Tesla and its Host of Issues

Elon Musk, considered a real-life Tony Stark by some, promised years ago to revolutionize the auto industry. It began with the Roadster, a premium luxury car experience which was followed by the Model X, Model S, and now the anticipated Model 3. Today however, Tesla seems to be running into a host of issues. The largest issue currently is that the Model 3 release date continues to be pushed back, with some estimates predicting that people who put a deposit down for the car in 2016 will not be able to receive their Model 3 until 2021. Out of the past 31 financial quarters, Tesla has only managed to post two positive quarters (it posted positive in the third quarter of 2016). As you can see from the graph, nearly every time Tesla attempts to sell cars it loses money.

What is interesting though is that Tesla has a positive profit margin on the cars they sell. So where does the disparity lie? The disparity comes in Tesla’s massive R&D budget which drains any profits Tesla may actually earn.

Furthermore, Tesla recently merged with SolarCity and Space X to form a trifecta of money losing companies. One additional reason SolarCity and now Tesla finds itself in dire straits is that states such as Nevada are rolling back their net metering programs which allow solar panel households to sell back their unused power to utility companies. Without these types of programs, solar panels make little to no financial sense. As Prof. Smitka aptly pointed out, combining three money losing companies into one is not exactly smart business.

So what is Tesla’s alternative business strategy? Well for one by asking consumers to put a deposit down on vehicles before they have even begun production allows Tesla to acquire valuable financial capital.  400,000 consumers already made $1,000 deposits on the Model 3 giving Tesla an extra $400,000,000 in financial assets. Furthermore, Tesla plans on operating out of its own dealerships, something other auto industries have attempted, but failed to do due to high operating costs associated with dealerships. Tesla hopes these dealerships will provide an added layer of unmatched service (we’ll see if that actually helps). Finally, with Tesla hoping to be one of the first fully battery powered cars to hit the market, Tesla has to operate and open more of their SuperCharge stations to make mass production and sales of Tesla vehicles even possible (imagine if Ford had to open and operate their own gas stations). One problem however, is that cars like the Nissan Leaf and Chevy Bolt are likely to hit already on the market, long before the Model 3 will launch, leaving Tesla with only brand recognition left as its saving grace. Tesla may have to up its current $0 marketing budget to compete in such a competitive market or may find itself coming up short of its financial goals yet again.

Sources:

  • http://www.cnbc.com/2016/10/26/tesla-reports-third-quarter-earnings.html
  • http://thetechnalyzer.com/tesla-business-model/
  • http://dailycaller.com/2016/11/10/billionaire-elon-musks-solar-company-has-basically-turned-into-a-bonfire-of-money/
  • http://www.businessinsider.com/a-legendary-car-exec-thinks-tesla-is-facing-the-trifecta-of-doom-2015-10

12 thoughts on “Tesla and its Host of Issues

  1. Why does Telsa continue such strenuous R&D if it loses them so much money/they have a model that makes them profit? I would be curious to see when they begin to focus on the existing technology they have and stop attempting to develop new technology.

    • One of our students who’s had accounting should look at their F/S. This may be a catch-all category that includes engineering expenses, of which part would be the detailed development work on new models. In other words, it’s more the “D” of R&D than the “R”. These are of course necessary, ordinary expenses for bringing a vehicle to market. They also have their autonomy system, and that soaks up R&D. They announced they’re incorporating the hardware in all cars, but the footnote pointed out that they’re disabling the software for the time being, so they actually removed functionality from existing vehicles, presumably because it wasn’t working well enough to be safe to engage.

      • According to Tesla’s official released annual report:

        “Research and development (R&D) expenses consist primarily of personnel costs for our teams in engineering and research, supply chain, quality, manufacturing engineering and manufacturing test organizations, prototyping expense, contract and professional services and amortized equipment expense.

        R&D expenses for the year ended December 31, 2015 were $717.9 million, an increase from $464.7 million for the year ended December 31, 2014. The increase in R&D expenses consisted primarily of a $93.9 million increase in expensed materials primarily to support our Model X development and Model S improvements, a $75.9 million increase in employee compensation expenses, a $30.6 million increase in facilities and depreciation costs, a $20.1 million increase in costs related to Model X, Autopilot and dual motor powertrain engineering, design and testing activities and a $22.8 million increase in stock-based compensation expense related to increased headcount and increasing values of awards granted.”

