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1 Tesla 1 1. INTRODUCTION Tesla Inc. is an energy and car manufacturer founded in 2003 at USA, under the name of Tesla Motors. Not only does the company focus on the manufacturing electric cars, but also on the production and sales of solar panels. By creating new technologies for their products such as self driving cars, the company is being disruptive compared to the rest of the market. In recent times, Tesla has faced some production and financial problems that could jeopardize the future of the company. 2. HISTORY Founded by Martin Eberhard and Marc Tarpenning and nowadays run by Elon Musk (co- founder of Tesla) as current CEO, the company has always aimed at offering electric cars at prices affordable to the average consumers. In its early days, Tesla started by offering sport cars, followed then by mass market vehicles all with the purpose of accelerating the introduction and implementation of electric vehicles. The Tesla Roadster, was the first automobile to use lithium-ion battery cells, able to increase the endurance of the vehicle. During the financial crisis of 2008, Tesla was struggling to survive, and managed to avoid bankruptcy, thanks to investment funding obtained by venture capitalists such as Google, Daimler, Toyota and even Elon Musk himself. Shortly after that, the company launched its IPO on Nasdaq, raising 226 million of US dollars. In the following years, the company launched new car models. In 2012, the first Tesla Model S, was introduced into the market, becoming only one year later the first electric car to top the monthly new car sales ranking in any country. In 2015 the first crossover utility vehicle or SUV 1 Case written by Elena Cacciapaglia, Marc Solé, Alessio Matrone and Ruggero Giordano, and supervised by Oriol Amat, Barcelona School of Management, 2019.
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Tesla1 - ACCID · 2019-02-21 · 8 Musk, Elon (2015): Elon Musk USC Commencement Speech. 9 Vator TV (2010): Interview with Elon Musk- Elon Musk:“Work twice as hard as others. 10

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Page 1: Tesla1 - ACCID · 2019-02-21 · 8 Musk, Elon (2015): Elon Musk USC Commencement Speech. 9 Vator TV (2010): Interview with Elon Musk- Elon Musk:“Work twice as hard as others. 10

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Tesla1

1. INTRODUCTION

Tesla Inc. is an energy and car manufacturer founded in 2003 at USA, under the name of Tesla

Motors. Not only does the company focus on the manufacturing electric cars, but also on the

production and sales of solar panels. By creating new technologies for their products such as

self driving cars, the company is being disruptive compared to the rest of the market. In recent

times, Tesla has faced some production and financial problems that could jeopardize the future

of the company.

2. HISTORY

Founded by Martin Eberhard and Marc Tarpenning and nowadays run by Elon Musk (co-

founder of Tesla) as current CEO, the company has always aimed at offering electric cars at

prices affordable to the average consumers. In its early days, Tesla started by offering sport

cars, followed then by mass market vehicles all with the purpose of accelerating the

introduction and implementation of electric vehicles. The Tesla Roadster, was the first

automobile to use lithium-ion battery cells, able to increase the endurance of the vehicle.

During the financial crisis of 2008, Tesla was struggling to survive, and managed to avoid

bankruptcy, thanks to investment funding obtained by venture capitalists such as Google,

Daimler, Toyota and even Elon Musk himself. Shortly after that, the company launched its IPO

on Nasdaq, raising 226 million of US dollars.

In the following years, the company launched new car models. In 2012, the first Tesla Model

S, was introduced into the market, becoming only one year later the first electric car to top the

monthly new car sales ranking in any country. In 2015 the first crossover utility vehicle or SUV

1 Case written by Elena Cacciapaglia, Marc Solé, Alessio Matrone and Ruggero Giordano, and

supervised by Oriol Amat, Barcelona School of Management, 2019.

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under the name of Model X was launched. Both models have achieved the expected sales target

set by the company. The year after, Tesla agreed to acquire SolarCity Corp., the largest installer

of rooftop solar system in the United States, for a transaction worth 2.6 billion of dollars in

stocks. As a consequence of this acquisition, Tesla stopped using door to door sales methods

and started to directly sell its products at stores.

In 2016, after the company announced the release of the new Tesla Model 3, global reservations

have reached an amount of 325,000 units in a week, inducing Tesla to advance its annual unit

build plan, in order to meet the demand.

The year 2017 represented a really successful year for the company, which has managed to

become one of the most valuable American automaker briefly surpassing Ford and General

Motors in terms of market capitalization. However in the same year, Tesla’s stock value lost

more than $12 Billion, for a series of factors that disappointed investors. Nowadays, there’s an

ongoing discussion of the possibility of Tesla going private.

Mostly because of the pressure posed by investors on the decisions taken by the company which

might be optimal for the present, but not necessarily for long term growth. However, Elon

Musk and the board of directors have excluded this option, meaning that for the moment Tesla

should remain public.

3. INDUSTRY

Tesla has two different product portfolios, which are the electric vehicles and the sustainable

energy business. Both products go alongside with Tesla’s mission that is “accelerating the

transition to sustainable energy”2. Right now, Tesla’s main business is the electric transport

industry.

Car Industry

Since Tesla started manufacturing electric cars in 2003, the demand has risen exponentially

due to the point that most of classical car manufacturers are changing their strategy. Nowadays,

people are more environmental friendly than before and that is one of the reason that explains

2 Source: Tesla Official Website.

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this increasing tendency. According to Unilever (2017)3, 33% of the customers prefer to buy

sustainable products.

Source: http://www.ev-volumes.com/country/total-world-plug-in-vehicle-volumes/

Figure 1. Sales of EVS Worldwide in thousands (2013-2017)

Over the last five years as it is seen in Figure 1, the average growth of the industry has been

58% per year. However, fuel cars are still leading in terms of sales.

One of the reasons that this is still happening is that this type of cars are still more affordable

than electric cars. Of course this is going to change and according to Hodges (2018)4, electric

cars are going to be cheaper than gasoline cars in 2024.

SWOT of the industry

Strengths

● Aspect of technological development: lower costs of

use and servicing

● Environmentally friendly, high energy efficiency

● Social awareness

● Seen as a luxury product (higher price compared to

regular cars)

Weaknesses

● Higher cost of production, higher barriers to entry

● EV sales amount to only 1% globally

● Low margin (even negative), no economies of scale

● Limited travel range (battery life), long charging

time

● Danger for pedestrian traffic (sound)

3 Unilever (2017): Reports show a third of the customers prefer sustainable brands.

https://www.unilever.com/news/press-releases/2017/report-shows-a-third-of-consumers-

prefer-sustainable-brands.html 4 Hodges, Jermey (2018): Electric Cars may be cheaper than gas guzzlers in seven years,

Bloomberg.

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Opportunities

● Market growth and development, competition

● Government support, funding (& tax breaks for

purchasing)

● Free parking service and charging in some countries

● Increased public social awareness

● Technology development, further reduction of costs

Threats

● Little competition given % global sales EV (cross-

market: cannot compare to gas powered vehicles

market)

● Lack of cooperation between manufacturers

● Charging mostly limited and complex

● Charging infrastructure in countries

● Seen as a luxury product still (given price)

● Price uncertainty in secondary market

Figure 2. SWOT Analysis of the Industry

Competitors and Sales Ranking

Source: http://www.ev-volumes.com/country/total-world-plug-in-vehicle-volumes/

Figure 3. Top 6 companies in terms of EV sales worldwide (2016)

As it can be seen in Figure 3, Tesla’s main competitors include the American Ford Motor

Company, General Motors, Asian Honda Motor Company, Nissan Motor Company, BYD Auto

Co, BAIC Motor, and European car manufacturers, primarily Renault, BMW and Volkswagen,

along with others that are starting to explore the electric vehicle industry such as Audi, Jaguar,

Porsche and Mercedes.

