Like any large follower of the technology and innovation sector, Tesla Motors is a company I am naturally intrigued by. Why would not anyone be interested in Tesla? They have managed to do something the principles of economics tells us is impossible: join and compete in a monopolized market. As such, even for a company with as much value proposition as they do, it has been quite a difficult rode for Tesla Motors and for them to achieve any level of long-term sustainability, there are a few hurdles they must successfully cross. For one, they must assure prospective shareholders of the company’s ability to stay competitive in such a fierce market in the long-term. Their share price is extremely volatile and many shareholders place all of their faith in the longevity of the company in Elon Musk. Also, the affordable Gen III Tesla model absolutely MUST be a hit with American car buyers- both for the future of EV vehicles, and for Tesla to enter the mass-market. Now, we’ll take a look at the history of the company, and what risks lie ahead in their future.
Production started on the Model S in June 2012 and the Roadster launched in 2009. They intend to ramp up production of Model S overseas, however, several factors may hinder this goal such as: suppliers inability to meet Tesla’s demand for parts, frequent changes in design to ensure premium innovation, inability to train employees at a quick enough rate, negative results in long term testing, and any other factors beyond the company’s control. The company has also taken great strides in innovating the car industry including: aluminum spot welding, 17 inch display screens, and retractable exterior door handles. With such innovation, the company has over 300 suppliers, and their goal is to find secondary sources of supply to ensure they never encounter a shortage, however, they will not be able to do so in the short-term. Manufacturing costs for the Model S were also initially quite high, but as their factory and business has matured, costs of production have slowly declined. However, costs need to drop even lower because: Tesla is about to announce what they call the “Gen III”, they intend for this vehicle to be open to the mass-market with its suitable price point. For this to happen, the company will need to be supplied with a substantially larger number of their Lithium-ion cell batteries, and this could put stress on their suppliers. The raw materials used to produce the vehicles including: copper, aluminum steel, and nickel, are all subject to raises in prices depending on the market and demand for them and this could hurt Tesla’s production of vehicles.
For Tesla’s continued growth, they must ensure that that market acceptability continues to advance and for long-term success, electric vehicles need to become a universal success. In the US, this will undoubtedly happen, but overseas they are still not sure. The Model S has been extremely successful in Norway. Simply put, the future growth of Tesla Motors is dependent on consumers willingness to adopt electric cars. Unfortunately, an NY Times reporter writing a story on Tesla’s supercharger network stretching across the New England region, failed to follow Tesla’s instructions on where to fully recharge the vehicle at certain supercharger locations. As a consequence, the Model S failed to complete the journey and the reporter published a negative review. Even though the reporter was at fault and not the vehicle, the article was cited multiple times in arguments against the company and Tesla experienced a dip in sales in the region the event occurred.
To be able to have the company’s name become more widespread, the company intends to put a great deal of capital into marketing and advertising of the company. They intend to do this using traditional means such as print ads, TV ads, and online as well.
Now, these automobiles do have shortcomings, which is a deterrent to many current and future consumers. For one, electric vehicles can only be driven so far on a single charge and many are not satisfied with the distance. Based on various reports and performance testing from Tesla Motors: the vehicle’s battery will not last as long when driven in extremely cold climates. This will surely affect their selling performance in historically colder countries.
