TESLA Case Analysis

ExecutiveSummary

Theautomotive manufacturing field is among the most competitive marketsin the world. Due to increased environmental concerns, most vehiclemanufacturers aim at designing vehicles with high fuel consumptionefficiency as well as explore alternative fuel sources. This paperpresents a case analysis of Tesla Motors. The pros and cons of thestrategy that is currently used in Tesla, evaluation of the financialperformance, assessment of the importance of information on exhibit 2and outlook of the future prospects of Tesla in revolutionizing theautomotive industry in the world.

Introduction

Teslawas established in July 2003 by Marc Tarpenning and Martin Eberhard.These Silicon Valley engineers believed in their capacity to produceexceptionally `awesome` electric cars. They coined the name ‘Tesla`from Nikola Tesla, a scientist and electrical engineer who livedbetween 1856 and 1943. Nikola is known for his invention of powertransmission systems using alternating current and electric motors incollaboration with Thomas Edison[ CITATION Ber06 l 2057 ].

2.0. Pros and Cons of the Current Strategy2.1. The PESTEL Analysis

ThePESTEL framework helps in evaluating the factors within the externalenvironment that influence the identification of risks andopportunities of certain strategies. Changes to any of thesevariables significantly affect industries in both short and longrun[ CITATION Yük12 l 2057 ].

2.1.1.Political

Teslahas markets in more than 17 countries in America, Asia, and WesternEurope. This implies that the company faces distinctive politicalpatterns that ultimately affect the business operations. Forinstance, environmental protection laws in various countries outlinethe need to manufacture cars that meet certain emission levels. Also,the funding from Department of Energy for different countries likethe US plays a major role in influencing the research and developmentprograms for Tesla.

2.1.2.Economic

Theseincludes the factors affecting economic growth. For instance, theadvancement in alternative energy industries and increases fossilfuel prices triggered the need to develop high fuel-efficiency carsin Tesla. This increases the demand for high-efficiency cars. Also,factors like decreased inflation and increased GDF from the economicrecession in 2008/2009 played a major role in increasing thepurchasing power of the customers.

2.1.3.Social

Someof the social factors affecting Tesla include attitudes and increasedenvironmental concerns on eco-friendly vehicles. As such, manyconsumers now detest the gasoline-powered vehicles. The increase inelderly and retired people with huge wealth and savings increases thelikelihood of purchasing premium electric cars. Additionally, thecurrent society classifies people based the model of car they drive,with the electric car being amongst the few vehicles that raise thesocial status of a person.

2.1.4.Technological

Theimproved technologies such as the design of lithium-ion batteries,supercharging stations, and electric drive have played a major rolein increasing competitive power of Tesla. Also, investment intechnology-minded people such as Israeli-born Ze`evDrori, Tesla has been able to improve drastically regardingconvenience and safety of their cars.

2.1.5.Environmental

Theincreased pressure to produce cars that contribute little or noamount of greenhouse gasses has influenced the development ofelectric cars in Tesla. Currently, Tesla is ranked 5-star concerningsafety by NationalHighway Traffic Safety Administration (NHTSA), which is a score thatis only obtained by approximately one percent of all cars in theworld[ CITATION Nyk15 l 2057 ].

2.1.6.Legal

Governmentregulations such as federal credits and energy loan programs emphasison production of eco-friendly vehicles. For instance, customersbuying Model S from Tesla were entitled to $7,500 federal tax creditand those that leased the same model were not supposed to pay anyrebates. Other legal factors affecting car manufacturing in Teslainclude tax incentives and subsidies on battery car to increasedemand for vehicles.

2.2. Porter’s 5 Forces Analysis

Thisanalysis plays a major role assessing the attractiveness of motorvehicle manufacturing industry. The results of the analysis help indiscovering the most appropriate strategic innovation approach toimprove the profitability of an industry[ CITATION Gru06 l 2057 ].

      1. Threat from New Entrants

Teslaentered the industry in 2003. During this period, the company faceddifferent challenges in its financing, branding, and theestablishment of distribution channels. Also, the government supporttowards the development of electric cars was minimal in 2003 comparedto today.