However, right now Tesla seems to have no type of strong competition. According to the

Financial Times (2018)5, all the electric vehicle manufacturers have fallen short to surpass

Tesla. But it is important to consider that there are going to be new competitors in the future.

As Elon Musk (2016) said “There have been so many announcements of autonomous and ev

startups...I am waiting for my mom to announce one” (2016)6.

5 Campbell, Peter (2018): Electric car rivals revved up to challenge Tesla, Financial Times. 6 Musk, Elon (2016): Elon Musk- Full interview- Code Conference 2016, Youtube.

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Big tech companies have shown some interest in producing electric cars. It was reported by

Griffin (2018) that Apple might be investing a lot of resources to compete in the sustainable

transport business7 (2018).

3. QUALITATIVE ANALYSIS

Who?

There are a lot of factors that could explain the success of Tesla inside the electric car market.

However, there is one factor that people always mention and that is Elon Musk.

Elon Musk is a successful entrepreneur who has revolutionized the financial industry (creating

Paypal), the private aerospace industry (with SpaceX) and the transport industry (with Tesla,

Boring Company and Hyperloop). At only 47 years old, Elon has achieved more than

somebody could ever imagine in their whole life. So the question to make is, what makes Elon

so special?

1. “Work like every waking hour”- Elon Musk (2014)8

It was reported that Elon spends between 80 to 100 hours working on different projects9. Not

only the CEO of the company is doing it, but also employees are dedicating a lot of efforts to

accelerate the transition to sustainable energy. Ashlee Vance, who wrote an authorized

biography about Elon, explained that there were a lot of Tesla’s employees working on the

weekends10. Elon always try to acknowledge that the success of Tesla has come by having a

“phenomenal team”. It was reported by Payscale11, that Tesla was the second biggest tech

company in the world where employees think that they are actually making huge contributions

7 Griffin, Andrew (2018): Apple Car: iPhone company could be working on new electric

vehicle after all, new hire suggests, Independent. 8 Musk, Elon (2015): Elon Musk USC Commencement Speech. 9 Vator TV (2010): Interview with Elon Musk- Elon Musk:“Work twice as hard as others. 10 Vancee, Ashlee (2015): Elon Musk: Tesla, Spacex and the Quest for a fantastic future. 11 Payscale (2016): Payscale compares top tech companies.

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to the society. This amount of hours

dedicated, allows Tesla to do

breakthrough innovations before the

competitors can do it.

2. “Failure is an option here. If things are not failing, you're not innovating

enough”- Elon Musk (2015)12

It could be seen that Elon’s religion is innovation. According to the Forbes ranking, Tesla is

considered to be 4th most innovative company in the world13.

For customers perspective, it is a blessing that a company is always thinking different ways to

improve their product. Tesla has launched trailblazing innovations such as: self-driving cars,

beautiful designs and high autonomy in their batteries. However, innovations are costly and

difficult to establish.

3. “With Elon, what you see is what you get”- Kara Schwisser14

The most admirable attribute that people value from Elon, is his vision of helping the world by

making great products. He is not driven by materialistic motivations, he just wants to make

great contributions to the world. However, shareholders have another aim which is

profitability, and sometimes it generates a problem with Elon’s personality. Elon doesn’t worry

too much about Tesla stock price fluctuations. Also, he has expressed that there are some

inconveniences of being a public company. This mentality doesn’t go alongside with some of

the shareholders or investors of the company. His transparent view of a possible privatization

of the company, cost him to renounce his position of President of the Company.

12 Musk, Elon (2005): Hondas in Space, Interview with Fast Company. 13 Forbes (2018): The world most innovative companies. 14 Scwisher, Kara (2018): Elon Musk is “What you see is what you get”, says Recode’s Kara

Schwisher, CNBC.

Figure 4: Elon Musk’s Tweet (2018)-Twitter

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What?

Tesla’s strategy aims at offering high-performance electric cars, in order to be perceived as a

green and technology advanced brand. The first car launched by Tesla was the Roadster, which

unveiled Tesla’s cutting-edge battery technology and electric powertrain. Indeed, the Roadster

was the first all-electric car to use lithium-ion battery cells and the first all-electric car to travel

more than 320 kilometers per charge.

The original production of Tesla’s Roadster has ceased in 2012. Nowadays, the company’s car

product line is composed by 5 models:

1. Model S

On June 2012, Tesla launched Model S, the world’s first ever premium sedan, designing it from

the ground up. Moreover, it is characterized by the longest range of any electric vehicle, over-

the-air software updates that make it better over time, and a record 0-60 mph acceleration time

of 2.28 seconds as measured by Motor Trend. As of September 2018, the Model S, with global

sales of 250,000 units, ranks as the world's second best-selling plug-in electric car in history

after the Nissan Leaf.

2. Model X

In 2015, Tesla expanded its product line by introducing Model X, a full-size crossover SUV.

Model X is characterized by a lightweight aluminum body and passenger doors with “falcon-

wing” designs that open vertically. It comes in three configurations for 5, 6 or 7 passengers.

The Tesla Model S was the top selling plug-in electric car worldwide in 2015 and 2016 and in

September 2016, the Tesla Model X was voted in Norway as the top selling plug-in electric

car. Previously, the Model S had been the top selling new car four times.

3. Model 3

Tesla’s third creation is the Model 3, a low-priced high-volume electric car. Model 3 comes in

two configurations: the standard model delivers an EPA-rated all-electric range of 350 km,

while the long-range model delivers 500km. Tesla introduced Model 3 on March 31st 2016 and

it immediately had an incredible success: only one week later Tesla registered over 325,000

reservations, representing sales of over 14 billion dollars, and in July 2017 the number of

reservations was about 500,000. Since the beginning of 2018, Tesla Model 3 sales have been

the highest in the United States for each month and since August 2018 Tesla Model 3 has

become the world’s top-selling plug-in car of the year 2018.

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4. Tesla Roadster Next Gen

The aim of this model is to prove that electric cars could be even more faster and efficient than

fossil fuel cars. This car was presented in 2017 and it will be delivered around 2020. According

to Elon, this model will be faster than any other commercial car ever presented. It goes from 0

to 60 mph with only 1.9 seconds. This car’s price is $200,000, only affordable for high-income

customers.

5. Tesla Semi-Truck

The point here is to prove that not only cars could go electric. According to Elon, every

transport could be electric except rockets.

The launch of this truck/lorry was able to answer multiple doubts about electric trucks:

1. Autonomy: it has a capacity to drive 804 km without stopping

2. Speed: this truck has the ability to do 104 km per hour, compared to the best diesel

trucks that could drive 73 km per hour.

3. Affordability: low operating costs compared to conventional cars. Because of that,

companies such as DHL, Budweiser, Walmart or Pepsico had done big orders of

this model in order to save costs in the future.

Customers

Initially, with the introduction of Model S, Tesla aimed to target individuals looking for a high

performance electric car. Indeed, the original target group of the company included mainly

wealthy people in the upper-middle class, mostly business executives and entrepreneurs and

early adopters. However, with time Tesla started to expand its target to increase its customer

base, by focusing on younger people (between 20 and 40 years old) that are eco-friendly and

are looking for their first luxury car. Indeed, we can say that Tesla’s target group is divided in

three categories: the eco-friendly, the tech-savvy and the entry-level luxury buyers.

