A Background to Tesla
The Californian automotive company, Tesla, was founded in July 2003 by Martin Eberhard and Marc Tarpenning with the goal ‘to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible’. Tesla produces high performance electric cars which are aimed to be the newest assets to the automotive industry, including the systems and designs that come with the models themselves. Today, some 14 years later, Tesla’s market value is over $48 Billion, making it the second most valued car company in America, with Toyota, the highest valued car company in America which is a Japanese multinational car company head and shoulders above Tesla worth over $160 Billion. [1] [2]
An important moment for Tesla was in 2006 where they unveiled their very first production car that was to be manufactured, The Roadster. This made Tesla an official car manufacturer. By the end of 2007, the company found itself in financial difficulties, and had a shift around of leadership positions until Elon Musk became CEO of Tesla, after investing around $70 million from his own pocket into the company. Between 2008 and 2012, TESLA sold 2250 Roadsters. [1] [2]
In 2008, Tesla unveiled their second car for production, which was the Model S. This targeted the family market, and retailed at $50K giving it the label ‘affordable’. In 2012, TESLA stopped producing the Roadster and focused mainly on the production of the S after customers took to the new model very positively. It was also the very first electric vehicle to surpass the 300-mile range on a single charge, and features full self-driving capabilities.
In 2015 and 2016, the Model S was the world’s best-selling electric vehicle and between June 2012 and September 2017 sold over 197000 Model S’. [3] [4] [5] [6]
From May 2010, after a partnership between General Motors and Toyota’s New United Motor Manufacturing Inc (NUMMI) disintegrated, a partnership between Tesla and Toyota saw the Fremont plant in California open up an opportunity for Tesla. They called it the Tesla Factory and is now the main vehicle manufacturing facility for Tesla and in 2016 they announced that they were operating at a production rate of 2,000 vehicles per week. [7] [4]
Now, Tesla as began building a Gigafactory in Nevada, United States. The building is planned to have the largest footprint in the world and is expected to be completed by 2020. At a cost of $5 Billion, the building will have an area of 15 million square feet. This will allow Tesla to massively increase the production rates of their cars as they are able to produce the amount of batteries that are required. CEO Elon Musk said that the factory will produce all of the energy it needs sustainably, with a huge rooftop covered in solar panels and a windfarm close by. Musk said that the design is of a diamond shape so that the amount of Earth that has to be moved is decreased significantly, and he has aligned the Gigafactory with true north in order to install his assembly equipment by GPS. [5] [1] [2]
Engineering Analysis
The Tesla Model S
The Tesla Model S is the flagship model from Tesla, first on the roads in June 2012, with the 60kWh Model, the 60D. Sales of the Model S were quite low in its first year, with total of 2650 cars being delivered by the end of 2012, all of which in the US. Fast forward to the present, and a total of over 158000 Model S cars have been sold, across all variations. 58% of these sales were in the US, the company’s largest customer base by quite some way. [8]
There are currently 3 variations of the Model S, the ‘base’ model being the 70D, starting at £64,700. Despite being the cheapest variation of the Model S that Tesla offer, it still boasts impressive performance figures. The 75kWh battery and front and rear motors mean the car can accelerate from 0-60mph in 4.2 seconds, and drive up to 304 miles at highway speeds [9]. The mid-range model, the 100D, has an upgraded 100kWh battery, allowing for a longer range of 393 miles, and a higher top speed of 155mph compared to the limited 140mph of the 75D. The 100D begins at £86200 [9], with the potential to cost over £100000 with options available such as Autopilot, HEPA air filtration and a third row of seating. The final and top of the range Model S is the P100D. The P100D uses the same 100kWh battery as the 100D, but is shipped as standard with the higher quality interior and other premium upgrades such as better speakers and the air-filtration system prior mentioned. The most impressive feature of the P100D is the ‘ludicrous speed upgrade’ the car is shipped with, meaning the car can accelerate from 0-60mph in 2.5 seconds, meaning it is currently the fastest accelerating production car on the planet, according to manufacturer specifications. This record is disputed in independent speed tests [10]. The P100D starts at £122,200, with not much room for additional options given that the car ships with the majority that Tesla offer.
