Current market conditions ca_week3

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Current Market Conditions Competitive Analysis
Current Market Conditions Competitive Analysis
Ernesto Lanazca
ECO/365 Principles of Economics
Professor: Kimberly HLAING
University of Phoenix
April 14, 2017

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Current Market Conditions Competitive Analysis
Current MarketConditions Competitive Analysis
Tesla Inc. (formerly named Tesla Motors) is an American automaker, energy Storage
Company based in Palo Alto California founded in 2003 by Martin Eberhard and Marc Tarpenning,
Elon Musk amount its co-founders. The company specializes in electric-cars, Lithium-ion battery
energy storage.
The demand for quality electric motor vehicles is a growing rapidly in the worldwide market, and it’s
slowly became a competitive market vehicle product, there are other big automakers that are getting
into the electric car business as well. One question still in the air is if Tesla can meet the production
requirement to perform accordingly its demand? Taking in consideration that Tesla has about
4000,000 pre-orders if not more for Model 3. Although Tesla’s fame is merited (since 2012, the
company’s stock has increased by more than 600%, and the number of automobile awards speaks for
itself) for investors, the current picture of Tesla’s stock value is neither as clear nor as promising as it
has once appeared. An uncertain future for electric cars and the fear of overvaluation has forced some
investors to engage in rampant speculation and led other, more conservative investors to avoid the
stock altogether.
Analysis of Competitors and Customers
Since the Tesla is an American made all electric automobile, this analysis will only contain other
all electric vehicles available in America. The Tesla Model S was introduced in 2012 has an
estimated new base of $70,000 and an estimated range of 270 miles (Tesla, 2016)
 The Nissan Leaf- Nissan Motors is a car manufacturer based out of Japan, but has factories in
America. Introduced 2010. Estimated new base $29,000 est. range 107 miles (Nissan USA,
2016).

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Current Market Conditions Competitive Analysis
 The Ford Focus EV- Introduced 2011. Estimated new base cost $29,000 est. range 100 miles
(Ford Focus Electric, 2016).
 The Chevrolet Spark EV- Introduced 2013. Estimated new base cost $25,000 est. range 82
miles (Chevrolet, 2016).
According to an online forum entitled “Tesla Motors Club” the majority of buyers of the Tesla
Model S are the upper middle class ages 36-40 with annual incomes of $80,000. No other
information was given as to sex, race, or marital status (Tesla Motors Club, 2016).
Comparative Advantages and International Trade Opportunities
With Tesla showing no profit how can we assume they have or had a comparative advantage?
Since Tesla was founded in 2003, like most they have put profits into things like advancements.
“Like most companies in Tesla's early stage of development, the strategic focus is on growth.
Consequently, gross profit dollars, defined as revenue minus cost of goods sold (COGS), is being
funneled back into growth drivers, such as pushing into new markets like China and England, and
new product development such as the Model X or right- hand drive vehicles.” (Ditchek, 2014)
Unlike other manufactures, Tesla does not have independent dealerships. But how can one
explain the growth in sales now with more than fifty thousand vehicles on the road, according to
tesla.com. The growth must be from all of the advertising. That’s also another way Tesla
maintains their comparative advantage. “The uniqueness of Tesla's business model could drive a
lower SG&A than its automotive competition. Sales costs per vehicle should be lower due to its
online approach to sales.
With Tesla using so much of its dollar into advancements and international manufacturing
plants the opportunity for international trade isn’t an opportunity anymore, it’s a certainty. “The

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Current Market Conditions Competitive Analysis
company is expanding its manufacturing footprint into other areas, including in Tilburg,
Netherlands, where it has an assembly facility, and Lathrop, California, where it has a specialized
production plant.” (Tesla, 2016)
Factors that will affect Demand, Supply, and Prices of the Product
Some of the factors that affect Tesla with respect to demand, supply, and the price of their
product are not that much different from that of any other vehicle manufacturer. The difference
is in the cost of ownership. A thirty-thousand-dollar base model Chevy Impala in fuel costs
alone, can reach into the thousands of dollars over the life of ownership. This puts a new light on
spending that same thirty-thousand-dollars on a car that will not cost a dime in fuel.
The issue that can be seen is Tesla’s low production rate. As demand rises, they will have to
keep up with available supply. Can the average person wait for the car or would they rather just
purchase one that is available. Even though it may cost more to own it in the long run most
consumers do not think about cost of ownership when it comes to purchasing a vehicle. If a
typical driver drove 30 miles a day, times 5 day a week equals 150. If the average car gets 25
mpg that’s 6 gallons a week, an 18-gallon tank would last 3 weeks. That’s $36 every 3 weeks, at
$2 a gallon filling up 17 times a year would cost $612 and $3,000 in five years.
Finally, the price of Tesla’s product is largely due to the fact that they are just as much a
technology company as they are a motor vehicle company. The average price of a Tesla is still
seventy-thousand dollars however it’s unknown what that average was before Tesla began selling
lower priced models like the S. The factors effecting the change are technological. As time goes
on technology advancements also allow for reduced cost that should allow for reduced pricing in
the Tesla brand.