Distribution Channels

The amazing innovation of Tesla is also evident in terms of distribution channels. In fact, Tesla

introduced a completely new approach, much different from the one used by traditional

automakers that sell their cars through car dealerships, which means having a large inventory

of cars. Instead, Tesla only has a sample of each car in a showroom where customers can make

their purchasing decision. Customers will then order a car over the Internet and they will have

to wait for the product to be manufactured and shipped. This strategy not only helps Tesla to

improve consumer experience, but also to reduce inventory as well as increase turns. Moreover,

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Tesla’s strategy to differentiate itself from the market also includes the fact that the company

has ownership of distribution and repairs, which allows it to keep greater control over local

sales and services.

4. PRESENT SITUATION OF THE COMPANY

Right now, Tesla has nearly 50.000 employees and has shops/galleries around 27 different

countries in four different continents. As of September 2018, Tesla is the top selling luxury

brand in the United States. Indeed, in the last September, Tesla has demonstrated an

extraordinary growth in sales, reaching a market share of 35% in the US, surpassing Mercedes-

Benz, BMW, Lexus, Jaguar Land Rover and Audi, as reported by Shahan (2018)15. According

to recent news by Fred Lambert (2018), Tesla also dominates the luxury segment in Europe

thanks to the sales of the Model S and the Model X. The sales of this model are a key aspect to

finance future investments. Tesla aims to produce an electric car affordable to the mass market

and expand its supercharging network all around the world.

Tesla’s strategy was defined by Peter Thiel (2015)16 as “complex coordination” because it

involves creating many innovative pieces that fit together in order to challenge and change the

automotive industry.

Tesla’s production is focused on the exploitation of economies of scale, as it operates many

large factories, and on a high degree of vertical integration, which requires the company to

excel in multiple technology domains such as batteries, electric motors, sensors and artificial

intelligence.

As it has already been said, Tesla is a public company performing inside the Nasdaq Stock

Exchange. Some problems the company had with some of their investors are notoriously

known. Part of their investors considers Tesla as a risky investment. Also, it is important to

consider that the company does not pay any dividends to the shareholders because the company

is not generating a positive net income in annual terms. To evaluate the current situation, it is

important to look at the performance of Tesla share price in the lasts 12 months: 21% increase

against a decline in the main competitors Ford (-28%), GM (-15%) ...

Most of the critiques Tesla had towards its stock performance are being reduced because of the

profitability and achievements of the company compared to other auto manufacturers. Even

15 Shahan, Zachary (2018): Yep, Tesla is Gobbling USA Luxury Car Market- 8 charts and

Graphs, Clean Technica. 16 Thiel, Peter (2015): Zero to one. Notes on Startups or How to build the future.

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companies such as JMP Securities have recommended to buy Tesla’s shares, as it was reported

by Sheetz (2018).17 Of course, it is quite volatile compared to other companies.

So stock performance is not the main issue of Tesla. The main present issue of Tesla is to

understand when the company will start generating a net income and paying back to their

shareholders. In the 3rd trimester, the company generated a net profit of $311,5 million.

It is important to mention that the company is still expanding and investing resources in R&D.

That hardens the possibilities of having a positive net profit next year.

As it was reported by Lambert (2018)18, the company announced that it will increase its

network of superchargers around the world which, according to Elon, “it will cover between

the 95% to 100% of the population”.

Not a long time ago, to facilitate the transition to sustainable cars, the service of supercharging

was free for all Tesla cars. However, in order to facilitate their expansion, recently the company

started to charge a price per kwh.

Right now, Tesla is preparing the expansion of the Model 3 through Europe.

As will be mentioned later, the company is offering this model for at least 59.100€. This price

is still far off compared to a price that most people could and would be willing to afford. To

minimize costs of logistics, the company is looking for possible locations to place a new factory

of cars and batteries.

The company has announced that they will enter to new markets such as India, Turkey and

different countries of South America.

So the strategy or vision of Tesla is based on growing their infrastructures (also points of sale

and factories around the world) in order to sell more cars. With more cars produced, the

company could benefit more of economies of scale and be more competitive compared to the

classic auto manufacturers. Economies of scale and technology improvements would help

Tesla to produce an electric car affordable to the mass market.

17 Sheetz, Michael (2018): Tesla gets a new buy recommendation ahead of Earnings”- CNBC 18 Lambert, Fred (2018): Tesla plans to double Supercharger Network, V3 Delayed to early

next year, says Elon Musk, Electrek.

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5. SPECIAL ISSUES

Production Delays

One of the most notoriously known problems of Tesla are production delays. As an example,

in March of 2016 Tesla presented the Model 3, which became the most affordable car that the

company has offered. The lowest price of the car (with tax incentives) was $35,000. This

version was a huge success for Tesla even to the point that demand was over 325,000 cars with

only one week. The company promised that the deliveries of this car would start between late

2017 and early 2018. However, there was a delay between 6 to 9 months and the demand was

delivered in July of 2018. The company was expecting to produce over 5,000 cars per week.

However, at the early stages of production the company was capable of producing only 1.500

cars. According to Musk (2018), this problem was due to “putting too much technology at

once”19. Delays was a such a big problem, even to the point that the company was in 3 weeks

of default or bankruptcy20.

It is also described that the company was losing 100 million dollars per week because of the

bottlenecks of the Model’s 3 production. Delays also allowed for some customers to cancel

their orders and generated the whole problem.

Costs

One of the struggles that consumers face regarding whether to buy an electric car or not is the

cost. It is known that most of the electric cars are more expensive than conventional or fossil

fuel cars. The average price of a conventional car in 2016 in the European Union was 28.114€,

according to Stadista (2017). As previously stated, the most affordable Tesla costs $35.000 in

the USA. However, the current price of the Model 3 in Spain is at least 59.100€, far from the

average price in the European Union.

As it can be seen, Tesla prices are above the average prices for a car. Moreover, it is important

to consider that insurance costs for an electric car is 60% above compared to a fossil fuel car,

as claimed by Smith (2018)21.

19 Musk, Elon (2018): Tesla CEO Elon Musk offers a rare look inside Model 3 Factory, CBS

This Morning. 20 Musk, Elon (2018): Axios: HBO, HBO Documentaries. 21 Smith, Luke Johnh (2018): Electric car SHOCK- The surprising hidden cost of ownership,

Express.

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According to a study conducted by Deloitte22, most customers are willing to pay less than

$30.000 for an electric car. So in order to have high sales, the company must break down the

barrier of 30.000€ price.

If Tesla wants to accelerate the transition to sustainable energy, it is necessary to produce an

electric car that costs less than 30.000€. However, Tesla has to go through many improvements

in order to break down this barrier.

Right now, for every order of the standard version of the Model 3 ($35.000) Tesla is losing

$3.000 on the sale. The company is struggling to lower costs mainly for two reasons. As the

company has low production, they cannot benefit from economies of scale as other competitors

do. Moreover, the technology of batteries has to be improved in order to lower costs. Another

thing that could incentivize the consumption of electric cars is tax subsidies. However,

governments do not yet provide significant incentives to buy this type of personal transport. In

the European Region, there are only six countries who are offering incentives to buy electric

vehicles. Moreover, in USA there was a tax credit of $7.500 that has been reduced to $3.500.

