MASTER S THESIS - CBS Research Portal
Transcript of MASTER S THESIS - CBS Research Portal
MASTER’S THESIS
VALUATION OF TESLA MOTORS, INC.
COPENHAGEN BUSINESS SCHOOL, 2016
MSC ACCOUNTING, STRATEGY & CONTROL
NUMBER OF PAGES: 80
NUMBER OF CHARACTERS: 173,480
DATE OF SUBMISSION: MAY 30TH 2016
AUTHOR: NORBERT KÁIN
CPR NUMBER: 090391-XXXX
SUPERVISOR: OLE VAGN SØRENSEN
SIGNATURE:
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TABLE OF CONTENTS Chapter 1 – Problem formulation ....................................................................................................................................... 4
1.1 Introduction............................................................................................................................................................... 4
1.2 Problem statement .................................................................................................................................................... 6
1.2.1 Sub-questions ..................................................................................................................................................... 6
1.3 Delimitation .............................................................................................................................................................. 7
1.4 Methodology and Theory of Science ........................................................................................................................ 7
1.4.1 Assumptions about the Nature of Social Science .............................................................................................. 8
1.4.2 Assumptions about the Nature of Society ........................................................................................................ 11
1.4.3 The chosen paradigm ....................................................................................................................................... 15
1.4.4 Research Design .............................................................................................................................................. 17
1.4.5 Strategic analysis ............................................................................................................................................. 18
1.4.6 Financial analysis ............................................................................................................................................. 19
1.4.7 Forecasting ....................................................................................................................................................... 20
1.4.8 Valuation.......................................................................................................................................................... 20
1.4.9 Data collection ................................................................................................................................................. 20
Chapter 2 – Tesla Motors & Automotive Industry ........................................................................................................... 21
2.1 Tesla Motors ........................................................................................................................................................... 21
2.1.1 Three-step master plan ..................................................................................................................................... 21
2.1.2 Vehicles and Energy storage applications ....................................................................................................... 22
2.1.3 Historical events & Share price development .................................................................................................. 24
2.2 The Automotive Industry ........................................................................................................................................ 26
2.2.1 The Electric Vehicle Market ............................................................................................................................ 29
Chapter 3 – Strategic Analysis .......................................................................................................................................... 31
3.1 External analysis: PEST analysis ............................................................................................................................ 31
3.1.1 Political factors ................................................................................................................................................ 31
3.1.2 Economic factors ............................................................................................................................................. 37
3.1.3 Social factors ................................................................................................................................................... 43
3.1.4 Technological factors ....................................................................................................................................... 44
3.1.5 Conclusion of external analysis ....................................................................................................................... 45
3.2 Industry analysis: Porter’s five forces analysis ....................................................................................................... 47
3.2.1 Threat of new entrants ..................................................................................................................................... 47
3.2.2 Threat of substitutes ......................................................................................................................................... 49
3.2.3 Bargaining power of suppliers ......................................................................................................................... 50
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3.2.4 Bargaining power of customers ....................................................................................................................... 52
3.2.5 Intensity of existing rivalry .............................................................................................................................. 53
3.2.6 Comperative industry structure analysis .......................................................................................................... 54
3.3 Internal analysis: Value chain analysis & VRIO .................................................................................................... 55
3.3.1 Support activities ............................................................................................................................................. 56
3.3.2 Primary activities ............................................................................................................................................. 59
3.3.3 VRIO ............................................................................................................................................................... 62
3.4 SWOT analysis ....................................................................................................................................................... 63
3.4.1 Strengths .......................................................................................................................................................... 64
3.4.2 Weaknesses ...................................................................................................................................................... 65
3.4.3 Opportunities ................................................................................................................................................... 66
3.4.4 Threats ............................................................................................................................................................. 67
Chapter 4 – Financial Statement Analysis ........................................................................................................................ 68
4.1 Analysis of accounting policies .............................................................................................................................. 68
4.1.1 Changes in revenue and cost allocation ........................................................................................................... 68
4.1.2 Changes in balance sheet items ........................................................................................................................ 69
4.2 Reformulation of the income statement and balance sheet ..................................................................................... 69
4.2.1 Analytical income statement ............................................................................................................................ 70
4.2.2 Analytical balance sheet .................................................................................................................................. 70
4.3 Financial analysis .................................................................................................................................................... 71
4.3.1 Operating efficiency ........................................................................................................................................ 72
4.3.2 Asset use efficiency ......................................................................................................................................... 73
4.3.3 Liquidity risk ................................................................................................................................................... 73
Chapter 5 – Forecasting .................................................................................................................................................... 76
Chapter 6 – Valuation ....................................................................................................................................................... 78
6.1 The discounted cash flow approach ........................................................................................................................ 79
6.2 The economic value added approach ..................................................................................................................... 80
Chapter 7 – Sensitivity Analysis ....................................................................................................................................... 81
Chapter 8 – Conclusion .................................................................................................................................................... 82
Bibliography ..................................................................................................................................................................... 84
Appendix .......................................................................................................................................................................... 93
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CHAPTER 1 – PROBLEM FORMULATION
1.1 INTRODUCTION
The aim of this thesis is to conduct an independent valuation of the American electric vehicle and
energy storage manufacturer, Tesla Motors, Inc. (TSLA).
The automotive industry is highly cyclical, meaning that it performs well when the economy is in
booming period and suffers when the economy is in recession. Investors in cyclical industries,
therefore, want to know where the bottom and the top of the business cycle are in order to buy and
sell these stocks at the optimal time. One goal of this thesis is to help these investors by analysing
macro and industry factors with a special focus on alternative fuel segment due to the company’s
positioning. The segment in which Tesla is operating in has some unique features compared to
traditional automobile segment. Electric vehicles, unlike traditional cars equipped with internal
combustion engines, take advantage of high oil prices but rather sensitive to political and
technological changes in terms of government regulations and innovations that can affect price and
attractiveness of these products.
Source: Compiled by author / NASDAQ
0,00
50,00
100,00
150,00
200,00
250,00
300,00Share price development, USD
Tesla General Motors Ford Toyota Motors Honda Motors
2011 2012 2013 2014 2015 2016
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The automotive industry is under even more pressure than ever due to economic austerity and
increasing environmental concerns. Manufacturers constantly have to innovate due to intensified
competition and new regulatory compliances setting higher fuel-efficiency standards.1 According to
Nieuwenhuis, there is an inevitable trend for automobiles to shift towards electric powertrains,
making them over time less of mechanical and more of electronic devices.2 This trend can be well-
observed from the above figure, which shows that Tesla Motors with its long-distance electric
vehicles has significantly higher stock value increase than the biggest players representing the
traditional segment of the industry. The fact that Tesla, who was founded a bit more than a decade
ago and could report GAAP-based profit in only one quarter since its operation, could manage to
reach around half of the market capital of some of the well-established automakers with hundred
year’s history, makes the company an interesting subject of analysis.
Moreover, the current dissension among industry experts about the fair value of one Tesla share
makes the analysis more desirable. As of 23 May 2016, FBR & Co. had the lowest price target of
USD 150, while Dougherty & Co. had the highest estimate of USD 500. Opinions of well-known
rating companies differ on the appropriate stock price as well. Bank of America and JPMorgan Chase
& Co. have one of the lowest estimates of USD 155 and USD 185, although JPMorgan Chase & Co.
has increased its target from USD 170. Goldman Sachs and Morgan Stanley have a lot higher price
target of USD 250 and USD 333. As a result, Tesla Motors Inc. has a consensus rating of “Hold” and
an average price target of USD 278.41. From the biggest financial companies, six have rated the stock
with a selling rate, four have assigned a hold rating and thirteen have given a buy rating to the
company’s shares with one strong buy rate.3 I find it extremely interesting how different, well-known
financial companies have distinct opinion about the right stock value of Tesla Motors Inc. This is
where I find my choice of topic and independent analysis relevant and useful for current and future
investors.
1 Boston Consulting Group (2014), ”Accelerating Innovation: New Challenges for Automakers”, p. 5 2 Nieuwenhuis, P. Wells, P. (2012), “New Business Models for Alternative Fuel and Alternative Powertrain vehicles”, p. 56 3 MarketBeat (23.05.2016), “Tesla Motors Company Profile (NASDAQ:TSLA)”
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1.2 PROBLEM STATEMENT
What is the fair value of one Tesla Motors (TSLA) share as of 23.05.2016?
1.2.1 SUB-QUESTIONS
In order to answer the problem statement, a thorough strategic and financial analysis will be
accomplished. The following sub-questions will be answered to support findings:
Chapter 2 – Tesla Motors & Automotive Industry
- What business model and strategy does Tesla Motors follow?
- What are the characteristics of the automotive industry and the electric vehicle
segment in particular?
Chapter 3 – Strategic Analysis
- Which macro-economic factors influence Tesla’s risk and future cash flow potential?
- What is the overall attractiveness of the industry and how does it affect Tesla’s
operations?
- What are the core capabilities of the company?
- Does Tesla possess a competitive advantage and is it sustainable?
Chapter 4 – Financial Statement Analysis
- Was there any change in the firm’s accounting policies?
- What is the historical profitability and liquidity risk of the company?
- What are the prospects for future financial performance?
Chapter 5 – Forecasting
- How will the expected market outlook affect Tesla’s key value drivers?
- What is Tesla’s future profitability potential?
Chapter 6 – Valuation
- What is the appropriate discount rate?
- What is the present value of future free cash flows to firm and economic value added?
Chapter 7 – Sensitivity Analysis
- How sensitive is the valuation to changes in the key value drivers?
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1.3 DELIMITATION
The paper is written from an independent analyst’s perspective who has no more – internal –
knowledge than the market and no access to primary data. If internal information is available, a
more refined analysis can be developed. Due to the dynamic nature of Tesla’s external factors,
assumptions are based on information available until 23 May 2016. Therefore, an analysis of Tesla
Motors Inc. conducted after this date might lead to a different result.
1.4 METHODOLOGY AND THEORY OF SCIENCE
Within the methodology section I present the research design of the project. The aim of this chapter
is to discuss how the project is structured in a logical way that allows the reader to see the connections
between the research issues that have been showed in the ‘Problem statement’ section, the
philosophical assumptions underlying the approach of the project, the theories have been used, the
way in which data have been collected and analysed, and the result of this thesis. Therefore, we can
declare that research design is the ‘blueprint’ or the ‘master plan’ of the project. In terms of
Philosophy of Science, the understanding of these connections gives the paradigmatic grounding of
the research which has a strong influence on the methodology of the project. As methodology is the
backbone of the project, I put a great emphasize on finding the right methodological approach thus
the project reflects the work of Gibson Burrell and Garth Morgan who have developed a framework
for conducting research.
According to Gibson Burrell and Garth Morgan, “Social science can usefully be conceived in terms
of four key paradigms based upon different sets of meta-theoretical assumptions about the nature of
social science and the nature of society”. (Burrell and Morgan 1979, p. viii) These four paradigms
are Functionalist paradigm, Interpretive paradigm, Radical Humanist paradigm and Radical
Structuralist paradigm. Each of the paradigms determined by the four sets of philosophical
assumptions related to ontology, epistemology, human nature and methodology, in accordance with
two sets of dimensions. The dimensions of which Burrell and Morgan distinguishes are the
‘Subjective-Objective dimension’ and the ‘Regulation-Radical change dimension’. While the former
focuses on how knowledge about social reality is created, the latter is concerned with the nature of
human society.
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1.4.1 ASSUMPTIONS ABOUT THE NATURE OF SOCIAL SCIENCE
Burrell and Morgan state that “All Social Scientists approach their subject via explicit or implicit
assumptions about the nature of the social world and the way in which it may be investigated.”
(Burrell and Morgan 1979, p. 1) As it was mentioned above, these assumptions are related to:
Ontology: describes the essence of phenomena under investigation.
- Assumptions: Whether the reality to be investigated is external to the individual or the
product of individual consciousness? Whether reality is given out there in the world
or the product of one’s mind?
Epistemology: describes how one understands the world and communicate it as knowledge to
others.
- Assumptions: What forms of knowledge can be obtained, and how can one sort out
what is to be regarded as ’true’ from what is to be regarded as ’false’? Whether
knowledge can be acquired or it has to be personally experienced?
Human nature: describes the relationship between humans and their environment.
- Assumptions: Are humans determined by their environment or do they have a ’free
will’, where man is regarded as the creator of his environment?
All three sets of assumptions directly affect the nature of methodology. On the basis of either
objectivistic or subjectivist approach to social science we should distinguish between different
ontology, epistemology and model of human nature which lead to different methodologies.
Objectivists see the social world as it if were hard, external and objective reality. They examine
relationships and regularities between the elements and search for concepts and universal laws to
explain reality. Subjectivists focus on how individuals create, modify, and interpret the world, and
see things as more relativistic. These two approaches to social science lead to four main socio-
philosophical debates, which will be further discussed below. The following figure represents the
‘Subjective-Objective dimension’ which shows the outcomes of both subjectivist and objectivist
approach to social science.
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Subjective-Objective dimension
The subjectivist approach to
social science
The objectivist approach to
social science
Nominalism Ontology Realism
Anti-positivism Epistemology Positivism
Voluntarism Human nature Determinism
Ideographic Methodology Nomothetic
1.4 .1 .1 SO CIO-PHILOS O PHICAL DEBATE S
The above figure outlines the different ontological, epistemological, human and methodological
standpoints which characterise either subjectivist or objectivist approach to social science. These two
approaches are opposite of each other hence creating socio-philosophical debates related to the four
sets of assumptions. In this section of the methodological chapter these four debates will be reviewed,
first examining the subjective and then the objective approach, in order to find the dimension which
is best suited for the problem.
1.4 .1 .1 .1 THE ON TO LO G I CAL DEB AT E : N OM IN A LIS M -RE ALIS M
Nominalism has the view that “the social world external to individual cognition is made up of nothing
more than names, concepts and labels which are used to structure reality.” (Burrell and Morgan
1979, p. 4) For the nominalists, these labels and names are artificial creations which are used for
describing, making sense of and negotiating the external world. The nominalists assume that the
social world is created by individuals.
According to the realist however, social world is not created by individuals but exists separate from
their perception of it. People are born into and living within a social world which has a reality of its
own. Realism claims that the social world is as real as physical world and ontologically it is prior to
the existence and cognition of any human being. Realism claims that the social world external to
individual cognition is a real world made up of hard, tangible and permanent structures that exists
independent of our labels.
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1.4 .1 .1 .2 THE EP IS TEMO LO G IC A L D EB ATE : AN T I-P OS IT IV ISM -POS IT IV IS M
As it was mentioned above, subjectivist see the social world more relativistic. Thus anti-positivists
have the view that it “can only be understood from the point of view of the individuals who are directly
involved in the activities which are to be studied.” (Burrell and Morgan 1979, p. 5) It means that
human activities can only be comprehended from the inside rather than the outside. This viewpoint
assumes that social world can only be perceived through experience and reject that social science can
create any kind of objective knowledge.
Positivist epistemology, on the other hand, assumes that an ‘observer’ can interpret and forecast what
happens in the social world by searching for patterns and relationships between individuals.
Positivists argue that this ‘observer’ can develop a hypothesis in order to find regularities. This
hypothesis then might be verified by an experimental research programme or falsified and does not
considered to be ‘true’. Nevertheless, every positivist agrees that the growth of knowledge is a
cumulative process.
1 .4 .1 .1 .3 THE HUM AN N ATURE DEB A TE : V O LU N TAR ISM -DE TERM IN ISM
This debate is concerned about the behaviour of individuals related to their environment. Subjectivists
have the voluntarism view which assumes that one’s activity is completely independent from the
environment and he/she has his/her own ‘free will’.
Objectivist presupposes the opposite of voluntarism, which is called determinism. The deterministic
view presumes that individuals’ activity is entirely determined by the situation or the environment
they are located.
1.4 .1 .1 .4 THE METHO DO LO G IC A L DE B ATE : IDE O GR APH IC -N OMO THE T IC THE ORY
The ideographic approach to social science is based upon the view that social science can only be
understood by acquiring first-hand knowledge of the subject under investigation. Thus ideographic
approach put a great emphasis on analysing subjective reports. It is done by observing oneself detailed
background and life history by looking at diaries, biographies and journalistic records. “The
ideographic method stresses the importance of letting one's subject unfold its nature and
characteristics during the process of investigation.”(Burrell and Morgan 1979, p. 6)
With the objective view of social science human activities are assumed to be understandable and
predictable by an ‘observer’. Since this ‘observer’ can make hypotheses, nomothetic methodology
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relies on scientific tests like hypothesis testing and the use of quantitative techniques like surveys,
questionnaires, personality tests and standardised research tools for the analysis of data.
1.4.2 ASSUMPTIONS ABOUT THE NATURE OF SOCIETY
1.4 .2 .1 OR DER-CONFLI C T DEBATE
This debate revolves around the different approaches to sociology which either concerned with the
stabilising effects of social order and equilibrium or the change, conflict and coercion in social
structures. The ‘order theorists’ - like Durkheim, Weber and Pareto - have an integrationist view,
seeing the society as relatively stable and based on consensus, while ‘conflict theorists’ - like Marx -
have a coercion view, meaning that they see the society as constantly changing and disintegrating.
Ralf Dahrendorf further explains these two models of society in his work. According to him, the
Order/Integration theory of society is based on the following assumptions:
Every society is built up by somewhat constant and stable elements.
Every society is a well-combined structure of components.
Every component in a society contributes to its maintenance as a system.
Every functioning society is based on a consensus of values.
He also describes the assumptions which Conflict/Coercion theory of society is based on:
Social change is universal, meaning that the society is continually changing.
There are always disagreements and conflicts within the society.
Every member of a society contributes to its disintegration and change.
Every society is based on the coercion of some of its members by others.
Summarising the above mentioned, the following table presents the characteristics of the two models
of society Dahrendorf distinguishes between. (Burrell and Morgan 1979, p. 13)
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Two theories of society: ‘order’ and ‘conflict’
The ‘order’ or ‘integrationist’ view of
society emphasises:
The ‘conflict’ or ‘coercion’ view of society
emphasises:
Stability Change
Integration Conflict
Functional co-ordination Disintegration
Consensus Coercion
1 .4 .2 .1 .1 CR IT IC ISM O F O RDER -C ON FLIC T DEB ATE
While Dahrendorf assumes that the order and conflict models are completely separated from each
other Cohen argues that they are two sides of the same coin. Cohen supposes that we do not need to
rely exclusively on order or conflict model but theories can include elements of both models.
Dahrendorf acknowledges that the different adjectives can be interpreted different way by different
people. Hence these are not completely accurate in describing the debate and can cause
misinterpretation. Therefore, Burrell and Morgan suggest that the order-conflict debate should be
described by the concepts of ‘regulation’ and ‘radical change’.
1.4 .2 .2 ‘REG ULATIO N’ A ND ‘RA DIC AL CH ANGE ’ DIMEN SIO N
Burrell and Morgan use the term 'sociology of regulation' to refer to theorists - like Durkheim, Weber
and Pareto - who are primarily concerned to explore and provide explanations of the unity and
cohesiveness of society. The central issue of this sociology is to understand why society is maintained
as an entity. In other words, it tries to explain why does society not collapse but remain as a system.
Therefore, “It is a sociology which is essentially concerned with the need for regulation in human
affairs.” (Burrell and Morgan 1979, p. 17)
'Sociology of radical change’, on the other hand, refers to theorists – like Marx – who are concerned
to find explanations for the radical change, structural conflict, modes of domination and structural
contradiction within the society. “It is a sociology which is essentially concerned with man's
emancipation from the structures which limit and stunt his potential for development.” (Burrell and
Morgan 1979, p. 17) In other words, while ‘sociology of regulation’ tries to expound the status quo,
‘sociology of radical change’ concentrates on the deprivation of man and potential changes. In order
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to sum up the above, Burrell and Morgan have made a table which clarifies the differences between
their two sociologies.
The regulation – radical change dimension
The sociology of Regulation is concerned
with:
The sociology of Radical Change is
concerned with:
The status quo Radical change
Social order Structural conflict
Consensus Modes of domination
Social integration and cohesion Contradiction
Solidarity Emancipation
Need satisfaction Deprivation
Actuality Potentiality
1.4 .2 .3 TWO DI MENS ION S : FOU R PA RA DIGM S
The previous two sections of methodology discussed the assumptions about the nature of social
science, using the subjective-objective dimension, and the assumptions about the nature of society,
using regulation-radical change dimension. It was done in order to find the right approach to social
theory. The following two-dimensional map, with the subjective-objective dimension on the
horizontal axis and the regulation-radical change dimension on the vertical axis, shows the possible
combination of approaches to social science, i.e. the four paradigms. (Burrell and Morgan 1979, p.
22) These four paradigms namely are the ‘Radical humanist’, ‘Radical structuralist’, ‘Interpretive’
and ‘Functionalist’ paradigm which will be further discussed below.
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Four paradigms for the analysis of social theory
1.4 .2 .3 .1 THE FUNC T ION A LIS T P AR AD IG M
Functionalist theorists support sociology of regulation from an objectivist point of view. They try to
find explanations of the status quo, social order, consensus, social integration, solidarity, need
satisfaction and actuality. As a result of the objectivist standpoint it approaches social science from a
point of view which tends to be realist, positivist, determinist and nomothetic. Its overall aim is to
provide rational explanations of social affairs which can be measured by science. It is assumed to be
the primary paradigm for organisational study.
1.4 .2 .3 .2 THE IN TERPRE TIV E P AR AD IGM
Theorists who follow the interpretive paradigm also favour sociology of regulation but from a
subjectivist standpoint. It means that these theorists try to explain the status quo, social order,
consensus, social integration, solidarity, need satisfaction and actuality from the individuals’ point of
view. In other words they try to understand the fundamental nature of the society based on their
subjective experiences.
1.4 .2 .3 .3 THE RAD IC AL HUM AN IS T P AR A D IGM
Theorists located within this paradigm advocate sociology of radical change from a subjectivist
viewpoint. It has similarities with the interpretive paradigm in terms of the approach to social science.
Both the interpretive paradigm and radical humanist paradigm view the social world from a
perspective which tends to be nominalist, anti-positivist, voluntarist and ideographic. However,
radical humanists are not concerned with the explanation of stability but the radical change, modes
of domination, emancipation, deprivation and potentiality. The central issue of this paradigm is that
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individuals should tear themselves away from social patterns and realise their full potential. In other
words, this paradigm criticises the status quo by declaring that social constraints limit human
development.
1.4 .2 .3 .4 THE RAD IC AL STRUC TUR A LIS T P AR AD IGM
Just like the previous paradigm, radical structuralist paradigm also supports sociology of radical
change, nevertheless from an objective view. Further disparity that this paradigm argues that radical
change is a fundamental part of the nature of society and inherent structural conflicts generate
constant change through political and economic crises.
1.4.3 THE CHOSEN PARADIGM
This section of methodology is going to explain the chosen approaches to social science and sociology
in order to find the actual approach to social theory. It discusses the four sets of philosophical
assumptions related to ontology, epistemology, human nature and methodology, in accordance with
the ‘Subjective-Objective dimension’. This discussion will tell us whether this project has a subjective
or an objective approach to social science. In other words, it shows the horizontal direction on Burrell
and Morgan’s paradigm model. Moreover, this section reveals the assumptions about the nature of
social science, applying the ‘Regulation-Radical change dimension’. By doing this, we can clearly
see the right direction on the vertical axis on this four paradigm model. After the above discussions
we will see which quadrant of Burrell and Morgan’s matrix suits the best to my approach to social
theory. In short, we can see the actual paradigm that fits the best to this project.
In terms of social science, the objectivist view suits the best to the philosophical assumptions. In the
following, this approach will be explained by the four sets of assumption.
Ontology is concerned with the individual’s view on how reality is created. On the one hand, Tesla
is somewhat creating its own reality by building charging stations and negotiating with government
representatives about government incentives, which represents the subjectivist approach of
nominalism. On the other hand, Tesla’s reality exists irrespectively of the company as the most
important decisions influencing the company’s environment are ultimately in outsiders’ hands.
Realism assumes the social world is not created by individuals but exists separate from their
perception of it. The objective realism of the ontological assumption is therefore seen to be the best
fit for solving the problem.
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Epistemology is concerned with how knowledge is obtained and passed on to others. The aim of this
project is to make an unbiased third-party evaluation of the fair value of one Tesla share. As it was
mentioned above, positivist epistemology assumes that an ‘observer’ – the researchers of this project
– can interpret and forecast the changes within the society. Therefore, the objective positivist
approach is the best to understand the subject of investigation.
