4th Bulletin Gravedad Cero

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Bulletin Currrent Status of Spontaneous and Focused IDEAS Idea Evaluation Idea Concept Form

A summary of completed activities during the first semester of the year. Always keeping you in Gravedad Cero mode!

Here you will find‌ GRAVEDAD CERO PROGRESS

NEWS - Resource the new hires

- What have we done with the spontaneous ideas? - Innovation, leadership and vision: the Tesla formula for analysis

- What have we done with the focused ideas?

- What are the activities that follow?

GRAVEDAD CERO PROGRESS

If you thought we had disappeared from the face of the Earth… well, that did not happen. We are “rowing” to accomplish all of Gravedad Cero´s objectives.

The last couple of months have been full of coordinated hard-work between the Innpulsores team, experts and General Management.

In this bulletin, we will summarize the completed activities and the obtained results.

A little bit of context…

As you might recall, IDOM´s innovation process follows the “Stage and Gate” methodology, consisting of 4 stages and 3 gates or approval points. The essence of the innovation process are the ideas, which rise from two main sources:

276 ideas

Spontaneous ideas

Focused ideas

These include the ideas that you have shared in the Gravedad Cero platform right up to the 31st of December 2017 (1st edition G0). Thank you for your active participation!!

These are the ideas that emerged across different offices in the Co-creation workshops, revolving around two main innovation hotspots: • Big Data and Artificial Intelligence • New products and services

103 ideas

Innovation Process

1. Theme-based grouping: 276 ideas

December 2017 cut

From the ideas received, 9 main themes have been identified.

The theme-based approach was useful to initiate the idea classification (first innovation process gate or approval point), in joint collaboration between the Gravedad Cero Team and the Innpulsores de Apoyo of each Technical Area (AT).

In order to ease the task, we created the “Guide to evaluate G0 ideas�

NOV-2017

When

Theme-based distribution

DEC-2017

JAN-2018

FEB-2018

MAR-2018

APR-2018

Results

What we did

What have we done with the spontaneous ideas?

These were the results of the classification of ideas according to status

2. Classification of ideas according to criteria We categorized the ideas based on 4 unified criteria: • Innovative component • Alignment with strategy • Coherent need and solution • Acceptance and contributions by other users

Results

What we did

What have we done with the spontaneous ideas?

The combination of these criteria, determined the status of the idea, among the following:

When

• Idea with innovative potential • Idea for improvement • Discarded idea NOV-2017

DEC-2017

JAN-2018

FEB-2018

MAR-2018

APR-2018

* The spontaneous ideas to evaluate, correspond to ideas of New Business that are considered to have a transversal vision and have been include in the focused ideas. These ideas will be evaluated by General Management directly

3. Ideas for improvement implementation procedure

Cross-sectional areas in IDOM

Analyzing the high number of improvement ideas, corresponding to 42% (117 ideas), we designed a procedure to

assign these ideas to possible "sponsors" and analyze their implementation feasibility in the short term. The sponsors were identified as: -

Cross-sectional Areas of IDOM Geographic Areas General Management of IDOM

Results

What we did

What have we done with the spontaneous ideas?

The team of Gravedad Cero, held a meeting with each responsible and adapted the G0 Platform as a means to perform the analysis

52 ideas

Geographic areas IDOM The Geographic Innpulsores de Apoyo team, together with the Office Directors, analyzed the ideas and determined the feasibility of implementing them in the offices

39 ideas

General Management IDOM When

NOV-2017

DEC-2017

JAN-2018

FEB-2018

MAR-2018

APR-2018

The team of Gravedad Cero held a meeting with General Management to analyze ideas

26 ideas

4. Prioritizing ideas with innovative potential Of the total of the ideas that you shared with us on the platform, 21% were considered to have innovative potential (57 ideas). We analyzed and classified them by topic so that they could be prioritized by General Management (current stage)

When

The ideas that are prioritized will pass to the "Concept" phase of IDOM´s innovation process.

NOV-2017

DEC-2017

JAN-2018

FEB-2018

MAR-2018

APR-2018

Ideas with innovative potential

Results

What we did

What have we done with the spontaneous ideas?

Of the total of ideas with innovative potential, 28 are related to New Businesses that contribute to Technical Areas

We analyzed all the ideas coming from the workshops, and we identified those ideas that do not provide new business value for IDOM, that are not related to Big Data and Artificial Intelligence, or that they simply do not have enough information or displayed enough improvement.

