Tesla’s rise in power – Sunyang Ji (Eco 2)

What is a ‘Tesla’?

Tesla is an electric vehicle company founded in 2003 by Martin Eberhard and Marc Tarpenning, funded by Elon Musk. The company produces electric vehicles, battery storage and solar panels. Tesla currently sells the Model S, 3, x and y, along with Powerwall batteries and solar panels. Tesla has never had a profitable year but has had profitable quarters.

Model S (source: tesla.com)

The economics of Tesla

Tesla is the leading manufacturer of electric vehicles, with a market share of 17% of all plug-in vehicle sales. Tesla’s market capitalization reached 160 billion dollars on the 4^th of February after a steep rise in stock prices. What sets Tesla apart from other vehicle manufacturers is that Tesla uses vertical integration. Vertical integration is when a company owns or controls its suppliers. In the past, Tesla has always purchased batteries from Panasonic. Purchasing a single 50kwh battery costs $10,000, which translates to $200 per kilowatt. Tesla wanted to reduce the price of a 50kwh battery by 30%, so they did. They achieved this by building their own factory with help from Panasonic that produces both batteries and vehicles, the ‘Tesla Gigafactory’ in Nevada. One of Tesla’s long terms goals is to reduce the price per kilowatt to below $100. If Tesla wants to produce the cheapest cars on the market, why does Tesla locate their factories in America, where labour costs are high? Tesla’s Californian factory is only located a few kilometers from its headquarters which simplifies logistics. This means that the executive, development and production staff can make tweaks and changes to make production more efficient quickly.

Consumer sovereignty

Tesla recognized consumer’s demand for cheaper electric vehicles and therefore, released a vehicle designed and marketed towards what consumers want. The model 3. Historically, in Australia, both the model S and X entered the market with six-digit price tags. The model 3 released with a price tag of only $67,900. The price may still be high, but it is half the price of both the model S and X.

Affect on stakeholders

The cost to purchase Tesla vehicles has remained steady due to the growing demand but lackluster increase in production. Consumers have felt the effects of relative scarcity, Tesla cannot produce more vehicles due to inadequate capital resources, the capital resource being factories in this case.

Production and sales figures for Tesla vehicles over the past year (source: https://www.tesla.com/ns_videos/tesla-impact-report-2019.pdf)

In Q4 of 2019, Model’s S, X and 3 had 7204 more deliveries than production, indicating that if Tesla continues to sell existing inventory at this rate there will be supply issues in the future.

Tesla’s strong 2019 sales figures, having delivered 367,500 vehicles throughout the year has benefited shareholders. Over the past year, Tesla’s stock prices have risen from $300 to $850, a 105% increase.

Tesla’s Stock prices since March 2019 (source: https://www.marketwatch.com/investing/stock/tsla)

Personal opinion

Although Tesla has continuously worked to drop the price of electric vehicles, Tesla vehicles still cost much more in Australia than most other countries. If the government lowers taxes and introduces incentives for electric vehicles it will drive prices for these vehicles down. Once this happens, I think the number of consumers who can afford these vehicles will increase which in turn increases demand and should lower costs if Tesla produces more vehicles.