Human nature is concerned with the relationship between humans and their environment. As it was
mentioned above, Tesla is somewhat trying to manipulate its environment but it is important to note
that the company does it because it is forced by the current environment. As an example, Tesla would
not build charging stations if they were already available. The deterministic view assumes that one’s
activity is determined by its situation or environment. The objective determinism of human nature
hence best describes the relationship between Tesla Motors and its environment.
The chosen approaches to the above assumptions determine the actual methodological approach as
well. This project mainly relies on quantitative data, which will be further discussed below, in order
to answer the problem statement. These are mostly secondary data, based on quantitative methods,
which reflects the objective nomothetic methodology.
In terms of regulation-radical change dimension, the best-suited approach is sociology of regulation.
Even though Tesla’s stock is characterised by high historical volatility, meaning radical changes in
the price, the aim of this paper is to suggest the fair value of one Tesla share given the company’s
external and internal environments. Sociology of regulation tries to find an explanation for the status
quo so does this paper.
On the basis of the aforementioned, with the objective dimension on the horizontal axis and the
regulation dimension on the vertical axis, ‘Functionalist’ paradigm is argued to be the best
paradigmatic view to solve this problem statement.
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1.4.4 RESEARCH DESIGN
Chapter 1
Problem formulation
Introduction Problem statement Delimitation Methodology
Chapter 2 Tesla Motors & Automotive Industry
Chapter 3
Strategic Analysis
External analysis:
PEST
Industry analysis:
Porter’s five forces
Internal analysis:
Value chain & VRIO SWOT
Chapter 4
Financial Statement Analysis
Accounting policies Reformatting Financial analysis
Forecasting
Chapter 6
Valuation
Discounted Cash Flow model Economic Value Added model
Chapter 7 Sensitivity Analysis
Chapter 8 Conclusion
Chapter 5
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1.4.5 STRATEGIC ANALYSIS
Strategic analysis is performed to get an understanding of the external and internal factors that affect
the company’s cash flow potential and risk. The aim is to identify the non-financial value drivers that
can have an effect on the value creation in the company. Therefore, findings of this section will
influence financial value drivers and serve as foundation for the forecasting of future performance.
The analysis follows a top-down approach that aims at understanding the company’s macro-,
industry-, and company specific factors influencing the cash flow generation and risk.
1.4.5 .1 EXTERN AL A NAL YSI S : PEST-AN ALY SIS
PEST is an acronym for Political, Economic, Social and Technological. PEST-analysis is a strategic
management tool that will be used to help determining how these four external factors affect the
company’s performance in the long-run. It enables the reader to gain a complete overview of the
factors in the macro environment that can have an effect on Tesla Motors.
The PEST analysis, however, has some limitations. First of all, there is a probability of the model not
taking into account all the relevant factors that affect the company’s operations. It is because some
data are hard to gather or not available at the time of analysis. Furthermore, external factors examined
in PEST analysis are dynamic and they can change very fast. This can quickly lead to outdated
assumptions, as the model provides only a static view of the factors, thus making harder to predict
why and how these factors might affect the future of the company.
1.4.5 .2 IND USTR Y A NAL YSI S : PO RTER’S F IVE FO RCES
Following the external analysis I will narrow down the focus of investigation into industry-level.
Porter’s five forces analysis highlights different forces affecting the competition in an industry and
the possibility of earning acceptable returns, i.e. returns equal to or above the cost of capital. The
model investigates the bargaining power of suppliers, bargaining power of buyers, the level of
competitive rivalry, threat of substitutes and threat of new entries. The goal is to determine whether
this is an attractive industry for Tesla Motors to be a part of and what the growth and profit potentials
are.
The Porter’s five forces model also has the same criticism of only generating snapshots. According
to Thurlby (1998), Porter’s model does not take time into consideration, thus providing a static picture
of the industry structure. This requires continuous creation of new models.
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1.4.5 .3 INTERN AL A NAL YSI S : PO RTER’S VALUE CHAI N & VRIO FR AME WO RK
Once we have the broad picture of Tesla’s environment, it is time to examine its internal situation. A
value chain is a group of activities that an organization performs to create value for its customers.
Porter’s value chain will be used to examine Tesla’s activities and see how they are connected. The
purpose is to identify core capabilities of the company by concentrating on organizational strengths
that creates value for customers and provides a competitive advantage. Then the VRIO framework
will be used to summarize the findings of the value chain analysis and determine whether Tesla’s
internal resources and capabilities can provide sustainable competitive advantage.
1.4.5 .4 SWOT A NAL YSI S
SWOT analysis will be the last part of the strategic analysis where key issues will be identified based
on the external, industry and internal analyses. It is only at this point of the analysis that an accurate
assessment can be made of the company’s strategic drivers. It helps determining where the company
stands and what changes are needed to achieve strategic objectives.
Nadine Pahl and Anne Richter, nevertheless, argue that the results of a SWOT analysis are dependent
on the person conducting the analysis, and therefore a subjective view is taken on it. This results that
the findings of the SWOT analysis may vary depending on who the researcher is. They argue that the
conclusion may be inaccurate, if researchers do not have sufficient knowledge of the industry (Pahl
and Richter 2009, p. 28).
1.4.6 F INANCIAL ANALYSIS
Analysis of Tesla’s historical financial performance will be done to determine trends in financial
value drivers. The main focus will be on the company’s operating efficiency, asset use efficiency and
both short-term and long-term liquidity risk.
Findings should be carefully examined as financial ratios are based on historical accounting data. It
is therefore doubtful whether these ratios can paint a correct picture of the company’s future
performance.4
4 Petersen & Plenborg (2012), Financial Statement Analysis, p. 158
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1 .4.7 FORECASTING
Forecasting assumptions will be derived from the assessment of strategic and financial value drives.
These assumptions will serve as foundation for preparing Tesla’s pro forma income statement and
balance sheet. The aim is to determine future operating profitability and how operations are funded.
1.4.8 VALUATION
Valuation approaches are classified into four main groups, namely, Present value approach, Relative
valuation approach or Multiples, Liquidation approach and Contingent claim valuation models.
According to Petersen & Plenborg, Present value approach and Multiples are the most frequently
used valuation models. They also argue that companies in the early stage of their lifecycle are not
directly comparable with those companies later in their lifecycle, even if they are within the same
industry.5 Tesla is still in its introduction stage of its lifecycle that will be further discussed below.
Since Tesla’s competitors operate in a mature industry, Relative valuation approach is not applicable.
Consequently, I use Present value approaches, such as the Discounted Cash Flow approach (DCF)
and the Economic Value Added model (EVA). The DCF approach uses future free cash flow
projections and discounts them by using the company’s weighted average cost of capital (WACC) to
calculate company value. According to the EVA model, the value of a company is determined by the
sum of the initially invested capital and the present value of all future EVAs. Despite the difference
they are theoretically equivalent valuation approaches, thus should have the same results.6
1.4.9 DATA COLLECTION
The research solely relies on publicly available information that is gathered in the form of secondary
data, also known as desk research. Books, annual reports, research reports, surveys, market data and
online articles are used as main sources.
1.4.9 .1 RELIABIL ITY & VALI DITY OF DAT A
Desk research allows to gather data quickly and at low cost as it does not require the researcher to
travel for interviews to gain primary data. The downside of this type of research is that the quality of
data is considered to be lower than it is in the case of primary data collection. It is because not all
sources used can be verified as hundred percent reliable. Another problem with desk research is that
secondary data collected was not primarily made for the purpose of this paper. Interpretation of these
5 Petersen & Plenborg (2012), Financial Statement Analysis, p. 106 6 Petersen & Plenborg (2012), Financial Statement Analysis, pp. 216-220
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data, therefore, can vary from person to person. Thus it is possible that one might come to a different
conclusion by using the same information. In order to maintain high reliability of data, it is necessary
to ensure that information is gathered from credible sources. Reliability is accomplished by using the
work of widely acknowledged scholars like Burrel and Morgan, and relying on trustworthy sources
such as Forbes, Bloomberg, NASDAQ, etc. Validity of information is determined by the extent to
which the research measures what it was planned to measure (Joppe 2000, p.1). As all information
collected helps in answering the research question, data used is assumed to be valid.
CHAPTER 2 – TESLA MOTORS & AUTOMOTIVE INDUSTRY
2.1 TESLA MOTORS
Tesla Motors is an innovative company that designs, develops, manufactures and sells high-
performance completely electric vehicles, sophisticated electric vehicle powertrain components and
stationary energy storage systems. 7 Tesla’s mission is to accelerate the world’s transition to
sustainable transport. It was originally founded in July 2003 by Martin Eberhard and Marc
Tarpenning who wanted to prove that electric cars could be as good as gasoline-powered cars or even
better.8 In October 2008, Elon Musk, who was already a member of the board of directors and by this
time had invested USD 70 million of his own money into Tesla, succeeded as Chief Executive Officer
(CEO) and is holding this position to this day.9
On June 29 2010, the company went public on NASDAQ stock exchange under the symbol “TSLA”,
with an Initial Public Offering (IPO) of USD 17 per share. While total revenues increased from USD
3.19 billion in 2014 to USD 4.04 billion in 2015, its net loss has increased from USD 294 million to
USD 888 million in respective years, leading to a current market cap of USD 31.78 billion.10,11
2.1.1 THREE-STEP MASTER PLAN
Tesla has a three-step master plan for bringing electric vehicles to mass market. The first step is to
start with a high-price/low-volume car, followed by mid-price/mid-volume models, and finally
produce low price vehicles in high volume. The reason for this strategy, according to Elon Musk, is
that “in order to make any technology mass market it takes time, you have got to go through major
7 Tesla Annual Report (2014), p. 4 8 TechCrunch (28.07.2015), “A Brief History Of Tesla” 9 Tesla Motors (23.05.2016), “Board of Directors Elon Musk” 10 Tesla Annual Report (2015), p. 48 11 Reuters (23.05.2016), “Tesla Motors Inc”
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design iterations”, and to raise funds, “people will only give you money if you have shown some prior
success”.12 In other words, initially the company should target the premium segment with a smaller
number of high-performing, more expensive vehicles to gain public awareness and cover some of the
initial high costs of the new technology to be able to support cheaper models in the future for the
mass market.
2.1.2 VEHICLES AND ENERGY STORAGE APPLIC ATIONS
Up till now Tesla has achieved two out of its three-step master plan and it plans to achieve the third
step in late 2017.
2.1.2 .1 TE SLA ROA DSTE R
The company has accomplished the first step by launching the Tesla Roadster in 2008, which was the
first ever mass manufactured electric sports car.13 It was an impressive start for the company, as its
first full-electric car could accelerate from zero to 60 miles per hour in 3.7 seconds with a maximum
speed of 120 miles per hour and 245 miles range on a single charge, thereby painting a rather different
picture of what car buyers had in their mind about electric cars. With its USD 109,000 base price the
Roadster naturally belonged to the luxury category. Approximately 2500 units were sold when the
company stopped production in January 2012.14
2.1.2 .2 M ODEL S AN D M ODEL X
The second step of the master plan was first accomplished by the deliveries of Model S in June 2012,
and later by handing over the keys for the first Model X owners in September 2015.
Model S is a fully-electric, five-adult passenger premium sedan with a starting price of USD 70,000
before incentives, up to 288 miles range and a zero to 60 miles per hour acceleration in as little as 2.8
seconds with the company’s latest “ludicrous mode” upgrade.15 According to Tesla Motors, Model S
is the fastest-accelerating sedan on the road and has become the best-selling electric vehicle in the
United States in the first half of 2015. The Model S has won several awards, including Motor Trend
Car of the Year in 2013, received the highest customer satisfaction score by Consumer Reports for
two years in a row, and earned the highest safety rating in the U.S. by the National Highway Traffic
12 CBS News (04.02.2014), “Elon Musk says Tesla is following his master plan” 13 Motor Authority (11.04.2010), “The World`s Only Electric Sports Car: 2010 Tesla Roadster” 14 Tesla Annual Report (2014), p. 6 15 Tesla Motors (02.10.2015), “Model S”
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Safety Administration (NHTSA).16 So far, Model S is the company’s best-selling model with an
estimated sales of 109,870 by the end of 2015.17
Model X is an electric-powered, all-wheel drive, seven-seat sport utility vehicle (SUV), with a range
of 257 miles on a single-charge and an acceleration of 3.2 seconds from zero to 60 miles per hour in
“ludicrous mode”.18 It is claimed to be the safest SUV ever, according to Elon Musk, due to its
outstanding scores in collision tests compared to its best-performing competitive SUVs, and an
overall five-star rating by the NHTSA. For maximum safety, the model comes standard with active
safety system which includes automatic emergency breaking and side-collision avoidance. Falcon
Wing doors are one of the unique characteristics of this model that is designed to give easy access to
second and third row seats even in such small spaces where traditional SUV doors would fail.19 It
comes with a base price of USD 69,300, although the first signature models, equipped with all extras
available, came with a rather higher price tag of USD 132,000.20
2.1.2 .3 M ODEL 3
The company unveiled its third generation electric vehicle, called Model 3, in March 2016 and starts
production in late 2017. This would be a 20 per cent smaller but considerably cheaper product than
the Model S. Smaller size, however, means smaller battery size and shorter range of approximately
215 miles per charge and a zero to 60 miles per hour acceleration under 6 seconds. Elon Musk,
moreover, ensured that the new model will receive top safety ratings as all of the previous models.
However, it is important to note that the final product could have slightly different parameters.
Different battery sizes will be available to choose from, providing higher range and better
performance. It would likely powered by one of the smaller motors currently used in Model S. This
would mean that Model 3 would utilize many parameters of the previous models, which would lead
to higher cost-efficiency and lower base price. As production of Model 3 would only take place once
the Gigafactory is fully operational, battery packs are assumed to be at least 30 per cent cheaper to
produce than it was for the earlier models, which would mean further drop in the base price of Model
3. The expected starting price of USD 35,000 before government incentives makes this car a lot more
affordable for the mass market than the previous models.21 Strong demand for the cheaper model can
16 Tesla Motors, Second Quarter 2015 Shareholder Letter 17 Calculated by author, using Tesla’s annual reports, as the following: 2650+22477+34291+50452=109870 18 Tesla Motors (02.10.2015), “Model X” 19 Model X Launch Event (29.09.2015) 20 Bloomberg Business (01.10.2015), Tesla Model X Pricing: A Safe $132,000 Bet” 21 TESLARATI (26.05.2015), “What We Know About the Tesla Model 3 and What We Don’t”
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be seen by the surprisingly high number of pre-orders. Within only twenty-four hours, Tesla has
received 180,000 pre-orders and 325,000 pre-orders within the first week. These are extremely high
numbers, considering that the company has only sold approximately 100,000 vehicles until the reveal
of Model 3.22,23 According to Tesla, the number of pre-orders corresponds to USD 14 billion in
implied future sales. This is more than three times higher than the company’s all time maximum
revenue of USD 4 billion in 2015. By delivering Model 3, Tesla would achieve the third step of its
master plan, which is a low-price/high-volume electric vehicle that would most likely improve the
financial position of the company.
2.1.2 .4 ENERG Y STOR A GE APPLIC ATION S
Using existing technologies developed for its vehicle powertrain systems, Tesla has entered the
energy storage market by producing battery systems for both home and commercial use. Tesla
Powerwall is a rechargeable lithium-ion battery with a storage size of 10kWh designed for residential
use. Tesla 100 kWh PowerPack is designed for commercial use that can be grouped together to
provide 10mWh+ for utility scale system. Primary use of these battery systems are backup power,
peak demand reduction, demand response and wholesale electric market services.24 Even though it is
a new market for Tesla, only a small fragment of its income stems from Tesla Energy products. Due
to its negligible effect on the company’s finances, this paper does not analyse the energy storage
market.
2.1.3 H ISTORICAL EVENTS & SHARE PRICE DEVELOPME NT
It has been a long time since an American automobile company went public. Tesla’s IPO was the first
by an American car manufacturer since Ford Motor Co. in 1956.25 TSLA share is characterised by
high degree of volatility. At the time of IPO, one TSLA share cost USD 17 and it has reached an all-
time maximum of USD 286.64 on 20 July 2015, but traded at USD 216.22 on 23 May 2016. It means
that the share price has increased with a Compounded Annual Growth Rate (CAGR) of approximately
76 per cent as of 20 July 2015 and 53 per cent as of 23 May 2016.26 High fluctuation of TSLA share
22 The Wall Street Journal (01.04.2016), “Tesla’s Model 3 Electric Car Gets Requests for 180,000 Vehicles on First Day of Ordering” 23 The Verge (07.04.2016), “Tesla has received 325,000 preorders for the Model 3” 24 Tesla Motors (08.04.2016), “Tesla Energy” 25 MarketWatch (28.06.2010), “Tesla Motors revs up $244 million IPO” 26 (284.64/17)^(1/5)-1=0.76; (216.22/17)^(1/6)-1=0.53
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price over the years was due to, inter alia, the company’s performance, analyst reports, unexpected
events and the CEO’s statements.
Source: Compiled by author/NASDAQ/Business Insider/Motor Trend/CNNMoney/International Business Times
Tesla’s share price was relatively stable for more than two years after the IPO, even though Model S
delivery has already begun in the middle of 2012. In May 2013, the company announced its first, and
so far only, quarterly GAAP-based net profit of USD 11.2 million. Consequently, the share price
skyrocketed from USD 55.79 on May 8th 2013 to USD 193 on October 1st 2013, an almost 2.5 times
jump in as little as five months.27 Nonetheless, stock price had a sharp fall after a few Model S caught
on fire and some analysts had negative reports on Tesla Motors and downgraded its stock.28 In less
than two months, TSLA dropped 37 per cent from USD 193 on October 1st to USD 121.11 on 20th
November. The share price development had a positive turn again when the Model S received the
highest owner-satisfaction according to Consumer Reports.29 It had an astonishing price jump of
nearly 14 per cent from one day to another when Morgan & Stanley doubled its price target for Tesla
27 Tesla Motors, First Quarter 2013 Shareholder Letter 28 CNNMoney (03.10.2013), “Tesla stock continues to fall” 29 Business Insider (21.11.2013), “Tesla's Model S Receives 'The Highest Owner-Satisfaction Score Consumer Reports Has Seen In Years'”
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&Model S fire
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reports
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Record quarterfor production
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estimates
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Annual report2015
Q1 2016 report
Morgan & Stanley
Gigafactory
'Highstock price'
Power Wall
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stock.30 Tesla’s share price, however, hit another rock bottom when the first quarterly report of 2014
showed lower than expected Earnings per Share (EPS).31 TSLA rose to new peaks after Tesla Motors,
Inc. and Panasonic Corporation signed an agreement of constructing a large-scale battery
manufacturing plant in Nevada, called the Gigafactory. The company expects significant reduction
in battery production cost and increase in production volume from the Gigafactory that will
completely powered by renewable energy.32 After signing the agreement, Tesla’s share price was so
high that some people, including the CEO, started to question whether the market is too generous. In
September 2014, Elon Musk said that “I think our stock price is kind of high right now to be totally
honest”.33 This statement coupled with another delay of Model X and weak sales in China affected
the share price negatively and resulted a ten-month low of USD 185.34 Share price started to climb
fast again, following Tesla’s announcement of entering the energy-storage market. In April 2015,
Elon Musk revealed the Tesla Home Battery, called the Power Wall, which would mean a more
diverse portfolio for the company.35 Share price has climbed even further after the announcement of
record quarter production, reaching its all times maximum of 286.64 on 20 July 2015. This was
followed by a continuous decrease in price due to lowered delivery estimates. In the beginning of
2016, some analysts have lowered their price target that led to a price drop of more than 25 per cent
in less than ten days, trading Tesla’s share at half price they did less than seven months earlier.36 Once
investors could see the annual report of 2015, share price has risen close to USD 250 again. In its
latest quarterly report, Tesla has announced the advancement of its 500,000 unit build plan by two
years to 2018. To speed up production, however, would require the company to spend more money
than previously stated.37 As a consequence, Tesla’s share was traded close to USD 210 during the
past few weeks.
2.2 THE AUTOMOTIVE INDUSTRY
The automobile industry is highly competitive and demand is characterized by high volatility. 38 The
market had a remarkable growth during the past decade. It has experienced a sixth straight years of
30 International Business Times (25.02.2014), “Tesla (TSLA) Stock Soars After Morgan Stanley Report: Could Elon Musk's 'Giga Factory' Disrupt Entire Electric Utility Industry?” 31 Autoblog (07.05.2014), “Tesla loses $50 million in Q1, Model X could be delayed until 2015” 32 Tesla Motors (31.07.2014), “Panasonic and Tesla Sign Agreement for the Gigafactory” 33 Forbes (05.09.2014), “Elon Musk: Tesla Stock Price 'Kind Of High Right Now'” 34 Bidness Etc (15.01.2015), “After Weak China Sales, Is Tesla Motors Inc Facing Trouble In Europe?” 35 CNBC (07.05.2015), “Tesla's new bet: A home battery to slash energy costs” 36 Fortune (05.02.2016), “Here's What's Behind Tesla's Long, Slow Stock Slide” 37 Internatonal Business Times (05.05.2016), “Tesla Motors Inc. (TSLA) Shares Fall” 38 Tesla Annual Report (2014), pp. 26-27
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record sales in 2015, indicating that the global recession is now behind the industry. After the financial
crisis, a shift in global sales ratio has occurred. Since 2010, gradually growing emerging markets
accounted for more than half of global light-vehicle sales, with China providing the highest single
market sales.39 Meanwhile, passenger cars remained the core segment, adding up to 74 per cent of
the industry.
Source: Compiled by author / OICA / KPMG
Global sales of passenger cars rose from 45.2 million in 2005 to 66.3 million in 2015, an increase of
46.6 per cent and a CAGR of 3.9 per cent. According to KPMG, there will be 111 million light
vehicle sales by 2020 of which, given the current rate, approximately 82 million would be passenger
cars.40 This would require a CAGR of 4.4 per cent, which is a slightly bullish estimate, given the
slowing sales growth rates that will be further discussed below.41 When using past CAGRs, it is more
likely that the number of new passenger car sales will be between 79 and 80 million units.42
Distribution of sales volumes largely differs across the globe before and after the crisis. In the middle
of the previous decade, the European Union sold the highest number of passenger cars of 15.6 million,
followed by the USA of 7.6 million and China of 3.9 million. During the crisis, sales both in the EU
and in the U.S. have dropped drastically while sales in China have skyrocketed. By 2011, China was
the leading market in terms of passenger car sales with an annual sales of 14.4 million, followed by
Europe of 13.6 million and the USA of 6 million.
39 Standard & Poor’s (2013), “The Global Auto Industry Shifts Its Focus To Overseas and Emerging Markets” 40 KPMG (2015), “KPMG`s Global Automotive Executive Survey”, p. 12 41 CAGR=((111,000,000/66,311,917)^(1/5))-1=4.4% 42 Five year CAGR=3.6%, Ten year CAGR=3.9%; 66,311,917*(1.036)^5=79,066,099; 66,311,917*(1.039)^5=80275964
0
10000000
20000000
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60000000
70000000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Passenger car sales
China European Union USA World
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Source: Compiled by author / OICA
The above column chart shows that China has mostly gained sales volume in proportion to the
European Union, although the EU showed improvements in the last year. In 2015, China was the
largest market, responsible for 32 per cent of global passenger car sales, followed by EU of 22 per
cent and the USA of 11 per cent. As we can see, China clearly benefited more from the market
conditions of the past decade than any other region. It is, therefore, no surprise that Tesla Motors has
entered the market in 2014.43
Source: Compiled by author / OICA
43 Tesla Annual Report (2014), p. 47
9% 11% 12% 14%21% 25% 25% 26% 28% 30% 32%
35% 33% 32% 30%29% 25% 24% 21% 20% 20% 22%
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Sales ratio of passenger car sales by region
China European Union USA Rest of the world
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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Passenger car sales growth
China European Union USA Rest of the world World
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It is important to note that the above mentioned trend is might subject to change. Worldwide
passenger car sales growth has become modest during the past few years. Although China had the
highest growth rates over the past decade, sometimes reaching above 50 per cent increase, it is now
producing slowing growth figures. Meanwhile, the European Union, who suffered the longest from
the crisis, shows such great improvements that it has become Tesla’s fastest growing passenger car
market last year. The U.S. showed some impressive growth recovery between 2009 and 2012, but it
was again suffering from negative growth in 2015. In overall, worldwide passenger car sales indicate
a setback in growth from 12.4 per cent in 2010 to 1.4 per cent in 2015. Moreover, there is a shifting
trend with the European Union becoming an increasingly important car market, while the U.S. and
the rest of the world are losing ground. Although China is the world’s largest car market and still has
above average growth figures, it faces with slowing growth rates in the passenger car segment.