To sum up, if Tesla wants to be competitive against fossil fuel cars, they have to do cost

improvements and not be dependent of external incentives.

Financial Instability

There has been a lot of doubts about the solvency of Tesla. As it was mentioned before, in 2018

the company was weeks away from disappearing due to production delays. From suppliers to

investors have expressed their doubts about the longevity of the organization. Even newspapers

such as the Fortune made an article saying that the company might go bankrupt in the near

future. Out of all parameters and ratios used to evaluate Tesla, the one with the most impacting

results is undoubtedly the Z-score. As it is known, is a measure which combine liquidity, capital

structure, assets and equity profitability of a company to assess its proximity of default. As

stated the result for Tesla is extremely low (-4,9), meaning that in the near future the company

might be facing bankruptcy.

This potential danger that Tesla is facing might be caused partially by the losses generated

during the last years. By other hand, due to not generating a positive net income, the company

is highly leveraged. All this generate a lot of doubts about the future survival of the company.

22 Deloitte (2018): Unplugged: Electric Vehicle realities versus consumer expectations,

Deloitte.

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Questions for discussion

1. Describe the key success factors of Tesla.

2. Identify the financial strengths and weaknesses of Tesla. Which are the three main

problems?

3. Design a cause and effect diagram.

4. Propose recommendations for Tesla and prepare a budget for the next two years including

these recommendations (you can use the templates proposed at the end of the Annex).

Hint: To forecast the future years, it is recommendable to use the growth rate

between 2017 and 2018.

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Annex23

Tesla Income Statement 2014-2018 (data in $ thousands)

The data of 2018 includes only 9 months

2018 (till Sept) 2017 % 2016 % 2015 % 2014 %

Total revenues 21.270.222 11.758.751 100% 7.000.132 100% 4.046.025 100% 3.198.356 100%

Total cost of revenues 17.016.178 9.536.264 81,10% 5.400.875 77,15% 3.122.522 77,18%

Gross profit 4.254.044 2.222.487 18,90% 1.599.257 22,85% 923.503 22,82% 881.671 27,57%

Research and development 1.938.843 1.378.073 11,72% 834.408 11,92% 717.900 17,74% 464.700 14,53%

Selling, general and admin. 3.484.246 2.476.500 21,06% 1.432.189 20,46% 922.232 22,79% 603.660 18,87%

Total operating expenses 5.423.090,81 3.854.573 32,78% 2.266.597 32,38% 1.640.132 40,54% 1.068.360 33,40%

Loss from operations (EBIT) -1.169.046 -1.632.086 -13,88% -667.340 -9,53% -716.629 -17,71% -186.689 -5,84%

Interest income 58.707 19.686 0,17% 8.530 0,12% 1.508 0,04% 1.126 0,04%

Interest expense -952.689 -471.259 -4,01% -198.810 -2,84% -118.851 -2,94% -100.886 -3,15%

Other (expense) income, net -125.373 -125.373 -1,07% 111.272 1,59% -41.652 -1,03% 1.813 0,06%

Loss before income taxes

(EBT) -2.188.401

-2.209.032 -18,79% -746.348 -10,66% -875.624 -21,64% -284.636 -8,90%

Provision for income taxes 31.251 31.546 0,27% 26.698 0,38% 13.039 0,32% 9.404 0,29%

Net loss -2.157.149 -2.240.578 -19,05% -773.046 -11,04% -888.663 -21,96% -294.040 -9,19%

23

Data from the Security Exchange Commission

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Tesla Balance Sheet 2014-2018 (data in thousands of dollars)

Sep. 30, 2018 % Dec. 31, 2017 % Dec. 31, 2016 % Dec. 31, 2015 % Dec. 31,

2014 %

Cash and cash equivalents 2.967.504 10,14% 3.367.914 11,75% 3.393.216 14,97% 1.196.908 14,79% 1.905.713 32,58%

Restricted cash 158.627 0,54% 155.323 0,54% 105.519 0,47% 22.628 0,28% 17.947 0,31%

Accounts receivable, net 1.155.001 3,95% 515.381 1,80% 499.142 2,20% 168.965 2,09% 226.604 3,87%

Inventory 3.314.127 11,33% 2.263.537 7,90% 2.067.454 9,12% 1.277.838 15,79% 953.675 16,30%

Prepaid expenses and other current assets 325.232 1,11% 268.365 0,94% 194.465 0,86% 125.229 1,55% 94.718 1,62%

Total current assets 7.920.491 27,07% 6.570.520 22,93% 6.259.796 27,62% 2.791.568 34,50% 3.198.657 54,68%

Property, plant and equipment, net 11.246.295 38,43% 10.027.522 34,99% 5.982.957 26,40% 3.403.334 42,06% 1.829.267 31,27%

Solar energy systems, leased and to be leased, net 0,00% 6.347.490 22,15% 5.919.880 26,12%

Intangible assets, net 291.476 1,00% 361.502 1,26% 376.145 1,66%

Operating lease vehicles, net 0,00% 4.116.600 14,37% 3134080 13,83% 1.791.403 22,14% 766.744 13,11%

Goodwill 65.226 0,22% 60.237 0,21%

MyPower customer notes receivable 422.897 1,45% 456.652 1,59% 506.302 2,23%

Restricted cash, net of current portion 396.835 1,36% 441.722 1,54% 268.165 1,18% 31.522 0,39% 11.374 0,19%

Other assets 431.819 1,48% 273.123 0,95% 216.751 0,96% 74.633 0,92% 43.209 0,74%

Total assets 29.262.713 100,00% 28.655.372 100,00% 22.664.076 100% 8.092.460 100% 5.849.251 100%

Accounts payable 3.596.984 12,29% 2.390.250 8,34% 1.860.341 8,21% 916.148 11,32% 777.946 15,94%

Accrued liabilities and other 1.990.095 6,80% 1.731.366 6,04% 1.210.028 5,34% 422.798 5,22% 268.884 5,51%

Deferred revenue 570.920 1,95% 1.015.253 3,54% 763.126 3,37% 423.961 5,24% 191.651 3,93%

Capital lease obligations, current portion 0,00% 0,00% 0,00% 0,00% 9.532 0,20%

Resale value guarantees 604.949 2,07% 787.333 2,75% 179.504 0,79% 136.831 1,69%

Customer deposits 905.838 3,10% 853.919 2,98% 663.859 2,93% 283.370 3,50% 257.587 5,28%

Current portion of long-term debt and capital leases 2.106.538 7,20% 796.549 2,78% 984.211 4,34%

Convertible senior notes 0,00% 601.566 12,33%

Total current liabilities 9.775.324 33,41% 7.674.670 26,78% 5.827.005 25,71% 2.040.375 25,21% 2.107.166 43,19%

Long-term debt and capital leases

9.669.879

33,05% 9.415.700 32,86% 5.860.049 25,86%

Convertible senior notes issued to related parties 2.634

0,01% 2.519 0,01% 10.287 0,05% 1.806.518 37,02%

Deferred revenue, net of current portion 950.126 3,25% 1.177.799 4,11% 851.790 3,76% 446.105 5,51% 292.271 5,99%

Resale value guarantees, net of current portion 455.762

1,56% 2.309.222 8,06% 2.210.423 9,75% 1.293.741 15,99% 487.879 10,00%

Other long-term liabilities 2.555.319 8,73% 2.442.970 8,53% 1.891.449 8,35% 364.976 4,51% 173.244 3,55%