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Current Market Conditions Competitive Analysis
Factors that will affect Total Revenue
The ultimate goal of any company is to maximize profit. When considering profit the key is to
examine total revenue. In order to calculate total revenue the company must not only know what
they collect but more importantly, what they deem to be the total cost of running the company.
Perceived profit minus total cost will then calculate total revenue.
The perceived profit comes from the amount the company receives for its sales or output, in
essence whatever the company sells in addition to the quantity of those sales multiplied by the
price at which it is sold. That number is then figured by subtracting the total cost or market value
of the inputs a company uses in production including all explicit and implicit costs to calculate a
true total revenue. Parker (2016),” Tesla has industry-leading gross margins, better than other
auto industry giants such as Ford Motor Company (F) and General Motors (GM). Analysts are
estimating Tesla’s 4Q15 gross profit to have grown to $416.3 million, with a gross margin of
23%” (Could Tesla’s Margins Surprise the Market in 2016?)
Tesla Car Company has many factors to consider. High-end vehicles in general have a
substantial production and overhead cost to them. This combined with quality parts and labor
adds to the overall overhead in producing their high-end electric luxury vehicles. Total revenue
for Tesla is showing increased profit year by year. Even with the cost of gasoline decreasing
drastically from a few years ago and oil companies showing dramatic losses and decreased profit
recently, Tesla is still going strong despite less attention to the necessity of consumers looking to
alternative electric car options. This company has made a mark in the industry as a luxury item.
This type of business has created a price elasticity of demand, where Tesla can demand and sell
its product at a high price due to status and luxury not necessity.
Price Elasticity of Demand

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Current Market Conditions Competitive Analysis
When discussing price elasticity what is considered is price sensitivity, meaning the
relationship between a possible change in the quantity of a product or service demanded based on
a change in its price. There are essentially three drivers of demand for Tesla brand vehicles, #1:
Cost of gasoline or fossil fuels (fear of unpredictable extreme increase in price) #2: The desire to
lower our carbon footprint and heal pollution /prevent further damage to the Earth and #3: An
almost cult like following for the elite status of this luxury product. Tesla established a marketing
plan in 2015, detailing the current target individual as “business executives and entrepreneurs
who are city dwellers, tech-savvy and green-friendly…wealthy, early adopters in the upper to
middle class.”("Investopedia", 2015) para 6. Due to this regardless of change in price of fossil
fuels and controversies about the benefit of electric cars and possible pollution caused by their
batteries, these cars are still in high demand.
Factors that Influence Productivity
Productivity is one of the most important aspects of running any business. When searching to
create a level of high productivity a company is essentially trying to create efficiency, maintain
the same level of spending by producing more product, faster with the same use of resources.
Certain factors need to be considered, like internal and external factors along with own and
foreign factors (Bueno, 2016) para 8. In order to stay truly productive some key influences can
include profit-maximizing point of production. This is where profit maximizing point of
production is marginal revenue equals marginal cost. In addition, marginal revenue equals
demand equals price; you have to cover your average revenue cost. Reviewing economic vs
accounting profit and production function with marginal product to find the total cost curve is
important. As the level increases in production, diminishing return starts to take place.

