An Economic Evaluation of the Manufacture & Marketing of ...

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An Economic Evaluation of the Manufacture & Marketing of The Tesla Roadster

Tesla Motor is a company that designs, manufactures and sells electric cars. The company was the first to produce the first fully electric sports car and aims to eventually mass-‐produce fully electric cars at a price affordable to the average consumer, allowing electric cars to become the normal.

The Roadster was the first car manufactured by Tesla motor and the car

has the capability to travel more than 200 miles per charge. Not only was the car designed to run on an electric motor it was designed to optimise the performance of the car. Quality such as maximizing the range and energy conversion has contributed to the enhanced functionality of the car. Tesla looks the various aspects of road friction, aerodynamic drag and mechanical resistance to elevate the quality of the vehicle to a sports car. Energy conversion in the fuel source distributing to the motor and engine achieves a high efficiency performance as an electric car. Supercharge is available in certain stations to allow the electric car to charge quicker and go a further distance making it even more efficient.

In certain countries Tesla Electric drivers are given incentives for

purchasing an electric car such as tax credits, rebates, free parking, or unrestricted access to high occupancy commuter lanes on major roadway. In the UK for example, a driver of a Tesla Electric doesn’t pay road tax or the congestion charge in London. The Tesla makes an excellent company car, as it has a zero rate on company car tax based on C02 emission.

There are currently 3 models of Tesla Roadsters; the Electric, the Model X

and the Model S with the Model S designed to attract the younger market, is than cheaper than previous Tesla cars.

The Roadster is Tesla’s first fully electric sports car, designed with the aesthetically appearance of a sports car it offers users an alternative to power source of electric to an otherwise crude oil fuelled market. It attracts the environmentally conscious market; the roadster offers the same sports car performance without the same emission. The Tesla Roadster has been on the market to buy since 2009 and has recently stopped selling them this year (2012). Over this four-‐year period, Tesla


has sold a total number of 2,321 units1. The base price is just over $100,000 with the average cost to buy a single Tesla Roadster is $146,000 (£92,000). This is what their average costs per unit sold looks like from the year 2009-‐2012:

Year 2009 2010 2011 2012 Units (USA) 630 308 280 278 Units (Other) 200 252 280 93

830 560 560 371 Average Selling Price/Unit $147,323 $144,803 $143,140 $141,920

Gross Profit/Unit $33,733 $25,703 $29,099 $30,388

As you can see from these figures the average selling price is slowly but surely reducing in average unit cost, and in the units sold, particularly in the year 2012 explaining why they have stopped the production. In the four-‐year spell of selling the car they have created total average revenue of $69,961,458 from each individual Tesla unit sold collectively.

The total cost of creating the Tesla Roadster is not just the costs of the materials but also fixed inputs and variable inputs need to be considered:

Fixed Inputs Variable Inputs Machinery Power Buildings Raw Materials Overheads (inc. head office & accountants)

Some Labour (overtime etc.)

The fixed inputs are established costs, usually lasting a period of 12

months or more, in which the price doesn’t change. Fixed costs being a long-‐term expense, they may change from year to year due to companies deciding to invest in long-‐term structures such as buildings depending on how successful the company is proving. Variable costs are short-‐term costs that may change within the day to day running of the company. Due to demand the variable costs change often with time. The Inputs from 2011 look as follows:

Fixed Inputs Input Cost Machinery/tooling $16,584,000 Land $26,391,000 Wages $82,217,000 Buildings $12,016,000 Total $137,208,000

1 Sources for page data: http://business.library.wisc.edu/resources/kavajecz/10_Fall/TeslaMotors_Report.pdf


Variable Inputs Input Cost Materials $15,867,000 Warranty $16,874,000 Sales $80,158,400 Distribution $946,400 Total $113,845,800

From these input tables and costing table, you can derive an average cost curve graph using the following equations:

𝐴𝐹𝐶 =𝑡𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠

𝑜𝑢𝑡𝑝𝑢𝑡

𝐴𝑉𝐶 =𝑡𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡𝑠

𝑜𝑢𝑡𝑝𝑢𝑡

𝐴𝑇𝐶 = 𝐴𝐹𝐶 + 𝐴𝑉𝐶 By simply plugging in the correct data collected from each year from 2009-‐12 we get the results as follows:

AFC ($) 165,321 245,030 245,030 369,857

AVC ($) 137,163 203,296 203,296 306,861

ATC ($) 302,484 448,326 448,326 676,718

This average cost curve graph shows that the average cost per unit decreases greatly as the output rate is increased, as shown the average total cost increases significantly from $302,408 per unit in 2009 to $676,718 per unit in 2012. It is diminishing returns to profit trend, and as a result they have taken the Roadster out of production, therefore there isn’t an increasing returns to profit section in the graph, as a company would expect.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