All Tesla’s ship as standard with automatic emergency braking, advanced collision avoidance and 400kWh of free supercharging allowance per year, meaning a customer can charge from zero to full in around an hour depended on the battery size of the car [9]. All Model S’ to be sold in the United States are manufactured in the Tesla Factory in Fremont, California, whereas all units to be sold in markets outside of the US are manufactured at the European Headquarters and manufacturing facilities in Amsterdam and Tilburg, The Netherlands.
With Tesla’s popularity at an all-time high, and with more charging stations being erected worldwide, the rate of sales of the Model S will continue to increase as they have been. And with the over the air updates that Tesla offers to all its customers, the technology driving the cars will remain up to date, like a software update on a phone. The Model S will likely remain at the forefront of electric automation, as will the rest of the Tesla products and this lends to the success the company continues to have.
Product Manufacturing
When compared to other car manufactures Tesla is a relatively new company. To compete with their well-established competitors, they have filled their production line with innovations from start to finish. The production of the model S takes place in the Tesla Factory in Fremont, California. There every process is carried out turning what starts off as aluminium sheet, into a fully tested model S. It is one of the world’s most advanced automotive plants with plans to be expanded to nearly double its size to ramp up production for upcoming models. Since 2012, when Tesla started manufacturing cars there, the total number of vehicles produced annually has risen significantly, producing 83,922 cars in 2016, and 25,000 in the first quarter of 2017. [11]
The number of cars Tesla can produce each year is constantly rising because of the innovations they bring to the manufacturing process. One innovation that Tesla have been pushing hard is the levels of automation they want to achieve in their factories. CEO and founder Elon Musk has repeatedly said that he is striving to make manufacturing so automated, it would be incomparable to manufacturing today. Currently the factory is already very automated in several processes including the body part stamping and the body paint application. It is expected that this will allow them to have much faster production start-up times for future models as the automated factory could produce a different model with minor reconfiguration and software updates. Tesla have also used automation to assist in parts of the assembly line where human workers are still required. One example of this is their self-driving carts which transport heavy body parts around the factory floor by following lines marked on the ground. [12]
Another innovation is Tesla’s approach to in house produ
ction. Tesla produce more than 70% of their car parts entirely in the Tesla factory. This is made possible partly by the advanced machinery they have installed in the factory but also due to the highly skilled workers that allow them to perform difficult processes, that other car manufacturers may outsource, in house. In the Tesla factory the cars start out as just aluminium sheets. They stamp all their body parts using their advanced hydraulic presses before workers assemble them with the help of automation. They then go on to be painted in the factory using processes unique to Tesla. It is because they don’t outsource this work that they are able to use new industrial methods that don’t rely other company’s infrastructure. This allows them to innovate quickly to avoid using outdated methods and keep their production rate as high as possible. [12]
The innovations outlined are what have allowed Tesla to increase its production rate so rapidly over the last five years. Without doing this the company would not have been able to compete with the larger car manufactures and become global name in the electric car market.
Though production of the model S is an important aspect of the company, it means very little if the company cannot take a large enough income to keep afloat. Luckily for Tesla, the demand for their electric car is increasing as they become more popular. This means that as they consistently increase the production rate of the cars they are also increasing their sales revenue. This is clear when you see that the company not only produces 83,922 vehicles in 2016 but also sold 76,230 of them. This means that with a production increase of 64% from 2015 to 2016 they had a sales increase of 51% to go with it. This link between production and sales is the simple reason that Tesla’s annual gross profit increased by 68% from 2015 to 2016. From this it can be expected that Tesla will continue to invest in their manufacturing plant in Fremont while they continue to reap large financial befits from it. [13]
As seen Tesla’s rate of car manufacture is very much proportional to their sales. This may not always be an advantage to the company as seen with its newest model launch, the model 3. The model 3 was launched in mid-2017 with the first deliveries taking place on 28th of July. But since the launch Tesla have had severe issues meeting their own predicted manufacturing targets. The company forecast it could produce 1,500 cars in the first quarter of production but severely under achieved this target, only producing 220 units. According to the company’s CEO, Elon Musk, "the primary production constraint has been in the battery module assembly line at Gigafactory 1, where cells are packaged into modules". This would suggest that it is just one issue causing the delay and once sorted the car will be in full scale manufacture. [14]
Though Tesla seems to have made it through the worst of the manufacture delays the company certainly took a hit in its 3rd quarter of 2017, making a net loss of £468 million despite making a profit in the last year of £16.7 million. Tesla’s stock price has also fallen steadily since September when the manufacturing delays were announced.
