Demand and Supply of Tesla's Electronic Cars

1286 words (5 pages) Business Assignment

14th Oct 2020 Business Assignment Reference this

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Abstract

Fossil fuels have been society's main commodity as a source of energy for many years. Ever since investors and entrepreneurs have realized how to harness this raw material, the industrial age has been revolutionized through the advantages that were presented. From automobiles to locomotives, airplanes, ships and even machinery for manufacturing, this commodity allowed civilizations to advance in ways far greater than a time before its existence. However, innovation never stops and coupled with the concerns of our environment, led to a demand for less-polluting technology. In 2003, the creator of PayPal, Elon Musk, sold his company to Ebay. He took his earnings and started a new company called Tesla Inc. This company focused on bringing viable electric cars to the market. The first vehicle that went on sale was the roadster and in 2012 the model S followed. The demand for both cars at the time was very high, with car enthusiasts and environment-conscious individuals, plotting down an upfront payment and had to wait a period between one and two years before taking delivery. 

The Age of Electric Cars

Electric cars are poised to change the way individuals think about travel. With Tesla proving that battery technology is now capable to match the distance fossil fuel cars can travel on a full tank, it is looking more feasible that electrification is the way to go. Even though the demand for this vehicle in its infancy was high, it was still new technology. Manufacturing facilities weren't yet equipped to handle the orders demanded by the company and because new investments had to be made from both the buyer (Tesla) and the sellers (Producers), it ultimately caused the prices of parts to rise. So, like any new product being introduced, each vehicle's cost was extraordinarily expensive. However, once Tesla decided to complete their manufacturing facility with the building of the Gigawatt factory out in Nevada, they were now in a position to set more affordable prices for their vehicles. This opened up the market and demand increased. Fast forward to the present day and Tesla’s vehicles are even more affordable with the introduction of one of their flagship vehicles the model 3. The demand for this vehicle has surpassed its predecessors by a large margin and the trend upward continues. 

This year, analysts were disappointed with the first quarter sales for Tesla's vehicles. A fear that the trend for the lack of demand for its vehicles drove the stock price down about 34%. This can be looked at as the demand expectations. Investors and analysts expect or predict based on prior outcomes, that the market for a particular product would trend a certain way. In the case of Tesla's vehicles, investors weren't happy to see that the demand wasn't where they expected. However, there still exists the demand factor and Tesla has been producing more and more of these cars which are being bought. It's just not at the pace to be expected. Also, the technology being offered isn't the vehicle itself but what drives it. The chart below illustrates what tesla’s performance against other car companies.

The second chart is an illustration of Tesla’s sales against other electric/Hybrid vehicles.

Why do we point to the data above? Because auto sales, in general, has seen a decline from 2017 to 2019 and is forecasted to decline further in 2020. Hertzke, Linder, & Sahdev (2019) states that “Global sales of EVs surpassed the one million mark (1.3 million) in 2017, and we forecast that sales could rise to as many as 3 million vehicles in 2020”, one can see that this portion alone has contributed to fewer gasoline cars being bought with an outward uptick in the electric vehicle market. In figure 1, you see that the Model 3 has shown considerable growth against one of the bestselling vehicles in the U.S which is the Toyota Camry. Also, if we look at figure 2 sales of electric vehicles have proven to have taken away a large portion of gasoline cars which shows that though the demand is small, it is growing. One of the reasons electric vehicles wasn't widely received was due to range anxiety. Car owners weren't sure that these cars were yet reliable and had widespread fear that the car had the potential of leaving them stuck on the side of the road due to running out of battery power. Today, such anxiety has been quelled by a large number of vehicles now operating on the roadways without any huge dilemmas. Lastly, Strauss (2019) points out that his research on the market led to this statement made by Emily Kolinski Morris, a chief economist for the Ford Motor Co., stated that “Global automotive sales in 2018 totaled 95.2 million units, and they are expected to be flat in 2019”. She also stated that “total new vehicle sales in the U.S. are forecasted to decline from 17.7 million units in 2018 to 17.3 million units in 2019”. This information gives us more fuel (battery) to understand that even though Tesla’s vehicle demand isn’t as strong as analysts would like, the automobile market isn’t doing too well also.

The purpose of this paper was to make the reader aware of the shift in demand and supply of a commodity. As we read, Tesla's vehicle demand is still present as a new company combining two already existing technologies into one. The chart showed the demand by the quarter of Tesla's strength even though the numbers were not what analysts would have liked to see. The point made is that no matter the expectations for this commodity (tesla vehicles), the trend is showing that demand is moving upward. The determinant demand is due to the awareness that these vehicles outperform their gasoline rivals and are very reliable thus making the determinant supply to increase because of this awareness and the showed interest in wanting to own the vehicle. It must be pointed out though that the demand increased by a large margin, and continues to do so until the fourth iteration of Tesla's lineup went on sale. This vehicle is the Model 3. All Tesla needs to do from this point is to add a much lower costing vehicle to their lineup and this should ramp up demand even more. If I were to produce this commodity there is nothing I would do differently except for the previously mentioned statement of offering yet another option in the lineup at a lower cost.

References

  • Feldman, S. (2019, June 13). Tesla Is Dominating U.S. Electric Vehicle Sales. Retrieved from https://www.statista.com/chart/18361/electric-cars-sales-by-type/
  • Hanley, S. (2019, July 2). Tesla Delivers 95.200 Cars in Q2, Crushes Wall Street Estimates. Retrieved from https://cleantechnica.com/2019/07/02/tesla-delivers-95200-cars-in-q2-crushes-wall-street-estimates/
  • Hertzke, P & Linder, M & Sahdev, S & McKinsey Quarterly. (2019). Bending the cost curve for electric vehicles.
  • Ohnsman, A. (2019, June 11). Brushing Aside Demand Fears Elon Musk Says Tesla Has ‘Decent Shot’ At Record Second Quarter. Retrieved from http://eds.b.ebscohost.com.proxy.devry.edu
  • Strauss, W. (2019, August 1). Economic growth to decelerate in 2019 and then ease further in 2020 as auto sales downshift. Chicago Fed Letter. 2019, Issue 417, p1-6. 6p.

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