the fourth quarter of 2023, which was the same as Tesla’s. BYD is also planning to enter the US market and establish a production plant in Mexico. Overall, the competitive pressure on Tesla from BYD and the traditional automakers who are continuously enhancing their EV portfolio is all set to increase. The Volkswagen group has also experienced a significant increase in its EV sales in 2023 compared to the prior year. VW is a significant player in the EV sector with an 8% market share as of the third quarter of 2023 according to counterpoint research.

Strategy: As Tesla is experiencing increasing competitive pressure from traditional automakers and dedicated players in the EV segment, the company needs to formulate a strategy to beat the competitive pressure in the long term. Currently, it must continue innovating and maintaining a strong focus on research and development to stay ahead in technology. Diversify the product lineup and invest in new vehicle segments to address a broader market.

Tesla’s competitive edge lies in the technology. It can further strengthen its position in this area to maintain product demand and market share. However, Tesla’s attraction also lies in its elegant and simplistic vehicle designs. Still, the company will need to further expand its product portfolio and include more affordable models to grow market share and expand its customer base. Currently, Tesla models are out of reach for the average consumers.

However, if Tesla can introduce a few models at more affordable prices, it can sharply increase demand and EV adoption rate in its key markets. Especially, the Tesla fans who cannot afford to buy one yet, will be delighted to see a lower priced Tesla model available in the market.

Innovation will continue to remain a primary driver of growth in the EV sector. Apart from superior battery technology, AI will also be a game changer. Since Tesla is steadily focused on innovation, it might retain its demand but to prevent loss of market share to players like BYD, it will need a larger portfolio.

2. Supply Chain and Production Challenges:

Challenge: Potential disruptions in the supply chain, including shortages of key materials and components. Supply chain management is the most critical area for automakers. Most of the legacy auto manufacturers have outsourced a large part of their supply chains. However, the pandemic and the resulting supply chain disruptions dealt a heavy blow to these companies. So, making supply chains more resilient and ready for facing challenges including supply chain disruptions is a real concern before automobile businesses.

Strategy: Supply chain management will require special focus from Tesla due to its criticality in terms of business operations and sales. The company must try to strengthen relationships with suppliers, invest in supply chain resilience, and explore strategic partnerships. It can also diversify sourcing strategies to mitigate risks associated with geopolitical and market uncertainties. However, in an effort to reduce its dependence on third party suppliers, Tesla is also producing some parts inhouse. This will also help Tesla secure its business against potential supply chain disruptions.

A well optimized and modern supply chain is essential for Tesla to maintain its competitive edge and meet demand efficiently. Tesla will also need to substantially scale up its production to match demand and its sales target. According to Tesla’s Chief Financial Officer Zach Kirkhorn, Tesla might need to invest six times more than it has until now to hit its long term target of increasing output to 20 million vehicles annually by 2030 (10 times the current capacity), which could cost the company around $175 billion.

3. Battery Technology and Cost:

Challenge: The cost and scalability of battery production, which is crucial for electric vehicles and energy storage solutions. Batteries are the most important building blocks of electrical vehicles. Tesla has released its own 4680 batteries and started their production. However, the current pace of production is not sufficient to help Tesla hit its production targets. The company will need to significantly scale up production of batteries.

Strategy: Batteries are crucial to the sales and profits of Tesla. If it can reduce battery costs and achieve higher in house production, the company can realize higher profit margins. It must continue research and development efforts to improve battery technology and reduce costs. The company must optimize production processes in Gigafactories to achieve economies of scale. It should also explore partnerships and collaborations to advance battery technology. Panasonic is a leading supplier of batteries to Tesla.

Even if Tesla is able to scale up its production of 4680 batteries in the near term ( which appears slightly improbable), it will still need to maintain its partnership with suppliers like Panasonic and others to meet sales targets and manage costs.

4. Regulatory Challenges:

Challenge: Evolving and potentially stringent regulations in various markets, including autonomous driving regulations. Tesla is operating in several overseas markets apart from the United States. While the company may not face the same regulatory barriers as the other automakers, there are several areas where regulatory compliance is essential for the company. Labor and its autopilot technology are two critical areas in this regard. Particularly, the autopilot technology which is currently also under investigation, may face more regulatory hurdles.

Strategy: To deal with regulatory challenges, Tesla’s strategy must be to engage proactively with regulators, advocate for supportive policies, and invest in regulatory compliance. It must maintain transparency and cooperation with regulatory bodies to address concerns related to safety standards. Tesla also depends heavily on data to continuously train and advance its autonomous driving technology. It collects data from the Tesla cars only on the roads to make its technology more robust. As a result, it is also required to comply with the data security and privacy laws in its various markets.

5. Autonomous Driving and Regulatory Approval:

Challenge: Achieving widespread regulatory approval and public acceptance for fully autonomous driving technology. While on the one hand, Tesla’s autonomous driving technology is facing regulatory investigation by NHTSA. Several safety related concerns have arisen regarding Full Self-Driving since several accident cases came to light. Regulatory bodies seem to be in no mood currently to give a nod to Tesla’s full self-driving capabilities.

Strategy: At this stage, Tesla must continue testing and refining autonomous driving capabilities. It must collaborate with regulatory agencies to establish safety standards and gain regulatory approval.

Apart from that, it can implement effective communication strategies to educate the public on the safety and benefits of autonomous driving. However, the concern raised by the regulatory agencies is that people may over-trust technology which can lead to accidents in certain situations.

