Tesla - to Accelerate the Advent of Sustainable Transport

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Porter Five Forces Analysis of the Industry (Battery Electric Vehicle segment)

Threat of Substitutes: This type of threat comes from different views and they might be even bigger in locations with a higher accessibility of public transportation. Other than that, the threat involves all types of vehicles, trains, airplanes, bicycles, motorcycles, and even walking could be considered a substitute. For this reason, Tesla faces a high threat of substitutes.

Threat of New Entrants: This type of threat is considered low in the electric cars segment due to high costs involved in research and development (R&D), the costs involved in the creation of a brand image as strong as Tesla, who has already been well positioned in the market, as well as the costs of production being higher for new entrants than for Tesla. These factors create a potential barrier to entry, making this a difficult segment from new entrants.

Degree of Rivalry: This segment is highly competitive, making this a strong strategic concern for Tesla. There are many automotive companies competing in the automotive industry market as a whole, and some of these companies are offering their hybrid/electric models as well.

Buyer Bargaining Power: This type of threat can be low for Tesla if buyer’s intention is to own a high-end electric car, as there are fewer competitors in the luxury electric cars segment. However, this force can become moderate when comparing to hybrid models and other similar vehicles offered by different manufacturers in the market. For this example, buyers have the power of switching from one manufacturer to another easily.

Supplier Bargaining Power: This force is moderate for Tesla, as one of the main components of Tesla’s products are its battery, and Panasonic is the exclusive battery provider for Tesla’s models. This makes bargaining power of supplier relatively moderate, especially being that there are few suppliers in the automotive industry.

Pestel Model

Political Factors: The electric and plug in hybrid market has a government incentive program. The U.S. government offers a $7,500 federal income tax credit to the owner of a model S tesla or roadster year 2012-2016. State or local incentives may also apply (FuelEconomy.gov). The U.S federal government is setting aggressive targets for fuel economy standards. A target has been set for 54.5 MPG (Miles per gallon) by 2025. From a political perspective this can help Tesla gain more market share being that Tesla Model, which is 100% electric and zero emission-producing vehicle. In their product line currently, the best selling model has a range of 270 miles on a single charge.

Economical Factors: Raw materials and commodities are increasing and always changing in price. Steel prices have gone up for more than fifty percent recently. This can have an effect on profitability and reduce margins.

In addition, consumer-purchasing habits have changed since the financial crisis. Short-term profitability was affected for established markets. The top four largest manufacturers of automobiles are estimated to account for 33% of global revenue. 77.4% of automobile manufacturing expenses are accounted towards purchases. However, Tesla has a competitive advantage in which the company benefits from sustainable energy trends as well as the decreased costs of battery.

Sociocultural Factors: Tesla can find great opportunities as consumer’s lifestyle continue to change to a more low carbon emission and sustainable energy society, macro environment factors that can potentially lead to an increase in Tesla’s market share. In addition, social factors such as an increase in wealth in developed countries can lead consumers to choose quality e-cars rather than gasoline fuel cars, as society becomes more concerned about environmental issues.

Technological Factors: Technology plays an important role in the automotive industry, especially in the electric car industry. The rapid advancements in technology allow Tesla to continuously improve its products, but also can create threats in the sense that more EV re-charging points are required to fulfill consumers’ needs while on roads.

Environmental Factors: Environmental factors create great opportunities for Tesla, as consumers become more aware and concerned about environmental issues, such as climate change. As Tesla produces zero emission vehicles, its market share can potentially increase by attracting eco-friendly consumers.

Legal Factors: Tesla has potential advantage in the U.S. market as the government offers a tax credit for the purchase of a plug-in electric drive motor vehicle, which ranges from $2500 to $7500, based on the battery capacity and vehicle’s weight (FuelEconomy.gov).

Additionally and to Tesla’s advantage, The Paris Climate Change Agreement calls for laws to cut Greenhouse gas emissions worldwide. This document can seriously boost Tesla’s market share in the BEV (Battery Electric Vehicle) market as gasoline powered vehicles slowly get phased out in the coming years.

Financial Analysis of the Company

Tesla’s financial statements indicate a sustainable revenue growth, which in 2015 the company was able to generate over 4 billion dollars in revenue (Figure 3). However, Tesla has not yet been able to break-even and eventually become profitable due to higher costs and expenses, which are causing the company to incur a net loss every year, such as their cost of goods sold being too high; high overhead expenses, and that includes, but are not limited to: management, legal and accounting wages; stores and service centers expenses. In addition, being an automotive company, Tesla needs to constantly invest in technology and in ways to improve its vehicles, for that reason, the company incurs high expenses in R&D as well.

Even though the companies has not been able to break-even and eventually generate a positive income, Tesla’s high gross margin represents significant potential for future earnings, leading to a high valuation of Tesla’s stock price.

Tesla is listed on the Nasdaq Exchange since June 29, 2010. The company originally issued 13.3 million shares at $17 per share during its IPO, and raised capital of $226.1 million (Figure 4). As of 12/02/2016, the stock closing price was $181.47 (Nasdaq), which is almost reaching its fair price, as analysts have set an average target price of $210.00 (Nasdaq). However, due to Tesla’s financial situation and also, Tesla’s recent acquisition of SolarCity (Higgins, 2016), Tesla’s stock price might decrease in the short-run, which analysts