2.2.1 THE ELECTRIC VEHICLE MARKET
The market for electric vehicles (EVs) is currently a small but gradually significant segment of the
automobile industry. Governments from all around the world wish to increase the magnitude of EVs
on the road due to their economic and environmental benefits. On the one side, state regulations
inspire car manufacturers to develop EVs. On the other side, government incentives encourage
customers to buy them.44
2.2.1 .1 ELE CTRI C VEHI CLE SEGMENT S
The electric vehicle market consists of three main segments, namely, Hybrid Electric Vehicles
(HEVs), Plug-in Hybrid or Plug-in Hybrid Electric Vehicles (PHEVs) and Battery Electric Vehicles
(BEVs). Each of the electric vehicle segment has different operating principle:45
HEVs: vehicles that are powered by both an internal combustion engine (ICE) and a battery
pack. The battery is charged with regenerative breaking hence the vehicle can only be
refuelled with petroleum. The 2016 Ford Fusion Hybrid is a fine example of HEVs.46
PHEVs: these vehicles are similar to HEVs as they are powered by both an ICE and a battery
pack, but the battery should be recharged by plugging the vehicle into an external electric
44 Navigant Research (2014), “Electric Vehicle Market Forecasts”, p. 1 45 Emotive (2014), “The Beginners Guide to Electric Vehicles (EV)”, p. 3 46 ford.com/cars/fusion
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source. Therefore, PHEVs need both petroleum and external charging to reach maximum
capacity. A good example of PHEVs is the Chevrolet Volt.47
BEVs: vehicles that are solely powered by battery packs that should be recharged by an
external electric source. While lithium-ion battery provides the longest range for today’s
BEVs, hence probably the most likely choice of EV manufacturers, its higher production price
places lithium-ion battery-equipped EVs to the premium category. Tesla models are prime
examples of BEVs.
2.2.1 .2 ELE CTRI C VEHI CLE M ARKET PROGN OSI S
KPMG’s survey, in which two hundred senior automotive executives from the world’s leading car
manufacturing companies were participated, represents a notable increase of the EV market.48
Source: Compiled by author / KPMG
The column chart shows the percentage share of overall powertrain production volume in respective
years according to the survey. Senior automotive executives assume that EV manufacturing is going
to more than double in proportion from 1.51 per cent of total production in 2011 to 4.57 per cent in
2020.49 Although HEVs give majority of EV sales during this interval, they are slowly losing ground
to PHEVs and BEVs. Whereas more than 90 per cent of the segment is provided by HEVs in 2011,
47 chevrolet.com/volt-electric-car 48 KPMG (2015), “KPMG`s Global Automotive Executive Survey”, p. 18 49 0.12%+1.39%=1.51%; 0.62%+0.99%+2.96%=4.57%
1,39%
2,18% 2,16%2,50% 2,62% 2,76% 2,86% 2,97% 3,00% 2,96%
0,07% 0,10%
0,19%0,36%
0,53%0,68%
0,80% 0,87% 0,99%
0,12%
0,14% 0,18%
0,32%0,38%
0,44%0,49%
0,55% 0,60% 0,62%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Electrified powertrain production forecast
HEV PHEV
BEV
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it is predicted less than 65 per cent in 2020.50 Both PHEVs and BEVs are expected to have higher
growth rate, indicating a market trend in the foreseeable future. Nonetheless, it shall not be ignored
that this survey also suggests gradual slow-down in the growth of EV market. Thought the segment
grew by almost 60 per cent from 2011 to 2012, it is expected to grow by less than 2.5 per cent from
2019 to 2020.51
CHAPTER 3 – STRATEGIC ANALYSIS
3.1 EXTERNAL ANALYSIS: PEST ANALYSIS
PEST analysis helps determining how Political, Economic, Social and Technological factors affect
the activities and performance of Tesla Motors in the long-term. The figure below demonstrates how
these macro factors are related to the firm.
Figure: Macro environmental factors affecting a firm
3.1.1 POLITICAL FACTOR S
Political factors represent governmental acts and legal issues influencing the macro environment of
a firm. Governments, in general, face two alternatives in having a legal impact on a given industry
and its members. They can either force government regulations or provide government incentives.
3.1.1 .1 GOVE RNME NT REGULATIO NS
Governments can choose a more direct approach to affect automotive industry by forcing industry
players to manufacture vehicles that meet the current regulatory requirements in terms of safety, fuel
50 1.39%/1.51%=92.05%; 2.96%/4.57%=64.77% 51 (2.39%-1.51%)/1.51%=58.28%; (4.57%-4.47%)/4.47%=2.24%
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economy and green-house gas (GHG) emission standards. Moreover, the way companies can sell
their vehicles is also regulated by government laws. In this section, I have a special focus on fuel
economy, GHG emission standards and dealership laws, as I see them the most relevant political
factors influencing the macro environment of Tesla Motors.
The following figure depicts the different CO2 passenger car standards around the world by
converting all regulatory programs to be comparable with the European method.
International CO2 passenger car standards
[1] China’s target reflects gasoline vehicles only. The target may be higher after new energy vehicles are considered.
[2] US standards GHG standards set by EPA, which is slightly different from fuel economy standards due to low-GWP refrigerant credits.
[3] Gasoline in Brazil contains 22% of ethanol (E22), all data in the chart have been converted to gasoline (E00) equivalent
Source: The International Council on Clean Transportation
In light of the successful adoption of the first National Program for GHG and fuel economy standards
for model years 2012 through 2016 vehicles, President Obama requested the Environmental
Protection Agency (EPA) and the NHTSA to develop a second phase of the program, with improved
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standards for model years 2017-2025 vehicles. 52 EPA sets national GHG standards under the Clean
Air Act, while NHTSA establishes Corporate Average Fuel Economy (CAFE) standards under the
Energy Policy and Conservation Act. The first phase required new passenger cars to meet an emission
level of 225 grams of carbon dioxide (CO2) per mile in model year 2016, or 37.8 miles per gallon
(mpg). In phase two, standards have been increased for the upcoming years, with an emission level
of 143 grams of CO2 per mile (93g/km) in model year 2025, which is equal to 56.2 mpg.53 This would
mean that, in case of successful adoption of the National Program phase two, new vehicles in 2025
should have only half of the GHG emission level of new vehicles produced in 2010. These are fairly
high level of improvements that, according to EPA, will most likely be achieved through
advancements in internal combustion engines, transmissions, aerodynamics, weight reduction, lower
tire rolling resistance and last but not least through electrification, meaning higher production of
stop/start system, HEVs, PHEVs and BEVs.
The European Parliament and the Council of the European Union accepted the proposal of the
European Commission in regard to reduce CO2 emission from light-duty vehicles by setting emission
performance standards for new passenger cars. In this respect, the European Parliament and the
Council agreed that developed countries in the European Union should strive to achieve 30 per cent
reduction in greenhouse gas emission by 2020 compared to 1990 levels, and the Union itself should
accomplish 20 per cent reduction for the same interval, disregarding developed countries. According
to this, the average CO2 emission for new passenger cars should not exceed 130 g/km from 2015, and
95 g/km from 2020. The European Parliament proposed a target range of 68-78 g/km for 2025 of
which the European Commission should review by 1 January 2017.54 The Commission sees these
targets achievable through improvements in vehicle motor technology and implementation of
innovative technologies aimed at producing more eco-friendly vehicles. Manufacturers whose
average CO2 emission exceed these targets should pay an excess emission premium in each calendar
year. The higher the average CO2 emission level compared to the Commission’s target, the higher
excess emission premium should be paid (see Appendix 1).55
52 United States Environmental Protection Agency (2012), “EPA and NHTSA Set Standards to Reduce Greenhouse
Gases and Improve Fuel Economy for Model Years 2017-2025 Cars and Light Trucks”, p. 10
53 ICCT (2014), “UNITED STATES LIGHT-DUTY VEHICLE FUEL EFFICIENCY STANDARDS” 54 ICCT (02.05.2013), “EU vote on cars CO2: 95 g/km in 2020, 68-78 g/km in 2025” 55 Official Journal of the European Union (2009). REGULATION (EC) No 443/2009 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
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Companies facing with tighter government regulations over time, however, may try to trick the
system to seemingly comply with government standards. Volkswagen’s emission cheating scandal is
a prime example of such an attempt. It was revealed that Volkswagen Group has cheated on emission
tests. It had built a ‘defeat device’ in many of its diesel cars, which activated once the car has been
tested. The German automaker first denied the accusations, claiming that discrepancies between
pollution tests were just technical errors. Only when EPA has threatened to withhold approval for the
company’s 2016 diesel models, Volkswagen admitted the charges. The scandal has affected 11
million vehicles and raised awareness in the whole automotive industry. Volkswagen should fix the
problem in a timely manner or else its vehicles will be recalled by the authorities. It also faces lawsuits
from costumers claiming compensation for the resale value drop of their vehicles.56 The scandal may
paint a negative picture of the diesel car industry in particular, which is one of the main alternatives
of EVs. This can lead to tighter emission control in the future and a shift in consumer demands to
more trustworthy segments of the industry. Consequently, EV segment and Tesla Motors might
benefit from events like this in the future.
The China Automotive Technology and Research Center (CATARC) in collaboration with multiple
agencies of the Chinese government drafted the regulations for China’s first-ever fuel consumption
standards for passenger vehicles in 2004. Phase III of the fuel consumption regulation established a
corporate-average fuel consumption (CAFC) target for new vehicles of 7 L/100 km, equivalent to
CO2 emission of 167 g/km. Phase IV of the regulation has entered into force in 2016 that set a fleet
average target for new vehicles of 5 L/100 km, or 117 g/km by 2020. It is important to mention that
these regulations offer automakers some flexibility to comply. Producers that use off-cycle fuel
saving technologies on their cars, such as start-stop, gear shift indicators, tire pressure monitoring and
efficient A/C systems, can claim up to 0.5 L/100 km fuel consumption credit if all these technologies
are adopted on their cars.57
As it was mentioned above, governments also influence the way companies can distribute their
vehicles. Tesla is currently fighting legal battles to be able to sell its vehicles in its domestic market.
As of 31st December 2015, Tesla was only allowed to open stores and sell directly to customers in
about 20 states. States like Michigan, Connecticut or Texas, however, ban direct retail sales.58 The
aim of restrictions is to prevent manufacturers from undercutting prices and drive dealers out of
56 BBC News (04.11.2015), “Volkswagen: The scandal explained” 57 Transportpolicy.net (22.09.2015), “China: Light-duty: Fuel Consumption” 58 The Pew Charitable Trust (16. 12. 2015), “For Tesla, a Fight to Sell in Some States”
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business, thereby lessening the level of competition. One of Tesla’s biggest challenges, therefore, is
to win the right to sell its vehicles directly to customers. This requires the company to fight multiple
legal battles at the same time that can be money and time consuming.
3.1.1 .2 GOVE RNME NT INCENTI VES
In this section I focus on government incentives provided for the EV segment, due to their relevance
in answering the problem statement. Governments can choose a less-direct approach to influence the
macro environment by providing both supply side and demand side incentives to shift automotive
industry toward greener technologies. On the supply side, incentives help manufacturers conduct
research and development to enter the EV market. On the demand side, governments aimed at driving
down the initial cost and the operating cost of EVs through financial and non-financial incentives to
encourage customers to buy them.
Advanced Technology Vehicles Manufacturing (ATVM) loans support the development of advanced
technology vehicles (ATV) in the United States. The Department of Energy (DOE) has a budget of
USD 25 billion to offer ATVM grants and loans for automobile manufacturers and component
suppliers in the United States to produce qualified advanced technology vehicles or qualifying
components which aimed to achieve improvements in fuel economy performance.59 This supply side
incentive program motivates automotive companies to put more EVs on the roads. Tesla has also
taken loans from the DOE that was fully paid back by May 2013.60
Governments around the world provide financial and non-financial incentives in order to encourage
people to choose more eco-friendly cars. In the United States, EVs are currently eligible for up to
USD 7500 federal income tax credit, based on the battery capacity used to fuel the vehicle. This tax
credit, however, will phase out once a manufacturer produced its 200,000th plug-in electric drive
vehicle. Phase out starts at the beginning of the second calendar quarter after the 200,000-vehicle
mark has reached. At that point, EVs from this specific manufacturer will only receive 50 per cent of
the previous credit amount. From the fourth calendar quarter, the amount of tax credit decreases again
to 25 per cent and it ends from the beginning of the sixth calendar quarter after this production mark
has reached by the company.61 According to estimates, Tesla would produce its 200,000th vehicle by
59 Federal Register (2008). Department of Energy: Advanced Technology Vehicles Manufacturing Incentive Program. Vol. 73 (No. 219), pp. 66721-66725. 60 Tesla Annual Report (2015), p. 31 61 Fueleconomy.gov (24.10.2015), “Federal Tax Credits for Electric Vehicles Purchased in or after 2010”
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2017, after which new Tesla owners would not receive further tax credits unless new settlements have
been reached.62
Today, eighteen out of twenty-eight member states in the European Union provide some sort of
financial incentive for potential electric vehicle owners. Nevertheless, the type and level of these
incentives can vary a lot amongst these countries. In general, these governments offer electric vehicles
exemption from registration tax, annual circulation tax, road tax, company car tax, and in some cases
they even provide grants for owning green cars (see Appendix 2).63
Among the non-EU European countries, Norway offered the highest government incentives for
purchasing and owning EVs. New EV owners did not have to pay purchase tax, which is extremely
high in Norway. In addition, they had an exemption from 25 per cent VAT on purchase. Initially, the
Norwegian Parliament agreed to provide these incentives until 2018 or when 50,000 EV has been
sold. This target has been reached by the middle of 2015, after which government parties had a debate
about the future of these incentives. Finally, they have agreed on maintaining the tax exemptions until
2017 but EV owners have to pay half of the yearly road license fee as of 2018 and the full rate as of
2020. According to newspaper Dagens Næringsliv, however, Tesla models will cost more in Norway
due to its higher initial price than the government-imposed ceiling for the 25 per cent VAT
exemption.64 This is probably one of the reasons for Norway has been bypassed by China in Tesla’s
top selling markets.65
Air pollution is a serious problem in several big cities in China. Chinese policymakers put huge
emphasise on supporting green technology to reduce green-house gas emission, while maintaining
economic growth. National subsidies of RMB 35,000-60,000 (~USD 5,600 – USD 9,500) are
provided for consumers who purchase New Electric Vehicles (NEV) that are produced locally. In
general, all electric vehicles receive nearly twice as much subsidies as HEVs and PHEVs. National
subsidies are offered through 2020 but scaling down each year. Tax exemptions is another way of
encouraging NEV purchase. In September 2014, China’s State Council eliminated the 10 per cent
purchase tax on NEVs manufactured locally, which will proceed through 2017. Furthermore, a
number of local governments offer free licence plates for NEVs. In Shanghai, new Tesla owners can
save an average of RMB 74,000 (~USD 12,000) just on the licence plate. Moreover, several local
62 Tesla Shareholder Letter (Q4 2015), p. 4 63 ACEA (27.03.2015), “Overview of incentives for buying electric vehicles” 64 Newsinenglish.no (07.05.2015), “Electric cars hang on to tax breaks” 65 Forbes (31.17.2014), “Analysis Of Tesla Sales By Geography”
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governments offer their own incentives that can go as high as the national subsidy, resulting a
maximum purchase subsidy of RMB 120,000 (~USD 19,500) when both national and local subsidies
are provided. China’s determination towards greener future, can also be perceived through the
National Government Offices Administration’s declaration that from 2014, at least 30 per cent of all
new government cars should be NEVs. As a result of these government incentives, China’s NEV
sales jumped by 325 per cent in 2014 compared to 2013 sales.66
The following table summarizes the different financial and non-financial government incentives in
Tesla’s main markets.
Table: Government incentives for electric vehicles in Tesla’s main markets
United States China Norway The Netherlands
Financial
ATVM loans;
maximum of $7500
federal income tax
credit
National subsidies:
$5,600-$9,500
Local subsidies up to
$9,500
Free licence plates:
$12,000
Exemption from:
purchase tax,
25% VAT
Exemption from:
registration tax BPM
(private motor vehicle
tax), annual circulation
tax
Non-
financial
Free parking;
access to high-
occupancy vehicle lane
Free parking lot for
EVs with charging
stations; use of public
transport lanes[1]
Parking lots reserved
for EVs;
free charging in public
parking spaces
[1] Local authorities have the right to allow free parking and use of public lanes
Source: Compiled by author / Fuel Economy / The New York Times / The Telegraph / China Business Review
3.1.2 ECONOMIC FACTOR S
3.1.2 .1 ECO NOMI C DE V ELOPMENT
The latest financial crisis had a negative impact on the entire world economy between 2007 and 2009,
although China was less affected than the European Union or the United States. Even though these
economies have recovered from the crisis, GDP growth rates are decreasing in some of Tesla’s key
markets.
66 China Business Review (2015), “Opportunities and Challenges in China’s Electric Vehicle Market”
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Source: Compiled by author / The World Bank / European Commission / Trading Economics
The above line chart shows that China had the highest GPD growth rate in the past decade, which is
why it has become critical for global automakers who tried to offset the flagging sales in Europe after
the crisis. As a result, China has become the world’s biggest auto market in 2009.67 China, however,
faces drop in new-car sales growth due to slowing economic growth and rising concern of air
pollution.68 GDP growth in the USA, Tesla’s domestic market, is also expected to slow down. The
European Union, however, is experiencing a slow but steady increase. In general, there is a moderate
world economic growth prospect of 3.76 percent, with China having the highest growth potentials
within Tesla’s main markets, but moving towards the world average.
3.1.2 .2 CYCLI CAL IN DU STRY
Automobile is a cyclical industry, meaning its overall performance is sensitive to the business cycle.
While non-cyclical industries provide goods consumers need on a daily bases, such as water, food
and electricity, cyclical industries typically produce big ticket items, which represent higher value
goods that have a longer useful lifetime. Automobiles are prime examples of such items. Revenues
for companies that operate within a cyclical industry are generally higher in times of economic
prosperity and lower during economic downturn. It is because consumers are more confident in the
booming period, while saving up and postponing big item purchases during recession. 69 As a result,
67 Business Insider (09.01.2014), “China's Booming Car Market Is Terrific News For Western Automakers” 68 International Business Times (08.28.2015), “China Crisis: Automakers Like Volkswagen, General Motors Brace For Impact As China Car Sales Fall” 69 InvestingAnswers (11.12.2015), “Cyclical Industry”
-5,0%
0,0%
5,0%
10,0%
15,0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2020
Historical & forecasted GDP growth
China European Union USA World
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vehicle sales tend to move with consumer confidence, which is directly related to business cycles and
GDP. The following figure shows the development of world GDP and vehicle sales from 2006
through 2015.
Source: Compiled by author / The World Bank / OICA
As we can see, world GDP and vehicle sales follow a somewhat similar growth pattern. By calculating
the correlation coefficient between the two sets of data, we can determine how sensitive the
automotive industry to business cycles. The closer the result to 1, the higher the correlation, hence
the more sensitive the auto industry to economic performances. The correlation between world GDP
and vehicle sales was 0.72, with the highest correlation in the U.S. of 0.84, followed by the European
Union of 0.56, while China had the lowest correlation of 0.45 (see Appendix 3). According to these
figures, we can see a stronger relation between economic development and vehicles sales in
developed countries while it is less likely the case in emerging economies. GDP growth and vehicles
sales growth, however, do not always have similar pattern. While GDP had a moderate growth,
vehicle sales grew significantly between 2011 and 2012. Due to the financial crisis, people saved up
money and postponed big ticket item purchases. This led to an accumulated demand, which is why
vehicles sales grew at a higher rate, while GDP trended slightly downwards. Nonetheless, an opposite
pattern can be observed since 2012. Although world GDP shows moderate but steady growth,
vehicles sales growth has slowed down. In fact, world vehicle sales had lower growth figures than
total global GDP. The last time this happened, world economy was suffering from the financial crisis.
Therefore, it might be a warning sign of future economic downturn. Nonetheless, if we are to believe
-5,0%
0,0%
5,0%
10,0%
15,0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
World GDP growth & World vehicle sales growth
World GDP growth World vehicle sales growth
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the World Bank’s moderate economic growth forecast, a moderate growth in vehicle sales can be
expected, given the industry’s cyclical nature.
3.1.2 .3 F I NAN CI AL M AR KET COND ITIO NS
Evidences for the United States and Canada propose that the lack of access to credit has also
contributed to the reduced number of car purchases since mid-2008.70 This suggests that better
financial market conditions could provide momentum to vehicle sales. Since the financial crisis has
occurred, central banks dropped their interest rates to historically low levels, in order to keep
financing costs and yields low and boost economy. People’s Bank of China (PBC) has continuously
decreased its interest rate from around 7.5 per cent pre-crisis level to 4.35 per cent in October 2015.
The US Federal Reserve System (Fed) changed its rate from 4.5 per cent in October 2007 to 0.25 per
cent in December 2008. Since December 2015, the Fed rate has increased to 0.5 per cent, indicating
that the U.S. is getting over the crisis. The lowest interest rate amongst Tesla’s main markets is
currently provided by the European Central Bank (ECB). The ECB had a historical interest rate of 4
per cent before the crisis, but it was changed to 0 per cent as of March 2016. The ECB has also cut
the deposit rate facility to minus 0.4 per cent, meaning it is now more costly for banks to hold cash
than lend it out to customers. 71 Improved financial market conditions should have a positive effect
on vehicles sales in the future.
3.1.2 .4 COM MOD ITY P RI CES
3.1 .2 .4 .1 C R U D E O I L
The price of crude oil has significant influence over the automotive industry. Fluctuations in crude
oil prices affect the cost of production, as well as customer demand. If gasoline prices are high,
owning an ICE car can be costly that might encourages people to seek another means of
transportation, and vice versa.
70 OECD Economic Outlook, Vol. 2009 Issue 2, “The automobile industry in and beyond the crisis” 71 Global Rates (07.01.2016), “ECB refi rate - European Central Bank’s interest rate”
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Source: Compiled by author / MacroTrends / World Bank
Crude oil prices were characterized by high volatility over the years. The financial crisis had a
negative effect, causing a steep drop in the value of oil. Crude oil prices, however, have relatively
quickly normalized and reached pre-crisis levels. Over the next few years, prices remained high,
which made more expensive techniques such as deep water drilling and fracking pay off. As a result,
the U.S. has reached its highest production level for decades that weakened domestic demand.
Demand for crude oil has also dropped in China due to economic slowdown. Instead of reducing
global supply, the Organization of Petroleum Exporting Countries (OPEC), which accounts for about
42 per cent of world supply, engaged in a price war to maintain market shares. In addition, Iran
started to export oil after economic sanctions had been lifted due to compliance with nuclear deal.
Weak demand, coupled with increased production led to oversupply. As a result, crude oil prices have
dropped to historically low levels.72
Price of a barrel of oil went as low as USD 26.05 in February 2016, a more than 70 per cent decrease
from the 2014 level. Nonetheless, the World Bank has raised its 2016 forecast for crude oil prices
from USD 37 per barrel to USD 41 a barrel.73 In its latest prognosis, crude oil prices are expected to
reach USD 58.8 by 2020, which is still far from pre-crisis levels. This, however, might be a fairly
72 Bloomberg (02.06.2016), “Oil prices” 73 World Bank. Commodity Markets Outlook; 2015 Q4, 2016 Q1 & Q2
0
20
40
60
80
100
120
Historical & forecasted crude oil prices, $/bbl (nominal)
CAGR = -10,30% CAGR = 9.43%
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modest forecast as a barrel of oil is already priced above USD 44.74 Oil prices have started to rise
again due to production decline in the U.S., Canadian wildfire that required to shut down pipelines,
and political factions in Libya.75
In overall, the price of crude oil is currently low but it is expected to rise during the upcoming years.
Nevertheless, it most likely will not reach pre-crisis levels by the end of the decade. We should bear
in mind that crude oil prices are sensitive to environmental, economic and political factors. Future oil
prices, therefore, largely depend on changes in these factors.
3.1.2 .4 .2 RAW M ATER IA LS
According to Market Realist, about 47 per cent of vehicles’ costs come from raw material, making it
the biggest cost driver in the auto industry.76 Tesla mainly uses aluminium, copper and nickel to
produce its vehicles.77 Although aluminium is more expensive, it is much lighter than steel and has
the same strength. The body and chassis of Tesla’s vehicles, therefore, are mainly made of this
material to improve range.78 Moreover, Tesla uses nickel, cobalt and aluminium in its battery cells.