If Tesla continues to improve its autonomous driving technology, these issues might be addressed to some extent. The autonomous driving technology has not fully matured yet. Elon Musk will need to prove to the regulators that Tesla’s autonomous driving can be made even safer and the chances of accidents can be minimized.

6. Global Economic Conditions:

Challenge: Economic downturns or global economic uncertainties impacting consumer purchasing power. Economic changes can pose a significant challenge before automakers including Tesla. Tesla depends mainly on its leading markets like the US and China for a significant part of its total net sales. Economic decline in key markets can cause a significant sales decline.

Strategy: Diversify the product portfolio to cater to different market segments and price points. Implement flexible pricing and financing options to make Tesla’s products more accessible during economic downturns. Tesla can further expand its product portfolio and include more affordable models to minimize the impact of economic changes on its business. With more affordable models, Tesla will appeal to a larger customer segment which will help it absorb the negative impact of economic downturns to a significant extent. Elon Musk has himself agreed that Tesla needs at least ten car models.

7. Infrastructure Development:

Challenge: Insufficient charging infrastructure in some regions may hinder the adoption of electric vehicles. The charger infrastructure is a challenge before Tesla as well as other EV brands. It is one of the primary factors affecting the rate of EV adoption. In several markets, a lack of appropriate charging infrastructure is preventing people from buying EVs.

Strategy: Tesla must continue to invest in expanding the Supercharger network and collaborate with governments and other stakeholders to accelerate the development of charging infrastructure. It must also advocate for supportive policies to encourage infrastructure development. Currently, Tesla has the best charger network in the world of all EV brands. However, it will need to continuously expand the supercharger network in its newer markets too to encourage the public to adopt more EVs and grow its sales.

8. Brand Image and Perception:

Challenge: Managing and maintaining Tesla’s brand image amid public scrutiny and potential controversies. Tesla has maintained the image of an innovative brand and until now it has a positive perception in people’s minds. However, Tesla has to ensure that its image among its customers and fans worldwide remains strong. Tesla does not invest in marketing but mainly relies on its brand image for publicity. It is also a crucial reason that its focus on market image must be stronger.

Strategy: Implement effective communication strategies, address concerns transparently, and emphasize the positive impact of Tesla’s products on sustainability and innovation. It must prioritize customer satisfaction and address any quality or service-related issues promptly. Tesla’s focus should continue to remain on innovation and customer experience.

9. Dependence on CEO Elon Musk:

Challenge: Tesla’s heavy dependence on CEO Elon Musk for leadership and vision. Elon Musk has been responsible for driving the growth of Tesla since its early years. His role is still critical to maintaining the momentum Tesla has achieved. However, it also leaves Tesla highly dependent on Elon Musk for providing leadership and direction. Musk himself is a popular figure and his role in terms of marketing and customer engagement has also remained critical.

Strategy: Tesla must develop a strong leadership team and succession plan. Empower key executives to take on more responsibilities and contribute to the strategic direction of the company. Ensure a smooth transition plan in case of leadership changes. While a leadership change in the short term remains unlikely, in the longer term, Tesla will need to remain ready for it. A proper succession plan and strong leadership will help Tesla navigate through a challenging and competitive landscape.

10. Energy Market Challenges:

Challenge: Market challenges in the energy sector, including policy changes and competition. The energy market is also full of challenges including growing competition, policy changes and improving accessibility for consumers.

Strategy: Diversify energy product offerings, explore new markets, and adapt to evolving energy policies. By leveraging synergies between electric vehicles and energy products to create integrated solutions, Tesla would be able to grow the appeal of its energy generation and storage products. Its focus on innovation and developing more efficient and affordable energy generation and storage products would remain key to managing the competition as well as ensuring accessibility for various customer segments.

11. Cybersecurity Risks:

Challenge: Increasing cybersecurity threats as vehicles become more connected and reliant on software. The cybersecurity threats are a major challenge before all tech brands. With time, these threats have continued to grow more sophisticated and dealing with them more difficult.

Strategy: Tesla is an innovative brand and it can develop strategies to tackle the rising cybersecurity risks. The company heavily relies on data to train its autonomous driving assistant and the security of consumer data is a challenging area. Tesla must prioritize cybersecurity measures, invest in robust cybersecurity systems, and regularly update software to address vulnerabilities. It must also collaborate with industry experts to stay ahead of emerging threats.

12. Geopolitical Risks:

Challenge: Geopolitical tensions impacting trade, supply chains, and market access. For example, the trade tensions between the US and China or the Russian invasion of Ukraine can affect supply chains.

Strategy: While geopolitical risks pose a significant threat, Tesla can minimize their impact on its operations and supply chain by staying informed about geopolitical developments, diversifying suppliers and manufacturing locations to minimize geopolitical risks. It can also engage in diplomatic efforts to mitigate potential challenges.

Tesla’s ability to navigate these challenges will depend on its agility, continuous innovation, effective risk management, and its commitment to delivering high-quality products and services. Regularly assessing the competitive landscape and staying responsive to market dynamics will be essential for long-term success. The business environment is dynamic, and the electric mobility segment is evolving fast.

However, Tesla has maintained a strong competitive edge and it will need to take a few strategic steps to maintain its market leadership in the longer run. Expanding its product portfolio is critical to maintaining market share and the company will also need to focus on scaling battery production to maintain its competitiveness and control costs.