      1. Bargaining power of Buyers

Fromthe case presented, the overall bargaining power of the Tesla`sclients can be ranked as modest. For instance, the collaboration withToyota and Daimler has seen a considerable increase in Tesla`sprofits. Also, the tax incentives and reduce rebates from thegovernment stimulates an increased demand due to the low bargainingpower of the buyers[ CITATION Ber06 l 2057 ].

      1. Threat of Substitution

Theautomotive industry faces considerably low threat of substitutes.Among the main substitutes are air flights, biking, trains, buses,subways or walking, which can be tiresome and inconvenient, or tooexpensive to afford.

      1. Suppliers’ Bargaining Power

Suppliers`power is relatively high since Tesla Company depends mostly on theirconvenience. For instance, in 2013, Tesla experience major challengesin meeting the demand due to the inability of Panasonic Corp indelivering enough battery cells. Also, Tesla had to engage Daimler inmanufacturing battery packs as well as purchasing components frommore than 200 suppliers worldwide.

      1. Competition

Theautomotive manufacturing is amongst the most competitive industriesin the world. In electric vehicle industry, Tesla`s positioning ismodest since only a few manufacturers like Ford Focus BEV, NissanLeaf, and Chevrolet Volt. However, the electric vehicle market isexpanding at a very high rate with other companies like Audi,Volkswagen and BMW entering recently. It is anticipated that infuture, the competition in electric car production will beconsiderably high.

    1. SWOT Analysis

Thisanalysis highlights the strategic capabilities of Tesla and mainvariables in the external environment influencing the development ofstrategy[ CITATION Jac03 l 2057 ].

      1. Strengths

Teslahas been competitive due to various factors like outsourcing ofcomponents to reduce costs and primarily focus on advancing theirtechnological capacity such as strong R&ampD. The application oflean management system allows employees to work together in a waythat is easy to manage and enhance trust between the subordinatestaff and management. Also, the large pool of investors fromcompanies like Google, Panasonic, Toyota and Daimler has enabledTesla to develop its financial muscles. Good and strategicdistribution stores increase the efficiency of their sales.

      1. Weaknesses

Liquidityis one of the main problems in Tesla. For instance, despite the highsales in 2013, due to huge amounts of debts, the company lost over$70 million. This is especially because of failure to controloperational costs and plan for any cost reduction methods. Thelimited manufacturing facility at Fremont factory may limit thecapacity to meet demand during peak seasons. The shortage of lithiumcells supplies affects brand image.

      1. Opportunities

Theincreased awareness of environmentally friendly vehicles in theautomotive environment, as well as the regulations on fuel-efficientcars, has played a major role in increasing the demand for electriccars. The rise in petroleum prices compels people to seek othercheaper alternatives. Subsidiary programs from the government andgreen-energy funding increase purchasing power of the people andproduction capacity of manufacturing companies.

      1. Threats

Establishedmanufacturers like General Motors and Ford have higher capabilitiesand economies of scale than Tesla. The higher economies of scaleimply that cars from these competitors will be sold at relativelylower prices, hence taking away potential clients who cannot wait forthe slow battery cell development process from Tesla. The cleanalternative fuels like hydrogen and catching fire of electric carsmay affect Tesla`s competitiveness and position in the automotiveindustry.

3.0. Financial Analysis

Exhibit1

Currently,the financial health for Tesla is attractive. Revenues wereincreasingly steadily from 2010 to 2013.

Table1:Income

Revenues

2013

2012

2011

2010

&nbsp

2,013,496.00

413,256.00

204,242.00

116,744.00

Thisimplies that the company is on the right track based on sales andmarketing. For instance, the increase in revenue from 2012 to 2013was overwhelmingly high.

    1. Liquidity ratios

Liquidityratios help in determining the safety of the company base on theinvestment as they depict the likelihood of the company in repayingits debts. The primary liquidity ratios evaluated based on Exhibit 1include cash flow to current liabilities, working capital and currentratio.

Currentratio relates directly to the current assets against liabilities of acompany. An attractive current ratio should be more than 1. Below isa representation of liquidity ratios in Tesla.