Tesla’s rate of manufacture is proportional to its sales while the demand for their product is high and therefore the company’s net profit is very closely tied as well. Clearly this can be advantageous to the company when it is able to produce its car fast and consistently and can be detrimental if it is not. This explains why the company continue to invest huge sums of money into it manufacturing lines and push for innovations such as automation that will put the company one step ahead of its rivals. [14] [15]
Tesla Battery Innovation
One engineering measure to understand the technology of the Model S is the vehicle’s battery properties, including power, energy density, cost, safety, reliability, charge time, charger availability and battery lifetime. The annual report begins by describing how advancement in the lithium-ion vehicle batteries is being applied to their non-vehicular energy storage products. This means advancement in battery technology impacts the profitability of multiple Tesla products.
The report states that the aim of improving batteries is to maximise energy density and minimise cost whilst remaining safe, reliable and long lasting. It then gives an example about increasing the power in the battery for the Model S 100D, the “longest range all-electric production sedan in the world”, to 100kWh. Increasing battery power gives electric vehicles more range, acceleration, top speed and towing power, increasing their appeal in practically every way, again increasing profitability and growth potential for multiple present and future Tesla products. Battery performance is therefore directly linked to the commercial success of the Model S product and many other products in Tesla’s portfolio. The report briefly mentions continued research and development into individual cells and whole battery packs, which is encouraging, but doesn’t provide examples about specific projects. An article [16] on Tesla batteries discusses the wide range of cells currently being tested, and then goes on to discuss the small, AA-battery-sized cells present in the Model S. Tesla essentially made a gamble with this this technology by pursuing these small cells. Other electric car manufacturers use larger cells, which have the advantage of being easier to engineer a battery pack out of as fewer are needed. However, larger cells contain more energy and so are more prone to combustion. To combat this, larger cells are constructed from materials of lower energy density. To counteract the lower energy density, these larger cells are made flat to increase packing density, but this increases cost. By using small cells, Tesla has benefited from economies of scale from the laptop industry, who developed this type of cells originally. However, the report points out that Tesla is vulnerable to its suppliers suffering from issues outside of its control. Due to smaller cells being safer, they are made of more energy-dense materials, using less material and therefore reducing both manufacturing costs and space in the vehicle. The article discusses how the cost of the battery is the main obstacle to Model S ownership, and how it has recently halved the cost per kilowatt-hour, so the battery now costs less than half the price of car. Other innovations mentioned in the article include Tesla having to develop a way to wire together thousands of cells instead on hundreds, as well as a liquid cooling system to prevent excessive heat issues travelling from one cell to another. The report briefly discusses how Tesla’s battery packs are designed to prevent fires spreading from cell to cell, and how any perceived battery safety issues could harm sales.
Battery charging is also mentioned in the report, which is a major point of concern for drivers. Rapid charging of batteries and plenty of places to do this are the key to ensuring the Model S and other electric vehicles are successful, and the annual report highlights this. Tesla’s Supercharger network is meant to provide rapid charging points in a huge number of locations globally in the near future, with the report focussing on the pressing need to seriously increase the charging infrastructure volume if Tesla wish to maximise the success of the Model S and future vehicles, which will require large amounts of capital. Article [17] mentions how car charging at the car-owner’s home is possible, but since household electrics run off AC power the car’s electronics must convert this into DC to charge the battery. Since this charging system supplies approximately ten kiloWatts of power, it can take several hours to completely charge the battery. The Supercharger however supplies around one hundred and thirty-five kiloWatts, reducing charging time to the region of thirty minutes.