        Indeed it seems like much of Tesla’s research and development expenses comes from development work.

        http://ir.tesla.com/secfiling.cfm?filingid=1564590-16-13195&cik=

  2. I am very surprised that Tesla was able to raise so much capital by getting customers to place down payments on cars in advance of production as that is simply unheard of in the industry. People must have gotten so caught in the all the buzz around the company because I just do not know why else they would fork up in advance. Why wouldn’t they just wait until the car is actually ready to buy one?

    Furthermore, Tesla will not be able to continue this strategy if they keep delaying release dates as mentioned above. They will quickly burn through all of their credibility with consumers if they continue to renege on commitments.

  3. I don’t understand why consumers continually buy into Elon Musk’s vision of the future of automotive technology. Even if I thought his science was sound, I would be extremely worried about the future of a company that was genuinely okay with taking losses for this amount of time. Could it be that the wealthy who have placed a deposit on the Model 3 are acting irrational, with the addition of the Nissan Leaf and the Chevy Volt into the market? Or are they seeing something that we are missing?

    • I don’t think they all see something that we are missing. However, someone with a lot of disposable income is going to be more attracted to a Tesla car than a Nissan or Chevy just by nature of the brands. Setting aside all they hype (which may or may not be deserved) that surrounds the company over their technology, Tesla has already shown themselves to be successful in the luxury car market as they were the best selling luxury car in Western Europe a couple years ago.

      • While I fully agree that Tesla as a brand is more appealing to those with disposable income that say a Chevy, disposable income is not the only reason Tesla sells well as 4,000 of the 16,000 or so Tesla’s sold in Western Europe are credited to Norway which offered huge tax breaks, free parking, and unlimited city access for electric cars. Tesla will soon have to compete with other electric luxury cars instead of just companies like Chevy as companies like Porsche and Audi are developing their own electric vehicles. Tesla has it’s brand image but I’m not positive that Tesla will be able to hold up to the introduction of other luxury electric vehicles in the future.

        http://www.forbes.com/sites/neilwinton/2016/04/06/tesla-model-s-the-biggest-selling-luxury-car-in-europe/#1dd0f7593c94

  4. After hearing Professor Smitka’s rational analysis of the auto industry, it is becoming clearer the issues that Musk faces operating on the auto industry playground. The system has had more than a century form out its characteristics, and spit out its fair share of winners and losers. Yet, my only grain of salt is with who Elon Musk is as a person. The guy really does not lose at whatever venture he partakes in, and I think he recognizes that the ultimate game plan is to build long term foundations. Yes history is against him, but I think we can never underestimate the importance of one individual. History has shown great man taking down the entire structures of empires.

  5. I’d like to know more about the decision to combine three money losing companies. Maybe Musk views these companies as helpful components in the development of a fully electric vehicle for Tesla. SolarCity and Space X thus may offer the missing link in the development of the technology needed for his new car. Still, these acquisitions seem like money spending ventures, similar to his investments in R&D. Maybe these companies will be what Tesla needs to finally generate a profit again, but that is probably unlikely.

    On the topic of R&D, Tesla’s spending reminds me of that of Amazon detailed in a blog post last week. I’d like to know the specific differences that allow Amazon to flourish so well, while Tesla continues to experiences losses. Is this where it comes back to the dealerships? It appears that their expanding costs in operations may be the driving factor, for revenue did rise as well during 2016. In their efforts to make a car that transcends the market, however, it may be impossible to cut costs and improve their profit margins.

    http://www.autonews.com/article/20160803/OEM05/160809905/teslas-losses-deepen-as-expansion-costs-grow

  6. It seems like a lot of the consumers who put down the $1000 deposit may just be flocking to the brand. Tesla, for all of its flaws, undoubtedly projects an image of being sleek and futuristic. If you’ve got the money it probably feels good to be staking your claim in that image. On that note, its really a shame that Tesla is not taking some of that R&D money and putting it into advertising. That sleek, futuristic image has a hold on a lot of people’s perception of Tesla (including mine before this class) and I’m sure they could boost the brand’s image and create more hype around current and future projects. That hype might encourage more people to put down a deposit for the Model 3.

    • These deposits are refundable, or at least will be if Tesla remains solvent. Furthermore, such deposit schemes in the past have had conversion rates of 30%-40%. Unlike the Model S, the Model 3 is not targeted at wealth individuals, but at the mass market with a target $35,000 price. In the past the actual cost of Tesla models has been well above the initial target. But in the middle market there are many individuals who might be willing and able to pay $35,000 for a car they really, really want but simply can’t afford $40,000 or $45,000. The higher the actual price of the Model 3, the fewer the share of deposits that will turn into sales.

  7. What of Tesla’s direct sales model? What are the financial implications of “company” stores? [This applies as well to restaurants: do you franchise or own it yourself?]

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