Thus, we obtained a consolidated list of 103 valid ideas, which would then be analyzed at the technical level

When

Ideas according to Strategic Innovation Focus

1. Analyze and filter

NOV-2017

DEC-2017

JAN-2018

FEB-2018

MAR-2018

APR-2018

Results

What we did

What have we done with the focused ideas?

2. Technical assessment of Big Data ideas The 43 Big Data ideas were presented to Kenneth Lobato and Ă lvaro Barrios (technical area of Consulting), who are experts in the field and close to innovation processes, in order to obtain a technical assessment and idea feasibility.

When

NOV-2017

DEC-2017

JAN-2018

FEB-2018

MAR-2018

APR-2018

Results

What we did

What have we done with the focused ideas?

According to this analysis, 79% of the ideas (34) were considered technically feasible and with innovative potential. The following trends regarding the fields of application were identified:

When

3. Idea analysis of innovative products and services We analyzed and classified the 60 ideas related to new products and services, which were identified in the cocreation workshops.

NOV-2017

DEC-2017

JAN-2018

FEB-2018

MAR-2018

APR-2018

We identified 8 areas of application for the innovative Products and Services ideas Results

What we did

What have we done with the focused ideas?

What are the activities that follow?

We are getting closer and closer to our goal!

Prioritize and determine the ideas that follow the "Concept" stage of the IDOM´s Innovation process.

Soon we will know the ideas and the teams!

What are the activities that follow?

In general terms, the activities that follow are related to: finalizing the prioritization of ideas, communicating the prioritized ideas to the proponents, giving way to concepts generation and continue with innovation projects

APRIL

MAY/ JUNE

JUNE/JULY

What are the activities that follow?

All the people of IDOM who have ideas

with innovative potential and who have

been prioritized, will be contacted by the Gravedad Cero Team to determine the next steps and to accompany you closely in the new stage of the "CONCEPT" Innovation process. In this phase, the idea should be better detailed through the "Concept Form".

Don´t worry!! The Gravedad Cero team and the Innpulsores de Apoyo will assist you in whatever you may need to fill out the form.

It will be a true team effort, where we will show that

innovation is 1% inspiration and 99% perspiration.

We will be in full Gravedad Cero mode to take forward IDOM´s

innovation projects!

NEWS

Resource for new hires In response to information requests about Gravedad Cero and the interest of the people who join IDOM, we have created a document that collects the basic information of the program and will be available to all.

To download the document, you must enter www.idomgravedadcero.com and select the option "Resources".

We continue welcoming suggestions.

All are welcome!

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain The emerging companies that all analysts talk about today do not only innovate; they also make employees, customers and investors participate in the dreams of their founders, to the point that a company that does not generate net profits and sells less than 100,000 vehicles a year may well have a market valuation greater than General Motors, the giant of the sector with almost 10.0000 million net profit and 10 million vehicles marketed annually.

The situation itself is not new, especially since the advent of the Internet we have become used to the rapid emergence of companies that, under prospects of disruptive business, achieve stratospheric valuations.

Due to the intrinsic interest of analyzing highly innovative companies, we will now review the future prospects of Tesla and to what extent they justify its current assessment.

Note: this article was written in December 2017

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain History Tesla Motors is a California-based company founded in 2003 that is primarily engaged in the manufacturing and marketing of vehicles, as well as components and batteries for other manufacturers, energy storage systems for the home and, more recently, the installation of solar panels. Its automotive and energy businesses (panels and storage systems) feedback in a closed loop.

The generalization of battery technology for the home could favor economies of scale and new techniques that make cheaper the most expensive component of electric vehicles (the battery).

In 2014 Tesla released a series of proprietary patents.

This movement was interpreted by some as a strategic error of an idealistic leader, while others saw it as a strategic success given the need to involve more agents in the electric vehicle segment to favor its implementation.

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain Current situation Currently, Tesla's business can be summarized in the following figures:

• Billing: 7,000 million dollars (2016) • Net result: -674.9 million dollars (2016) • Employees: 33,000 (mid-2017) Financially, not only does it continue to have a positive net result, but its operating results are far from being able to finance its large investments in research and development, which means that it will have to continue relying on debt or capital increases to maintain the current rate of investment.

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain Comparing it with other references in the automotive sector, Tesla mobilizes large investments in research and development, but its narrow operating margins do not allow it to maintain this investment by themselves.