0 200 400 600 800 1000 1200

AC (Average Cost, $/unit output)

Output rate Q (units/year [2009-‐12])

Average Cost Curves

AFC

AVC

ATC


As the average costs increase, there is a direct correlation with demand as shown below:

The demand curve above shows how the sales of the Roadster have diminished. Since launching in 2009, the sales have dropped by more than half in 2012. Showing why the Roadster is no longer in production. This shows that the supply demand curve affects the product price. The stronger the need for a product, the higher the prices can be set, this shows that Tesla have less price elasticity, therefore less power to control their product prices. The price elasticity price of demand can be calculated using the following equations:

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃

$147,323− $143,140 = 4,183 4,183

$147,323 = 0.02839 = −2.8%

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄

830− 371 = 459

371830 = 0.553 = −55.3%

Total Efficiency

𝜀𝑝 =% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃

𝜀𝑝 =55.3%2.8% = 19.75%

140000

142000

144000

146000

148000

150000

152000

0 200 400 600 800 1000 1200

Price/Unit ($)

Output (q) from Years 2009 -‐ 2012

Demand Curve

P1

P2

Q2 Q1


This shows that Tesla has a very poor percentage change in both product

price and product demand, confirming what the demand curve portrays. Reasons behind the price elasticity issues could be to do with consumer incomes; with the average prices being above $140,000 not everybody can afford the privileges of the roadster. Other factors may be internal problems within the company, with Tesla being a free standing producer they have a lot of extra bills to pay than they would if they rented or shared facilities, but they may see it as a long term investment, that will eventually work out in favor of Tesla.

Tesla outsources a variety of the components that make up the Roadster including the chassis, body parts and the battery. Despite many components being sourced from a range of different companies across the globe, these components are assembled at Tesla’s headquarters at Silicon Valley in northern California. This is where the process of adding value occurs, where all the components are brought together, assembled, and the final product is made.

Its two main outsourcing partners are Panasonic, the electronics company

from Japan, and Lotus, a car manufacturer from England. The Li-‐ion battery packs that are used in the Roadster were sourced from Panasonic due to their specialisation in the electronics industry with high quality in what they produce. However, due to Tesla’s very high average cost per unit of $110,000 the company searched to cut their high production costs to help become more profitable as a company. Their strategy to do so included the automation of the manufacturing process and increased volume production, as well as moving the battery pack production from Panasonic to California to help reduce costs. This therefore meant that the cost per unit fell to around $80,000, allowing Tesla to become more profitable in the long term.

There is a very strong relationship between Tesla and Lotus, which came

around at the very start of Tesla’s start up. There has been designs and parts exchanged between the two companies including the design of the chassis that is based on the Louts Elise. The Elise and the Roadster share a few similar components including the air bags, windshield, dashboard parts and suspension parts.

Other parts that are outsourced include the body panels from Sora

Composites, who specialize in plastic parts reinforced with glass and carbon fibre. BorgWarner produce the gearbox while Siemens produce the brakes and airbags.

By January 2010 the total number of Roadster’s sold reached the one

thousand mark in 2 years of it being in production. This would allow for Tesla to benefit from economies of scale, as the high levels of production, to satisfy consumer demand, would reduce the average cost of the materials used and in turn the product itself.


As this graph shows, with increasing output the average cost falls up to a point Q2 and this is called economics of scale. However, past this point increased production becomes less beneficial and the average cost begins to rise, known as diseconomies of scale. A company such as Tesla would have to find this point where they would be producing at the most efficient rate in order to benefit most from economies of scale.

In the long run, the aim for Tesla would be able to benefit greatly from

economics of scale, producing as cheaply and efficiently as they can. This is called the minimum efficient scale, whereby the internal economies of scale have been fully exploited to benefit from lowest average total cost with output.

Looking at the structure of the market, I have looked into the current used car market to identify the percentages of each different fuel type currently in circulation in the UK in order to base my analysis. I used ‘Autotrader’ (one of the biggest UK used vehicle advertising websites) where 380,149 vehicles were for sale, below a web diagram is shown to represent my findings.

As can be seen from the diagram, petrol and diesel engines still remain

the two mainstream vehicle engine types circulating in the UK. Although, this being a biased search in the fact the petrol engine vehicle has been in circulation for a much greater period of time in comparison to the electric vehicle. However, further data I have found in my research has led to some positive news on the electric car market.

Petrol Diesel Hybrid LPG Bi-‐fuel Electric

Petrol engines make up: 58% of the motor vehicle market (219,279)

Diesel engines make up: 41.4% of the motor vehicle market (158,501)

Hybrid engines make up: 0.5% of the motor vehicle market (1982)

LPG engines make up: 0.05% of the motor vehicle market (206)

Electric engines make up: 0.03% of the motor vehicle market (108)

Bi-‐fuel engines make up: 0.02% of the motor vehicle market (72)

*An Autotrader search on 16/11/2012 led to these results using a national (UK) search.