Fluctuation in the prices of these commodities, therefore, directly affects manufacturing costs.
Source: Compiled by author / MacroTrends / World Bank
74 Investing.com (05.05.2016), “Crude oil historical data” 75 The Week (05.05.2016), “Oil prices boosted by Canadian wildfire and Libyan unrest” 76 Market Realist (05.02.2015), “Raw materials – the biggest cost driver in the auto industry” 77 Tesla Annual Report (2015), p. 10 78 Tesla Annual Report (2015), p.7
0
5000
10000
15000
20000
25000
30000
35000
40000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Historical and forecasted raw material prices, $/mt
Aluminium Copper Nickel
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Prices of raw materials have significantly dropped since the financial crisis. The World Bank’s latest
commodity markets outlook, however, forecasts an increase in the value of these commodities. From
2016 to 2020, prices of copper, aluminium and nickel are expected to rise by 16, 17 and 36 per cent,
respectively. Due to competitive pressure, however, automotive companies can hardly pass cost
increase to customers. Consequently, rising raw material prices might influence Tesla’s profit
margins in the future.
L ITH IU M
There are many possible uses of lithium, which include glass, lubricants and pharmaceuticals. With
the spread of portable technological devices, lithium use in batteries have increased from 26 per cent
in 2009 to 39 per cent in 2015. Global lithium demand is expected to skyrocket with the advent of
electric vehicles that mainly use lithium-ion batteries.79 Goldman Sachs already calls lithium the ‘new
gasoline’, while The Economist considers it ‘the world’s hottest commodity’.80,81
Tesla is using lithium-ion cells in its vehicle powertrain systems and stationary energy storage
products. Changes in the price of lithium, therefore, can affect Tesla’s cost of manufacturing.
Gigafactory is currently under construction to supply enough battery cells for increasing future
demand of Tesla products. According to Elon Musk, the company would need to absorb today’s entire
global lithium ion production to reach full capacity. Due to increasing demand, the average price of
lithium has jumped by 47 per cent in the first quarter of 2016 and expected to further increase in the
future.82 Majority of global lithium production is in the hand of three companies, thereby creating an
oligopolistic environment that can lead to further price pressure.
3.1.3 SOCIAL FACTOR S
Environmental awareness has significantly increased over the past decades. According to researches,
two-thirds of consumers intentionally avoid certain brands due to environmental concerns. Today,
people feel greater responsibility to take action in order to preserve the environment.83
In addition, studies have found that status motives increased desirability of green products, especially
when such products cost more than their non-green counterparts. Choosing a more expensive product
79 Battery University (01.04.2016), “BU-308: Availability of Lithium” 80 Goldman Sachs (2015), “Global Investment Research”, p. 16 81 The Economist (16.01.2016), “An increasingly precious metal” 82 The Wall Street Journal (05.05.2016), “How Tesla Is Shaking Up Metals Markets” 83 Huffpost Business (09.10.2015), “Environmental Concern Empowers the People”
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that is environmental-friendly signals that the person has enough wealth to sacrifice resources to act
prosocial. Prosocial behaviour and resources are associated with an individual’s status in a group.
Choosing a more expensive green car, therefore, can lead to social reputation and good reputation is
more valuable than money (Vladas, 2010).
3.1.4 TECHNOLOGICAL FACTOR S
Today, we live in a rapidly changing environment in terms of technology. Technology advancement
highly formulated the automotive industry over the past few years. Development of electric and
hybrid vehicles, computerized control systems with autopilot functions, as well as automatic parking
systems became available, and more innovations can be expected in the future. Computer aided
design and crash test simulations leads to more variety and improved safety of future vehicles.
Range anxiety and battery costs, however, still limit consumer adoption of electric vehicles. Although
Tesla offers the highest range electric vehicles on the market with charging flexibility, consumers
still fear that they will run out of energy.84 While Tesla is continuously improving the range of its
vehicles, it is also building a network of charging stations to solve range problems that will be further
discussed later. The cost of battery largely determines the cost of the final product.
Source: Compiled by author / Goldman Sachs
Tesla has reached significant battery cost reduction over the years. Even though the company does
not publish exact numbers, it is estimated that its first model had a battery cost close to USD 600 per
kilowatt-hour. Tesla’s current battery cost is somewhere between USD 180 and USD 250 per
84 Tesla Annual Report (2015), p. 4
0
100
200
300
400
500
600
2008: Roadster 2010: Roadster(2nd Gen)
2012: Model S 2017: Gen III 2020: Gigafactory
Battery costs, $/kWh
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kilowatt-hour. With operations in the Gigafactory is about to start in 2017, it is assumed that the new
model will have a battery cost below USD 200 per kilowatt-hour. Once the Gigafactory reaches full
capacity in 2020, battery prices are expected to drop to nearly USD 100 per kilowatt-hour thanks to
higher economies of scale. According to industry experts, once battery costs reach the USD 100 mark,
electric vehicles will be cost-competitive with their gasoline-powered counterparts.85
3.1.5 CONCLUSION OF EXTERNA L ANALYSIS
Future performance of Tesla Motors depends on a number of external factors. Automotive is a
cyclical industry, hence its performance largely depends on future business cycles. A moderate global
economic growth is forecasted, with the highest growth coming from China. Nonetheless, growth in
China is expected to slow down that generates concerns in the automotive industry, as China has the
biggest auto market. Given the industry’s cyclical nature, moderate economic growth will most likely
be followed by a moderate growth in vehicle sales. It is, however, noteworthy that global vehicle
sales growth fell below global GDP growth that can be a warning sign of future economic slowdown.
In order to boost economy, central banks have decreased interest rates and some of them have even
imposed negative deposit rates to encourage banks to lend money. Improved financial market
conditions, i.e. easier access to credit, will probably have a positive effect on vehicle sales.
Governments also play a major role in Tesla’s future performance. Higher government pressure to
improve fuel economy and lower GHG emission pushes automakers to shift towards more eco-
friendly cars. In addition, government incentives encourage both manufacturers and customers to go
green. On the one hand, it is good news for Tesla because demand for EVs rises. On the other hand,
this will increase the level of competition in the EV segment. Although governments around the world
offer incentives for purchasing environmental-friendly vehicles, most of these incentives will phase
out by 2020. Unless further incentives will be provided, the price of green vehicles will increase as
current incentives cease. Moreover, Tesla is required to fight legal battles for the right to sell its
vehicles in its domestic market. Although fighting legal battles is capital and time consuming, it is
necessary for Tesla to be able to fully exploit U.S. potentials. If the company loses in court, it will be
banned from marketing its products, hence winning the right to directly sell to customers is one of
Tesla’s biggest challenges.
85 Clean Technica (05.09.214), “Tesla’s Gigafactory May Hit $100/kWh Holy Grail Of EV Batteries”
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Government efforts seem to pay off, as studies show that environmental awareness has increased over
the years. Customers consciously avoid certain brands due to environmental concerns and choose
green products over non-green products, especially when green products are more expensive. The
explanation is that sacrificing resources for the common good, i.e. protecting the environment, is
associated with prosocial behaviour, which improves social status. Ceasing government incentives,
therefore, might not influence Tesla’s future performance badly. In fact, higher EV prices might
provide higher social status for customers. In general, Tesla will benefit from this green trend in the
future.
By entering the mass-market with the new model, however, Tesla will have a different customer base
that is less motivated by social status and more sensitive to prices. Factors that influence the cost of
final product, therefore, will have greater significance in Tesla’s future success. Such factor is the
future price of commodities. Crude oil price has reached historically low levels due to oversupply
that was caused by lower demand and OPEC’s price war to maintain market share. Although crude
oil price has started to rise again, it is expected to remain below the pre-crisis levels until the end of
the decade. Low crude oil prices mean lower production cost for most companies. Tesla, however,
increasingly rely on renewable energy, thus mainly its suppliers can benefit from cheaper oil prices.
Current low oil prices reduce the competitiveness of EVs compared to ICE cars. Higher future oil
prices, on the other hand, put EV producers in a better competitive position. The price of other
commodities, such as aluminium, copper and nickel, nonetheless, has direct effect on Tesla’s
manufacturing costs. Prices of these commodities are expected to rise that can lead to higher raw
material costs and lower profit margins.
Technological development, however, can lead to advancements in production efficiency that can
offset rise in raw material prices. Tesla has already achieved significant reductions in battery costs
that largely contributes to the final cost of the product. According to forecasts, once the Gigafactory
operates at full capacity, Tesla has a battery price close to 100 per kilowatt-hour, which is the
theoretical level at which EVs are as cost-competitive as ICE cars. In overall, technological
advancements lead to better performing vehicles and improved battery costs that enables Tesla to
better compete in the future.
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3.2 INDUSTRY ANALYSIS: PORTER’S FIVE FORCES ANALYSIS
The attractiveness of an industry is defined by the chance of earning returns that exceed the cost of
capital. Amongst scholars it is agreed that higher level of competition lowers the possibility of
obtaining acceptable returns.86 Porter’s five forces analysis is a useful tool to highlight the different
factors affecting the competition in a given industry, hence painting a better picture of the company’s
earnings potentials. According to Porter, the five forces that shape any industry’s attractiveness are
the following: threat of new entrants, threat of substitutes, bargaining power of suppliers, bargaining
power of customers and the intensity of existing competitive rivalry amongst industry players. The
following figure illustrates how these forces are linked to each.
3.2.1 THREAT OF NEW ENTRANTS
If an industry promises high profitability, more and more company might decide to explore the
opportunity of good earnings. The ultimate aim of new entrants is to gain market share, which
indirectly affects existing companies’ market shares and profitability already operating in the
industry. We can determine the threat of new entrants by looking at the different factors that limit the
ability to enter the industry, also known as the barriers to entry. When analysing these barriers we
should distinguish between the traditional ICE and the emerging EV market.
In general, the automotive industry is characterized by high capital requirements. New entrants should
invest a considerable amount of money in raw materials, production facilities and workforce. The
average capital expenditure (CAPEX) spent by the ten biggest automobile OMEs exceeded USD 6.3
billion in 2014, which is a slight increase from the previous year’s USD 6.1 billion. Tesla Motors’
86 Petersen & Plenborg (2012), Financial Statement Analysis, p. 189
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cash flows from investing activities, which primarily related to CAPEX, were USD 264.2 million,
USD 969.9 million and USD 1630 million in 2013, 2014 and 2015. Although Tesla spends far less
money on CAPEX compared to the biggest industry players, we can clearly see an upward pattern. It
is already clear that high initial investments are needed to be able to start a business within this
industry. By comparing CAPEX to sales ratios, however, we can have an idea of the required level
of income to be reinvested in order to keep a company in business. In this sense Tesla Motors by far
exceeds the well-positioned industry players. It reinvests a lot higher percentage of its sales revenues
than any of the ten biggest automobile OMEs (see Appendix 4 and 5). It is because Tesla is considered
to be a new entrant and has to build up everything from the ground.
Technological complexity is another barrier to entry. It takes a certain level of expertise and thousands
of components to build a car. Companies are not only challenged to find and retain workforce with
the right skills, but to keep up with the latest technological innovations. Innovations are driven by
both competitive and political pressure. New models are required to comply with higher government
standards in terms of safety and green-house gas emission level. In order to keep the prices low and
stay competitive in this capital-intensive environment, manufacturers must be able to achieve
economies of scale. Automobile producers should reach mass production, thereby making cars
affordable for more customers. It is usually hard for companies with limited resources to achieve that.
Companies already operating in the industry have their strong distribution networks. It can be difficult
for new entrants to establish their own distribution channels as there are a limited number of
dealerships available. One solution is to follow Tesla’s example who has its company-owned stores,
thereby cutting out the middle guy and directly selling to end-users. Nevertheless, even this business
model has some challenges, as the company faces lawsuits brought by dealer associations, whose aim
is to prohibit to cut out the middle guy.87
Although companies who start from scratch would face huge challenges when entering the industry,
it is relatively easy for well-established companies to enter the EV segment, in which Tesla is
competing, as they have the required capital and economies of scale. Therefore, we should be careful
when measuring the threat of new entrants. On the one hand, the chance of a new brand entering the
market is considerably low. On the other hand, industry leaders who are facing an increasing pressure
to go green can relatively easily enter the EV segment. BMW, Daimler, Nissan, Fiat, Ford and
Mitsubishi are already producing electric vehicles. In addition, Porsche, Lexus, Audi, Volkswagen
87 Tesla Annual Report (2015), p. 11
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and Volvo are also working on their own electricity powered cars.88 Although currently none of these
manufacturers have models with attributions similar to Tesla, they put increasing pressure on the
Silicon Valley-based company.
I conclude that the threat of new entrants currently range from low to moderate but it will most likely
increase in the long run.
3.2.2 THREAT OF SUBSTITUTES
There are several other forms of transportation available than using a car, such bicycles, motorcycles,
buses, trains and airplanes. Nonetheless, none of these alternatives offers the flexibility and
convenience of a car. Geographical location of potential customers, however, can affect the preferred
means of transportation. In densely populated areas public transportation might perceived as a better
solution, while in rural areas, where this service is less available, people may prefer to own a car.
According to the American Public Transportation Association, public transit use has grown more than
population or highway travel in the U.S. during the last decade, indicating that an increasing rate of
people choose some kind of public transportation.89 As EVs are currently more suitable for short
distance travels, given their relatively short range compared to ICE, public transportation is might
perceived as more of a threat for EVs than as it is for traditional cars. For those who buy an electric
car for its price efficiency, public transportation is a potential substitute. However, Tesla’s customers
represent the premium segment who choose the vehicle for its superior features, hence they are less
motivated by cheaper transit.
When measuring the threat of substitutes of EVs, we should also consider ICE vehicles, hybrids and
plug-in hybrids as viable alternatives. As these types of vehicles offer higher range than solely electric
powered cars, they are more of a threat to EVs than any other types of transportation. In terms of
environmental-friendliness, however, none of them are as effective as a zero emission electric vehicle,
which is why they might not serve as substitutes for those who make their purchase due to
environmental awareness. Considering that new technologies are developed every day, however, we
can expect a slight rise in the threat of substitutes.
88 Tesla Annual Report (2015), p. 12 89 2015 Public Transportation Fact Book (2015), p. 11
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I conclude that the threat of substitutes in traditional automotive sector is low, while it is moderate
in the EV segment. As new technologies are developed daily, a slight increase in substitute threat can
be expected.
3.2.3 BARGAINING POWER OF SUPPLIERS
As it was mentioned above, automobiles require thousands of different parts. It was not uncommon
amongst automakers to have thousands of suppliers for these components. Nonetheless, everything
has changed when the latest financial crisis hit the automotive industry and world motor vehicle
production has fallen in 2008 and 2009 (see Appendix 6). Original equipment manufacturers’
(OEMs), such as Ford Motors, respond for shrinking demand was to reduce the number of suppliers
to cut production cost.90 As a result, significance of the remaining suppliers have increased, which
put them in a better bargaining position. During the financial crisis, struggling key industry suppliers
were not only less willing to reduce prices but insisted to increase margins to be able to manage high
fixed cost and continue operation. Ford Motors, for instance, had to fulfil its key suppliers’ claims to
ensure uninterrupted production.91
Since automobile companies use a smaller number of suppliers than before, they are more reliant on
these suppliers. The figure below depicts that the proportion of suppliers’ value addition in
automobile production has increased from 56 per cent in 1985 to more than 80 per cent in 2015. It
suggests that OEMs are turning from manufacturers to more of assemblers, as most of the vehicle
parts are produced by suppliers. OEMs are more focused on what they do best, i.e. vehicle design,
marketing and distribution.92
90 Bloomberg (21.10.2013), “Ford Plans to Reduce Number of Suppliers by 40%” 91 Ford Annual Report (2015), p. 14 92 Bain & Company (1999), “The dawn of the mega-supplier”, p. 5
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Source: Compiled by author / Statista
More concentrated supplier base, coupled with higher value addition leads to the formation of mega-
suppliers. Of the world’s 100 largest global OEM parts suppliers, the top twenty accounted for more
than half of total global OEM automotive part sales revenues in 2014.93 Ford, who acquires about 80
percent of its parts from the 100 biggest suppliers and about 60 percent from the top 65, is a great
example of this trend.94 As fewer but bigger companies continue to supply automakers, the balance
of power slowly shifts from OEMs to suppliers.
Moreover, the majority of lithium production is controlled by only three companies. This creates an
oligopolistic situation that put lithium suppliers in a better bargaining position.
From suppliers’ perspective, however, automakers represent powerful customers. The automotive
industry is considered to be an oligopoly, meaning only a few big company serves the market needs,
hence only a few company buys up all the automotive parts. As there is a limited number of customer,
i.e. automakers, they are in a position to influence supplier margin to a certain extent.
While Tesla uses multiple sources for some of its components, many of them are still purchased from
a single supplier.95 This creates a monopolistic situation for single-source suppliers that provides
them higher bargaining power.
I conclude that the bargaining power of suppliers is moderate but rising.
93 Automotive News (2015), “Top Suppliers” 94 Bloomberg (21.10.2013), “Ford Plans to Reduce Number of Suppliers by 40%” 95 Tesla Annual Report (2015), p. 9
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1985 1990 1995 2000 2005 2010 2015
Proportion of Supplier Value Addition in Automobile Production
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3.2.4 BARGAINING POWER OF CUSTOMERS
While other automotive companies use the traditional distribution channels, relying on dealerships to
market their products, Tesla sells directly to customers through a network of company-owned stores.96
The relevance of this type of distribution model is that Tesla sells to individuals who have little
influence over the price of that one or two cars they are about to buy, while companies using the
traditional franchised distribution model should deal with dealerships who buy a higher number of
cars, hence they have higher buying power than individuals.
Even though individual buyers can hardly negotiation prices, they can easily alter their purchase
because of the wide range of brands available on the market and the low switching cost associated
with choosing from these brands. Due to government regulations and intensifying competition,
manufacturers are continually challenged to introduce higher quality products with lower prices.
These products start to offer similar features, as more and more components are sourced from the
same mega-suppliers. As future models are becoming increasingly similar, price plays a more
important buying factor. Price sensitive customers may switch to another model, if it offers the same
specifications at a lower price. Customers in the premium segment, however, are less price-sensitive,
as they are more driven by the perception that certain brands offer superior features. As a result,
OEMs put a lot of effort to achieve higher brand recognition, which in return would weaken the
bargaining power of customers. According to Advertising Age, automotive industry will spend over
USD 44 billion on advertising in 2016, which is the highest amount amongst all industries.97 Although
Tesla operates in the premium segment, it has mostly relied on media coverage and word of mouth
advertising.98 This strategy had worked so well that customers have already stood in line to put the
USD 1000 deposit down for Model 3 before even seeing it or knowing its final price.99 While the
lower price is most certainly a positive attribution of the new model, it seems that Tesla fans are so
fascinated by the brand that they do not even try to negotiate on price. Nonetheless, as Tesla moves
from the premium segment to mass market, price sensitivity of customers will most likely rise.
I conclude that the bargaining power of customers is currently low but probably rises as Tesla enters
the mass market.
96 Tesla Annual Report (2015), p. 7 97 Advertising Age (11.06.2015), “Global Ad Spending Will Be Up an Average 4.2% Next Year” 98 Tesla Annual Report (2015), p. 8 99 International Business Times (31.03.2016), “Tesla Model 3 launch”
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3.2.5 INTENSITY OF EXISTING RIVALRY
According to Tesla, it competes both with traditional internal combustion automobiles and alternative
fuel vehicles, principally electricity-powered models.100 Therefore, we should analyse both segments
when determining the level of rivalry. There are a number of factors influencing the level of
competition in a given industry. As a result of globalization, competition is no longer limited to
domestic markets but automakers should compete with each other on a global scale. The number of
competing firms have increased but high exit barriers prevent existing companies to leave the
industry. Since there is a little chance that the number of car manufacturers declines, the rate of
existing rivalry is unlikely to decay either.
The power of the five forces typically varies with the stages of the industry life cycle. Introduction
phase is characterized by high innovation costs, low profit and few players. Growth phase experiences
growth in sales and profit margin while the level of competition and buying power is still low.101 I
consider the EV segment to currently be in its introduction stage as different models and the required
infrastructure are both under development. Nevertheless, automakers have already invested a lot of
money in the new technology. With government subsidies and rising environmental concerns,
popularity of green cars is likely to rise. Thus, I assume that the EV segment reaches its growth phase
in the not too distant future. According to KPMG’s report, less than one in twenty vehicles produced
will be equipped with electrified powertrains by 2020. At first it does not seem much, but it is a big
leap when considering that five years ago this rate was less than one in sixty cars.102 The traditional
ICE segment, however, has reached its maturity stage, in which companies face with average industry
growth, more powerful buyers due to lower switching cost, and lower margins as a result of higher
competition for market share. Intense rivalry in the traditional segment and government regulations
encourage automakers to enter the alternative fuel market. Consequently, I expect increased
competition in this segment as well in the long run.
We can quantify the intensity of existing rivalry by calculating the market concentration ratio. It
indicates the size of firms in relation to their industry and the level of competition among them. There
are a number of ways to calculate this ratio but the most commonly accepted measure is the
Herfindahl-Hirschman Index (HHI). The HHI is calculated by squaring the market share of each firm
competing in the market and then summing the resulting numbers. The HHI index was approximately
100 Tesla Annual Report (2015), p. 12 101 Johnson, G. et al. (2011), Exploring Strategy,9th edition, p. 65 102 KPMG (2015), “KPMG`s Global Automotive Executive Survey”, p. 18
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644 and 704 in 2009 and 2014 (see Appendix 7). According to the U.S. Department of Justice, this
classifies the market as concentrated.103
Although higher HHI in 2014 compared to 2009 indicates decrease in competition, most of the biggest
auto manufacturer are more powerful than before, as they have gained market share from the rest of
the competing firms. The figure below compares passenger car production in 2009 and 2014.
Source: Compiled by author / OICA
By analysing these two pie charts, we can see that OEMs’ market shares have rearranged during the
years. Although the composition of the top ten automotive producers remaind the same, their order
has changed. Volkswagen, Toyota, Hyundai, Honda and Nissan have all gained market share, but the
rest of the companies in the peer group lost market presence. The share of ‘Other’ manufacturers has
also declined. While the top five passenger car manufacturer provided less than 47,5 percent of global
production in 2009, they supplied more than half of total production in 2014.
I conclude that the intensity of existing rivalry is high in the traditional ICE segment. It is currently
between low and moderate in the EV segment but most likely intensifies in the future.
3.2.6 COMPERATIVE INDUSTRY STRUCTURE ANALYSIS
Given the fact that industry life cycle affects the power of five forces, it is required to make industry
structure analyis dynamic. It can be done by comparing the five forces over time in a radar chart that
provides a more refined summery of this chapter. The figure below illustrates the power of each of
the five forces over time.
103 The United States Department of Justice (19.08.2010), “Horizontal Merger Guidelines”
Toyota; 12,04%
Volkswagen; 11,56%
G.M.; 9,79%
Hyundai; 8,27%
Honda; 5,84%
Ford; 5,78%PSA; 5,42%
Nissan; 4,66%
Suzuki; 4,12%
Renault; 4,00%
Other; 28,52%
PASSENGER CAR PRODUCTION 2009
Volkswagen; 13,55%
Toyota; 12,19%
Hyundai; 10,59%
G.M.; 9,22%Honda; 6,21%
Nissan; 5,94%
Ford; 4,48%
Suzuki; 3,53%
PSA; 3,50%
Renault; 3,33%
Other; 27,46%
PASSENGER CAR PRODUCTION 2014
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Source: Compiled by author (see Appendix 8)
I quantified the different levels of power to make a graphic illustration of the five forces possible. I
ranked each of the forces from one to three, one refering to high level of power and three meaning
low power. The higher the power of a force the closer its value to the centre. Accordingly, the total
area enclosed by the line is smaller when the foreces are high and bigger when they are low. The
larger the enclosed area, the more attractive is the industry and the greater is the profit potential.
The large enclosed area in Time 0 suggests that it is an attractive industry to invest in now. The early
stage of the industry life cyle in the EV segment, however, requires us to look further. Based on the
above analysis, I predict some increase in substitute threat due to continuous technological
advancement within the industry. Supplier power might enhance with the stregthening of mega-
suppliers. Buyer power will most likely rise after Tesla enters the mass market, where it has to deal
with more price sensitive customers. Increasing environmental pressure encourages existing
automakers to go green. As a result, entry threat is expected to heighten. If more OEM enters the
alternative fuel segment, intensity of existing rivalry probably goes up. In overall, the smaller
enclosed area in Time + 5 indicates less attractive market conditions than it is in Time 0. These values,
however, are used for illustration purposes only.