Total liabilities 23.409.144

80,00% 23.022.980 80,34% 16.750.167 73,91% 6.961.471 86,02% 4.879.345 100%

Redeemable noncontrolling interests in subsidiaries 551.264 1,88% 397.734 1,39% 367.039 1,62%

Convertible senior notes (Note 13) 0,00% 70 0,00% 8.784 0,04% 42.045 58.196

Common stock 171 0,00% 169 0,00% 161 $ 131 126

Additional paid-in capital 9.957.711 34,03% 9.178.024 32,03% 7.773.727 34,30% 3.414.692 42,20% 2.345.266

Accumulated other comprehensive gain (loss) 8.271 0,03% 33.348 0,12% -23.740 -0,10% -3.556 -0,04%

Accumulated deficit -5.457.315 -18,65% -4.974.299 -17,36% -2.997.237 -13,22% -2.322.323 -28,70% -1.433.682 -24,51%

Total stockholders' equity 4.508.838 15,41% 4.237.242 14,79% 4.752.911 20,97% 1.088.944 13,46% 911.710 15,59%

Noncontrolling interests in subsidiaries 793.467 2,71% 997.346 3,48% 785.175 3,46%

Total liabilities and equity 29.262.713 100,00% 28.655.372 100,00% 22.664.076 100% 8.092.460 100% 5.849.251 100%

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Tesla Cash flow Statement 2014-2017 (data in thousands of dollars)

2017 2016 2015 2014

Cash flow from operations -60.654 -123.829 -524.499 -57.337

Cash flow from investing activities -4.418.967 -1.141.430 -1.673.551 -990.444

Cash flow from financing activities 4.414.864 3.743.976 1.523.529 2.143.130

Tesla Cash Cycle 2015-2017

2017 2016 2015

Days Inventory (1) 86,64 139,72 115,28

Days Receivable (2) 9,22 26,03 15,24

Days Payable (3) 91,49 125,72 107,09

Cash Cycle (1 + 2 -3) 4,37 40,02 23,43

Tesla Financial Ratios 2014-2017 compared with the average of the industry

2017 2016 2015 2014 Average Industry

(2017)24

Current assets / Current liabilities 0,856 1,074 1,368 1,518 1,45

Debt/Assets 0,852 0,79 0,865 0,83

Sales/Assets 41,04% 30,89% 50,00% 54,58% 64%

ROE (Net profit / Equity) -52,88% -16,26% -81,61% -32,25% 117%

ROA (EBIT / Assets) -7,82% -3,41% -10,98% -5,03% 41%

Financial Leverage

(EBT / EBIT x Assets / Equity) 9,15 5,33 9,08 9,78

24 Source: CSI Market.

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Template to prepare the budgets for 2019 and 2020

2017 2018

(since Sept.)

2019 (without

measures) Measure 1 Measure 2

2019 (combined

measures)

2020 (with all

measures)

Total revenues

$11.758.751,00

$21.270.222,70

Total cost of

revenues $9.536.264,00

$17.016.178,16

Gross profit $2.222.487,00 $4.254.044,54

Research and

development $1.378.073,00 $1.938.843,81

Selling, general

and administrative $2.476.500,00 $3.484.246,99

Total operating

expenses $3.854.573,00 $5.423.090,81

Loss/Gain from

operations (EBIT) $-1.632.086,00 $-1.169.046,27

Interest income $19.686,00 $58.707,13

Interest expense $-471.259,00 $-952.689,09

Other (expense)

income, net $-125.373,00 $-125.373,00

Loss before

income taxes

(EBT)

$-2.209.032,00 $-2.188.401,23

Provision for

income taxes $31.546,00 $31.251,38

Net loss $-2.240.578,00 $-2.157.149,85

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2017 % of change

(2017-2018)

2018 (since

Sept.)

2019

(without

measures)

Measure 1 Measure 2 2019 (combined

measures)

% of change

(2018-2019)

2020 (combined

measures)

% of

weight

compared

to total

assets

Cash 3.367.914 -13,49% 2.967.504

Inventories 2.263.537 31,70% 3.314.127

Accounts

receivable, net 515.381 55,38% 1.155.001

Others 423.688 12,44% 483.859

Total Current

Assets 6.570.520 17,04% 7.920.491

Total Non

Current

Assets

22.084.852 -3,48% 21.342.222

Total Assets 28.655.372 2,08% 29.262.713

Accounts

Payable 2.390.250 33,55% 3.596.984

Others 5.284.420 14,47% 6.178.340

Total Current

Liabilities 7.674.670 21,49% 9.775.324

Total Non

Current

Liabilities

15.348.310 -12,58% 13.633.820

Total

Liabilities 23.022.980 1,65% 23.409.144

Total Equity 5.632.392 -24,92% 4.508.838

Total Equity

and

Liabilities

28.655.372 2,08% 29.262.713

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Proposed answers25

1. Describe the key success factors of Tesla.

The strategy of the company is based on investing resources in research and development to

offer an attractive and distinctive product. The new technologies they are including in their

products make customers want to buy anything that has the brand Tesla. As Elon Musk said,

“great companies are built on great products”. Tesla have not done a lot of promotion, they

have focused on having a product with breakthrough innovations.

The aim of focusing in innovation is to prove that electric cars could be as good or even better

than any other fossil fuel cars. There are two characteristics that Tesla has focused on in order

to satisfy their aim:

1. Batteries and Charging. The most repeated critique towards electric cars has been the

lower capacity of batteries. One of the first commercialized electric cars was the

General Motors EV1(1996), which had an autonomy of 160 km. This capacity of range

didn’t allow drivers to make long distance travels without stopping. Tesla has been able

to do progress on that aspect and the Model S has an autonomy of 507 km.

Tesla has not only made advances on batteries, but also in the charging network for

electric cars. Tesla has put 11.583 supercharges in strategic points in four different

continents, allowing drivers to have more freedom for their journeys.

2. Attractiveness. Tesla has realized that in order to accelerate the transition to

sustainable energy, it is not enough to offer a “commodity car”. From the product itself

to the customer service, the company has found a way to differentiate compared to the

classical automakers. By analyzing the product, it can be seen that there are two main

factors that the company differentiates, which are design and technology.

25 Answers written by Elena Cacciapaglia, Marc Solé, Alessio Matrone and Ruggero Giordano,

Barcelona School of Management, 2019.

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In 2018, the Automobile Magazine recognized the Tesla Model 3 as the Design of the

Year. Also the famous comedian Jay Leno (2012) 26 defines Tesla Model S as “an

electric car that doesn’t look like an electric car...it is a good looking car”. Tesla has

broken the conventionalism of electric cars of not being “sexy”.

Tesla takes care not only about how the car is displayed, but also focuses on what goes

inside the vehicle.

The company has proved that electric cars could be faster than fossil fuel cars. As it

was reported by Hawkins and Warren (2017)27, the Tesla Roadster next Gen will be the

fastest car in the world ever commercialized, going from 0 to 60 mph in 1,9 seconds.

Also the company has been a pioneer in new technologies. Tesla is the first brand that

has commercialized self driving vehicles.

Another priority for the company is the customer experience. As it is mentioned in the

case, the company has a great channel network that combines their own galleries with

their online website. Tesla is expanding their points of sale to be more present around

the world and therefore achieve their mission.