The article then goes on to explain why the charging speed of the vehicles are limited: cell degradation. Although Panasonic, who manufacture the 18,650 batteries used in the Model S, specify a maximum charging current of two amperes per cell, Tesla allow up to twice that, keeping charging times reasonable without dramatically increasing the rate at which cells degrade. Cell degradation is inevitable in all rechargeable batteries, and tests so far indicate that the Model S’s cells degrade at a very slow rate of around one and two percent of their capacity per year at the most (dependant on mileage as per the figure below). The inability for Tesla to prevent degradation is interestingly highlighted when the article points out that the batteries are warranted against failure and not degradation. Therefore, the only way to increase the charging rate of the Model S cells would be to use more powerful batteries like the ones currently being developed and used in the newer Model 3 vehicle, as they can accept charge at a higher rate. This article also details actual design improvements made by Panasonic (altering the cell anode design to increase cell capacity by 6%) and Tesla (reconfiguring the battery pack to allow more cells per module, increasing the energy stored from 90kWh to 100kWh)
The annual report proudly states that there are early eight hundred Supercharger stations worldwide at the time of publishing, with about five times that number of wall mounted destination chargers as well. To put this in perspective, there were approximately eight and a half thousand petrol stations in the UK at the time Tesla published this annual report [18]. An article [19] briefly outlines the necessary steps to constructing and activating a Supercharger: “arrange for a location with the property owner, acquire a permit with the city, ship the hardware, which is built in California, hire a contractor to install the hardware, and arrange for a connection with the electric utility.” The article states that Tesla has had years to streamline this process, so the availability of rapid battery charging should be steadily increase into the future. The article states that, as of October 2017, Tesla had “6,934 Supercharger stalls” (there are multiple stalls per Supercharger station). For Tesla to meet their stated aim of 10,000 Supercharger stalls by the end of the year, apparently Tesla must build as many stalls in 3 months as it did in the first 2 years of building. They seem capable of achieving this, with nearly 90 being built or planned currently. [20]
Tesla Autopilot
A final engineering measure that can be considered is one of Tesla’s flagship features, autopilot. It has been continuously improved and updated since release and has become both a major selling point of the Model 3 as well as testament to Tesla’s customer satisfaction in ensuring that their cars are up to date and offer the best possible technological features.
Tesla’s autopilot first became accessible in September 2014 where any subsequent Model S vehicles had the option to come fitted with all the necessary sensory modules (HW) required for autopilot to work. Allowing the car to detect road signs, lane markings and obstacles. Both the software and hardware has continuously update since then up to the current version known as “Enhanced Autopilot” or version 8.1, the hardware could also be updated on older models at a cost to the driver.
Figure 1 – Image depicting the range of the Tesla’s various sensors
All Tesla vehicles that are currently be produced, including the model 3 come fitted with the updated hardware (HW2) that is needed for enhanced autopilot to work. This is shown on Tesla’s website [21]. This includes eight surround cameras which allow the car to have 360 degrees of visibility which varies from a max distance on the side of the car of 60m to 250m of the narrow front facing camera as demonstrated in figure 1. Other hardware that can be found on the Model 3 is twelve ultrasonic sensors (able to detect hard and soft objects at a maximum distance of 8m) and a forward-facing radar that has a max distance of 160m that is able to see through heavy rain, fog, dust and the car ahead.
Each of these hardware components complement each other and provide the car’s processing system with all the necessary data required to complete the autopilot’s semi-autonomous tasks. These components combined with the Tesla’s onboard computer, over-the-air firmware updates and data feedback data loops allows the system to continually improve.
Enhanced autopilot allows the car to perform semi-autonomous tasks such as:
This gives a unique selling point to all Tesla cars as enhanced autopilot gives the car many semi-autonomous features that would be appealing as they make everyday life easier and safer.
This obviously has improved the commercial value of the Tesla Model 3 as these are very unique benefits to the Tesla. This is shown in their annual report [23], in the comparison of the 2015 to 2016 year. There was 63% automotive revenue increase, of $2.16 billion, which was mainly due to Model X production and sales, but it is also noted that there was an increase in production and sales of the Model S, this seems to be uncharacteristic for an older model to continue to increase in sales and production after a newer model is released. However, it would be reasonable to consider this may be partly due to the widespread implementation of autopilot in October 2015, making the model S even more appealing.
However, Tesla is behind schedule as explained in an article about enhanced autopilot [22]. This brings a negative image of the company's ability to fulfil on its promises for the future. Although Tesla does note in the annual report that autopilot will be a centre for difficulties in the future due to increasing concern for health and safety and complying with increasing regulations.