Although it is logical in a take-off company that aims to change a sector such as the automotive industry, it is particularly worrying from the point of view of the investor that this situation is not reversing in parallel with the growing evolution of its sales.

At some point in the future, Tesla's activity should be able to sustain investment in research and development on its own, as well as a remnant of benefits.

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain Regarding the automotive sector, Tesla commercializes three main models: the Model S, the Model X and the most recent Model 3. It currently maintains a distribution rate of around 120,000 vehicles per year, mainly Models S and X. The recent launch of Model 3, Tesla's bid to market a blockbuster, has suffered major bottlenecks that keep its production pace well below the target.

Because of the great commitment that the brand has made for this model, all the eyes of the analysts focus on its evolution.

Sales disaggregated by model in the third quarter of 2017: • • •

Model S: 14.065 Model X: 12.000 Model 3: 220

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain Market value Although there are different alternatives, we will take the approach of considering the following: the market value of a company becomes the present value of the future cash flows that will be generated discounted by the time preference and preference for liquidity (what we might call the interest rate). "Natural") as well as the perceived risk (risk premium).

This method of valuation is based on the fact that people have a temporary preference such that, cĂŠteris pĂĄribus, it assesses to a greater extent the present availability and certain the uncertain future.

This means that we invest (we renounce having present income) in a company to the extent that we estimate that, in the future, that investment will provide us with higher returns with respect to the

value that the immediate safe availability of the amount supposes and we demand that the potential returns are greater the greater we perceive that the risk is.

Although you can choose different investment modalities with different commitments between risk and profitability (for example, senior debt issues vs. capital increases), uncertainty about the future is an inevitable element. Betting on a company already established assumes the same assumption regarding the future as doing it for a new growing company. What varies in each case is the perceived risk.

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain In this sense, we will review some of the main reasons that make an investor believe or distrust the future evolution of Tesla without addressing, due to its complexity, its quantification and conversion into estimated cash flows.

Reasons to be positive about Tesla's valuation

1. It has introduced a new vehicle concept for the masses due to the convergence of elements such as the power source, personalization options, advanced driving assistance, active safety and constant software improvements.

2.The automotive sector is undergoing major changes in the direction that companies like Tesla anticipated, making it a potential market leader in the future.

3. It projects a great image of brand and innovation, comparable to that of companies such as Apple. Having great media impact and extremely loyal customers even with a small investment in marketing is incredibly favorable.

4. Tesla has been the first manufacturer to commercialize vehicles with advanced assisted driving funcionalities (level 3), which affirms that it will gradually experience software improvemnet until they reach level 5 (totally autonomous driving). In any case, this last assertion has been questioned by different analysts (at least for vehicles manufactured before the end of 2016).

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain 5. It has its own network of fast charging stations for electric vehicles (it is estimated that there will be around 10,000 charging points), which is especially dense in the United States, representing an initial competitive advantage of some relevance.

6. It is diversifying its business with strategic initiatives such as electricity accumulation systems in homes or electric trucks with assisted driving. In addition, it is believed that there will be a gradual emergence of new vehicle projects in segments, currently not present as collective transport.

7. Tesla vehicles behave like a large data collection network, which allows to continuously improve their assisted driving systems. In this sense, while companies like Google tried to develop autonomous driving systems from the beginning, Tesla opted for a much more practical and gradual approach that benefits from the data reported by tens of thousands of vehicles every day.

8. When the vehicles of Tesla are totally autonomous, they will become spaces for leisure and/or work for all its occupants with greater prospects for monetization.

Managing these spaces will be a very attractive business.

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain 9. Elon Musk, the visionary CEO behind Tesla is in itself a differential claim for investors.

10. Tesla has had a great evolution in terms of income going from 117 million dollars in 2010 to 7,000 million dollars in 2016, all in a complex period of economic crisis 11. Thanks to its Gigafactory it is capable of producing its own batteries on a large scale, which can be an important competitive advantage.

12. The fact that Elon Musk is also CEO of SpaceX provides Tesla with access to staff at the cutting edge in terms of engineering, production and materials science.

13. Tesla's commitment to electric vehicles seems to be increasingly aligned with public policies, both in the sense of reducing emissions and direct aids to the purchase of vehicles or the imposition of restrictions on circulation to combustion vehicles.