This shows that Tesla’s market segment is clearly the high performance

pure electric vehicle. The Roadster fills this gap very nicely. However the Roadster faces competition from a variety of different sources; these being spread throughout the different fuel type are available on the market. The main three sources being the petrol/diesel, hybrid and electric categories. Tabled

As can be seen in the diagram to the left, electric charge costs are actually much lower than consumers expect. A saving of 82.8% annually can be achieved going on the average data.

Is electric on the up? “The Chevrolet Volt Hybrid outsold half the cars, trucks and SUV’s on the (American) market”

i.e.: the BMW 1 series, Audi A3 “The Toyota Prius is now the world’s 3rd bestselling

vehicle”

Roadster Disadvantages o The higher retail cost from new, in

comparison to the mainstream. o The generally unappealing aesthetic o The minimal millage achievable

between charges. o Limited charging points away from

home. o Emerging technology, resistance to

switch from the current. o Is there really a benefit? Is the

electricity not sourced through fossil fuels to charger the battery?

Roaster Advantages o 0 to 60 mph in 3.7 seconds o Supercar performance without

supercar pricing o Zero emissions (therefore free road

tax) o The car is 88% efficient compared to

16% for a conventional petrol driven car. It charges itself as it drives when you take your foot off the accelerator

o Minimal need to recharge due to battery’s structure.

o Reduced fuel costs compared.

^The table above shows how car sales have dramatically increased in year between 2010 and 2011, most specifically in the pure electric vehicle sales. This is especially promising for the Roadster’s

future sales forecast.


below are the vehicles I feel are providing the most competition for the Tesla.

Petrol/Diesel: Hybrid: Electric: Mazda Mx5

Price from: 17,995

Toyota Prius

Price from: 21, 485

Nissan Leaf

Price from: 25,990

Other Competitors: Porsche Boxster Audi TT BMW Z4 Ferrari 458 Spider

Other Competitors: Fisker Karma Chevrolet Volt Toyota GRMN Mercedes SL

Other Competitors: Renault Fluence ZE Renault Twizy Mitsubishi i-‐MiEV Peugeot iOn

The Roadster faces competition from the currently best-‐selling roadster (Mazda Mx5), the best-‐selling hybrid (Toyota Prius), and the best-‐selling pure electric (Nissan Leaf) of which their benefits and desirables need to be overcome. What they offer over the Roadster are: lower retail costs (1/3 of the price), increased practicality (4 seats in the cases of Prius & Leaf), conventional body styling and greater incentives to buy (high warranty lengths, etc.). The Roadster offers the higher-‐end premium electric motor vehicle. It offers a quality product with greater specifications than available with any other electric vehicles. The Tesla offers powerful performance; competitive with ‘supercars’ available on the market. It offers the conventions of a motor vehicle with the benefit of reduced running costs, especially due to the regeneration technologies, which reduce the need to recharge. These differentiations from the other electric vehicles and the lack of competition from any other “pure electric” vehicle on the market results in the Roadster being in a sort of monopoly situation, where there is no competitor to undercut. Therefore this leads to the ability to command that higher starting base price of $109,000. But what the Roadster does face is to convince a consumer to revert from the conventional fuels to the unknown fuels. In the next ten years we may be seeing cars similar to the ones pictured below.

Honda EV-‐STER

BMW i8

Infiniti EMERG-‐E


My presumptions for the future market for electric cars is one where “futurisim” is at the heart of the design. Rising costs of fuels will lead to a boom in electric car sales, leading to a greater demand and therefore a price reduction. This will allow the market to become more accessable to those with less despendable income to put into car purchases. I presume developments in hydrogen power or another fuel source, which leads to minimum use of finite resources. I would anticipate solar energy or wind power to be incorporated into the motor vehicle business. Especially in the production of lorry trailers, as these provide a large surface area to absorb solar energy. A combination of energy sources is probably the most likely solution. As energy efficiency becomes more desirable, I feel the reduction in interface functions will reduce to those, which are essential to the main functionality of the vehicle – “to provide personal (or multi-‐person) transportation from one location to another”.

Looking into the financial records of Tesla, they openly publicise that the

majority of the revenue comes from the Tesla Roadster. I’m going to look into the records of 2011 and 2012, because the Roadster has been removed from production as of July 2012 in order to bring out the new model, which is to be launched next year. Every Roadster sold was at a loss, which is quite visible in the balance sheets. The loss however was not brought due to the high price of parts or labour or the low price of the unit, but due to the high research and development (R&D) costs. Only 2321 Roadster’s were sold in the period from 2009. Below is the balance sheet for Tesla over 2011/2012 periods published by them.