3.3 INTERNAL ANALYSIS: VALUE CHAIN ANALYSIS & VRIO
The ultimate goal of any organization is to create value for which customers are willing to pay. Value
creation occurs when the benefits of products and services being produced are higher than the cost of
Rivalry
Substitute threat
Buyer powerSupplier power
Entry threat
Comperative Industry Structure Analysis
Time 0
Time + 5
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production. Companies that create the most value usually outperform others.104 It is therefore vital to
realise which activities the company undertakes are relevant in creating value and which ones are not.
In 1985, Michael Porter introduced the concept of value chain. It is a series of interdependent
activities that add value to a product or service during each step of production. According to Porter,
every business conducts primary and support activities that fall into nine generic categories as shown
below. 105
Source: Compiled by author
3.3.1 SUPPORT ACTIVITIES
Support activities supply the required infrastructure that makes primary activities possible. In the
above diagram, the dotted lines show that each support activity can play a role in each primary
activity. If well-managed, therefore, support activities can help to improve efficiency of primary
activities.
3.3.1 .1 F I RM INF RAST R UCTU RE
Tesla has adopted a flat organizational structure that carries many advantages.106 It is cost efficient
because fewer manager layers means less salary-related expenses. Tesla hires less employees, hence
104 Kim, S. et al. (2006), Competing Values Leadership, p. 21 105 Harvard Business Review (1985), “How Information Gives You Competitive Advantage” 106 Tesla Motors (28.04.2016), “Careers”
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it can afford better pay. Even though Tesla is a small player in the automotive industry, it offers higher
salaries for its engineers than its giant competitors (see Appendix 9). Thereby, it ensures that the best
minds are working for the company.
Smaller management team leads to faster decision making because fewer people need to be consulted
about a decision. It allows clear communication, as information is less likely to be distorted between
the executive and the staff. Less supervision is required, thus, managers can focus on reaching the
company’s objectives instead of spending time on monitoring.
Besides having an organizational structure that boosts productivity and creativity, Tesla also has Elon
Musk. He has the required expertise, leadership and management skills to build a company that is
able to achieve Tesla’s objectives.
3.3.1 .2 HUM AN RESO UR CE M ANAGEMENT
Tesla is committed to hiring and developing top talent from across the world for any given
discipline.107 Finding employees with the right skills is not an easy task, which is why the company
puts a lot of effort in retaining them. Tesla not only offers high salaries, but it has adopted the 2010
Equity Incentive Plan that provides for the granting of stock options, restricted stock units (RSU) and
stock purchase rights to employees.108 Thus, Tesla aligns employee interests with company goals.
The number of people employed by the company has more than doubled from 5,859 in 2013 to 13,058
in 2015.109 Tesla, therefore, decided to outsource its human resource related tasks to be able to keep
up with growing demand and manage global expansion.110 Outsourcing helps the company focus its
attention on its core business, which is developing and producing electric-powered vehicles. By
relying on an external partner, who understands the local labour laws, Tesla can comply with
employer obligations and provide competitive benefits to employ the most talented workforce in each
country it is represented, while preserving its company culture.
3.3.1 .3 TE CHN OLOGY DEVELOPMENT
Given the fact that the EV segment is still in its infancy, most companies are still inexperienced with
new technologies. Tesla, being a ground-breaking company in the EV market, develops and utilizes
107 Tesla Motors (28.04.2016), “Careers” 108 Tesla Annual Report (2015), p. 66 109 Tesla Annual Report (2013 & 2015), pp. 22, 12 110 Radius (28.04.2016), “Tesla Motors: Achieving Excellence and Innovation Overseas”
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state-of-the-art technologies.111 Employing the latest technologies helps Tesla creating products that
no one has ever seen before, thereby staying ahead of its competitors. Tesla equips and continuously
improves all of its models with autopilot system. It includes auto-steering, traffic aware cruise control,
lane changing, automated parking, driver warning systems and automated braking functions.112 It
provides convenient ride with increased safety, hence reducing the chance of future accidents. This
technology is so promising that other automakers, such as BMW, are also working on their own
autonomous electric vehicles.113 The on-board system, furthermore, allows Tesla to diagnose and
solve several problems without ever seeing the vehicle.114 This makes after-sales service a lot cheaper
and faster.
Having the latest technologies requires an extensive amount of investments in research and
development. Even though Tesla earns only a fragment of its biggest competitors’ sales revenues, it
reinvests a lot higher percentage of its earnings on research and development (R&D). While the R&D
to Sales ratio ranged between four to five per cent for the majority of top automotive OEMs, it has
increased to more than nineteen per cent for Tesla Motors (see Appendix 10). Tesla’s high R&D rates
do not fit in the auto industry, which is why there is an active debate on whether Tesla qualifies as an
auto company or a tech company.115 In general, companies spend on R&D because they want to
develop new products or processes that lead to future growth. Following this argument, we can
conclude that companies that spend the highest rate of its earnings on R&D will experience the highest
future growth.
Tesla protects its intellectual property rights by using patents. This would prevent competitors with
strong financial backgrounds to copy Tesla’s products. Nevertheless, Tesla has announced a patent
policy in which it irrevocably promised that it will not initiate lawsuit against any party for violating
its patents for long as such party is acting in good faith. On the one hand, the company does this to
remain faithful to its mission, which is accelerating the advent of sustainable transport. On the other
hand, it hopes that the technology platform will more rapidly evolve after sharing its patents with the
world, from which Tesla itself can benefit as well.116
111 Tesla Annual Report (2015), p. 5 112 Tesla Annual Report (2015), p. 7 113 Computerworld (16.03.2016), “BMW: Our future is electric and autonomous cars” 114 Tesla Annual Report (2015), p. 8 115 The Motley Fool (11.04.2016), “The Most Compelling Argument for How Tesla Motors Is a Tech Company” 116 Tesla Motors (12.06.2014), “All Our Patent Are Belong To You”
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3.3.1 .4 PRO CU REMENT
Tesla has more than 350 suppliers worldwide who provide over 3,000 parts to build a Tesla model.
In order to prevent lag in production, Tesla has developed close relationship with its key suppliers.
Moreover, it has established a partnership with Panasonic who would invest in production equipment
that will be used in the Gigafactory to supply Tesla with battery cells.117 This cooperation is essential
to set up the Gigafactory, which will increase manufacturing capacity and make Model 3 production
possible.
3.3.2 PRIMARY ACTIVITIES
Primary activities are concerned with the creation of a product or service, its marketing and delivery
to customers, and its maintenance and servicing after sale. That is why, primary activities are directly
related to value creation. Describing Tesla’s primary activities, therefore, helps determining its core
competences.
3.3.2 .1 INBOU ND LO GIS TICS
Since I am using only publicly available data, it is difficult to determine how efficient Tesla is in
handling inputs. However, we know that Tesla maintains a good relationship with its key suppliers.
This is necessary, in order to have a disruption-free production. Another way of securing smooth
production is to produce the most important components in-house. Tesla has the required in-house
capabilities to design and engineer electric vehicles and electric vehicle components and systems. In
addition, the company carries only a low level of inventory in its galleries.118 Keeping inventory level
at minimum helps the company save space and money by using the funds, otherwise spent on
maintenance, for other uses. Reduced inventory cost allows more competitive pricing hence higher
profit margins.
3.3.2 .2 OPER ATION S
As it was mentioned above, Tesla designs and produces its most important parts in-house. It
manufactures various aluminium components at its facility in Lathrop, California. But the final
assembly takes place at the Tesla Factory, in Fremont, California. Tesla has achieved high level of
vertical integration here. Some areas of the factory have been designed to serve multiple products,
117 Tesla Annual Report (2015), p. 9 118 Tesla Annual Report (2015), p. 7
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hence providing high level of flexibility. It allows faster production, while maintaining Tesla’s high
quality standards.
The company has a third manufacturing facility in Tilburg, Netherlands. It manufactures, quality
checks and distributes products to customers in all markets outside of the United States. The facility
in Tilburg plays an important role in administration, and customer service in non-US markets. This
provides better corporate oversight that leads to more efficient globalization.119
Additionally, Tesla is building its own battery manufacturing facility, the Tesla Gigafactory, outside
of Reno, Nevada. It will bring battery material, cell and battery pack production under one roof. The
company expects to begin cell production in 2017 and reach full capacity by 2020, when it is projected
to manufacture more lithium ion batteries annually than the total world output in 2013. Using high
level of integration and economies of scale, Tesla expects to reduce the cost of battery packs by more
than 30 per cent.120 This is vital in order to be able to bring Model 3 to mass market.
Moreover, Tesla considers to set up a manufacturing facility with a local partner in China in order to
avoid high import duties and have access to more EV incentives that are mostly offered for locally
produced vehicles. If Tesla can establish this partnership, it will be able to better compete in its second
largest market.121
Tesla has core competences in computer aided design and crash test simulations that is expected to
reduce product development time for new models. These core competences have probably helped
Tesla earning the highest safety rates by the NHTSA. Moreover, Tesla has expertise in lightweight
materials that is essential for building long-range vehicles.122
3.3.2 .3 OUTBOU ND LOGI STICS
All vehicles produced for the US market are manufactured and distributed by the Tesla Factory, while
products for the rest of the world are supported by the Tilburg facility. The facility in the Netherlands
has strategic positioning and plays an important role in reducing order lead time in Europe. Finalizing
a partnership in China would further reduce lead time in the world’s biggest auto market and
contribute to faster delivery. Due to lack of internal sources, it is difficult to determine how efficient
119 Tesla Annual Report (2015), p. 9 120 Tesla Motors (02.05.2016), “Tesla Gigafactory” 121 Electrek (27.03.2016), “Tesla is reportedly considering a factory location in Suzhou” 122 Tesla Annual Report (2015), p.7
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Tesla is in delivering vehicles to customers after placing their orders. Nonetheless, those who order
the new model can expect long delivery time that might alter their purchase.123
3.3.2 .4 M ARKETING & SALES
According to Tesla, it spends a relatively low amount of money on traditional advertising. Instead, it
mostly relies on word of mouth and media coverage to drive its sales.124 Tesla Roadster and Model
S have appeared in popular movies and series such as Suits, Iron Man or Fifty Shades of Grey.125 In
these movies, Tesla owners represented forward looking and open minded individuals who like
premium, state-of-the-art vehicles that possesses a “coolness-factor”. This kind of media coverage
has a powerful impact on the popularity and fashionable image of Tesla products.
As it was mentioned in the five forces analysis, Tesla sells its vehicles directly to customers using a
network of company-owned stores. Tesla uses highly visible, premium outlets to reach its vendee. As
the vast majority of Tesla’s vehicles is customized, these galleries carry very limited inventory that
used only to introduce products to potential buyers. Tesla offers customers to place their order through
using the company’s online platform, where the vehicle can be tailored to the needs of the client.
From value creation perspective, Tesla creates value by controlling the entire buying experience,
thereby differentiating itself from competitors who use dealerships to sell their products. Forward
integration helps Tesla to further strengthen its brand and better control costs of inventory.
3.3.2 .5 SER VI CES
The company puts great emphasis on after-sales service. It had 118 company-owned service centres
operational by the end of 2015 and is planning to add more in several markets worldwide. These
service centres enables technicians to work closely with engineers and research and development
teams that leads to faster problem solving. In certain areas for additional charge, customers can also
choose the service of Tesla Ranger mobile technicians that does not require a vehicle lift.126
The company is building a network of fast charging stations, called the Tesla Supercharger, in North
America, Europe and Asia. Tesla provides this service to eliminate the inherent range problem of
123 Bankrate (05.04.2016), “Tesla buyers have long wait for Model 3” 124 Tesla Annual Report (2015), p. 8 125 IMCDB (02.05.2016), “Tesla Roadster in movies and TV series” 126 Tesla Annual Report (2015), p. 8
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using an electric vehicle. Supercharging stations are strategically placed along well-travelled
highways to allow long-distance travel for Tesla users.127
3.3.3 VRIO
In this section, VRIO model is used to summarize the findings of value chain analysis and provide
groundings for the following SWOT analysis. The framework, developed by Barney J.B., is used to
analyse a firm’s internal resources and capabilities to determine whether they can be a source of
sustained competitive advantage. VRIO is an acronym that stands for four questions:
Does the resource or capability add value to the firm? Is it Valuable?
Is the control of the resource or capability in a hand of a few? Is it Rare?
Is it difficult or costly to Imitate?
Is the firm Organized to exploit the resource or capability?
According to the VRIO framework, resources or capabilities that meet all four requirements can
provide sustained competitive advantage for the company.
Resource/Capability Valuable Rare Difficult to imitate Exploited by the
organization
Competitive implications
Long delivery time No Competitive disadvantage
Vertical integration /
In-house production
Yes Yes Not in the long-run Temporary competitive
advantage
Company-owned stores Yes Yes Not in the long-run Temporary competitive
advantage
Company-owned service
centres
Yes Yes Not in the long-run Temporary competitive
advantage
State-of-the-art
technology
Yes Yes Not anymore in the
long-run
Temporary competitive
advantage
Gigafactory Yes Yes Yes No Unexploited competitive
advantage
Computer aided design
& crash test simulation
Yes Yes Yes Yes Sustained competitive
advantage
Expertise in lightweight
materials
Yes Yes Yes Yes Sustained competitive
advantage
Supercharging Yes Yes Yes Yes Sustained competitive a.
Elon Musk Yes Yes Yes Yes Sustained competitive a.
127 Tesla Annual Report (2015), p. 7
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3.4 SWOT ANALYSIS
External analysis coupled with an industry analysis helps overseeing the macro and meso-level
environment of an organisation, thus determining its opportunities and threats. Internal analyses leads
to a better understanding of a firm’s micro environment, by analysing its key resources and
competences. It helps defining the company’s strengths and weaknesses and thereby its competitive
advantages relative to its peers. The main difference between external and internal aspects is that
internal factors can be influenced by the organisation, while external factors are out of its control.
The company can, therefore, use its strengths or opportunities in order to minimise its weaknesses
and threats. In overall, the SWOT model is used to summarize the Strengths, Weaknesses,
Opportunities and Threats likely to impact the firm’s ability to achieve its objectives. It provides an
overall picture of the company’s strategic positioning and helps deciding what changes to make.
Internal factors
Strengths
Outsourcing
Vertical integration
Production flexibility
Gigafactory
Employing top talent
Company structure that supports fast decision making &
innovation
State-of-the-art technology
Company-owned distribution network
Great after-sales services
Elon Musk
Weaknesses
Short operating history
Dependence on suppliers
Lack of lithium-ion batteries
Long delivery time
Low financial resources
External factors
Opportunities
Global economic growth
New market segment
Improved financial market conditions
Government regulations & incentives
Emission cheating scandal
Higher environmental awareness
Increasing crude oil price
Technological advancement
Albemarle Corporation
Manufacturing facility in China
Threats
Slowing Chinese economic growth
Forecasting errors
Ceasing government incentives
Increasing commodity prices
Higher supplier power
Dealership lawsuits
Bad media coverage
New entrants in the EV market
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3.4.1 STRENGTHS
There are several advantages that can position Tesla Motors in front of its competitors and contribute
to accomplish its goals. Outsourcing less relevant activities helps to minimize costs and enhance
efficiency by focusing resources on primary activities and value creation. Vertical integration, on the
other hand, allows Tesla to manufacture its most relevant components in-house, thereby ensuring
disruption-free production and high quality standards. Production flexibility enables Tesla to quickly
respond to changes in demand. Gigafactory will lead to reduction in battery costs through economies
of scale that will improve the competitiveness of future Tesla models.
Hiring top talent and allowing different departments to easily interact with each other generates an
innovative environment that leads to faster problem-solving and significant know-how creation. Flat
organization structure further facilitates communication that speeds up decision making and allows
quicker respond to external factors.
Expertise in fully electric vehicles, being in the forefront of autonomous driving, offering free over-
the-air software updates and installing a filtration system, which is so efficient that passengers can
even survive a military bio attack by sitting in the car, are such characteristics of the company that
differentiates it from other automakers. 128 Using state-of-the-art technologies enables Tesla to
develop and manufacture award-winning vehicles, thereby proving Tesla’s superiority over its
competitors.129
Company-owned distribution network ensure the same buying experience in every Tesla store that
further strengthen the brand. In addition, Tesla can make more profit per unit, while offering lower
prices for customers, by cutting out the middle man who would have charged extra money for its
services. Forward integration, therefore, allows higher margins and more competitive pricing.
Tesla knows that electric vehicles only gain popularity once the required infrastructure is available.
That is why, Tesla is building and expanding its own supercharging network that offers the world’s
fastest charging stations. 130 This unique after-sales service relieves range-anxiety and provides
competitive advantage for Tesla Motors. Company-owned service centres and mobile technicians
ensure that Tesla customers will have a fully functional vehicle after purchase, which further increases
trust in the brand. Tesla also found that opening a service centre can increase demand, which is why
128 Tesla Motors (02.05.2016), “Putting the Tesla HEPA Filter and Bioweapon Defense Mode to the Test” 129 Evannex (03.01.2016), “Tesla Model X wins top awards and honors” 130 Tesla Motors (04.05.2016), “Supercharger”
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the company complemented its store strategy with service centres. 131 Supercharging network,
coupled with company-owned service centres and mobile technicians accelerate the widespread
adoption of Tesla vehicles.
Elon Musk represents key competitive advantage that no competitor can duplicate. Besides having
the required skills, knowledge, vision and will power to make Tesla great, Musk has earned the
confidence of investors. He has already built billion dollar businesses, such as PayPal and SpaceX.
His current net worth is USD 13.5 billion, suggesting that he knows what he is doing.132
3.4.2 WEAKNESSES
Tesla has a short operating history in a highly complex industry. Consequently, it has limited
experience in designing, manufacturing and selling its products, which is why the company have
sometimes experienced unexpected delays that can also occur in the future. These delays mainly
caused by the company’s dependence on its suppliers, the majority of which are single-source
suppliers. If a supplier cannot deliver on a timely manner, Tesla will not be able to finish its vehicles
in time.
While Tesla Factory has a theoretical annual production capacity of 500,000 vehicles, it has utilized
only one fifth of it so far. Although the company has announced to reach its 500,000 total unit build
plan two years earlier than previously expected, the lack of adequate number of lithium-ion batteries
might hinder this plan.133 Tesla is already building its Gigafactory but it is expected to reach full
capacity only by 2020. Consequently, Tesla might have problems to satisfy increased demand for the
upcoming model. There is already an extremely high number of pre-orders for Model 3, but Musk
expects this number to climb up to half a million by the end of 2016.134 Considering the lack of
lithium-ion batteries, production capacity might not be able to rise fast enough to satisfy increased
demand. As a consequence, delivery time might rise up to years for those who place their orders
today. Potential customers who already reserved the new model might withdraw from the purchase,
if they have to wait for too long to receive their vehicles.135
131 Tesla Annual Report (2015), p.7 132 Forbes (04.05.2016), “Elon Musk” 133 Tesla Q1 2016 Shareholder Letter (04.05.2016), p. 1 134 The Verge (21.04.2016), “Tesla has received almost 400,000 preorders for the Model 3” 135 Fortune (01.04.2016), “Get Ready For a Long Wait Before Getting Your Tesla Model 3”
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Moreover, Tesla has less financial resources than well-established automobile manufacturers. It is
therefore more exposed to changes in the market that can adversely affect the company’s operating
results.136
3.4.3 OPPORTUNITIES
Moderate global economic growth is expected that most likely leads to moderate growth in global
vehicle sales, given the cyclical nature of the automotive industry, from which Tesla Motors can
benefit as well. While automotive is a mature industry, the electric vehicle segment is still at early
stages of the industry life cycle. It is currently in its introduction stage and the growth stage is yet to
come. Focusing solely on the EV segment, therefore, can provide great potentials for Tesla.
Improved financial market conditions provide easier access to credit that can boost economy and
vehicle sales in the future. Government regulations and incentives encourage both manufacturers and
customers to go green and choose environmental friendly vehicles, such as zero-emission Tesla
models. Some giant automotive companies have tried to cheat on emission tests that might leads to
tighter government control. In addition, some customer might lose faith in cheating companies
because the resale value of their vehicles have dropped immediately due to the scandal. Thus, Tesla
can gain customers by providing a more trustworthy brand. Studies prove that customers are more
environmentally conscious, and higher prices actually increases the desire for environmental-friendly
products. Tesla, therefore, may not have to worry about the price of its final products as long as the
hype for green products continuous.
Increasing crude oil price is good news for Tesla, because the higher the price of oil the more cost-
competitive electric vehicles become. It is particularly true for the U.S. market where people use
bigger cars for longer distances. Continuous technological advancement within the industry leads to
better performing and lower cost EVs that further increase their competitiveness.
In order to meet future demand, the company needs a stable supply of lithium. Albemarle Corporation
(ALB), located in Silver Peak, currently sells lithium to Panasonic, Tesla’s main battery supplier.
With the Gigafactory, however, Tesla aimed at producing its own batteries in the future that would
require a lithium supplier. It seems that the Gigafactory has been strategically positioned. It is only
four hour drive from Tesla Factory and three and half hour drive from Silver Peak. 137 Therefore, ALB
136 Tesla Annual Report (2015), p. 18 137 Nanalyze (19.08.2015), “The Likely Provider of Lithium for Tesla’s Gigafactory”
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would be a logical choice of lithium supplier for Tesla’s Gigafactory. By building a good relationship
with ALB, Tesla could secure stable supply of lithium for its future production.
Moreover, Tesla plays with the idea of setting up a manufacturing facility in China with a help of a
local partner. By doing so, the company would be able to avoid high import duties and entitled to
receive government incentives that mainly offered for locally produced vehicles. Consequently, Tesla
would have a better competitive position in the Asian market.
3.4.4 THREATS
While a moderate global economic growth is forecasted, GDP growth in China is expected to
gradually slow down. Slowing Chinese economic growth can negatively affect the entire automotive
industry as it has the world’s biggest auto market. There is also a chance that forecasts are bullish on
the prospects of future economic growth. Global vehicle sales growth was lower than world GDP
growth, which can be a sign of future economic slowdown.
Although governments provide incentives for electric vehicle owners, most of them will cease by the
end of the decade. Consequently, the price of EVs will go up, which mostly affect the more price-
sensitive customer base in the mass market, where Tesla is planning to enter with its new, lower-
priced model. Increasing commodity prices, such as aluminium, copper and nickel, can also cause
problems in the new market segment, where Tesla is less able to pass increase in raw material costs
to customers. With increasing demand, the price of lithium is also likely to rise in the future. The
majority of lithium is produced by only three companies that puts them in a strong bargaining
position. With the formation of mega suppliers that contribute over 80 per cent of value addition in
automobile production, bargaining power of suppliers is expected to further strengthen. This can lead
to higher production costs and lower profit margins.
Tesla is currently required to fight multiple legal battles for the right of selling its products directly
to customers in the United States. Losing in court would mean that Tesla has no access to its most
important market. Winning these court cases, therefore, is one of Tesla’s biggest challenges.
Moreover, any unexpected negative event, such as battery fires, can lead to exaggerated media
coverage that can harm Tesla’s reputation. Nonetheless, the truth behind these news are usually far
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from reality. Even though, there were only three Model S fires in which nobody got injured, Tesla
received more media attention than all 250,000+ gasoline fires combined in the respective year.138
Finally, Tesla is facing with increasing competitive pressure, as well-established automakers are
pushed to go green. These companies have the required resources and economies of scale to easily
enter the EV market.
CHAPTER 4 – FINANCIAL STATEMENT ANALYSIS
4.1 ANALYSIS OF ACCOUNTING POLICIES
International accounting standard 8 (IAS 8) defines accounting policies as “the specific principles,
bases, conventions, rules and practices applied by an entity in preparing and presenting financial
statements.“139 Reported financial data, therefore, is based on the firm’s chosen accounting policies
that may change over time. Changes in accounting policies can happen for two reasons:
Voluntary changes: management makes changes so financial statements can better describe
the firm’s performance and financial position.
Mandatory changes: new accounting standards have been introduced that should be adopted.
Changes in accounting policies might affect the company’s reported performance that influences
future growth potentials. Before carrying out a financial analysis, therefore, it is important to
determine changes in accounting policies and if necessary adjust reported financial data to eliminate
noise in the time-series analysis (see Appendix 11).