Commercial analysis
Tesla Business Model
A business model defines essentially how a company intends to make money. In this section the methods through which Tesla generates revenue, the customer base to whom they will sell their products, the products sold to said customers generating their revenue and details about the company’s financing will be highlighted and discussed. Tesla’s sources of revenue come from their 4 main products. The 3 cars the company produces, the Model S, X and 3, and the power generation and storage facilities the company offers such as the Tesla Powerwall and more recently the acquisition of Solar City [24]. Looking forward to the future, the company will introduce two new vehicle lines, the Tesla Roadster 2nd generation, the highly anticipated Tesla Semi-Truck and the Solar Roof Tiles currently being trialed, with some customers beginning to take delivery. Tesla handles the sales of its products exclusively, and are quoted in their Annual Report as
saying, “The benefits we receive from distribution ownership enable us to improve the overall customer experience, the speed of product development and the capital efficiency of our business.” [24]. The first point to take away from this is that Tesla takes pride in its customer relations, which is agreeably key in successful product sales and future development of relationships with a customer base. The second benefit of Tesla handling its own distribution is that it can keep track of and control the rate of sales and manufacturing, allowing the company to avoid being overwhelmed by a surge in product demand. In keeping the rate of manufacturing controlled at a steady pace, the ‘capital efficiency’ of the company is kept as low as possible i.e. the ratio of expenses incurred to money spent to make the products Tesla sells. What this means is that more of the revenue that the company generates is spent on manufacturing products and less is spent on expenses that will not produce a profit. In layman’s terms, Tesla is more effectively spending money to make more money as opposed to spending money that will never be seen again.
Tesla’s customer base has in the past been quite restricted, given the prices of the Model’s S and X, starting at £64,700 and £70,500 respectively and getting as high as £130,000 depended on options included at purchase [25]. Clearly the prices that Tesla has, up to now, been selling its flagship products for limit the customer base to those with higher incomes. Recently however, Tesla introduced the Tesla Model 3, The companies attempt at breaking into a more competitive market. Starting at around £30,000 the Model 3 is a direct competitor to the most popular saloon cars on the road, such as the Mercedes C-Class, BMW 3 Series and the Audi A4. What must also be considered is that the Model 3, as with all Teslas, is completely electric. Thus, once the car has been purchased, the cost to run and maintain the car is relatively minute compared to the costs inferred by running a combustion engine car. For example, to fully charge a Tesla Model 3, with the maximum 75kWh battery, costs £7.50, with most charging stations charging an average of £0.10 per kWh of charge. Compare this to the ~£80 it would cost to completely fill the tank of a top of the range Diesel Mercedes C-Class, with a 66L tank, it is clear to see that over the ownership of the car, the costs inferred after purchase are going to be far smaller for the Tesla. Granted the distance you would expect to travel in the Mercedes is further than that of the Tesla, with the Mercedes being capable of travelling upward of 850 miles if driven as economically as possible, and the quoted range of the Model 3 at 310 miles. However, the cost per mile is still drastically lower in the Tesla than in the Mercedes, and this comparison is true for the Tesla against all of its competitors. It is also worth noting Tesla’s regularly drive further than the manufacturer quoted ranges, with a model S recently travelling 670 miles on a single charge, almost doubling Tesla’s quoted range of 393 miles.
Tesla as a company is currently valued at roughly $48 billion, having recently overtaken one of the largest car manufacturers in the world, Ford (valued at $45 billion). In 2016, Tesla produced upward of 84,000 cars, an increase of 64% on the previous year. This lends to the rapid increase in values and profit of the company. In the first quarter of 2016 the company announced its plans to increase annual car production to 500,000, with the intended success of meeting this target being achieved through this increased production of the Models S and X, and the introduction of the Model 3. If these targets are met, the company will have achieved a 143% average annual increase in product manufacturing and production [26]. And with an estimated 550,000+ reservations currently made for the Model 3 alone, it seems discernible that each of these 500,000 cars manufactured will be sold. Of course, with increased production there are increased costs that Tesla will incur, such as the recent building of the Gigafactory 2, the manufacturing plant for the Model 3, and the labouring and other manufacturing costs concerning the production of Tesla’s products. However, the profit and value of the company will continue to grow with these increasing sales. And as more countries begin to set dates for the banning of sales of combustion vehicles, with Norway hoping to put this ban in effect as early 2025 [26] (France, India and the UK have also announced similar plans), customers will look toward the field leaders in electric automotive and power storage, Tesla. The business model of Tesla is nothing short of inspirational, with the company’s rapid rise to the top of the automobile industry and seemingly never-ending announcement of new ground-breaking products, the company looks set to continue growing at rates perhaps faster than in the past. Once the companies recently announced Roadster and Semi-Truck begin shipping, Tesla will have products in every market in the automobile industry barring Motorcycles, but with the innovation the company has shown in the past, a break into the two-wheeled industry isn’t hard to imagine.
