Eco 201 Week 3 Case Study

ECO 201 Milestone Three

Costs of Production

As I mentioned above, Tesla sets themselves apart from competitors by fueling the cost of their own supply to produce lithium-ion battery packs used to power their automobiles. In the second automobile, the Model S sedan that Tesla designed, developed and manufactured, more than forty percent of the total cost comes from the manufacturing of the battery pack used to power the luxury sedan. The rising variable cost of technology is why the newly activated Gigifactory is needed. The Gigafactory will be the production line in assembling the battery packs. The goal is to supply battery packs for mass production for models that have already been introduced, and to produce less expensive battery packs for future models. (Young, 2015) “The full activation of the Gigafactory carries existential significance for Tesla, representing a new sense of urgency at a company known for its unreachable deadlines.” (Randall, 2017) The new challenge that Tesla faces is producing a battery pack to the new Model 3 automobile. Ultimately, this model will be more cost efficient for consumers, proving to be about $30,000 cheaper than the Model S sedan. The

company intends “to offer this vehicle at a lower price point and expects to produce it at higher volumes that our Model S.” (Tesla Motors, 2015) If the factory allows them to produce a smaller, lighter battery pack for the new model, then more of the less expensive Model 3 will be produced. If the cheaper outputs are sold, then Tesla’s profitability will continue to increase due to the new capacity that the factory offers.
Overall Market
Tesla holds a unique position in the electric automobile industry. Although there is a list of competitors that off a model of an electrically powered automobile, “Tesla is the only company selling production volumes of a high-end, high-range electric vehicle.” (Speculations, 2015) Tesla’s greatest competition is not comparing the market performance of other electric vehicle brands and models, but comparing the overall market of high-end internal combustion engine vehicles. Other automotive companies such as Audi and BMW produce profits from high end vehicles with internal combustion engines, therefore Tesla’s greatest competitors are those of different car segments. If BMW and Audi are profitable based on their sales of the gas powered vehicles, why would they potentially waste money experimenting with electric powered vehicles that could negatively alter their market position. (Speculations, 2015)
Tesla also acquires a unique position when it comes to barriers of entry as well.

Even though there are competitors in the electric powered automotive market, no one else manufactures and supplies their own battery pack to power the vehicle. Tesla’s exclusive technology creates entry into the electrically powered luxury automotive market extremely difficult. The ease of entry categorizes Tesla as an Oligopoly market structure. As mentioned above, although there are other competitors inside the electric powered automotive industry, Tesla is the only one designing and manufacturing their own powertrain components for the cars to operate. Categorizing them with all other alternative fuel brands gives the company a “false picture of the market Tesla is trying to capture.” (Speculations,

2015)
Recommendation
My recommendation for Tesla’s future productions is to continuously invest in their renewable energy source so that they can operate at maximum potential. Currently Tesla does not pay out a dividend on their common stock, instead they retain all earnings to finance future growth. (Investors, 2017) Tesla is currently the leader in producing fuel alternative cars meaning they have the first initial contact with consumers. As the front running of fuel alternative luxury vehicles will allow Tesla to continue to build a reputation and build customer loyalty. If Tesla continues to reinvest in innovative research and development, they will need to expand their supply of all resources in order to maintain production. They will also need to expand their marketing to target consumers that will be more willing to purchase the Model 3 vehicle since it will be offered at a more reasonable price than the previous models available. Tesla has spent billions of dollars to set itself apart from other competitors and so far the innovative company has proven to be a valuable asset to the future of the automotive industry.

References
Investors. (2017). Retrieved from http://ir.tesla.com/faq.cfm
Randall, T. (2017, January 04). Tesla Flips the Switch on the Gigafactory. Retrieved from https://www.bloomberg.com/news/articles/2017-01-04/tesla-flips-the-switch-on-the-gigafactory
Speculations, G. (2015, July 02). Tesla's Unique Position In The Car Market Is One Of Its Biggest Strengths. Retrieved from http://www.forbes.com/sites/greatspeculations/2015/07/02/teslas-unique-position-in-the-car-market-is-one-of-its-biggest-strengths/#4c4b575522ec
Young, A. (2015, December 05). Why Is The Tesla Model S So Expensive, And How Can The Price Go Down For The Model 3? Retrieved from http://www.ibtimes.com/why-tesla-model-s-so-expensive-how-can-price-go-down-model-3-1655338