4.1.1 CHANGES IN REVENUE AND COST ALLOCATION
Revenues and costs from sales of pre-owned Tesla vehicles, sales of electric powertrain components
and systems to other manufacturers used to be recognised in ‘Automotive’. As of 2015, however,
these items are recognised in ‘Services and other’. 140 As a result, revenues and costs related to
‘Automotive’ have decreased, while revenues and costs related to ‘Services and other’ have increased.
It is important to note that the sum of ‘Automotive’ and ‘Service and other’ revenues and costs
remained the same. Changes in revenue and cost allocation, therefore, does not influence the
profitability of the company.
138 Tesla Motors (18.11.2013), “The Mission of Tesla” 139 European Commission (16.09.2009), “International Accounting Standard 8” 140 Tesla Annual Report (2014 & 2015), p. 49 & 38
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Although Tesla adjusted this change to previous years in its 2015 report, it only provides adjustments
until 2013. This means that data before 2013 is not adjusted to changes in revenue and cost allocation.
As Tesla does not provide separated revenue and cost information related to these items, it is not
possible to make adjustments by the author. This can create some noises in the time-series analysis.
4.1.2 CHANGES IN BALANCE SHEET ITEMS
Over the years, Tesla has made some changes in its balance sheet items. In some cases, it has only
changed the name of the balance sheet item. In other cases, it has integrated more balance sheet items
into one. The following balance sheet changes have been occurred over the investigated period:
‘Short term marketable securities’ and ‘Restricted cash’ ‘Restricted cash and marketable
securities’
‘Capital lease obligations’ and ‘Convertible senior notes’ ‘Long term debt and capital
leases’
‘Reservation payments’ ‘Customer deposits’
I have adjusted all of these balance sheet items over the investigated period to make them comparable.
Although the name and allocation of these items have changed, these changes had no effect on the
overall balance of assets and liabilities. ‘Prepaid expenses and other current assets’ and ‘Other long-
term liabilities’, however, both decreased that had an adverse effect on the balance sheet. Tesla does
not enclose any information related to these changes but states that it uses estimates and assumptions
in its financial statements preparations that can affect the reported amounts of assets and liabilities. It
also states that actual results could differ from these estimates.141 I assume that changes in these two
balance sheet items were caused by adjustments of estimates to actual results. Nevertheless, if latest
management estimates differ from actual numbers, the company’s performance can be either
overestimated or underestimated.
4.2 REFORMULATION OF THE INCOME STATEMENT AND BALANCE SHEET
Companies are made of operating, investing and financing activities. Operating activities are related
to the core business, hence these are what make the company unique and difficult to imitate, whereas
financing activities are only needed to provide sufficient funds to run the business. In other words,
operating activities are the primary driving forces behind value creation, thus it is important to
141 Tesla Annual Report (2015), p. 52
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separate them from financing activities when analysing the company.142 Tesla’s financial statements
do not make clear distinctions between operating items and financing items, therefore classification
of these items based on the author’s point of view.
4.2.1 ANALYTICAL INCOME STA TEMENT
Operating earnings show a company’s profit from its core business regardless of how it has been
financed. Investors, therefore, usually look at operating earnings as key performance measures. There
are three main options to measure operating earnings:
Earnings before interest, tax, depreciation and amortisation (EBITDA) = Total operating
revenues minus Total operating expenses
Earnings before interest and tax (EBIT) = EBITDA minus Depreciation and amortisation
Net operating profit after tax (NOPAT) = EBIT minus Tax on ordinary activities
By subtracting ‘Net interest expenses’ from NOPAT we get the company’s ‘Net earnings’. It is
important to note that interest-bearing expenses are tax-deductible. Since income statements do not
distinguish between tax on operations and tax on financial items, it is required to divide income tax
expenses into tax on operations and tax on financing to determine tax shield. Determining special
items is also relevant because they are not necessarily recurring, hence they cannot be forecasted.
Gains and losses on foreign currency transactions are recorded in ‘Other income (expenses), net’.143
As these gains and losses are impossible to be predicted, ‘Other income (expenses), net’ is classified
as a special item and separated from operating and financing items (see Appendix 12).
4.2.2 ANALYTICAL BALANCE SH EET
When reformatting financial statements, it is necessary to match items in the analytical balance sheet
with the related items in the analytical income statement. The purpose of separating operating items
from financing items in the analytical balance sheet is to determine ‘Net operating assets’ or ‘Invested
capital’ and how it is financed, i.e. the level of equity and net interest bearing debt (NIBD). Invested
capital, can either be calculated as the sum of operating assets minus operating liabilities, or the sum
of equity and NIBD. I have examined each balance sheet item to determine whether they belong to
operations or financing and had the following conclusion (see Appendix 12):
142 Petersen & Plenborg (2012), Financial Statement Analysis, p. 68 143 Tesla Annual Report (2015), pp. 55, 58
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Operating assets and liabilities Financing activities
‘Accounts receivable’
‘Inventory’
‘Accounts payable’
‘Accrued liabilities’
‘Deferred revenue’
‘Resale value guarantee’
‘Customer deposits’
‘Operating lease vehicles, net’
‘Property, plant and equipment, net’
‘Other assets’
‘Other long-term liabilities’
‘Cash and cash equivalents’
‘Restricted cash and marketable
securities’
‘Long-term debt and capital leases’
‘Common stock warrant liability’
Some items, such as ‘Restricted cash’ and ‘Resale value guarantee’, are both short-term and long-
term. In order to match items properly, both short-term and long-term parts were categorized as either
operating or financing activities. Tesla offers resale value guarantees to customers who finance their
purchase through one of Tesla’s commercial banking partners. Under this program, customers have
the option of selling their vehicle back to the company during the guarantee period for a pre-
determined resale value. Although Tesla receives full payment at the time of delivery, it is required
to account these transactions as operating leases.144 As these activities are part of Tesla’s main
business, ‘Operating lease vehicles’ and ‘Resale value guarantee’ are considered as operating items.
‘Cash and cash equivalents’ and ‘Restricted cash and marketable securities’ are comprised primarily
of money market funds, commercial papers and corporate debts that are not part of Tesla’s core
business, hence categorized as financing activities.145
4.3 FINANCIAL ANALYSIS
The aim of reformatting was to prepare financial statements for analytical purposes. In this section,
the company’s historical financial performance will be analysed, using the reformatted financial
statements. According to Petersen & Plenborg, this is required because “historical profitability is an
important element in defining the future expectations for a company”.146 The ultimate goal of the
144 Tesla Annual Report (2015), p. 53 145 Tesla Annual Report (2015), p. 55 146 Petersen & Plenborg (2012), Financial Statement Analysis, p. 93
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financial analysis is to determine trends in financial value drivers. In general, return on equity (ROE)
gives an overall picture of a company’s ability to create value for its shareholders, hence it is closely
watched by investors. The problem with simply relying on ROE when determining a company’s
attractiveness is that it fails to explain which factors drive value creation. Decomposition of ROE by
using the DuPont model, therefore, provides a much better understanding of the company’s financial
performance.147 As a result, the main focus of the financial analysis will be on the following areas
(see Appendix 13):
Operating efficiency
Asset use efficiency
Liquidity risk: short-term & long-term
4.3.1 OPERATING EFFICIENCY
There are many ways of calculating operating efficiency or profitability. In my analysis, I mainly
focus on ‘Gross margin’ and ‘Net profit margin’. ‘Gross margin’ shows ‘Gross profit’ as a percentage
of ‘Total revenues’. ‘Gross profit’ is the amount of money left after ‘Total cost of revenues’ have
been subtracted from ‘Total revenues’. Except for one year, Tesla has managed to have high ‘Gross
margin’ over the past five years thanks to selling vehicles in the premium market segment. In 2012,
this margin dropped partly because of higher automotive costs related to the introduction of Model
S. The company also experienced a slightly lower margin of 23 per cent in 2015 compared to the
previous year of 28 per cent. This was mainly caused by the start of Model X production and a higher
number of lower-priced vehicle sales. The company expects to increase the margin in 2016 due to
improving manufacturing efficiency.148
‘Net income’ is determined by deducting all expenses, including interest and tax costs from its ‘Total
revenue’. ‘Net profit margin’ is a ratio that measures how much income is kept in the company as
compared to the ‘Total revenue’. Simply put, it tells how much out of every dollar of sales a company
actually keeps in earnings. Tesla does not excel in this sense as it has only performed negative values
historically, due to high ‘Research and development’ (R&D) and ‘Selling, general and
administrative’ (SG&A) costs. High initial R&D expenses were caused by the development of
electric vehicles and powertrains, while SG&A costs were mainly related to the company-owned
distribution system. Although Tesla has managed to reduce negative ‘Net profit margin’ from minus
147 Petersen & Plenborg (2012), Financial Statement Analysis, p. 134 148 Tesla Annual Report (2015), p. 33
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125 per cent in 2011 to minus 9 per cent in 2014, the margin has dropped to minus 22 per cent in
2015 mainly due to lower ‘Gross margin’, which was explained above.
4.3.2 ASSET USE EFFICIENCY
The ‘Asset turnover ratio’ (ATR) is a measure of a company’s ability to use its assets to generate
revenue. It shows how well the managers used assets to generate sales. It is calculated through
dividing ‘Total revenue’ by ‘Total asset’. In general, the higher the ratio the more revenue generated
per dollar of assets, thus the more efficiently the company is in using its assets. Nonetheless, this ratio
varies between industries, hence it can only be compared between businesses in the same sector.
Tesla’s ATR varied between 0.47 and 1.29 over the investigated period. According to People’s United
Bank, automotive manufacturing companies tend to have lower than 1 ATR.149 ATR in the auto
manufacturing industry varied between 0.77 and 1.48 over the past five years.150 Consequently, Tesla
had average results in 2013 and 2014, but underperformed in 2011, 2012 and 2015. Below industry
standard results might require restructuring the company in order to improve efficiency.
The ‘Inventory turnover ratio’ (ITR) is a useful tool for evaluating how efficient management is at
managing company inventory. It calculates the number of times a company’s inventory is sold or
turned over a year. Higher ratio indicates that more sales have been generated, given a certain amount
of inventory. ‘Days sales of inventory’ (DSI) is an alternative way of evaluating inventory
management. It puts ITR into daily context by taking the inverse of ITR and multiplying it by 365.
In other words, it shows how rapidly the company sells its inventory. Tesla had a DSI of 237.15 in
2012, meaning it took the company more than 237 days to deliver its products to customers. As a
consequence, the company generated less revenue that led to a lower ‘Gross margin’ in the respective
year. Tesla has managed to lower DSI, but it is still relatively high and requires further improvements.
In its first quarter 2016 shareholder letter, Tesla confirmed that it is working on improved working
capital management and inventory control.151
4.3.3 L IQUIDITY RISK
As it was mentioned in section 4.2, financing activities are required to supply adequate capital for
operations. It generally means that without liquidity a firm will not be able to pay its invoices or
implement profitable investments. Moreover, in extreme situations the lack of liquidity can lead to
149 People’s United Bank (21.05.2016), “Total Assets Turnover” 150 CSI Market (21.05.2016), “Auto & Truck Manufacturers Industry” 151 Tesla Q1 2016 Shareholder Letter (04.05.2016), p. 2
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bankruptcy. Therefore, it is crucial to analyse a company’s short-term and long-term liquidity risk
when determining its financial performance and future profitability.
4.3.3 .1 SH ORT -TERM L I QUID ITY R ISK
Short-term liquidity risk reveals the company’s ability to satisfy its short-term obligations, i.e. usually
payments due within 12 months. ‘Current ratio’ or ‘Working capital ratio’ considers ‘Current assets’
relative to ‘Current liabilities’. This ratio, however, can be misleading if a firm’s current assets are
heavily weighted in favour of inventories, because inventories can be difficult to liquidate in short-
term. Low ‘Inventory turnover ratio’ is an indication of less accurate ‘Current ratio’.
It is a good idea to find the ‘Quick ratio’, which is a more conservative indicator of the short-term
liquidity risk, as it includes only the most liquid current assets by excluding the impact of inventory.
It is equal to (‘Current assets’ minus ‘Inventory’) divided by ‘Current liabilities’. Nonetheless, both
‘Current ratio’ and ‘Quick ratio’ attempt to answer the same questions:
What is the likelihood that current assets cover current liabilities in the event of liquidation?
In general, the larger the ratio, the greater the likelihood that the sale of current assets is able to cover
short-term obligations. However, ratios can only be compared between companies within the same
industry. Tesla’s ‘Current ratio’ ranged between 0.97 and 1.95, while its ‘Quick ratio’ varied between
0.48 and 1.69 over the past five years. Since Tesla is both manufacturing and selling its vehicles, it is
not 100 per cent comparable with other auto manufacturers, or retailers. Auto retailers’ had a ‘Current
ratio’ between 1.17 and 1.72, and a ‘Quick ratio’ between 0.14 and 0.26 over the investigated
period.152 Auto manufacturers had somewhat higher numbers of 1.54 and 2.43, and 0.41 and 0.63 for
these ratios in respective years.153 It means that Tesla has over performed auto retailers in 2011 and
2013, in terms of ‘Current ratio’, but only had average results compared to auto manufacturers. Last
year, nevertheless, the ratio dropped to 0.99, which is an indication of slightly higher short-term
liquidity risk. When comparing Tesla’s ‘Quick ratio’ to auto retailers or auto manufacturers, however,
we find that the company had better results than the industry. It is important to note that Tesla had
significantly lower ‘Quick ratio’ compared to its ‘Current ratio’ in 2012 and 2015, which was a result
of higher portion of inventory in current assets. Lower ‘Inventory turnover ratio’ in respective years
also supports this conclusion.
152 CSI Market (21.05.2016), “Retail sector” 153 CSI Market (21.05.2016), “Auto & Truck Manufacturers Industry”
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Although these ratios are useful to calculate, comparing them with industry averages can be
misleading. The reason is that automotive is a mature industry, while Tesla is still in its early stage
of its lifecycle, which is characterised by high investments and low or no earnings. The ‘Cash burn
rate’ (CBR) is typically used on companies with negative earnings, hence an effective measure of
Tesla’s short-term liquidity risk. It estimates how long a company is able to continue its operations
assuming its current performance and no further cash contribution from shareholders or creditors.
Tesla had extremely high CBRs of 177.10 and 138.95 in 2013 and 2014 that were coupled with high
‘Current ratio’ and ‘Quick ratio’. Although the company had a lower CBR of 23.78 in 2015, it was
8.44 higher than the CBR of 15.34 in 2011. To understand the significance of this difference, we
should compare the rest of the ratios in the respective years. Both ‘Current ratio’ and ‘Quick ratio’
were higher in 2011 than in 2015, indicating a lower short-term liquidity risk in 2011 than in 2015.
Nonetheless, the CBR showed that Tesla could have continued its operations for more than 8 months
longer in 2015 than in 2011 without any further cash contribution. Consequently, the CBR proved to
be a better measure for short-term liquidity risk in these years.
4.3.3 .2 LONG-TER M LIQ UID ITY R ISK
There are a variety of ratios that measure long-term liquidity risk that refers to a company’s ability to
satisfy its long-term obligations. The ‘Debt-to-Equity ratio’, also known as ‘Financial leverage,’
shows the proportion of NIBD to equity. Tesla had negative values in 2011 and 2013 because of
negative NIBD. It means that the company had more cash and cash equivalents than financial debt,
hence it was “cash positive”. It is usually a good sign but it can also reflect poor capital allocation, as
the excess cash was not used for value creation. Tesla has increased its ‘Financial leverage’ to 1.26
in 2015, which was still below the industry average of 2.57.154 While higher ‘Financial leverage’
means higher long-term liquidity risk, increasing the leverage to a certain level is favourable because
debt-financing is cheaper than equity-financing, as interest on debt it tax-deductible. Thus, the
adequate level of ‘Financial leverage’ can support growth.
The ‘Solvency ratio’ measures the rate of equity to invested capital, i.e. equity plus NIBD. A lower
ratio means that a lower part of invested capital is financed through equity and a higher part is
financed by debt. Thus, the lower a company’s ‘Solvency ratio’, the higher the chance that it will
default on its debt obligations. The recommended value of this ratio for automobile factories is above
154 CSI Market (21.05.2016), “Auto & Truck Manufacturers Industry”
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0.5.155 Tesla historically had high ‘Solvency ratio’, which has decreased due to increase in ‘Financial
leverage’. Although it increases long-term liquidity risk, it was argued that a certain level of
‘Financial leverage’ can boost growth. The ‘Equity multiplier’ computes the ratio of total assets to
stockholders’ equity. Companies finance the purchase of assets either through debt or equity.
Consequently, a higher ‘Equity multiplier’ indicates that a larger portion assets was financed by debt,
which means higher long-term liquidity risk. The multiplier, therefore, is a variation of ‘Financial
leverage’. Calculating the ‘Equity multiplier’ enables us to decompose ROE through the following
equation: ROE = Net profit margin * Asset turnover rate * Equity multiplier.
In overall, Tesla used to have low short-term liquidity risk and moderate long-term liquidity risk.
Nevertheless, last year’s results show that short-term liquidity risk has increased to moderate level
but the company would be able to continue its operations without any further cash contribution for
almost two years assuming its current performance. Long-term liquidity risk has also risen but it is
not necessarily a bad sign, as higher ‘Financial leverage’ can boost company growth through cheaper
financing. However, Tesla should find the adequate level of financial leverage, as too high leverage
can lead to failure in future payments.
Last but not least, it is important to note that all of these financial ratios are based on historical
accounting data and therefore are backward looking. As a consequence, while examining historical
financial data is important, it might be a good idea to put more weight on strategic value drivers when
determining future company performance.
CHAPTER 5 – FORECASTING
The previous chapter has focused on accounting data and the measurement of Tesla’s historical
profitability, growth and risk. In this chapter the focus of analysis changes from a historical view to
a forward-looking view by developing the company’s pro forma financial statements, which will be
used for valuation purposes. The pro forma income statements follow the same approach as the
reformulated income statements, which separate operating activities from financing activities. As
noted in section 4.2, operating activities are the primary driving forces behind value creation, hence
they are important to measure when forecasting future earnings.
155 Credinform (09.02.2015), “Solvency ratio of automobile factories”
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As it was mentioned earlier, Tesla mainly earns money through selling electric vehicles, electric
vehicle powertrain components and stationary energy storage systems. Most of its expenses are,
therefore, primarily related to the development, manufacturing and sales of these items. That is why,
I have chosen to use a sales-driven forecasting approach. Forecasting assumptions are based on the
analysis of historical financial performance, and the assessment of current and future outlook of
strategic value drivers. This paper, therefore, separates the ‘Historical period’ from the ‘Explicit
forecasting period’ and the ‘Terminal period’. The ‘Historical period’ provides insights about the
trends of financial value drivers, thus used as a foundation for forecasting. In the ‘Explicit forecasting
period’ financial value drivers are expected to change to either one direction or to another, depending
on the findings of the strategic analysis. The ‘Terminal period’, on the other hand, refers to a ‘steady
state’ environment and shows the company’s long-term growth potentials. The summary of
forecasting assumptions can be found in Appendix 14. When values are constant, I simply took the
average of historical rates. Findings of the strategic analysis, however, required to predict some ratios
on a yearly basis. The following forecasting assumptions were made when preparing the pro forma
statements:
Automotive revenue growth: it is based on the assumption that Tesla will achieve its plan of
producing 500,000 vehicles by 2018. Considering last year’s production level, this would
require to increase yearly production capacity by a CAGR of ~ 114 per cent. However, I
expect this increase to gradually slow down after 2018. The product mix is expected to shift
in favour of Model 3 that will negatively affect Model S and Model X sales in the long-run.
Based on historical data, I expect 80 per cent delivery rate. I calculated Model S and Model
X prices by using the average prices found on the company’s website. I used Elon Musk’s
estimate of USD 42,000 for Model 3 pricing. Moreover, I used the average expected inflation
rate of Tesla’s main markets to get the discounted value of future vehicle prices (see Appendix
15).
Gross margin: as it was mentioned earlier, Tesla expects to rise the margin in 2016 due to
improving manufacturing efficiency. With the shift in product mix to lower-priced vehicles,
however, I expect this margin to gradually go down to 20 per cent in the following years.
From 2020, nonetheless, I do not expect it to further decrease because of battery cost
reductions, improving economies of scale and the fact that Tesla sells electric vehicles that
carry social value.
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Effective tax rate: it was determined by the estimated industry average.156
Effective interest rate: Tesla amortises its convertible notes at an effective interest rates of
4.89 per cent and 5.96 per cent.157 I have calculated the average effective interest rate by
dividing total interest by the total principal amount of convertible notes (see Appendix 16).
R&D and SG&A: it was noted that Tesla is still in its introduction stage of its lifecycle, which
requires high initial investments. As the company moves to its growth stage with higher
number of sales, these expenses will make up a smaller part of its total revenue.
Inventory and Total current liabilities: section 4.3.2 mentioned that Tesla is working on
improved working capital management and better inventory control, which means decreasing
values in these ratios.
Operating lease vehicles, Resale value guarantee and Deferred revenue: there is an extremely
high number of Model 3 reservations already that will not be financed through leasing
partners, thus income from leasing to total income is expected to drop in the future.
PP&E: it is assumed to remain relatively high, as increasing production capacity requires
substantial amount of investments. Nonetheless, due to higher number of vehicle sales, fix
cost per sale will drop gradually.
Based on these forecasting assumption, I have found that Tesla will have a positive EBITDA from
2016 but reaches positive EBIT, NOPAT and Net income only from 2017 (see Appendix 17).
CHAPTER 6 – VALUATION
Once future profitability and financing is predicted, company value can be estimated. As it was
explained in the methodology section, I chose the DCF and the EVA present value models to compute
the enterprise value of Tesla Motors. These valuation models, however, require further assumptions
on the terminal growth rate and the company’s required rate of return, i.e. WACC. In section 3.1.2,
the world economic growth prospect of 2020 was ~ 3.76 per cent. It was also noted that automotive
is a cyclical industry, thus industry performance largely related to the economic cycle. As I assume
that Tesla will grow with the world average in the long-run, I used the terminal growth rate of 3.76
per cent. The weighted average cost of capital is calculated as: 158
156 New York University Stern School of Business (01.01.2016), “Debt fundamentals by sector” 157 Tesla Annual Report (2015), p. 64 158 Petersen & Plenborg (2012), Financial Statement Analysis, p. 96
Master’s Thesis 2016 Norbert Káin Cand. Merc. ASC
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𝑊𝐴𝐶𝐶 =𝑁𝐼𝐵𝐷
𝑁𝐼𝐵𝐷 + 𝑀𝑉𝐸∗ 𝑅𝑑 ∗ (1 − 𝑡) +
𝑀𝑉𝐸
𝑁𝐼𝐵𝐷 + 𝑀𝑉𝐸∗ 𝑅𝑒
The required rate of return to equity holders (Re) is determined by the risk-free rate, the company’s
beta and the market risk premium. The risk-free rate is based on the five year average of U.S. 10-year
bond yield from 1st May 2011 to 1st May 2016.159 Tesla’s beta was collected from Reuters, which is
considered to be a reliable source.160 I used professor Damodaran’s estimated equity risk premium.161
Based on these inputs, Tesla’s calculated WACC is ~ 8.63 per cent (see Appendix 18).
6.1 THE DISCOUNTED CASH FLOW APPROACH
The DCF model calculates the present value of future free cash flows to firm in order to measure firm
value. Therefore, the enterprise value is calculated by using the following equation:162
𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒 = ∑𝐹𝐶𝐹𝐹𝑡
(1 + 𝑊𝐴𝐶𝐶)𝑡
∞
𝑡=1
According to this equation, only the free cash flows to the firm and WACC affect the market value
of a company. This means that the value of Tesla Motors increases when it has higher FCFF and
lower WACC.
Numbers in USD 1000 2014 2015 2016 2017 2018 2019 2020
DCF Model
NOPAT -732036 -268028 319997,4 1097809 2091514 3407605
Net operating assets (Invested capital)
1464756 2501860 4159929 6624877 9630220 11561211 10443820
Δ Net operating assets 1037104 1658069 2464949 3005343 1930991 -1117391
Discount years 0 1 2 3 4 5 Terminal period
Free cash flow to the firm
-1769139 -1926097 -2144951 -1907534 160522,8 4524995
PV of FCFF -1769139 -1773047 -1817613 -1487984 115267 2991080 3103545
PV of FCFF in forecast horizon
-1972296
PV of FCFF in terminal period
42107095
Estimated enterprise value
40134799
Net interest-bearing debt
1422483
Estimated market value of equity
38712316
159 Investing.com (01.05.2011 – 01.05.2016), “U.S. 10-Year Bond Yield” 160 Reuters (18.05.2016), “Tesla Motors Inc” 161 Damodaran (11.02.2016), “Implied equity risk premium” 162 Petersen & Plenborg (2012), Financial Statement Analysis, p. 216
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Calculations show that Tesla will only have positive FCFF from 2019, leading to a negative overall
FCFF in the forecast horizon. It is mainly due to the high initial investments required to be able to
enhance production capacity to 500,000 units per year by 2018. Estimated enterprise value of ~ USD
40.13 billion, therefore, stems from the present value of FCFF in the terminal period. To get the
estimated market value of equity, net interest-bearing debt is subtracted from the estimated enterprise
value. This resulted an estimated market value of equity of ~ USD 38.71 billion.