Another key success factor is Elon Musk and all Tesla’s employees. The amount of hours

dedicated to their work allows them to achieve breakthrough innovations before the

competition.

26 Leno, Jay (2012): 2012 Tesla Model S, Jay Leno’s Garage, Youtube. 27 Hawkins, Andrew J and Wareen, Tamara (2017): Tesla’s new second-generation Roadster

will be the quickest car ever production ever made, The Verge.

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2. Identify the financial strengths and weaknesses of Tesla.

Strengths Weakness

Working

Capital

Current Ratio Low Current Ratio (0,856)

Real working

capital-

Working

Capital need Negative: The company needs Liquidity

Cash Cycle

The company is paying suppliers before getting paid from customers.

Lack of bargaining power with suppliers

Cash Cycle

Evolution

Improved cash cycle. The

company has reversed the

situation to sell the

inventory before paying

suppliers.

Equity Low Equity

Income

Statement

Sales

Steady and Constant

Increase of Sales

Financial

Expenses High Financial Expenses (4%)

Net Income Never generated profit annually

Leverage

Debt/Assets High leverage (0,852). Unstable and risky capital structure

Quality of Debt Good quality of debt

Financial

Leverage High financial leverage when the company is generating losses

Profitability ROE Negative ROE. Unattractive for investors

Assets

Management Sales/Assets Unproductive assets compared to the industry

Solvency Z-Score Negative Z-score. This means that the company might go bankrupt

Figure 1. Tesla’s Financial Strengths and Weakness

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Which are the three main problems?

1. Liquidity

It could be observed that the main problem of the company is liquidity. To justify the previous

statement, it is important to measure the current ratio over the last years.

2017 2016 2015 2014

CA/CL 0,856 1,074 1,368 1,518

Figure 2. Tesla’s Current Assets / Current Liabilities (2014-2017)28

Before making assessments about the main problem of Tesla, it is important to calculate the

real working capital and the working capital need. The difference between those two concepts

will clarify if Tesla has a surplus or deficit of its working capital.

2018 (3Q) 2017 2016 2015 2014

REAL WORKING CAPITAL -1.854.833 -1.104.150 432.791 751.193 1.091.491

WORKING CAPITAL NEED29 93.201 -1.174.635 -123.069 15.760 258.530

RWC-WCN -1.948.034 70.485 555.860 735.434 832.961

Figure 3. Real Working Capital and Working Capital Need (2013-2018)30

As it is observed in figure 3, from 2014 the surplus of Tesla has decreased to the point that in

2018 that the company has deficit in his working capital. This is a bad situation for Tesla

because it means that the company needs extra source of finance to run its daily operations. In

other words, the company needs liquidity.

As it could be seen from the Figure 2, the company in 2017 is not even able to repay its short

term liabilities with its current assets. Therefore, Tesla has problems of solvency in the short

term. To find the source of the problem, it is necessary to calculate the cash cycle.

28 Data from the Security Exchange Commission. 29 Assumption: Minimum Cash Balance 10% of CL. 30 Data from the Security Exchange Commission.

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Figure 4. Tesla’s cash cycle (2015-2016)31

By looking at the cash cycle in figures 4 and 5, the company has been able to reduce it from 29

days in 2015 to 13 days in 2017.

This is a positive sign because it means that the company is able to transform inventory into

cash faster. However, it is important to break down the cash cycle.

In essence, the source of the liquidity problem is that Tesla is paying its suppliers before

receiving the cash. Therefore, generating financial struggles both in short and long term.

To cover this lack of cash, the company has financed with debt to the point that company’s

liabilities were five times bigger than its equity.

However, it can be seen in Figure 5 that the cash cycle has improved over the last year.

Figure 5. Tesla’s cash cycle in 201732

The company has been able to reduce the difference between the amount of days that the

company is paying its suppliers in comparison with the amount of days that they receive cash.

Even Tesla is trying to push forward the days payable by asking suppliers to return early

payments compared to what they did in the past, as reported by Denning (2018)33.

31 Data from the Security Exchange Commission. 32 Data from the Security Exchange Commission. 33 Denning, Liam (2018): Tesla’s Cash Back Request Sends a Worrsiome Message,

Bloomberg.

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However, the problem is still persistent and the current situation has worsened. As it was said

before, the company has financed with long term debt in order to fulfill their needs of cash.

However, the long term debt has transformed into short term and that is why the current ratio

has decreased over the last five years. One of the reasons for the company having liquidity

problems is because they need to repay the debt that is expiring.

2. Leverage

Even the fact that debt has increased over the last years, the financial leverage has remained

positive, as it is observable in figure 6. This could mean that debt is a good source to increase

their profitability. This situation would be good if ROE was positive. However, in this case,

the financial leverage makes ROE to be more negative than it could be (because the company

has a negative income).

2017 2016 2015 2014 2013

Financial Leverage 9,15 5,33 9,08 9,78 3,63

Figure 6. Financial Leverage (2013-2017)34

However, there are still doubts if Tesla could repay their loans. Tesla is generating negative

cash flow, therefore having troubles to repay their liabilities.

Another aspect to consider is the ratio between debt and assets. The proper benchmark of this

ratio is 0,37 or less. If we evaluate this ratio, it could be seen that the company is two times

higher than the proper benchmark. According to the unidimensional analysis, the result of Tesla

could symbolize a future bankruptcy or default in the near future.

Figure 7. Debt/Assets (2015-2017)35

34 Data from the Security Exchange Commission. 35 Data from the Security Exchange Commission.

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By looking at the current situation of Tesla in the figure 7, it could be understood that some

stakeholders are worried about what the future holds for the company.

3. Net Income

2014 2015 2016 2017

Revenues 3.198.356 4.046.025 7.000.132 11.758.751

Gross profit 881.671 923.503 1.599.257 2.222.487

Total operating

expenses

1.068.360 1.640.132 2.266.597 3.854.573

Net loss -294.040 -888.663 -773.046 -2.240.578

Figure 8. Tesla’s Income Statement 2014-2017 (data in thousands of $)36

During the evolution from the year 2014-2018 the company has managed to increase the overall

volume of sales, as it is viewed in the figure 8.

Due to the characteristics of the competitive environment of the automobile industry, Tesla, as

many other companies in this sector, is facing an overall amount of costs related to revenues

of around the 80% of the sales generated. Even though the margin generated on sales, of around

21%, is above the industry average which fluctuates between 10-15%, the gross profit results

are far from being enough to compensate the effect of the total operating expenses.

The main accounts belonging to those categories of expenses are SGA and research and

development. For a company such as Tesla, innovation and technology are key aspects defining

the strategy and the positioning of the company. However, there is evidence that this strategy

in the long run is affecting the overall performance.

36

Data from the Security Exchange Commission.

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Conclusion

The main reason which may lead Tesla to bankruptcy is the lack of liquidity. There are different

measures signaling this issue, starting from the low results of the current ratio to the negative

cash-flows generated by operating activities.

This problem is empowered exponentially by the risky capital structure composed mainly by

debt, from the operating cycle which foresees first the payment of suppliers than the collection

of cash from consumers, and last from the characteristics of the industry which requires Tesla

to be first in terms of innovations and research and developments.

3. Design a Cause and Effect diagram

Figure 9. Tesla’s Cause and Effect Diagram

As it has been said before, the company is investing a lot of resources in order to grow.

