Tesla needs more than Elon Musk to survive.

Hello readers, welcome back to my blog. In my last post I looked at a complex branch of economics, concerned with rationality and mathematics known formally as Game Theory. I hope that you understood the ideas being discussed and now know what economists are on about when they talk about the prisoners dilemma in action.

In this post I will be returning to what I usually do, looking at current, interesting economics news stories and adding my judgement. Being a car fanatic and with the recent release of the Tesla Model 3 in the US, I thought it would be a good idea to look into the electric car market and explore the current leaders in this technology, Tesla.

The electric car market:

The internal combustion engine has revolutionised our lives. It is hard to imagine life without it. However its days are numbered. Discoveries and significant gains in battery technology are starting to drive the rise of electric cars on the road. Powered by efficient lithium ion batteries, cars such as the Tesla model S have already managed to squeeze 1000km on a single charge. The cost per kilowatt-hour has fallen from $1,000 in 2010 to $130-200 today. Governments are getting stricter, albeit President Trump and his “I don’t care about the planet” ideology. It was only a few months ago that Britain joined a lengthening list of electric-only countries, saying that all new cars will be zero-emission by 2050.

A few ideas that stood out for me, in an article by the economist are: compared with existing vehicles, electric cars are much simpler and have fewer parts; they are more like computers on wheels. Therefore they need fewer people to assemble them and fewer subsidiary systems from specialist suppliers. With less to go wrong, the market for maintenance and spare parts will shrink. Styling and performance may enable some brands to stand out however other brands could be in trouble unless they can promise low prices. Self driving capability is a very intelligent idea and together with companies such as Uber it could revolutionise our lives:-Lots of shared, self-driving electric cars would let cities replace car parks (up to 24% of the area in some places) with new housing, and let people commute from far away as they sleep—suburbanisation in reverse.

The main strive for developing electric cars is to reduce the dependence on fossil fuels (mainly oil) and develop sustainable transport for future generations. Charging car batteries from central power stations is more efficient than burning fuel in separate engines. Existing electric cars reduce carbon emissions by 54% compared with petrol-powered ones, and that figure will only rise as electric cars become more efficient and grid-generation becomes greener or better still as renewable energy kicks off. According to a study by the The World Health Organisation car emissions kill 53,000 Americans each year, against 34,000 who die in traffic accidents.

If you had bought shares in Lithium in 2011, you would be a very rich person now. The compound lithium carbonate has more than tripled, from $4000 to over $14,000. Lithium is also useful for power stations and for storing energy in giant batteries meaning the demand will surge. As the economist article discusses, “will all this make lithium-rich Chile the new Saudi Arabia?” The answer is, its unlikely since the batteries can be recycled, unlike oil where once it is burnt there’s no recycling. Extrapolating this trend further, we could see electric planes and boats power by solar panels and wind turbines at some point during our lives, although for now the combustion engine is still likely to dominate shipping and aviation for many years.

The governments role in the future will also be important. They will have to regulate markets to prevent monopolists from acting and creating market failures, they will have to ensure that electricity companies are equipped to keep up with the demands of increased power and most importantly they will have to account for the mass unemployment that could arise if factories/markets for spare parts close and adjust to the new market.

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A short history lesson about Tesla:

  • founded in 2003 by a group of engineers in Silicon Valley who wanted to prove that electric cars could be better than petrol-powered cars-with instant torque, incredible power, and zero emissions.
  • its mission: to accelerate the world’s transition to sustainable energy.
  • In 2012, Tesla launched Model S, the world’s first premium electric saloon. Built from the ground up to be 100 percent electric, Model S has redefined the very concept of a four-door car. Its flat battery pack is integrated into the chassis and sits below the occupant cabin, giving the car a low center of gravity that enables outstanding road holding and handling while driving over 280 miles per charge.
  • Tesla owners enjoy the benefit of charging at home so they never have to visit a petrol station or spend on petrol. For long distance journeys, Tesla’s Supercharger network provides convenient access to high speed charging, replenishing half a charge in as little as 20 minutes.
  • To reduce the costs of lithium ion battery packs, Tesla and key strategic partners including Panasonic have begun construction of a gigafactory in Nevada that will facilitate the production of a mass-market affordable vehicle, Model 3.
  • By 2018, the gigafactory will produce more lithium ion cells than all of the world’s combined output in 2013. The gigafactory will also produce battery packs intended for use in stationary storage, helping to improve robustness of the electrical grid, reduce energy costs for businesses and residences, and provide a backup supply of power.
  • Tesla is not just car maker, but also a technology and design company with a focus on energy innovation and a number of space ventures/concepts.
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Tesla’s Gigafactory

 

What do I think about the future of Tesla and can Elon Musk pull it off?:

Elon Musk certainly warrants the label of an eccentric, tech savvy tycoon. However there have been questions about whether Tesla will actually work. As it stands the company has not made a profit on its cars due to the amount of research & development that Tesla is doing. There are concerns that if Tesla does all the hard work, what is stopping BMW, Mercedes, Audi or Porsche, the 4 main German car manufactures from not only copying the same technology but improving it and making it 10 times more luxurious with rigorous german quality checks and superior styling. If you ask most people a Tesla could easily be mistaken for a Toyota and inside all it has is one giant iPad controlling the car. Although I think electric cars are the future, I don’t see Tesla making a profit anytime soon despite the fact that they are ahead of the game, are building a gigafactory and have thousands of orders for the model 3. It is only a matter of time before the Germans or the French catch up and retrofit their longstanding car factories.

Furthermore, about 63,000 people have canceled preorders for the model 3 over the course of the past year due to quality concern issues and it has just been announced that Tesla’s most expense models have seen a price slash due to a reduction in battery costs. This may be beneficial for the long term but what about the people that have a PCP loan/have spent their own cash on cars which are devaluating exponentially. This is likely to leave them with some serious negative equity and a worthless machine; however, this problem is not just exclusive to Tesla and is likely to play a role across the electric car market.

At one point, the company was valued at $45 billion, worth more than Nissan Motor Co. and only a few billion shy of Ford. However, to estimate future earnings reasonably, one has to make projections based on historical data. No one should believe that a company is suddenly going to make $1 billion in net profits if it barely broke even the year before.

Finally without Elon Musk Tesla really only has a big battery and a giant screen controlling it. Musk keeps share prices up with his ambition, enthusiasm, charisma and his ability to convince others that the model 3 really is the way forward. I believe its only a matter of time before he is ‘overtaken’.

Sources Used:

https://www.economist.com/news/leaders/21726071-it-had-good-run-end-sight-machine-changed-world-death

http://www.express.co.uk/life-style/cars/848277/Tesla-Model-S-Model-X-cars-price-cut

https://www.forbes.com/sites/brookecrothers/2017/08/05/tesla-week-model-3-cancellation-hamburgers-model-y-reeled-back-from-insanity/#58f5019f7732

https://www.wired.com/2017/05/tesla-quality/

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