6.2 THE ECONOMIC VALUE ADDED APPROACH
The EVA model ads the invested capital from the last fiscal year to the present value of all future
EVAs to estimate the value of a company. The enterprise value, therefore, is calculated by the
following equation:163
𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒 = 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + ∑𝐸𝑉𝐴𝑡
(1 + 𝑊𝐴𝐶𝐶)𝑡
∞
𝑡=1
According to the above equation, the value of Tesla Motors is positively affected by higher future
EVAs and a lower WACC.
Numbers in USD 1000
EVA model
Discount years 0 1 2 3 4 5 Terminal period
NOPAT -732036 -268028 319997 1097809 2091514 3407605
Net operating assets (Invested capital)
2501860 4159929 6624877 9630220 11561211 10443820
EVA -483990 -39090 525946 1260227 2409634 2500236
Present value of EVA -445532 -39090 525946 1260227 2409634
PV of EVA in forecast horizon 3711185
PV of EVA in terminal period 33921754
Net operating assets (Invested capital)
2501860
Estimated enterprise value 40134799
Net interest-bearing debt 1422483
Estimated market value of equity
38712316
No. of shares (in thousands) 145 880
Share price 265.37
Because the EVA model uses NOPAT, which is assumed to be positive from 2017, instead of FCFF,
the company will have a positive present value in the forecast horizon. Nevertheless, enterprise value
163 Petersen & Plenborg (2012), Financial Statement Analysis, p. 220
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is still mainly based on the present value of EVA in the terminal period. Although the DCF model
and the EVA model use different methods, these are theoretically equivalent approaches.
Consequently, the EVA model leads to the same estimated enterprise value of ~ USD 40.13 billion,
and estimated market value of equity of ~ USD 38.71 billion as the DCF model.
As of 23th May 2016, Tesla Motors had 145.88 million shares outstanding.164 Dividing the estimated
market value of equity by the number of outstanding shares resulted a share price of ~ USD 265.37.
One Tesla share was traded at USD 216.22 at Nasdaq Stock Exchange on the same day. Consequently,
I believe that the company is currently undervalued and its share price is going to rise in the future.
CHAPTER 7 – SENSITIVITY ANALYSIS
According to Petersen & Plenborg, “a valuation should always be accompanied by a sensitivity
analysis that examines the valuation consequences of changing some of the key value drivers”.165 The
previous chapter has revealed that the terminal value accounts for the majority of Tesla’s enterprise
value. Moreover, the pro forma statements showed that future profitability is largely based on what
gross margin the company is capable to capture. Therefore, I conducted a sensitivity analysis of the
terminal growth rate and the gross margin.
Terminal growth rate
2.76% 3.26% 3.76% 4.26% 4.76%
Gro
ss m
argi
n
19.0% 192.16 213.53 239.28 270.92 310.74
19.5% 203.03 225.38 252.32 285.43 327.08
20.0% 213.91 237.24 265.37 299.93 343.42
20.5% 224.78 249.10 278.42 314.44 359.76
21.0% 235.66 260.96 291.46 328.94 376.10
The above table depicts that Tesla’s share price is sensitive to both factors. A change of 0.5 per cent
in gross margin would change the share price with ~ USD 13 in either direction, while the same
change in terminal growth rate would push the share price either up or down with ~ USD 30.
164 Reuters (24.05.2016), “Tesla Motors Inc” 165 Petersen & Plenborg (2012), Financial Statement Analysis, p. 241
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It was also noted in the previous chapter that the WACC influences the outcome of the valuation.
Therefore, I found it relevant to make a sensitivity analysis of the risk-free interest rate and beta.
Risk-free rate
1.17% 1.67% 2.17% 2.67% 3.17% B
eta
1.29 376.81 336.41 301.96 272.13 246.22
1.34 350.79 314.23 282.86 255.53 231.69
1.39 327.28 294.05 265.37 240.27 218.26
1.44 305.93 275.62 249.32 226.19 205.83
1.49 286.48 258.74 234.55 213.18 194.30
The above table shows that the price of a Tesla share is highly sensitive to these factors as well. A
change of 0.5 per cent in the risk-free rate moves the share price with ~ USD 25, while a change of
0.05 in beta affect the price by ~ USD 17.
CHAPTER 8 – CONCLUSION
The aim of this paper was to estimate the fair value of one Tesla Motors share as of 23.05.2016, thus
challenge the current market price of USD 216.22. This topic was chosen due to the company’s high
historical stock price volatility and analysts’ distinct opinions of Tesla’s correct share price. As the
company is still in its early stage of its life cycle, which is characterised by high investments and
negative operating profit, determining the right stock price was even more challenging.
Over the past five years, Tesla grew total revenues by almost 19 times and the stock price followed
on with a rage of ~ USD 22 and USD 286, reaching its peak in July 2015. Ever since, Tesla’s share
price has dropped to the current market price. It was mainly due to lower than expected deliveries
and some analysts’ lower price targets, caused by the company’s announcement of advancing its
500,000 unit build plan by two years to 2018, which would require higher spending in the upcoming
years than earlier planned.
The strategic analysis has revealed that the company is operating in an attractive industry, i.e. electric
vehicle segment, but competitive rivalry is expected to rise as well-established manufacturers enter
the EV segment. Tesla possesses temporary competitive advantage through vertical integration,
company-owned distribution system and application of stat-of-the-art technologies. It has sustained
competitive advantage thanks to, inter alia, expertise in lightweight materials, supercharging network
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and employing Elon Musk as CEO. Once the Gigafactory is built, it will provide sustained
competitive advantage as well.
Tesla is dependent on several single source suppliers that led to delays in delivery. With an extremely
high demand for Model 3, delivery time can rise to years that might result cancellations of purchase.
Although Tesla plans to enhance production capacity by 2018, the Gigafactory is expected reach full
capacity only by 2020. The company, therefore, might face with a lack of lithium-ion batteries in the
future. Moreover, these investments require a substantial amount of capital. However, Tesla has far
less financial resources than its biggest competitors.
Tesla’s future profitability is dependent on raw material prices that are expected to rise in the
upcoming years. In addition, a shift in product mix in favour of the lower-priced Model 3 would
further decrease gross margin. However, technology advancements will results lower battery costs
and improved manufacturing efficiency that would offset these negative effects on the long-run.
The company had low short-term and moderate long-term liquidity risk historically. However, both
short-term and long-term liquidity risk has risen over the last year. Financial leverage is expected to
further increase as enhancement of production capacity requires further investments. Nonetheless, it
was argued that the adequate level of financial leverage can boost value creation through cheaper
financing.
Based on my forecasting assumptions, Tesla will have a positive EBITDA from 2016 but reaches
positive EBIT, NOPAT and net income only from 2017. Using the DCF model and the EVA model,
this would result a positive FCFF from 2019 and a positive EVA from 2018. While these models use
different methods, they theoretically equivalent approaches, thus resulted the same estimated
enterprise value of ~ USD 40.13 billion and estimated market value of equity of ~ USD 38.71 billion.
After dividing the estimated market value of equity by the number of outstanding shares, I received
an estimated fair value of ~ USD 265.37 of one Tesla Motors share as of 23.05.2016. This is higher
than the current market price but close to the consensus price target of USD 278.41. Therefore, I
conclude that the company is currently undervalued and its share price is going to rise in the future.
The sensitivity analysis, however, has revealed that the estimated share price is sensitive to changes
in key value drivers and underlines the importance of devoting the time necessary to prepare realistic
pro forma statements.
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http://www.cnbc.com/2015/05/07/teslas-new-bet-a-home-battery-to-slash-energy-costs.html
Newsinenglish.no (07.05.2015), “Electric cars hang on to tax breaks”
http://www.newsinenglish.no/2015/05/07/electric-cars-hang-on-to-tax-breaks/
TechCrunch (28.07.2015), “A Brief History Of Tesla”.
http://techcrunch.com/gallery/a-brief-history-of-tesla/
Nanalyze (19.08.2015), “The Likely Provider of Lithium for Tesla’s Gigafactory”
http://www.nanalyze.com/2015/08/the-likely-provider-of-lithium-for-teslas-gigafactory/
International Business Times (08.28.2015), “China Crisis: Automakers Like Volkswagen, General Motors
Brace For Impact As China Car Sales Fall”
http://www.ibtimes.com/china-crisis-automakers-volkswagen-general-motors-brace-impact-china-car-sales-
fall-2073436
Credinform (09.02.2015), “Solvency ratio of automobile factories”
http://www.credinform.ru/en-US/news/details/b32ae3af8421
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Huffpost Business (09.10.2015), “Environmental Concern Empowers the People”
http://www.huffingtonpost.com/brian-kennell/environmental-concern-emp_b_8105580.html
Transportpolicy.net (22.09.2015), “China: Light-duty: Fuel Consumption”
http://www.transportpolicy.net/index.php?title=China:_Light-duty:_Fuel_Consumption
Model X Launch Event (29.09.2015)
https://www.youtube.com/watch?v=RUz_EXSmp9w
Chevrolet (30.09.2015), “Next-Generation Chevrolet Volt”.
http://www.chevrolet.com/volt-electric-car.html#
Ford Motor Company (30.09.2015), “2016 Fusion”.
http://www.ford.com/cars/fusion/
MarketBeat (15.10.2015), “Tesla Motors Company Profile (NASDAQ:TSLA)”
http://www.marketbeat.com/stocks/NASDAQ/TSLA/
Fueleconomy.gov (24.10.2015), “Federal Tax Credits for Electric Vehicles Purchased in or after 2010”
https://www.fueleconomy.gov/feg/taxevb.shtml
Advertising Age (11.06.2015), “Global Ad Spending Will Be Up an Average 4.2% Next Year”
http://adage.com/article/btob/global-ad-spending-average-4-2-year/298980/
InvestingAnswers (11.12.2015), “Cyclical Industry”
http://www.investinganswers.com/financial-dictionary/economics/cyclical-industry-356
The Pew Charitable Trust (16. 12. 2015), “For Tesla, a Fight to Sell in Some States”
http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2015/12/16/for-tesla-a-fight-to-sell-in-
some-states
New York University Stern School of Business (01.01.2016), “Debt fundamentals by sector”
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/dbtfund.htm
The Wall Street Journal (01.04.2016), “Tesla’s Model 3 Electric Car Gets Requests for 180,000 Vehicles on
First Day of Ordering”
http://www.wsj.com/articles/teslas-musk-model-3-orders-surpassed-115-000-within-24-hours-1459483890
Fortune (01.04.2016), “Get Ready For a Long Wait Before Getting Your Tesla Model 3”
http://fortune.com/2016/04/01/wait-time-tesla-model-3/
Battery University (01.04.2016), “BU-308: Availability of Lithium”
http://batteryuniversity.com/learn/article/availability_of_lithium
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Investing.com (01.05.2011 – 01.05.2016), “U.S. 10-Year Bond Yield”
http://www.investing.com/rates-bonds/u.s.-10-year-bond-yield-historical-data/
The Economist (16.01.2016), “An increasingly precious metal”
http://www.economist.com/news/business/21688386-amid-surge-demand-rechargeable-batteries-companies-
are-scrambling-supplies
Tesla Motors (02.05.2016), “Tesla Gigafactory”
https://www.teslamotors.com/gigafactory
IMCDB (02.05.2016), “Tesla Roadster in movies and TV series”
http://www.imcdb.org/vehicles_make-Tesla_model-Roadster.html
Tesla Motors (02.05.2016), “Putting the Tesla HEPA Filter and Bioweapon Defense Mode to the Test”
https://www.teslamotors.com/blog/putting-tesla-hepa-filter-and-bioweapon-defense-mode-to-the-test
Bloomberg (02.06.2016), “Oil prices”
http://www.bloombergview.com/quicktake/oil-prices
Evannex (03.01.2016), “Tesla Model X wins top awards and honors”
https://evannex.com/blogs/news/71899781-tesla-model-x-wins-awards-and-top-honors
Computerworld (16.03.2016), “BMW: Our future is electric and autonomous cars”
http://www.computerworld.com/article/3045213/car-tech/bmw-our-future-is-electric-and-autonomous-
cars.html#
Electrek (27.03.2016), “Tesla is reportedly considering a factory location in Suzhou”
http://electrek.co/2016/03/27/tesla-is-reportedly-considering-a-factory-location-in-suzhou-china/
International Business Times (31.03.2016), “Tesla Model 3 launch”
http://www.ibtimes.co.uk/tesla-model-3-launch-fanatics-queue-through-night-pre-order-car-they-havent-yet-
seen-1552425
Tesla Motors (04.05.2016), “Supercharger”
https://www.teslamotors.com/supercharger
Forbes (04.05.2016), “Elon Musk”
http://www.forbes.com/profile/elon-musk/
The Verge (21.04.2016), “Tesla has received almost 400,000 preorders for the Model 3”
http://www.theverge.com/2016/4/21/11477034/tesla-model-3-preorders-400000-elon-musk
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Tesla Motors (28.04.2016), “Careers”
https://www.teslamotors.com/careers/job/engineer-massproperties-31757
Radius (28.04.2016), “Tesla Motors: Achieving Excellence and Innovation Overseas”
http://www.radiusworldwide.com/knowledge/case-studies/case-study-tesla-motors
Fortune (05.02.2016), “Here's What's Behind Tesla's Long, Slow Stock Slide”
http://fortune.com/2016/02/05/heres-whats-behind-teslas-long-slow-stock-slide/
Bankrate (05.04.2016), “Tesla buyers have long wait for Model 3”
http://www.bankrate.com/financing/cars/tesla-buyers-have-long-wait-for-model-3/
The Week (05.05.2016), “Oil prices boosted by Canadian wildfire and Libyan unrest”
http://www.theweek.co.uk/oil-price/60838/oil-prices-boosted-by-canadian-wildfire-and-libyan-unrest
The Wall Street Journal (05.05.2016), “How Tesla Is Shaking Up Metals Markets”
http://blogs.wsj.com/moneybeat/2016/05/05/how-tesla-is-shaking-up-metals-markets/
Internatonal Business Times (05.05.2016), “Tesla Motors Inc. (TSLA) Shares Fall”
http://www.ibtimes.com/tesla-motors-inc-tsla-shares-fall-company-says-it-will-spend-more-2016-
previously-2364867
Reuters (18.05.2016), “Tesla Motors Inc”
http://in.reuters.com/finance/stocks/overview?symbol=TSLA.O
People’s United Bank (21.05.2016), “Total Assets Turnover”
https://businessresources.peoples.com/SBR_template.cfm?DocNumber=PL10_0080.htm
CSI Market (21.05.2016), “Auto & Truck Manufacturers Industry”
http://csimarket.com/Industry/industry_Efficiency.php?ind=404
Tesla Motors (23.05.2016), “Board of Directors Elon Musk”.
http://ir.teslamotors.com/directors.cfm
Global Rates (07.01.2016), “ECB refi rate - European Central Bank’s interest rate”
http://www.global-rates.com/interest-rates/central-banks/european-central-bank/ecb-interest-rate.aspx
The Verge (07.04.2016), “Tesla has received 325,000 preorders for the Model 3”
http://www.theverge.com/2016/4/7/11385146/tesla-model-3-preorders-375000-elon-musk
Tesla Motors (08.04.2016), “Tesla Energy”
https://www.teslamotors.com/presskit/teslaenergy
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Damodaran (11.02.2016), “Implied equity risk premium”
http://pages.stern.nyu.edu/~adamodar/
The Motley Fool (11.04.2016), “The Most Compelling Argument for How Tesla Motors Is a Tech
Company”
http://www.fool.com/investing/general/2016/04/11/the-most-compelling-argument-for-how-tesla-
motors.aspx
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APPENDIX
Appendix 1: Excess emission premium calculation
The excess emissions premium shall be calculated using the following formulae:
From 2012 until 2018:
o Where the manufacturer's average specific emissions of CO2 exceed its specific
emissions target by more than 3 g CO2/km: ((Excess emissions – 3 g CO2/km) × 95
€/g CO2/km + 1 g CO2/km × 25 €/g CO2/km + 1 g CO2/km × 15 €/g CO2/km + 1 g
CO2/km × 5 €/g CO2/km) × number of new passenger cars.
o Where the manufacturer's average specific emissions of CO2 exceed its specific
emissions target by more than 2 g CO2/km but no more than 3 g CO2/km: ((Excess
emissions – 2 g CO2/km) × 25 €/g CO2/km + 1 g CO2/km × 15 €/g CO2/km + 1 g
CO2/km × 5 €/g CO2/km) × number of new passenger cars.
o Where the manufacturer's average specific emissions of CO2 exceed its specific
emissions target by more than 1 but no more than 2 g CO2/km: ((Excess emissions –
1 g CO2/km) × 15 €/g CO2/km + 1 g CO2/km × 5 €/g CO2/km) × number of new
passenger cars.
o Where the manufacturer's average specific emissions of CO2 exceed its specific
emissions target by no more than 1 g CO2/km: (Excess emissions × 5 €/g CO2/km) ×
number of new passenger cars.
From 2019:
o (Excess emissions × 95 €/g CO2/km) × number of new passenger cars.
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Appendix 2: Overview of purchase and tax incentives for electric vehicles in the EU in 2015
Austria:
Electric vehicles are exempt from the fuel consumption tax and from the monthly vehicle tax.
Belgium:
Electric and plug‐in hybrid vehicles are exempt from registration tax in Flanders.
Electric vehicles pay the lowest rate of tax under the annual circulation tax in all three regions.
The deductibility from corporate income of expenses related to the use of company cars is
120% for zero‐emissions vehicles and 100% for vehicles emitting between 1 and 60 g/km of
CO 2. Above 60 g/km, the deductibility rate decreases gradually from 90% to 50%.
Bulgaria:
None
Croatia:
None
Cyprus:
None
Czech Republic:
Electric, hybrid and other alternative fuel vehicles are exempt from the road tax (this tax
applies to cars used for business purposes only).
Denmark:
Electric vehicles weighing less than 2,000 kg are exempt from the registration tax. This
exemption does not apply to hybrid vehicles.
Estonia:
None
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Finland:
Electric vehicles pay the minimum rate (5%) of the CO2 based registration tax.
France:
Electric and hybrid electric vehicles emitting 20 g/km or less of CO 2 benefit from a premium
of € 6,300 under a bonus‐malus scheme. For vehicles emitting between 20 and 60 g/km, the
premium is € 4,000. For vehicles emitting between 61 and 110 g/km, it is maximum € 2,000.
The amount of the incentive cannot exceed a given percentage of the vehicle purchase price
including VAT, increased with the cost of the battery if this is rented. For vehicles emitting
less than 20 g/km, this is 27% of the purchase price, for vehicles emitting between 20 and 61
g/km, it is 20% and for vehicles emitting between 61 and 110 g/km, it is 5%.
Electric vehicles are exempt from the company car tax. Hybrid vehicles emitting less than 110
g/km are exempt during the first two years after registration.
Germany:
Electric vehicles are exempt from the annual circulation tax for a period of ten years from the
date of their first registration.
Greece:
Electric and hybrid vehicles are exempt from the registration tax, the luxury tax and the luxury
living tax.
Electric and hybrid passenger cars with an engine capacity up to 1,929 cc are exempt from
the annual circulation tax. Hybrid cars with a higher engine capacity pay 50% of the normal
circulation tax rate.
Hungary:
Electric vehicles are exempt from the registration tax and the annual circulation tax.
Ireland:
Electric vehicles benefit from VRT (registration tax) relief up to a maximum of € 5,000. For
plug‐in hybrids, the maximum relief is € 2,500. For conventional hybrid vehicles and other
flexible fuel vehicles, the maximum relief is € 1,500. In addition, electric and plug‐in hybrid
vehicles receive a grant of up to € 5,000 on purchase.
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Italy:
Electric vehicles are exempt from the annual circulation tax (ownership tax) for a period of
five years from the date of their first registration. After this five‐year period, they benefit from
a 75% reduction of the tax rate applied to equivalent petrol vehicles in many regions.
Latvia:
Electric vehicles are exempt from the registration tax.
Lithuania:
None
Luxembourg:
None
Malta:
None
Netherlands:
Electric vehicles are exempt from the registration tax BPM.
Vehicles emitting maximum 50 g/km of CO 2 are exempt from the annual circulation tax.
Poland:
None
Portugal:
Electric vehicles are exempt from the registration tax ISV and from the annual circulation tax.
Hybrid vehicles benefit from a 40% reduction of the registration tax.
Romania:
Electric and hybrid vehicles are exempt from the registration tax
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Slovakia:
Electric vehicles are exempt from the annual circulation tax. Hybrid vehicles benefit from a
50% reduction of the annual circulation tax (this tax applies only to vehicles used for business
purposes).
Slovenia:
None
Spain:
None
Sweden:
Five year exemption from paying annual circulation tax: Electric vehicles with an energy
consumption of 37 kWh per 100 km or less are exempt from the annual circulation tax for a
period of five years from the first registration. The same five year exemption applies to electric
hybrid and plug‐in hybrid vehicles that fulfil the new green car definition applied for new
registrations from 1 January 2013. The definition is dependent on the CO2 emission in relation
to the curb weight of the car. The formula for petrol, diesel, electric hybrid cars and plug‐in
cars is as follows: Maximum CO2‐emission allowed=95 g/km CO2‐emission + 0.0457 x (the
curb weight of the car – 1372 kg curb weight). Moreover, for both electric cars and plug‐in
hybrids the electrical energy consumption per 100 km must not exceed 37 kWh to be regarded
as a green car.
Reduction of company car taxation: For electric and plug‐in hybrid vehicles, the taxable value
of the car for the purposes of calculating the benefit in kind of a company car under personal
income tax is reduced by 40% compared with the corresponding or comparable petrol or diesel
car. The maximum reduction of the taxable value is SEK 16,000 per year.
Super green car premium new cars: A so called “Super green car premium”
(Supermiljöbilspremie) of SEK 40,000 is available for the purchase of new cars with CO2
emissions of maximum 50 g/km. The premium is applied both for the purchase by private
persons and companies. For companies purchasing a super green car, the premium is
calculated as 35% of the price difference between the super green car and a corresponding
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petrol/diesel car, with a maximum of SEK 40,000. The premium was introduced in 2012 and
will be paid also in 2015 as long as the funds are sufficient to pay the premium.
United Kingdom:
Purchasers of electric vehicles and plug‐in hybrid vehicles with CO2 emissions below 75 g/km
receive a grant of up to £ 5,000. There are three categories:
o Category 1: CO2 emissions of less than 50 g/km and a zero emission range of at least
70 miles
o Category 2: CO2 emissions of less than 50 g/km and a zero emission range between
10 and 69 miles
o Category 3: CO2 emissions of 50‐75 g/km and a zero emission range of at least 20
miles
Electric vehicles are exempt from the annual circulation tax. This tax is based on CO2
emissions and all vehicles with emissions below 100 g/km are exempt from it.