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Current Market Conditions Competitive Analysis
The key with Tesla is a realistic well studies production schedule. In comparison to total
motor vehicle market, Tesla is a small player, however due to its elasticity level as a luxury
product it commands luxury pricing and there for continues to be a multimillion dollar revenue
business with healthy production costs and profit margins.
Opportunity Costs
A company’s production costs include all of the opportunity costs associated with generating
the output of services and goods. Opportunity costs are not limited to financial or monetary
costs, but also include the cost of lost time and effort, forgone output, and the loss of benefit or
pleasure.
Tesla Motor Company equates their electric vehicles to investing in a clean energy, solar
powered future. Yet that vision comes with a hefty price.
Tesla’s most prominent explicit cost would be the company’s lithium-ion cells for their
trademark Powerwall batteries. Tesla aims to assimilate lithium-ion cells production into the
energy products and battery packs for Tesla vehicles (Tesla.com, 2016). They currently rely on
Japanese electronics giant Panasonic to supply this essential item for all of their vehicles. With
approximately 2000 vehicles a week the second fiscal quarter of 2016 (Tesla.com, 2016), the
company has decided that they will produce these batteries internally. This decision has led to
the development and construction of the Tesla Motors Company Gigafactory in Reno, Nevada.
The Gigafactory is slated to produce electric car battery cells, as well as electric cars.
Externalities and Government Public Policy
Tesla Motor Company has been the beneficiary of huge grants and advantages by both
federal and state programs. In January of 2010, the electric car company received a $465 million

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Current Market Conditions Competitive Analysis
dollar loan from the Energy Department. That is substantially more than $226 million the
company solicited in its IPO in the following months, and considerably more than it raised by
private shareholders. Detractors of the company attributed motivation for investors to purchase
stock.
In addition to receiving the loan, the federal government grants a $7,500 federal tax credit
buying an electric vehicle. With a price tag of $70,000 for the base Model S, this equates to a
discount of more than 10 percent. Several states offer similar incentives such as property tax
exemptions or reductions, sales tax exemptions, tax rebates, exemptions from annual inspections,
and free use of HOV lanes for single passenger vehicles.
Although Tesla has received many benefits from federal and state programs, those same
entities appear to be working against the company. Currently, almost of the states do not allow
Tesla to sell straight to customers, which is one of the fundamental cornerstone of the company.
Established in 2003, and going public in 2010, Tesla has earned a profit in just one three-
month period, and that profit was attributed to the money collected through the credit purchase
program. The company posted a net loss of $282 million for the first quarter of 2016, despite
promises from CEO Elon Musk that Tesla would finally turn a profit.
Maximizing Profit-making Potential
In Tesla’s second quarter 2016 update, it stated to its shareholders that the company had
reached their funding limit with a banking partner (Fernholz, 2016). With roadblocks like this to
meet production deadlines, the company has had to turn to other avenues in clean and solar
powered energy industry. In July 2016, Tesla acquired Solarcity, a company that finances the
solar panels installation on homes to replace or supplement power from utility companies
(Fernholz, 2016). The main pitfall of a solar powered home is that currently there is not a way to

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Current Market Conditions Competitive Analysis
capture the excess power and store it for future use. What is one way to encapsulate surplus
power? A battery within the home that can store this extra power. Tesla is currently constructing
the Gigafactory to produce what the company is advertising as the most advanced battery in the
world. The merger of Tesla and Solarcity is an economically sound move in the right direction
when taken into context with the economics of solar power and future appropriations.
Conclusion
When utilizing an economic market structure, it is important to remember the factors of which
type of market your product will compete, to analyze the competition and determine the customer
base. To analyze any comparative advantages and to look into establishing any international trade
opportunities. It is also important to understand the factors of supply and demand and the prices
of the product. Finally, it is important to not overlook the factors of total revenue, price elasticity,
opportunity costs, externalities and factors that influence productivity. With these factors in
mind, evaluating market structures becomes easier to comprehend and manage.
References:
Electric cars 2013. (2013). Retrieved from http://electriccars2013.org
Colander, D.C. (2010). Economics (8th ed.). Retrieved from The University of Phoenix eBook
Bueno, J. (2016). Big factors affecting productivity. Retrieved from
http://wudatime.com/productivity/4-big-factors-affecting-productivity.
Ditchek, B. (2014). Tesla: A Valuation Model for a High Gross Profit Automaker. Retrieved from
http://seekingalpha.com/article/2453065-tesla-a-valuation-model-for-a-high-gross-profit-
automaker?page=2#
Mankiw, N. Gregory (2015). Principles of Microeconomics (7th ed.). Stamford, CT: Cengage
Learning.
Oligopoly. (2016). Retrieved from http://www.investopedia.com/terms/o/oligopoly.asp
Parker, J. (2016). Why Is Tesla Underperforming in 2016?. Retrieved from
http://marketrealist.com/2016/02/teslas-margins-surprise-market-2016/