Return on Capital Employed
Return on capital employed (ROCE)=(Earnings before interests and tax(EBIT))/(Capital employed)
ROCE=(Revenues-(Cost of goods sold+Operating expenses) )/(Total assets-Current liabilities)
ROCE=(£7,000,132-(£5,400,875+£2,266,597) )/(£22,664,076-£5,827,005) (Tesla, Inc. , 2016)
ROCE= -0.0396
Return on capital employed (ROCE) is essentially a measure of how efficiently a company makes profit (Return On Capital Employed (ROCE), n.d.). As described in the above equation, it is a ratio of profit to capital actually used to generate that profit. In Tesla’s case, a loss is generated, as shown by the negative ROCE. Tesla have never actually made a profit since they became public, with the ROCE from the previous year being -0.1363. So, whilst it is improving, generating a loss is not encouraging for investment in the short term, although long-term investors may be encouraged. [27]
Joint Ventures
-China
In 2017 Tesla Motors sold over $1 Billion worth of its vehicles in China alone. China has the largest electric vehicle market in the world, with an estimated 295,000 electric vehicles to be sold in 2017 in China, whereas the rest-of-the-world combined is only estimated to sell 287,000. It is therefore easy to see why Tesla want to expand their sales by investing in the Chinese market. By building a new Tesla factory in Shanghai and producing their electric vehicles locally, they plan to reduce overheads by avoiding high transportation costs from its current factory in California to China. By having a factory in China, it will allow them to sell a higher volume of cars as their production rates increase, bringing in more sales for the company, even if they are still to pay the 25% import taxes. [28]
Until recently, China has made it very difficult for foreign car manufacturers to produce and sell cars in China. Their joint venture policy states that foreign companies must partner with Chinese companies to bring their cars to market, with the Chinese company receiving about 50% of the profits for each vehicle sold. There is also a massive import tax at 25%, which is 10 times larger than that of the Unites States, and more than double of that of the EU. One can see why it would be undesirable for Tesla to sell in China’s market before VAT of 17%, as the price of their cars on the market would have to be considerably higher than they are sold for in the United States without increased profit margins. [29]
Tesla has been negotiating a deal with the Chinese government to allow them to be the first foreign company to individually set up in China and avoid the joint ventures policy and its implications. Current talks are indicating that t
his would be allowed on the basis that the trade comes from China’s free trade zone, which could still be subject to the 25% import taxes on the goods sold. This will still allow China to expand their economy whilst also fulfilling the need for environmentally friendly cars, and allows Tesla to expand into a new market. [30]
The strategic value of producing electric vehicles in China is clear to see. Firstly, it allows them to sell to a significantly larger market than they currently have available. A market in which there is an increasing pressure from the Chinese government to buy an electric vehicle over an engine driven vehicle. The Chinese government aim to ban engine driven cars by 2030, which is significantly greater than the goals of Tesla’s current markets, in the EU and the United States. On top of this, the building of another factory in China will increase Tesla’s overall production rate which will assist them in achieving their goal of bringing affordable electric vehicles to the mass market. [30] [31]
-Panasonic
Tesla are currently developing a Gigafactory where they will work together with their suppliers, impartially Panasonic, to integrate production of battery materials, cells, modules and battery packs into one location for both vehicles and energy storage products. It will be built in Nevada, United States, and will be the largest battery producing factory in the world and will be the largest building in the world by footprint. The end goal of the Gigafactory is to drive down the cost-per-kilowatt hour of batteries, making Tesla’s cars and energy storage products much more affordable. This will be possible as having all processes involved in one factory will dramatically cut overhead and transport costs. [32] [33]
Tesla have partnered with Panasonic on the Gigafactory with investments in production equipment and will supply Tesla with cylindrical lithium-ion cells that will be made in the factory. By bringing in Panasonic to run this part of the production line, Tesla has sped up and reduced costs of bringing the factory on line whilst securing lithium-ion cells that will be needed to produce the battery packs in the future. As part of the agreement, Tesla will prepare, provide and manage the land, buildings and utilities where Panasonic will operate. The deal also secures Tesla as a customer of Panasonic in the future not only of the cells produced in the Gigafactory, but of those manufactured in the current Panasonic cell factory in Japan. Tesla agreed to this because of the high demand for batteries they expected to have when the Model 3 was launched in 2017. [5]