Tesla Cars 2012 ($’000’s) 2011 ($’000’s) Revenue Sale of Cars 19245 33628 Development Services 10922 15402 Total Revenue 30167 49030 Cost of Revenue’s Sales of Cars (13932) (26961) Development Services (6025) (4041) Total Cost of Revenue’s (19957) (31002) Gross Profit 10210 18028 Operating Expenses Research & Development (68391) (41162)


General & Admin (30582) (24212) Total Operating Expenses

(98973) (65374)

Profit/Loss (88763) (47346) Net Loss (89873) (48941)

Looking at 2011, Tesla had revenue of $49 million, with $33.6 million

coming from the car itself. Taking out the costs of revenues of $31 million, this left $18 million as their gross profit, of which the operating costs took $65.4 million out of it.

Then researching into 2012, they had revenue of $30.2 million, a

significant drop from 2011, with only $18.2 million coming from the cars. Taking out the costs of revenues of $19.95 million, this left Tesla only $10.2 million gross profit to pay for the operating costs, which were in close to $100 million of which $68.4 million was invested into R&D for I expect development of the future car. It is the operating expenses that created the loss in both years.

Their sales volume is hard to discover actual numbers between the 2009

and 2012 period, but I know they sold a total of 2321 cars at a base price of $109,000 each (with an average selling price of $140,000+), providing the past and current sales volumes. The future sales volume doesn’t apply to this example as production of the existing Roadster has ceased and as you can expect, Tesla have kept all details of the new model very secretive.

The Net Present Value (NPV) of a company is defined as the difference

between the present value of cash inflows and cash outflows (source: http://www.investopedia.com) and the Internal Rate of Return (IRR) of an investment is defined as the discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero (source: http://www.investopedia.com).

Before and investor invests they will perform NPV and IRR as a risk

calculation. For Tesla, I am using an example, which is an investment of $50 million, which could come from another company or the bank. The amount is just what Tesla need to get them “out of trouble” in the short term. In 2012, with a level of debt of $89.9 million, the NPV calculation would look something like this.

When taking the revenue for the projected years, carrying on the trend

from 2011 to 2012, by 2015 they would be making a loss of $27 million, and with the launch of his new car, I have made a steady profit for Years 1 -‐3.

I have also researched the present discount rate for the United States of

America, which is currently at 0.75%.


Revenue (current and projected

$ (‘000,000) Cash flow $ (‘000,000)

Present Value @ 0.75%

discount rate $ (‘000,000) (Current)

Present Value @ 10%

discount rate $ (‘000,000) (Example)

2011 49 2012 (Year 0) 30 (50) (50) (50) 2013 (Year 1) 35 35 34.7 31.8 2014 (Year 2) 40 40 39.4 33.1 2015 (Year 3) 40 40 39.1 30.1 NPV $63,200,000 $45,000,000

You would be unwise not to accept the project at either level of discount rate, current or example. By waiting 3 years, you would make more money by investing the £50 million.

The IRR for this investment shows how high the discount rate could raise

before you wouldn’t make any money. When the discount rate is so large that after 3 years you wouldn’t make money, there is no point in investing and the company should take the money now. The example below takes the above NPV and by trial and error discovers the discount rate.

Year Cash Flow (r=0)

PV @ r = 0.75%

PV @ r = 10%

PV @ r = 20%

PV @ r = 50%

PV @ r = 60%

PV @ r = 55%

PV @ r = 54.9%

PV @ r = 54.8%

0 (50m) (50m) (50m) (50m) (50m) (50m) (50m) (50m) (50m) 1 35m 32.6m 31.8m 29.2m 23.3m 21.9m 22.5m 22.6m 22.6 2 40m 34.6m 33.1m 27.8m 17.8m 15.6m 16.6m 16.7m 16.7 3 40m 32.2m 30.1m 23.1m 11.9m 9.8m 10.7m 10.8m 10.8 NPV 65m 49.4m 45m 30.1m 3m (2.7m) (20k) 100k 7.9k

This shows that the if the discount rate is at 54.8% then the opportunity

cost of capital would be too great to invest. For an investor thinking of investing $50 million, this would be a good investment, especially with the US discount rate so low at the moment, but the risk is the launch of this new car and is it worth it?

To conclude, Tesla isn’t in a very strong position financially however they

have a gap in the market in which they have full market share. With competition in the electric market from Honda and Mitsubishi this new car being developed is a ‘make or break’ for them. If it is successful and the projected revenue is correct this means that Tesla will stay open for business, build their market share and grow. However if this new car flops, they may be too far into debt to recover without donations or investment.

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