Those resources go directly to improve and create new technologies and expand their properties

all over the world. However, the company is financing this expansion mainly by debt,

generating high financial expenses (4% compared to sales in 2017) and low equity. Also, the

investments on new high technologies are being repercuted on variable costs, making the

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product less affordable. The high expenses in R+D and Administrative Expenses have mainly

been financed by debt, making the company highly leveraged.

This long term debt that has been used to finance those expenses is expiring, therefore

generating a problem in liquidity for the company.

Those factors combined generate a negative net income and therefore, reducing equity due to

retained earnings.

So the company needs to:

1. Increase Equity

2. Generate a positive net income

3. Reduce leverage

4. Propose recommendations for Tesla and represent those

recommendations by preparing a budget for the next two years.

In order to solve Tesla’s major problem of liquidity, the main budgeting objective is an increase

in the amount of cash up to 4.9 billion in order to reach the ideal ratio of CA/CL=1.5

Recommendations for generating more cash are as follows:

● By increasing the sales over the years 2019-2020 in order to start generating profits,

which will in turn result in a positive cash flow from operating activities.

● By increasing the amount of equity close to the 40%.

● By applying target costing in order to reduce variable costs.

● Reduce the number of inventory days from 2018-2019 of 21 days (71 days-50 days)

reaching the following operating cash cycle.

2019

(X/COGS)*365 = 50 (Inventory days)

(X/Sales)*365 = 18 (Receivables days)

(X/COGS)*365 = 91 (Payable days)

With those new operating cycle, we calculated the value of inventory, receivable and payable

for 2019.

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Budget

In order to understand the impact of our recommendations, it is necessary to do a forecast for

each policy in the next two years. To evaluate our measures, it is important to understand the

forecast of sales that the company is going to have in the next years. In this moment, the final

financial results of 2018 are not available. Therefore, the sales of 2018 must be predicted.

The core business of the company is in the automotive sector. So, one way to predict future

sales is to compare the historical deliveries of cars compared to the current ones.

We compare the car deliveries in 2017 compared to 2018 in order to predict the deliveries of

Q4, therefore, predict the annual deliveries of cars in 2018. To predict the deliveries of Q4, it

has been calculated the average growth of deliveries between Q1 to Q3.

Q1 Q2 Q3 Q4 Total

2017 25.051 22.020 26.150 29.870 103.091

2018 29.980 40.740 83.500 *32.260 *186.480

% Change 19,68% 85,01% 219,31% 108,00% 80,89%

Figure 10. Deliveries of Tesla Cars (2017-2018) (*Q4-Prediction according to historical

data)37

Figure 10 helps us calculate approximately the growth of sales between 2017 and 2018 (it has

been based using the % of growth of deliveries between 2017 and 2018).

Also, it is necessary to predict the sales in 2019 and 2020. To do these previews, we will also

use the expected deliveries of cars on those years.

According to Sparks (2014)38, sales are going to increase by 50% between 2018 and 2019.

Also, it was reported that revenues are going to increase by 66,7% between 2019 and 2020.

Before revealing the specific changes on numbers of our measures, is important to define the

different scenarios presented.

37 Data from Clean Technica. 38 Sparks, Daniel (2014): 1 mind Boggling Chart Everyone Following Tesla Motors, Inc

Should See, The Motley Fool.

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2019

1. Without Measures: except from sales, all the other variables are following the same trend

that they had between 2017 to 2018. This means that every state will follow the same %

of growth that they had between the years mentioned before.

2. Targeting Cost: the only thing that changes compared to the scenario “without measures”

is the cost of revenues. The current cost of revenues (variable costs) are of around 81%

related to sales. For the recommendations explained before and lowering more the marginal

costs thanks to economies of scale (because Tesla will produce more than 50% cars that the

previous year), we expect that variable costs will drop to be 75% compared to sales.

3. Raise Equity: by raising equity, the company could repay part of their debt and therefore,

reduce financial expenses compared to the last year. Our aim is to reduce the 25% of

Current Liabilities by increasing equity, meaning that the whole liabilities will drop of 11%.

So we could determine that financial expenses will reduce of 11% compared to 2018. It is

really important to reduce financial expenses because in 2017 those expenses represented

4%, higher than the optimal benchmark (which is 2-3%). Respective of the other variables,

it will follow the same % of growth as they had between 2017 to 2018.

4. Combined Scenario: this scenario combines the effect of raising equity and target costing.

Those policies explicitly affect variable costs and financial expenses. The other accounts

will follow the same trend compared to the previous year.

2020

After applying all the measures in 2019, we continue with target costing in 2020. We forecast

that the cost of revenues will drop to being 72% compared to the total revenues (3% decrease

compared to sales). We did not want to cut costs such as research and development or selling

and general administrative expense because they have a strategical value for the company. One

of the key aspects of the company is that products are more innovative than most of the

competitors. Therefore, it would not make sense to reduce expenses in something that gives an

added value for the consumer. In the case of SG&A, Tesla is trying to expand their

supercharging stations in order to acquire new customers. Also, it would not be reasonable to

cut those costs that are a huge part of the company’s strategy.

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Income Statement

The reasons why the net income is crucial for this company are:

1. The company has never experienced a positive net profit in annual terms.

2. The negative net income over the last years had a negative effect on equity because of

the retained earnings.

According to the forecast, the “combined” scenario (mixing target costing and reducing equity)

allows the company to reduce losses by 70%. However, in 2019 the company is still

unprofitable.

2017 2018

2019 (without

measures)

2019

(raise equity)

2019

(target costing)

2019

(combined)

2020

(target costing)

Total revenues $11.758.751,00 $21.270.222,70 $31.905.334,04 $31.905.334,04 $31.905.334,04 $31.905.334,04 $53.175.556,74

Total cost of revenues $9.536.264,00 $17.016.178,16 $25.843.320,57 $25.843.320,57 $23.929.000,53 $23.929.000,53 $38.286.400,85

Gross profit $2.222.487,00 $4.254.044,54 $6.062.013,47 $6.062.013,47 $7.976.333,51 $7.976.333,51 $14.889.155,89

Research and development $1.378.073,00 $1.938.843,81 $3.011.024,44 $3.011.024,00 $3.011.024,44 $3.011.024,44 $4.676.120,96

Selling, general and

administrative $2.476.500,00 $3.484.246,99 $4.902.070,31 $4.902.070,00 $4.902.070,31 $4.902.070,31 $6.896.839,78

Total operating

expenses $3.854.573,00 $5.423.090,81 $7.913.094,75 $7.913.095,00 $7.913.094,75 $7.913.094,75 $11.572.960,74

Loss/Gain from

operations (EBIT) $-1.632.086,00 $-1.169.046,27 $-1.851.081,28 $-1.851.081,00 $63.238,76 $63.238,76 $3.316.195,14

Interest income $19.686,00 $58.707,13 $233.782,16 $233.782,00 $233.782,16 $233.782,16 $233.782,16

Interest expense $-471.259,00 $-952.689,09 $-952.689,09 $-838.366,00 $-952.689,09 $-838.366,00 $-838.366,00

Other (expense) income,

net $-125.373,00 $-125.373,00 $-125.373,00 $-125.373,00 $-125.373,00 $-125.373,00 $-125.373,00

Loss before income

taxes(EBT) $-2.209.032,00 $-2.188.401,23 $-2.695.361,21 $-2.581.039,00 $-781.041,17 $-666.718,48 $2.586.237,90

Provision for income

taxes $31.546,00 $31.251,38 $38.491,01 $36.858,00 $11.153,63 $9.521,05 $724.146,61

Net loss $-2.240.578,00 $-2.157.149,85 $-2.656.870,21 $-2.544.180,00 $-769.887,54 $-657.197,43 $1.862.091,29

Figure 11. Income Statement Budgeted (data in thousands of dollars)

In 2020, if we take as reference the “combined” scenario and we continue applying cost

targeting generating reductions in variable costs, the company will turn to be profitable for the

first time ever in annual terms.

