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Tesla is Designing Distribution

Investors are enamored with Tesla, and what's not to like? Tesla is transforming the vehicle market with battery powered cars, whose style and performance are the equal of the best cars on the road. The cars even drive themselves. Tesla has manufacturing facilities that display the latest advances in robotic technology. The largest battery manufacturing plant in the world provides an innovative battery that stores power for an entire house. With Tesla’s recent acquisition of SolarCity, the vertical integration is complete as they deliver one stop shopping for the consumer in the electric car market. In a world where the platform is everything, Tesla may have the greatest advantage of all their competitors: their network of charging stations spanning the US and, eventually, the globe.

Tesla is delivering a platform that may make even Apple weep at its reach. The drivers of the world look with envy at the Tesla Model S and X, while they await the Model 3. Paragons of style and performance, they are the quintessential expression of the age: technology abundant and environmentally friendly. The cars can drive themselves and receive updates remotely to enhance performance. To meet the required demand for batteries in the car, Tesla began designing and manufacturing batteries for the needs of automobiles and homes. Solar power was the final addition to make the vertical integration complete: Tesla has control of the whole value chain from energy source to car consumer. Distribution, however, may be where it transforms diverse businesses from automobile dealers and gas stations to public transport.

Electrifying Cars. Tesla began the race into electric vehicles in 2006 with its prototype. The focus was on saving gas and performance: people not only want to save the world but enjoy the experience. The biggest challenges facing the car's development were those similar to racing cars: the balance between performance and weight. While the absence of a traditional motor reduced weight, the significantly heavier battery packs increased weight. Using lighter materials that included aluminum and carbon fiber addressed the weight problem. Delivering the improved performance was because of a century old insight from the inventor whose name adorns the company, Nikola Tesla.

The Tesla's electrical engine uses alternating current (AC) versus the direct current (DC) found in batteries and solar panels. The rationale for selecting AC is quite practical and the mirrors the reasons it is deployed in power plants: it was simpler to implement and, critically, more reliable over a range of speeds: a requirement for a sports car. With the engine delivering the performance requirement and weight manageable, Tesla focused on the next impediment: electricity.

Needing Energy. As Tesla was launching their electrical car ambitions, the world was in a commodity super cycle that was driving up the price of oil. The need to deliver a more cost efficient fuel for automobiles was an easy sell; however, the price of electricity was accelerating at the same time. The rising energy cost left Tesla with a dilemma: to deliver a cost effective fuel that helped reduce pollution was a significant hurdle with rising electricity costs. The perceived trade-off is switching one fossil fuel for another, which could relegate Tesla to a niche product within the high-end automobile market.

The solution to the electricity challenge was solar. As solar panel installation costs continued their decline, it has become economical to generate power at the residential house versus receiving it from the utility in some states. While the migration to solar energy has competition from other alternative sources, it didn't deter Tesla with its purchase of SolarCity. Tesla knows that solar power installation costs will eventually fall to a level that makes them cost competitive. The trouble with solar is timing: how to keep the electricity when the sun isn't shining.

Batteries were the answer. The cost of electrical storage, however, was a problem for both automobiles and solar generation at home. With the cost of batteries dropping significantly and more production capacity coming online to augment the capacity that Tesla has already achieved, the price of electrical storage will continue to fall further. The production capacity will support demand at home and on the road, not to mention at the utility.

Distributing Success. Tesla faced a hurdle in manufacturing their cars. A reference didn't exist for manufacturing automobiles that were simpler to build because of the absence of an engine and transmission. Without the need to follow established protocols, Tesla focused on automating the manufacturing process to enable the ability to scale in the future. The production process is a sight to behold: robots