September 26, 2014
Tesla Motors, headquartered in Palo Alto, California, is a United States (US) based company that designs, manufactures, and sells electric vehicles globally. The company is traded publically on the NASDAQ with a market capitalization of $30.8 billion. Under the leadership of CEO, Elon Musk, the company seeks to provide a variety of high performance electric vehicles (EVs) to consumers in the near future. The following is an external analysis of Tesla Motors.
One of Tesla's greatest strengths involves optimizing cost advantages associated with building economies of scale. Making batteries in massive volumes is a key part of Musk's plan to drive down unit costs so that electric cars can become affordable to a much larger market. Tesla plans to cut battery pack costs by 30%, which will hit the target price of $35,000 for its third-generation vehicle. Musk is doing this by building a giant battery plant in Nevada, referred to as the "Gigafactory." In addition, Tesla is targeting to market large-scale electricity storage systems used by power companies, where low unit costs are also a key competitive factor.
Tesla has utilized its reputation in the industry as a strength and has struck deals with other strong companies to form agreeable partnerships. In June 2014, the company announced a partnership with Panasonic that involved the production of lithium ion cells inside the facility for inclusion in Tesla's battery packs. In April 2014, China Unicom (Tesla's first retail partner) agreed to install charging stations for Tesla's EVs at hundreds of retail outlets nationwide. As a part of the agreement, Tesla will provide charging points for installation at 400 China Unicom retail outlets in 120 cities; China Unicom will provide maintenance and electricity supply for the retail stations.
Lux Research has predicted that Tesla will only be able to sell 240,000 vehicles a year by 2020, less than half the 500,000 it has forecasted. The research firm said this would leave Tesla with an overcapacity in battery production that would not be reconciled in sales to other car companies or for other battery applications. In addition, it is uncertain if Tesla's charging stations (in China) will be immediately compatible with other electric cars, creating a potential obstacle that could hinder sales in the world's largest automotive market.
Tesla was cash-flow negative in the last quarter, and its debt has a junk credit rating from Standard & Poor's because of uncertainty about its long-term prospects. According to JP Morgan, all of Tesla's operating cash flow derives from working-capital changes, not profits, through 2015; and there is no cash flow left after capital spending until 2016.
Tesla shares approached an all-time high after global banking and financial services company Deutsche Bank lifted its rating due to Tesla's aggressive expansion plan. Deutsche now expects Tesla to ship 100,000 vehicles in 2016, two-thirds ahead of its prior forecast. Tesla has the opportunity to live up to this optimistic expectation. To date, an industry standard design for EV charging stations is not in place. As Tesla builds charging stations for their own cars, other auto manufacturers may follow Tesla's lead or end up paying Tesla to use their stations for other EVs models. As a result, Tesla has the opportunity to not only be the leading manufacturer of EVs, but an energy distributor as well. Daimler AG and Toyota have decided to buy EV technology from Tesla; and more auto manufacturers may decide to do the same.
While Tesla's business model allows the company to realize cost savings by selling their EVs to consumers directly online...
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