EV’s are extremely quiet, and due to this fact, vision impaired pedestrians may be endangered as a consequence; Congress passed a law stating that all vehicles must emit a certain decibel of noise. With this artificial noise Tesla will have to install in their vehicles, potential buyers may be turned off. Also, since Tesla is attempting and succeeding in a virtually oligopolized industry, many of the major car companies are finding ways for Teslas to be banned from sale in certain states. For example, General Motors has pressed the Governor of Michigan to sign a bill banning any sale of automobiles not at a franchised dealership. As a consequence, Tesla will lose revenue in the state of Michigan as potential owners will have to travel to a different state to purchase. Also, the vehicle’s batteries have the possibility to release the energy in manner that produces venting smoke and flames. These risks have raised concerns over the suitability of lithium-ion cell batteries, however, Tesla has redesigned their cell batteries to contain any smoke or flame without letting it escape, but vehicles with the older batteries are still at risk. Also,Tesla’s use a substantial amount of software coding to operate, these complex systems have the tendency to fail to operate from time to time and customer satisfaction may plummet if Tesla cannot remedy the issue within a quick enough time.EV’s as a whole, may have flaws that turn off consumers all together, which other current internal combustion vehicles do not have, for instance: EV’s may not have the durability, longevity, and may not be as easy to repair as current vehicles. Repairing vehicles has been a challenge for Tesla because the company has limited experience in servicing their fleet. They have recently begun their Tesla Rangers program, although they need to hire and train employees, which will take a substantial amount of time. No other automakers provide maintenance and repair services directly, instead, owners must seek these services from 3rd party franchises. Tesla, however, will exclusively offer these services through their own centers. Owners must also be cautious with customizing their Tesla vehicles because: unlike other automobiles, adding after-market products can be an unsafe action because the technology in them is very complex and adding these products may damage the integrity of the car. In the process, if an owner is injured or killed from adding these after-market products, Tesla could face negative backlash.
Tesla Motors continues to be extremely ambitious and has many goals for the future. The company’s sales continues to rise every quarter. Even still, the company did not turn a profit until the first quarter of 2013, and they obviously intend to be more profitable in the future and their goal relies heavily on their ability to expand to other countries, avoid vehicle performance issues, and lower cost of production. Tesla recently opened the Resale Value Guarantee Program, which states that if a customer finances a Tesla vehicle through one of Tesla’s partnered banks- they may resell the vehicle back to Tesla for a predetermined cost. This produces a few issues: 1) Tesla cannot fully recognize the revenue until 39 months have passed, and 2) Since the vehicle is basically a lease, if the consumer returns the vehicle Tesla will overpay because of depreciation. Tesla could potentially be at risk as they do not utilize car dealerships and are competing with more experienced car companies with vast distribution channels. Tesla has recently began implanting Tesla Supercharger stations across the US and Europe. These stations are intended to remedy the concerns of individuals who feel Tesla vehicles are not fit for a long drive. However, since Tesla has promised not to charge owners for use of the stations will raise company operating expenses and does not guarantee more consumers will be drawn to the brand. Furthermore, as more Tesla’s saturate the market, the Supercharger stations could become impacted and owners could face long wait times. The company is also about to ramp up expenditures on building a new factory, development and manufacture of Model X, production of vehicles of higher volumes, and opening new Tesla service centers. They feel that their financial statements may not be reflective of the decent position the company is in. Now, if the company does not consistently have positive cash flows, they will need to raise capital through issuance of equity, debt securities, or obtaining credit from government or federal institutions.
The strength of Tesla’s massive competitors are, perhaps, the largest threat to the company. Tesla is working on releasing the Gen III, but the vehicle is still in its incubation phase and there are several unknowns. For instance, the Gen III will compete in a much more competitive price point and therefore, will have significantly lower margins than their other vehicles. If they are not able to develop the much higher number of vehicles, or be able to produce it at the price they are aiming for, their business will suffer. Many other both established car companies and start up companies are flooding the market with electric vehicles of their own; this is causing a strain on Tesla’s business as their competitors get stronger. None of these vehicles have been able to match the ingenuity and efficiency, but Porsche,Audi, and Land Rover are all rumored to be making a serious attempt. Another large hurdle is that most of these car manufacturers have advantages over Tesla in production, marketing, distribution, promotion, sales and support, and many others.
In addition to safety vulnerability, the company fears alteration in its board members that can adversely affect Tesla’s brand image, profit, and operations. For example, Elon Musk had changed the direction of the company dramatically, constituting for the increase in popularity and profits of the brand. Issuing an extensive number of convertible notes can lead to an adverse change in the company’s ownership, resulting in a great change in the company’s operation. Only time will really tell what the future holds for Tesla Motors- with the release of the Model X and production of the Gen III still ahead, these releases can surely be considered make or break success for the company.