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Appendix 3: Correlation between GDP growth and vehicle sales growth
World 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GDP growth 4.1% 3.9% 1.5% -2.1% 4.1% 2.8% 2.2% 2.4% 2.5% 2.8%
Vehicle sales
growth
3.7% 4.7% -4.5% -4.0% 14.3% 4.3% 5.1% 4.2% 3.0% 2.0%
Correlation
coefficient
0.72
European Union 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GDP growth 3.4% 3.1% 0.5% -4.4% 2.1% 1.8% -0.5% 0.1% 1.3% 1.9%
Vehicle sales
growth
3.8% 5.2% -4.9% -14.8% 0.9% 5.0% -5.5% -1.7% 0.8% 9.8%
Correlation
coefficient
0.56
USA 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GDP growth 2.7% 1.8% -0.3% -2.8% 2.5% 1.6% 2.3% 2.2% 2.4% 2.7%
Vehicle sales
growth
0.1% 1.1% -11.4% -16.3% 12.7% 9.4% 9.7% 5.7% 1.8% 5.7%
Correlation
coefficient
0.84
China 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GDP growth 12.7% 14.2% 9.6% 9.2% 10.6% 9.5% 7.8% 7.7% 7.4% 7.1%
Vehicle sales
growth
25.3% 21.8% 6.7% 45.5% 32.4% 2.5% 4.3% 13.9% 6.9% 4.7%
Correlation
coefficient
0.45
Source: Compiled by author / World Bank / OICA
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Appendix 4: CAPEX of World’s ten largest automobile OMEs
In USD million, 2014 Net sales Capital expenditures CAPEX to sales ratio
Volkswagen 200858 13005 6.47%
Toyota 222825 8890 3.99%
Hyundai 77832 2925 3.76%
General Motors 155929 7039 4.51%
Honda 108536 7167 6.60%
Nissan 104254 4244 4.07%
Ford 135782 7400 5.45%
PSA 59983 2747 4.58%
Renault 46448 2841 6.12%
B.M.W. 90962 6901 7.59%
Average 6316 5.31%
In USD million , 2013 Net sales Capital expenditures CAPEX to sales ratio
Volkswagen 197990 12490 6.31%
Toyota 191678 7832 4.09%
Hyundai 76132 2765 3.63%
General Motors 155427 7549 4.86%
Honda 90531 5778 6.38%
Nissan 96072 4915 5.12%
Ford 139369 6600 4.74%
PSA 59349 2814 4.74%
Renault 46308 3110 6.72%
B.M.W. 86049 7592 8.82%
Average 6145 5.54%
Source: Compiled by author / Annual reports of stated companies
In order to make different income statements comparable all figures have been transferred into USD
using the following exchange rates available at www.x-rates.com on 13.04.2016:
EUR/USD 1.131350
JPY/USD 0.009165
KRW/USD 0.000872
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Appendix 5: CAPEX of Tesla Motors
In USD million Net sales Capital expenditures CAPEX to sales ratio
2013 1922 264 13.75%
2014 3007 970 32.25%
2015 3741 1630 43.57%
Source: Compiled by author / Tesla Motors Annual Report 2015
Appendix 6: World Motor Vehicle Production
Source: Compiled by author / OICA
Appendix 7: World Passenger Car Production
Year 2009
Manufacturer Passenger cars s s^2 Manufacturer Passenger cars s s^2
Toyota 6148794 12.04 144.93 Tata 376514 0.74 0.54
Volkswagen 5902583 11.56 133.55 Saic 347598 0.68 0.46
G.M. 4997824 9.79 95.75 Anhui Jianghuai 336979 0.66 0.44
Hyundai 4222532 8.27 68.35 Geely 330275 0.65 0.42
Honda 2984011 5.84 34.13 Brilliance 314189 0.62 0.38
Ford 2952026 5.78 33.41 Avtovaz 294737 0.58 0.33
PSA 2769902 5.42 29.41 Great Wall 226560 0.44 0.20
(15,00)
(10,00)
(5,00)
-
5,00
10,00
15,00
20,00
25,00
30,00
0
10000000
20000000
30000000
40000000
50000000
60000000
70000000
80000000
90000000
100000000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
World Motor Vehicle production
Total production % change
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Nissan 2381260 4.66 21.74 Chrysler 211160 0.41 0.17
Suzuki 2103553 4.12 16.96 Shangdong 169023 0.33 0.11
Renault 2044106 4.00 16.02 Mahindra 145977 0.29 0.08
Fiat 1958021 3.83 14.70 Proton 129741 0.25 0.06
Chana 1525777 2.99 8.92 Chongquing 104434 0.20 0.04
BMW 1258417 2.46 6.07 Fujian 103171 0.20 0.04
Daimler 1055169 2.07 4.27 Kuozui 88801 0.17 0.03
Mazda 920892 1.80 3.25 Porsche 75637 0.15 0.02
Mitsubishi 715773 1.40 1.96 Ziyang 72470 0.14 0.02
Beijing Automotive 684534 1.34 1.80 Guangzhou 62990 0.12 0.02
Dongfeng Motor 663262 1.30 1.69 Chenzhou 51008 0.10 0.01
FAW 650275 1.27 1.62 Qingling Motor 50120 0.10 0.01
Chery 508567 1.00 0.99 Hebei Zhongxing 48173 0.09 0.01
Fuji 440229 0.86 0.74 GAZ 2161 0.00 0.00
BYD 427732 0.84 0.70 Total 51075480
Herfindahl-Hirschman Index [1] 644.35
Year 2014
Manufacturer Passenger cars s s^2 Manufacturer Passenger cars s s^2
Volkswagen 9766293 13.55 183.64 Baic 538027 0.75 0.56
Toyota 8788018 12.19 148.69 Iran Khodro 493585 0.68 0.47
Hyundai 7628779 10.59 112.05 Chery 449333 0.62 0.39
G.M. 6643030 9.22 84.96 BYD 433718 0.60 0.36
Honda 4478123 6.21 38.61 Faw 391079 0.54 0.29
Nissan 4279030 5.94 35.25 Avtovaz 381964 0.53 0.28
Ford 3230842 4.48 20.10 Mahindra 372637 0.52 0.27
Suzuki 2543077 3.53 12.45 Saipa 346914 0.48 0.23
PSA 2521833 3.50 12.24 Brilliance 235115 0.33 0.11
Renault 2398555 3.33 11.08 Jac 196777 0.27 0.07
B.M.W. 2165566 3.00 9.03 Hunan Jiangnan 167522 0.23 0.05
Fiat 1904618 2.64 6.98 Guangzhou 161334 0.22 0.05
Daimler AG 1808125 2.51 6.29 Chongqing 148452 0.21 0.04
SAIC 1769837 2.46 6.03 Haima Cars 93934 0.13 0.02
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Mazda 1261521 1.75 3.06 Proton 93840 0.13 0.02
Mitsubishi 1199823 1.66 2.77 Guihang 63724 0.09 0.01
Changan 1089179 1.51 2.28 South East 56256 0.08 0.01
Geely 890652 1.24 1.53 Rongcheng 54079 0.08 0.01
Fuji 888812 1.23 1.52 Uaz 25356 0.04 0.00
Dongfeng 745765 1.03 1.07 Ashok Leyland 430 0.00 0.00
Tata 614247 0.85 0.73 Shannxi 109 0.00 0.00
Great Wall 610023 0.85 0.72 Total 72068994
Herfindahl-Hirschman Index 704.33
[1] Herfindahl-Hirschman Index (HHI) =∑ 𝑠𝑖2𝑁
𝑖=1 , where 𝑠𝑖 is the market share of firm 𝑖 in the market, and N is the number of firms.
Source: Compiled by author / OICA
Appendix 8: Comparative Industry Structure Analysis [1]
Rivalry Substitute threat Buyer power Supplier power Entry threat
Time 0 2.5 2.5 3 2 2.5
Time + 5 1.5 2 2 1.5 2
[1] High=1, Moderate=2, Low=3
Appendix 9: Engineer salaries comparison as of 28.04.2016
Min Max Average
Tesla Motors 76000 154000 112222
Volkswagen 73000 88000 79444
Toyota 68000 110000 84592
G.M. 63000 96000 78977
Honda 56000 88000 65408
Ford 65000 108000 89071
Source: Compiled by author / Glassdoor
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Appendix 10: Research & Development
Tesla
Motors
Net
sales
R&D R&D to Sales
ratio
2013 1922 232 12.07%
2014 3007 465 15.45%
2015 3741 718 19.19%
Volkswagen Net
sales
R&D R&D to Sales
ratio
2013 197990 10186 5.14%
2014 200858 11545 5.75%
Toyota Net
sales
R&D R&D to Sales
ratio
2013 191678 7400 3.86%
2014 222825 8345 3.74%
Hyundai Net
sales
R&D R&D to Sales
ratio
2013 76132 931 1.22%
2014 77832 882 1.13%
General
Motors
Net
sales
R&D R&D to Sales
ratio
2013 155427 7200 4.63%
2014 155929 7400 4.75%
2015 152356 7500 4.92%
Honda Net
sales
R&D R&D to Sales
ratio
2013 90531 5135 5.67%
2014 108536 5812 5.35%
2015 122152 6073 4.97%
Source: Compiled by author / Annual reports of stated companies
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Appendix 11: Adjusted financial statements of Tesla motors
INCOME STATEMENT
Numbers in USD 1 000
2011 2012 2013 2014 2015
Revenues
Automotive 148568 385699 1921877 3007012 3740973
Services and other 55674 27557 91619 191344 305052
Total revenues 204242 413256 2013496 3198356 4046025
Cost of revenues
Automotive 115482 371658 1483321 2145749 2823302
Services and other 27165 11531 73913 170936 299220
Total cost of revenues 142647 383189 1557234 2316685 3122522
Gross profit 61595 30067 456262 881671 923503
Operating expenses
Research and development 208981 273978 231976 464700 717900
Selling, general and administrative 104102 150372 285569 603660 922232
Total operating expenses 313083 424350 517545 1068360 1640132
Loss from operations -251488 -394283 -61283 -186689 -716629
Interest income 255 288 189 1126 1508
Interest expense -43 -254 -32934 -100886 -118851
Other income (expense), net -2646 -1828 22602 1813 -41652
Loss before income taxes -253922 -396077 -71426 -284636 -875624
Provision for income taxes 489 136 2588 9404 13039
Net loss -254411 -396213 -74014 -294040 -888663
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BALANCE SHEET
Numbers in USD 1 000 2011 2012 2013 2014 2015
Cash and cash equivalents 255266 201890 845889 1905713 1196908
Restricted cash and marketable securities 48537 19094 3012 17947 22628
Accounts receivable 9539 26842 49109 226604 168965
Inventory 50082 268504 340355 953675 1277838
Prepaid expenses and other current assets 9414 8438 27574 76134 125229
Total current assets 372838 524768 1265939 3180073 2791568
Operating lease vehicles, net 11757 10071 382425 766744 1791403
Property, plant and equipment, net 298414 552229 738494 1829267 3403334
Restricted cash 8068 5159 6435 11374 31522
Other assets 22371 21963 23637 43209 74633
Total non-current assets 340610 589422 1150991 2650594 5300892
Total assets 713448 1114190 2416930 5830667 8092460
Liabilities and Stockholders' Equity
Accounts payable 56141 303382 303969 777946 916148
Accrued liabilities 32109 39798 108252 268883 422798
Deferred revenue 2345 1905 91882 191651 423961
Resale value guarantees 0 0 0 0 136831
Customer deposits 91761 138 817 163153 257587 283370
Long-term debt and capital leases, current 8983 55 206 7904 611099 633166
Total current liabilities 191339 539108 675160 2107166 2816274
Common stock warrant liability 8838 10692 0 0 0
Deferred revenue 3146 3060 181180 292271 446105
Long-term debt and capital leases 271165 411460 598974 1818785 2040375
Resale value guarantee 0 0 236299 487879 1293741
Other long-term liabilities 14915 25170 58197 154660 364976
Total non-current liabilities 298064 450382 1074650 2753595 4145197
Total liabilities 489403 989490 1749810 4860761 6961471
Convertible senior notes 0 0 0 58196 42045
Total stockholders' equity 224045 124700 667120 911710 1088944
Total liabilities and stockholders' equity 713448 1114190 2416930 5830667 8092460
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Appendix 12: Reformulated income statement and balance sheet of Tesla Motors
ANALYTICAL INCOME STATEMENT
Numbers in USD 1 000 2011 2012 2013 2014 2015
Revenues
Automotive 148568 385699 1921877 3007012 3740973
Services and other 55674 27557 91619 191344 305052
Total revenues 204242 413256 2013496 3198356 4046025
Expenses
Automotive -115482 -371658 -1483321 -2145749 -2823302
Services and other -27165 -11531 -73913 -170936 -299220
Depreciation and amortisation 16919 28825 106083 231931 422590
Research and development -208981 -273978 -231976 -464700 -717900
Selling, general and administrative -104102 -150372 -285569 -603660 -922232
Total expenses -438811 -778714 -1968696 -3153114 -4340064
EBITDA -234569 -365458 44800 45242 -294039
Depreciation and amortisation -16919 -28825 -106083 -231931 -422590
EBIT -251488 -394283 -61283 -186689 -716629
Corporate tax -489 -136 -2588 -9404 -13039
Tax shield -5 -1 -368 -3236 -2368
NOPAT -251982 -394420 -64239 -199329 -732036
Interest income 255 288 189 1126 1508
Interest expense -43 -254 -32934 -100886 -118851
Net interest expense 212 34 -32745 -99760 -117343
Tax shield 0 0 1186 3296 1747
Net interest expense after tax 212 34 -31559 -96464 -115596
Other income (expense), net -2646 -1828 22602 1813 -41652
Tax shield 5 1 -819 -60 620
Net profit after tax (NPAT) -254411 -396213 -74014 -294040 -888663
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ANALYTICAL BALANCE SHEET
Numbers in USD 1 000 2011 2012 2013 2014 2015
Operating assets and liabilities
Current assets
Accounts receivable 9539 26842 49109 226604 168965
Inventory 50082 268504 340355 953675 1277838
Prepaid expenses and other current assets 9414 8438 27574 76134 125229
Total current assets 69035 303784 417038 1256413 1572032
Current liabilities
Accounts payable 56141 303382 303969 777946 916148
Accrued liabilities 32109 39798 108252 268883 422798
Deferred revenue 2345 1905 91882 191651 423961
Resale value guarantees 0 0 0 0 136831
Customer deposits 91761 138817 163153 257587 283370
Total current liabilities 182356 483902 667256 1496067 2183108
Net current assets (NWC) -113321 -180118 -250218 -239654 -611076
Δ NWC -66797 -70100 10564 -371422
Non-current assets
Operating lease vehicles, net 11757 10071 382425 766744 1791403
Property, plant and equipment, net 298414 552229 738494 1829267 3403334
Other assets 22371 21963 23637 43209 74633
Total non-current assets 332542 584263 1144556 2639220 5269370
Non-current liabilities
Deferred revenue 3146 3060 181180 292271 446105
Resale value guarantee 0 0 236299 487879 1293741
Other long-term liabilities 14915 25170 58197 154660 364976
Total non-current liabilities 18061 28230 475676 934810 2104822
Net non-current assets 314481 556033 668880 1704410 3164548
Net operating assets (Invested capital) 201160 375915 418662 1464756 2553472
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Financing activities
Cash and cash equivalents -255266 -201890 -845889 -1905713 -1196908
Restricted cash and marketable securities -48537 -19094 -3012 -17947 -22628
Restricted cash -8068 -5159 -6435 -11374 -31522
Long-term debt and capital leases, current 8983 55206 7904 611099 633166
Common stock warrant liability 8838 10692 0 0 0
Long-term debt and capital leases 271165 411460 598974 1818785 2040375
Net interest-bearing debt (NIBD) -22885 251215 -248458 494850 1422483
Equity
Convertible senior notes 0 0 0 58196 42045
Total stockholders' equity 224045 124700 667120 911710 1088944
Equity + NIBD (Invested capital) 201160 375915 418662 1464756 2553472
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Appendix 13: Financial ratios of Tesla Motors
2011 2012 2013 2014 2015
ROE (I*II*III) -114% -318% -11% -30% -79%
Operating efficiency
Gross margin 30% 7% 23% 28% 23%
Net profit margin (I) -125% -96% -4% -9% -22%
Asset use efficiency
Asset turnover ratio (II) 0.51 0.47 1.29 0.82 0.60
Inventory turnover ratio 4.08 1.54 5,92 3.35 3.17
Days sales of inventory 89.50 237.15 61,70 108.83 115.28
Short-term liquidity risk
Current ratio, cash included 1.95 0.97 1.88 1.51 0.99
Quick ratio, cash included 1.69 0.48 1.37 1.06 0.54
Cash burn rate (no. of years) 1.28 0.64 14.76 11.58 1.98
Cash burn rate (no. of months) 15.34 7.70 177.10 138.95 23.78
Long-term liquidity risk
Financial leverage -0.10 2.01 -0.37 0.51 1.26
Solvency ratio 1.11 0.33 1.59 0.66 0.44
Equity multiplier (III) 1.79 7.12 2.34 4.02 6.00
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Appendix 14: Forecasting assumptions of Tesla Motor
Historical period Explicit forecasting period
(Forecast horizon)
Terminal
period
-4 -3 -2 -1 0 1 2 3 4 5 6
PRO FORMA INCOME STATEMENT
AR growth 160% 398% 56% 24% 89% 125% 60% 28% 19% 4%
S&O / AR 37% 7% 5% 6% 8% 7% 7% 7% 7% 7% 7%
Gross margin 30% 7% 23% 28% 23% 27% 26% 23% 21% 20% 20%
R&D / TR -
102%
-66% -12% -15% -18% -14% -11% -8% -6% -5% -4%
SG&A / TR -51% -36% -14% -19% -23% -17% -13% -10% -8% -6% -5%
D&A / TNCA -5% -5% -9% -9% -8% -7% -7% -7% -7% -7% -7%
Effective tax rate 0% 0% 4% 3% 1% 8% 8% 8% 8% 8% 8%
Effective interest rate 1% 0% -13% 20% 8% 5% 5% 5% 5% 5% 5%
Other income (expense)
/ TR
-1% 0% 1% 0% -1% 0% 0% 0% 0% 0% 0%
PRO FORMA BALANCE SHEET
(Accounts receivable +
OCA) / TR
9% 9% 4% 9% 7% 8% 8% 8% 8% 8% 8%
Inventory 25% 65% 17% 30% 32% 26% 24% 22% 20% 15% 10%
TCL / TR 89% 117% 33% 47% 54% 48% 43% 39% 34% 29% 25%
Operating lease vehicles
/ TR
6% 2% 19% 24% 43% 35% 20% 18% 16% 14% 14%
PP&E / TR 146% 134% 37% 57% 84% 80% 72% 64% 57% 48% 48%
Other assets 11% 5% 1% 1% 2% 1% 1% 1% 1% 1% 1%
Resale value guarantee,
non-current / TR
0% 0% 12% 15% 32% 29% 26% 24% 22% 20% 15%
(Deferred revenue, non-
current + OLL) / TR
9% 7% 12% 14% 20% 18% 16% 15% 14% 12% 12%
AR=Automotive revenue; S&O=Service and other; R&D=Research and development; TR=Total revenue; SG&A=Selling, general and administrative;
D&A=Depreciation and amortisation; TNCA=Total non-current asset; OCA=Other current asset; TCL=Total current liabilities; PP&E=Property, plant
and equipment; OLL=Other long-term liabilities
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Appendix 15: Automotive sales forecast of Tesla Motors
2015 E 2016 E 2017 E 2018 E 2019 E 2020
Production 51095 109289 233761 500000 704400 927061
Model S, units 50588 72388 132952 105000 77484 46353
Model S, growth 43% 84% -21% -26% -40%
Model X, units 507 36900 71589 70000 63396 46353
Model X, growth 94% -2% -9% -27%
Model 3, units 29220 325000 563520 834355
Model 3, growth 1012% 73% 48%
Deliveries 50658 87840 208867 446752 663520 882529
Model S, units 50452 58047 120839 110590 82987 52579
Model X, units 206 29793 64652 70318 64717 49762
Model 3, units 23376 265844 515816 780188
Average price/unit
In 1000 USD
Model S 73.85 78.73 78.73 78.73 78.73 78.73
Model X 84.30 84.30 84.30 84.30 84.30
Model 3 42.00 41.11 40.19 39.23
Automotive revenue
In 1000 USD
Model S 3725760 4570207 9514065 8707148 6533859 4139738
Model X 15213 2511564 5450133 5927798 5455626 4194906
Model 3 981798 10927998 20730706 30606436
Total automotive revenue 3740973 7081771 15945996 25562943 32720191 38941080
Automotive revenue growth 89% 125% 60% 28% 19%
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2015 E 2016 E 2017 E 2018 E 2019 E 2020
Average weekly production 979 2095 4480 9583 13500 17767
Model 3, share 50% 65% 80% 90%
Model 3 weekly production 2240 6229 10800 15991
Total Model 3 units 292201 325000 563520 834355
[1]Model 3 production is expected to start in late 2017, thus this number reflects Model 3 production in Q4 2017.
Inflation rates 2017 2018 2019 2020
USA 2.37% 2.54% 2.33% 2.31%
Europe 1.49% 1.64% 1.76% 1.86%
China 2% 2.20% 2.60% 3%
Average inflation rate 1.95% 2.13% 2.23% 2.39%
Appendix 16: Effective interest rate of Tesla Motors
Numbers in USD 1 000 2018
Notes
2019
Notes
2021
Notes
Total
Principal amount 659761 920000 1380000 2959761
Effective interest rates 4.29% 4.89% 5.96%
Interest 28304 44988 82248 155540
Average effective interest rate 5.26%
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Appendix 17: Pro forma financial statements of Tesla Motors
PRO FORMA INCOME STATEMENT
Numbers in USD 1 000 2015 2016 2017 2018 2019 2020
Revenues
Automotive 3740973 7081771 15945996 25562943 32720567 38941309
Service and other 305052 467919 1053610 1689037 2161967 2572995
Total revenue 4046025 7549690 16999606 27251980 34882535 41514304
Gross profit 923503 2038416 4419898 6267955 7325332 8302861
Expenses
Depreciation and amortisation 418451 635658 1142793 1643025 1881503 1901867
Research and development -717900 -1039804 -1817390 -2261488 -2246938 -2075715
Selling, general and
administrative
-922232 -1283447 -2243235 -2791392 -2773433 -2490858
EBITDA -298178 350823 1502067 2858101 4186464 5638155
Depreciation and amortisation -418451 -635658 -1142793 -1643025 -1881503 -1901867
EBIT -716629 -284835 359273 1215076 2304961 3736287
Corporate tax -13039 22787 -28742 -97206 -184397 -298903
Tax shield -2368 -5980 -10534 -20061 -29050 -29780
NOPAT -732036 -268028 319997 1097809 2091514 3407605
Net interest expense -117343 -74754 -131673 -250760 -363127 -372247
Tax shield 1747 5980 10534 20061 29050 29780
Net financial expenses after tax -115596 -68773 -121139 -230699 -334077 -342468
Other income (expense), net -41652 0 0 0 0 0
Tax shield 620 0 0 0 0 0
Net income -888663 -336802 198858 867110 1757437 3065137
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PRO FORMA BALANCE SHEET
Numbers in USD 1 000 2015 2016 2017 2018 2019 2020
Accounts receivable & Other current
assets
294194 579240 1304272 2090871 2676315 3185129
Inventory 1277838 1962919 4079906 5995436 6976507 6227146
Total current assets 1572032 2542159 5384177 8086307 9652822 9412274
Total current liabilities 2183108 3623851 7309831 10628272 11860062 12039148
Net current asset (NWC) -611076 -1081692 -1925654 -2541965 -2207240 -2626874
Operating lease vehicles 1739791 2642391 3399921 4905356 5581206 5812003
Property, plant and equipment 3403334 6052398 12181768 17455912 19972185 19926866
Other assets 74633 109961 247600 396925 508065 604656
Total non-current assets 5217758 8804751 15829289 22758194 26061455 26343525
Resale value guarantee, non-current 1293741 2190178 4474254 6507456 7557057 8159694
Deferred revenue, non-current &
Other long-term liabilities 811081 1372953 2804504 4078553 4735947 5113136
Total non-current liabilities 2104822 3563130 7278758 10586009 12293004 13272830
Net non-current assets 3112936 5241621 8550531 12172185 13768451 13070694
Net operating assets (Invested
capital)
2501860 4159929 6624877 9630220 11561211 10443820
Net interest-bearing debt (NIBD) 1422483 2505607 4771697 6909930 7083484 2900956
Total equity and convertible senior
notes
1130989 1654322 1853180 2720290 4477727 7542864
Equity + NIBD (Invested capital) 2553472 4159929 6624877 9630220 11561211 10443820
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Appendix 18: WACC of Tesla Motors
Numbers in USD 1000 Estimated
current effective
cost per annum
5-year
average
Market-value
weight
After-tax
costs
Weighted
costs
Net long-term financial obligations 1 028 152 102.53% 2.14% 1.97% 2.02%
Net short-term financial obligations -648 711 -64.69% 0.23% 0.21% -0.14%
Total equity 623 352 62.16% 10.86% 10.86% 6.75%
Equity + NIBD (Invested capital) 1 002 793 100.00% 13.22% 13.03% 8.63%
Risk-free rate 2.17%
Beta (b) 1.39
Market risk premium 6.25%
Required rate of return to equity
holders (Re) 10.86%