Recommendations for The Future Success of Tesla

Teslas Cost of Production

When going over the annual report for Tesla Inc., there are many aspects different than other Automotive manufacturing companies. Most of Teslas cost of production involve:

*Includes direct parts, material and labor costs, manufacturing overhead, including depreciation costs of tooling and machinery, shipping and logistics costs, vehicle connectivity costs, allocations of electricity and infrastructure costs related to Supercharger network, and reserves for estimated warranty expenses.

All the mentioned cost of productions is broken down into their own categories with some having numbers provided for the last five years and some only given numbers for the last two to three years. View the graphs below for each Category.

With looking over the overall expenses and displaying some of the categories via graphs we can see a trend has formed. As the company receives more revenues as the years come and as they expand their product line, they will incur more and more costs to produce these products as well as spending more in research and development to see where they stand in the market and how well their previous research and development has impact their production of next year.

To determine the level of output we will look over the data we were able to find from quarter two of 2016 up to the present which is quarter 3 of 2018 of the total vehicles that were produced and at the total cost of producing these vehicles. The graph below displays the data found.

The above graph displays the total vehicles produced for each quarter with the blue line. The orange area is the total automotive costs of revenue. As we can see it costs Tesla more to produce vehicles at a low rate compared to the newer results of the 2018 year where they had higher vehicles producitons and the cost was below the production line. We could determine that a production level of output of about 80,000 vehicles would be equal to the total cost (Tesla, Inc., 2017).

The Overall Market Tesla Resides With

The market that Tesla is apart of is the EV market as well as Luxury brand vehicles. See graph below.

As we can see with the graph above, two of Tesla vehicles, Model S and Model X, have the largest share of the EV market compared to other vehicles in the market. Tesla has a total 45% share of the market. This data is from the dates of January to July 2017. To be able to determine the trend over time we will need to dig a little deeper in the luxury vehicle market from the years 2013 to 2016. See graph below (McCarthy, 2017).

Within the luxury sedan market, we can see the trend over time is as all vehicles beside Tesla Model S decrease to the lowest percentage of 5%, Teslas Model S continues to growstarting at having a 0% market share back in 2013, growing to 19% in 2014, growing another 10% in 2015, and growing another 6% in 2016. The only other vehicle in this market that seems to keeps its share of percentage is the Mercedes-Benz S Class (Morris, 2017).

Tesla Overcomes Barriers to Entry

Tesla was able to overcome many barriers of entry when entering the luxury vehicle and electric vehicle markets. Others may not be so lucky or built as well as Tesla to overcome these barriers of entry. The fact Tesla chose to go down the entrepreneurship and innovation path instead of the main economies of scale was a decent start.  Their planned method they took was to start with a minimal feasible product, which was to produce a high-end luxury electric vehicle marketed to only a limited number of consumers who could truly have the funds for it. As being a distinctive start-up, Tesla really had to depend on the trial and error tactic, with the core driver behind their accomplishments is the want and need for innovation. Within industries where there are few to no new entrants, it is very rare to see advanced actions such as Tesla.

As well as not taking part in the usual model in economics, the learning curve. Tesla relied and continues to rely substantially on their associations to push onward and move up in their designated markets. Their alliances become partnerships and help them in the end with these partners investing in Tesla and their overall plan. Tesla also was smart in expanding their network externalities versus taking the route of new markets and the “possibilities”. Referring to the fact they are increasing their network of 240-V charging stations when they grasped how long the 120-V charging stations take to charge one of their vehicles (Dobrinova, 2018). They saw a downfall and tackled it before it made a negative mark on their company and products. Also, the dealerships and distribution making another barrier that Tesla faces. With all other automobile manufacturers having well-established networks of dealers and service associates, Tesla had to think of something to conquer this as well. Regardless of being a new company in the trade, they have moved up swiftly with the large players within the industry. With this they are forming their owned-and-operated service centers. Even though it has been declared that the Service Division is not supposed to make a revenue because its only assignment is to eliminate the worries of buying from consumers and upholding their products, Model S precisely cause this product could really lift Tesla’s sales in the long-run (Dobrinova, 2018).

Acting like a startup is what differentiates Tesla from all the other companies in the inclusive automobile field. As well as the strategic route that Tesla endures to take is helping the company not only enter the market, but it also redefines the competition and change the market structure completely. What has assisted the firm build up its influential base for the growth of a new niche in the already congested market is the start-up nature of the business as well as the entrepreneurial essence of its organizers.

Teslas Market Structure

So what market does Tesla specifically fall under? The market structure the firm belongs to is an Oligopoly. This is because it competes with other vehicle companies in today’s market. Their three main competitors would have to be Nissan, with a network of 500 fast chargers that rival Tesla’s Supercharger network, a “No Charge to Charge” program offered to consumers that lasts two years for new Nissan Leaf buyers, which Tesla competes with now by introducing the possibility of purchasing a new vehicle with the Free Lifetime Charging, and the only other thing is that it is cheaper than the Model S. Their second top competition is Toyota who uses Teslas battery for their RAV4, they were also the first to produce a commercial fuel-cell vehicle and have a much faster refuel time than many other EVs. Lastly, the Chevrolet Volt, which can compete due to the fact it can drive up to 380 miles on a fully charged battery and full tank of gas and is more affordable than the Model S.

Recommendations for Tesla

With the sales of EVs growing and continuing to grow rapidly, as a supplier for this market, Tesla should try to become the top or one of the major producers for the EV. Also, many of the central states in the United States have little to no charging stations and a lower awareness of EVs. The company should really try focusing on spending some of their funding on more Supercharger stations in these areas as well as more in the areas of their top sales. Also, inputting some more advertising will increase the awareness of their vehicle and their unique offers they have compared to other companies in the market. As well as expanding their line of products to be more applicable to a wide range of consumers, especially low-income consumers.

With the position Tesla currently has in their market, they are easily capable of overtaking the market and implementing their overall desire of innovation and a safer and cleaner world with the transition to EVs. Whenever one of their competitors came out with an incentive or a complement to their hybrid or EV, Tesla saw that moved and planned of action. Every plan of action created was well thought out, funded, and necessary for the company to make that made their products better than before and better than their competitors. With the many choices and possibilities and incentives provided by Tesla, they should not have that hard of a time of gaining more customers, especially once they make the Model 3 priced even lower.

The price elasticity of fully electric vehicles is more elastic than compared to Hybrid and Internal Combustion Engines. Evs are extremely elastic because they are not as common as many may think, hybrids are the most common vehicle that many thinks of when they hear Electric Vehicles. Also, Teslas factory is completely dedicated to EVs and offering a luxury EV at the right price. With the demand for Teslas products is elastic, but the supply is relatively inelastic. Tesla has sufficient capital and projections of demand to work through the losses they endure and continue supplying their vehicles to consumers.

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