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain Reasons to be cautious about Tesla's valuation

1. Tesla has not yet proven itself capable of manufacturing mass vehicles at the level of traditional manufacturers. In fact, at the current rate of manufacturing and delivery of the Model 3 (1,000 units per week) it would take almost 9 years to satisfy the orders already committed to customers (455,000).

2. It is continually violating its own estimates of vehicle production (by the end of 2017 it is producing one fifth of what was planned).

3. Since the beginning of 2017, the updates of its autonomous driving system have been less frequent with continued delays regarding the roadmap spread by the brand. There is a paradox that there are currently recent models that, due to

the lack of updates, they have less advanced autonomous functionalities than older models. In this sense, it seems that the advantage in this field is increasingly reduced with respect to its competitors.

4.It is entering a competitive sector and with large companies settled with many resources to compete with it. This is not an impediment in itself, but it is a challenge in cases of companies that create a new market that did not previously exist.

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain 5. Its cost structure is far from being able to maintain its investment in innovation and development on its own, which is its differential element in the market. For this reason, it must continue to use debt and capital increases or renounce this identity card.

6. Although his CEO is a visionary of undoubted talent, he is also seen as too idealistic and reckless when making business decisions.

7. Model 3´s commitment to sell a mass vehicle, can negatively impact the sales of other models that currently have greater margin per unit (due to the low production levels of Model 3).

8.Some analysts are of the opinion that the possible competitive advantages of Tesla will not last as long as they are relevant for the sales of the big companies in the sector such as General Motors, Toyota or Volkswagen. These opinions are based on the fact that these companies are already making important developments in assisted / autonomous driving and would have access to battery suppliers with the capacity to increase manufacturing volumes and reduce costs (some of them have even planned large investors in that field in the future).

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain 9.The release of patents in 2014 makes it more difficult for Tesla to retain differential technical elements that can not be accessed by the competition.

10. Although Tesla is still a benchmark, there are more and more competitors in the electric vehicle market, both in the form of already launched vehicles and projects / prototypes.

11. Investors are always looking for the next Google, a company that changes its sector forever, a bet for the future. This means that they tend to generate inflated expectations about companies that present new proposals and achieve relative initial success. The feeling of being left out of a possible winning investment weighs a lot.

12. Although great advances have been made in terms of driving assistance systems, it still takes a few years to see fully autonomous systems in all types of roads. In this sense, not only the stage of coexistence of different modes of driving will be complex, but the assistance systems. When they arrive at pure autonomous driving, they will face barriers of all kinds, including the media focus on each sinestro in which they are involved.

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain Considering the potential impact and degree of reliability about the available information on each of the above aspects, the following pro-Tesla dynamics can be highlighted as vital: • Differential and innovative product • Dynamics of change in the favorable sector

And contrary: •Difficulty to mass produce vehicles and maintain the rates of update of your driving system • Difficulty in obtaining margins that maintain your investment in research and development • Growing pressure from increasingly similar proposals and investing effort of traditional segment competitors

Conclusion Tesla has managed to establish a strong image of innovation both among investors and the general public.

This image is not pure marketing or chance, but the result of a differential product that is the result of an important commitment to research and development lead by a of a visionary leader who pushes the talent of his employees to the limit of his imagination. To a large extent, this is the best summary that can be made of its assessment: Tesla is a company that has managed to create and involve many participants in its vision of the future, which has resulted in many investors considering it a winning bet.

Innovation, Leadership and Vision: The Tesla formula to analysis

By Antonio Guimarey, Telecommunications. Santiago de Compostela, Spain It is difficult to determine if Tesla will be remembered as that innovative company that did not meet the high expectations that it had set itself or if, on the contrary, it will change forever the automotive market of the beginning of the 21st century. As we have seen, with the available data there are reasonable arguments to support both positions. In any case, a significant number of investors have already strongly committed to this company, so everything that is not to succeed and become one of the leading car manufacturers worldwide will disappoint their expectations.

The year 2018 will be of huge importance in this respect.

If the production numbers of the Model 3 get close to or meet expectations and receive positive reviews from its buyers, 2018 will be Tesla´s year: The success of the Model 3 would eradicate one of the main misgivings that all analysts currently have (the levels of production) and would surely channel others such as financing with own funds from investment in R&D. Otherwise, hundreds of thousands of customers will feel cheated and many investors will perceive a significant increase in risk of investing in Tesla, reflecting on whether it really is a winning bid as they thought, which could lead to major financial problems.

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