Table2: LiquidityRatios

Ratio

2010

2011

2012

2013

Inventory Turnover

2.51

2.99

2.41

5.12

Days Inventory

45.14

121.88

151.73

71.36

Current

2.76

1.95

0.97

1.88

Thecurrent ratio from 2010 to 2012 was decreasing. This implies that thevalue of assets was reducing at a higher rate than liabilities.Nevertheless, in the year ending December 2013, the value of theassets in Tesla improved significantly, hence the increase of currentratio from 0.97 to 1.88. Quick ratio assesses the sum of cash andmarketable securities of a company against the liabilities. Similarto current ratio, a quick ratio of more than one reflects a goodfinancial health of a company. The quick ratio decreased from 1.24 in2010 to 0.42 in 2012 and after that increased to 1.33 in 2013[ CITATION Fle13 l 2057 ].

Forworking capital, a similar trend is shown. The working capitaldecreases from 2010 to 2011. In 2012, it became negative andincreased in 2013. The decline from 2010 to 2012 illustrates thedecline in the ability of Tesla Motors to use the current resourcesin repaying its debts. The inventory turnover reflects the averagerate at which the inventory sells. A higher value of turnover rateand reduced days of turnover is an indicator that Tesla is performingwell in product sales[ CITATION Man12 l 2057 ].

    1. Profitability Analysis

Thisanalysis determines the return that can be made by the company, andit entails the evaluation of the profit received. These include grossprofit ratio, return on assets and return on equity.

Ratio

2010

2011

2012

2013

ROA%

-59.76

-46.28

-43.36

-4.19

ROE%

-118.03

-227.22

-18.69

Gross Profit%

26.32

30.16

7.28

22.66

Thegross profit ratio declined from 26.32% in 2010 to 7% in 2012 afterwhich it increased to 22.66% in 2013. A good gross profit ratioshould be high. A better reflection of Tesla`s profitability is areturn on equity (ROE). The ROE was becoming negative steadily up to2012 after which it increased, though negative in 2013. The return onassets (ROA) increased positively from -59.76 in 2010 to -4.19 in2013. These show that operating expenses are more than net sales.

Exhibit2

Exhibit2 presents the financial performance of Tesla by quarter, the GAAPvs. Non-GAAP from the first quarter of 2013 to first quarter of 2014.According to Elon Musk, they cannot use GAAP to tell the full revenuefor leased cars as they have overhang for residue value guarantee. Assuch, due to increase in car sales the company will never hit theprofitability of GAAP. Nevertheless, non-GAAPnumbers reflect amuch truer condition of the financial position of the company.

Therefore,these values can be misleading when reporting on Tesla’sprofitability. If this is to be considered exhibit is to beconsidered, the residual value guarantee should be dropped or Teslashould create a leasing subsidiary that would allow them recognizeleased car as upfront sales. Therefore, Tesla should ensure that theGAAP and non-GAAP should be kept as comparable as possible to avoidit becoming meaningless when used in quarterly comparison.

4.0. Recommendations

Theissues covered through these analyses affect Tesla both positivelyand negatively. Tesla is well positioned to remain competitivedespite the different threats and challenges that are currently inthe automotive manufacturing industry.

ForTesla to increase its competitiveness, the following recommendationswill be critical:

  • Tesla should increase the range of the models for both high and low premium levels to achieve a differentiation strategy. This will play a major role in increasing the market share. Nevertheless, this strategy may reduce the total turnover due to low premium vehicles which are priced low to cover the mass-market

  • More investment in research and development of lithium-ion batteries to reduce their level of flammability, or even coming up with other low-density batteries that are less flammable. This will reduce the instances of fires of their electric cars. However, investment in low-density energy batteries similar to those used by their competitors may reduce the speed and efficiency that is Tesla’s vehicle main strength.

  • The working capital reduction is majorly contributed by increased losses in operating income. Currently, working capital in Tesla is unsustainable and should be offset using more equity investments.

  • The profitability ratios show that good planning in necessary. This will help in reducing the operating expenses and increase the net sales.

References

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