The business strategy of Tesla has always been to bring electric cars to the mass market at an affordable price. The reduction in cost of producing the batteries directly enhances their ability to produce their cars at a lower cost. So, by bringing in Panasonic to reduce the start-up time of the factory they have taken one step closer to achieving their aim. Another benefit brought on by the partnership with Panasonic is the impact on their reputation of having a well-established profitable company on board. This is likely to bring more investors to the table, supporting Tesla in producing their second Gigafactory. [34] [33]
-Toyota
In 2010, Tesla Motors, a small electric vehicle company at the time, approached Toyota, the Japanese industry leading company to buy their New United Motors Manufacturing Incorporated (NUMMI) plant in Fremont, California. From this, a partnership began in which Toyota would invest $50 million in Tesla Motors once it became available on the public market. This equated to 3% of Tesla, making Toyota only a minority shareholder. As well as the investment, Tesla Motors and Toyota would begin a joint development project in which they would incorporate Toyota off-the-shelf parts and Tesla electric technology to produce a sub-$30,000 car. This would be produced in the NUMMI factory which was later named the Tesla factory.
From the potential partnership between the two companies, Tesla stood to gain much needed expertise from the well-established larger car company, Toyota. They also gained a significant investment which it was able to use to expand their company which was in its early days at this point. In this deal Toyota gained a reasonable stake in a company that was expected to excel rapidly in the coming years. The partnership also brought the possibility of a new model to both companies which would have been developed quickly and cheaply using the resources of both companies. If this project had taken off it is likely that both companies would have benefited greatly, with Toyota gaining a foothold in the electric car market and Tesla getting its brand recognised on a profitable car. [35] [34]
In 2016, Toyota decided to start developing their own purely electric car. With this they began to invest heavily in upcoming technologies including hydrogen fuel cells and self-driving vehicles. This meant that its partnership with Tesla was against their best interests as they would be directly competing against each other so holding shares in Tesla was no longer financially justifiable. After a periodic review of Toyotas investment portfolio, it was decided that it was to sell its shares in Tesla. Toyota sold their shares for approximately $481 million, making a significant return on their investment. [35]
Depreciation Policy of Assets
Depreciation of assets is an accounting technique that companies often use to limit the impact the initial expense of an asset has on the company’s financial report [36]. This Is because an asset previously bought (for example a factory) will continue to provide the company benefits over its lifetime and will then have a salvage value after it is no longer useful.
To calculate depreciation, the company must have knowledge of or estimate certain facts about the asset. These include things such as the cost of the asset, the useful lifespan of the asset and the salvage value of the asset at the end of its lifespan. [37], Depreciation is then usually calculated as follows: (Initial cost – Salvage value) / Lifespan.
Often public companies will not show accumulated depreciation on their annual report [38] and will instead choose to show a single asset item often referred to as “Net”. However, Tesla gives its accumulated depreciation values, for example when referring to operating lease vehicles we see a total cost of $3.53 billion and an accumulated depreciation of $399.5 million as of December 2016.
Tesla also chooses to give the public and shareholders info on their calculations of depreciation for such things as solar energy systems, property, plants and equipment.
Figure 1 – Table of expecting lifespans for various assets.
This is shown below and can be found in their annual report [3]. They also state the following in their annual report: “Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the respective assets as follows:”
Tesla also has a policy relating to the retirement or sale of previously depreciated assets, they state that the cost and related accumulated depreciation is removed from their balance sheets and the following gain or loss is then shown in the Statements of Operation. When relating to major improvements that increase functionality or expected life of an asset they are capitalized and depreciated over the
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