Different scenarios in the balance statement

1. Without measures: all the accounts are following the same growth rate that they had in

2018 compared to 2017, except from equity. Equity is calculated different because the

retained earnings will be linked without net income forecast. All this investment that the

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company has to do in order to keep growing (following the trend), will be financed by long

term or non current liabilities.

2. Target Costing and changing cash cycle: apart from changing the variable costs, we also

determine the appropriate number of days of: accounts payable, accounts receivable and

inventory. For example, target costing is going to help to control number of days of

inventory because the company has done previous experiments and has determined certain

attributes of the product before producing it massly.

Those are the suggested days that will help solve the cash cycle of the company.

2019

(X/COGS)*365 = 50 (Inventory days)

(X/Sales)*365 = 18 (Receivables days)

(X/COGS)*365 = 91 (Payable days)

This would help us to reduce inventories and receivables (compared to 2019 without measures)

and to have more cash. Therefore, transforming the current asset structure more oriented to

liquidity.

3. Raising Equity: our aim here is to raise equity and reduce the current liabilities in order to

have a better current ratio. It is really important that equity is around 40% in order to have

financial stability. However, if we want to arrive to a level of equity of 40% the company

would need to raise 10 billion of dollars, which is not an easy task.

4. To be more realistic, the company will raise around 2.968.995 thousand of dollars in order

to reduce the 25% of the current liabilities. This measure would generate a reduction of

11% of the total liabilities.

2020

1. Target costing and controlling terms: thanks mainly to the increase of sales and target

costing, the company will turn to be profitable. As we will see, this is going to help to

approximate the levels of equity to the optimal benchmark (40%).

The increase of equity will give Tesla more stability because the organization will be less

dependent on external sources of financing. Thanks to the positive figures on the net

income, this will help to reduce part of the current liabilities. Also, in this scenario we

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propose to improve the cash cycle by trying to minimize the days of inventory (a reduction

of 5 days compared to 2019). All other accounts (except three of the accounts of current

assets, accounts payable and equity) will have the same growth as they had between 2017

and 2018. The “others” account in the current assets will change according to rate of growth

between 2017 to 2018.

(X/COGS)*365 = 45 (Inventory days)

(X/Sales)*365 = 18 (Receivables days)

(X/COGS)*365 = 91 (Payable days)

2017

% of

change

(2017-2018) 2018*

2019

(without

measures)

2019 (target

costing and

Cash Cycle)

2019

(raising

equity)

2019

combined %

2020 (target

costing and

Cash Cycle) %

Cash 3.367.914 -13,49% 2.967.504 2.567.094 6.924.198 2.679.784 5.874.746 18,43% 4.329.477 13,46%

Inventories 2.263.537 31,70% 3.314.127 4.364.717 3.277.945 4.364.717 3.277.945 10,29% 4.720.241 14,67%

Accounts receivable, net 515.381 55,38% 1.155.001 1.794.621 1.573.414 1.794.621 1.573.414 4,94% 2.622.356 8,15%

Others 423.688 12,44% 483.859 544.030 544.030 544.030 544.030 1,71% 611.684 1,90%

Total Current

Assets 6.570.520 17,04% 7.920.491 9.270.462 12.319.587 9.383.152 11.270.135 35,36% 12.283.758 38,19%

Total Non

Current Assets 22.084.852 -3,48% 21.342.222 20.599.592 20.599.592 20.599.592 20.599.592 64,64% 19.882.803 61,81%

Total Assets 28.655.372 2,08% 29.262.713 29.870.054 32.919.179 29.982.744 31.869.727

100,00

% 32.166.561 100%

Accounts Payable 2.390.250 33,55% 3.596.984 4.803.718 5.965.860 4.803.718 5.965.860 18,72% 7.867.069 24,46%

Others 5.284.420 14,47% 6.178.340 7.072.260 7.072.260 4.103.266 2.941.123 9,23% 1.504.571 4,68%

Total Current

Liabilities 7.674.670 21,49% 9.775.324 11.875.978 13.038.120 8.906.983,5 8.906.984 27,95% 9.371.640 29,13%

Total Non

Current

Liabilities 15.348.310 -12,58% 13.633.820 16.142.108 16.142.108 16.142.108 16.142.108 50,65% 14.112.194 43,87%

Total Liabilities 23.022.980 1,65% 23.409.144 28.018.086 28.018.086 25.049.092 25.049.092 78,60% 23.483.834 73,01%

Total Equity 5.632.392 -24,92% 4.508.838 1.851.968 3.738.950 4.933.652 6.820.635 21,40% 8.682.726 26,99%

Total Equity and

Liabilities 28.655.372 2,08% 29.262.713 29.870.054 32.919.179 29.982.744 31.869.727

100,00

% 32.166.561 100%

Figure 12. Balance Statement Budgeted (data in thousands of dollars)

The possible improvements done in 2019 and in 2020 give the company a better financial

structure. The positive effects could be seen in different indicators/accounts:

1. Equity increases. In 2018, equity has a weight of 15,4% compared to assets. However,

in 2019, thanks to the positive net income and the different policies purposed, equity

will represent around the 27% of the assets.

Of course, is still far from the efficient benchmark that is 40%, but it is important to

compare it with other companies that are in the industry.

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Company Equity/Assets (2017)

Volkswagen 25,83%

BMW 26,8%

Daimler 25,55%

Figure 12. Equity/Assets39

Of course, those figures are from 2017, but if we compare with Tesla’s number, we see that the

company has a higher percentage of equity and more near the 40% figure, as it is observed in

figure 12.

2. Reduction in the current liabilities, therefore, having a better current ratio, as it is

seen in figure 13.

2018 2019 2020

Current assets /

Current liabilities

81,02% 126,53% 131,07%

Figure 13. Tesla’s current ratio from the budgeted scenario

3. Changing the cash cycle.

As it was mentioned before, one of the main problems of Tesla was the working capital

structure. As it was seen, the company was paying suppliers before collecting the cash from

customers. By proposing different measures, the structure has changed making working capital

need to be negative and the real working capital to be positive. Thanks to that, the company

reduces the problems of solvency and has more resources to keep investing in Research and

Development or another aspect.

4. Generating a positive net income

There are three key aspects as evidence that Tesla will have a positive net profit of $1.862

millions of dollars:

1. The one that is not controllable from a financial standpoint is sales. As it was said

before, it is expected that Tesla will growth his sales in a 66,7% in 2020 compared

to 2019. This is the main factor that makes Tesla to be profitable.

39 Data from the financial statements of Volkswagen, BMW and Daimler of 2017.

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2. Target costing is a key measure for Tesla to control their costs. Sometimes they

introduce too many technologies at once and that generates: delays, extra costs or

bad PR for the company. This measure helps Tesla reduce their variable costs and

therefore generate a positive operating leverage.

3. Raising equity helped the company to reduce debt and therefore minimize the

financial expenses (to be inside the optimal interval of 1,5% compared to sales).

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