Written by: John Sandlass
Tesla has been a popular investment for many people around the globe due to their innovations in electric cars and other new technology. However, lately, Tesla’s losses have been at an all time high, even though their revenue has increased exponentially throughout their years of existence. Based on numbers posted on November 1st, Tesla announced a 671 million dollar loss in the quarter, even though their revenue was at an all time high of nearly 3 billion in the quarter. Tesla is losing money on every new car that they produce, meaning that their marginal cost is greater than their marginal revenue. According to economics, this means they should shut down, but founder, Elon Musk, has no plans of doing so. Musk blames the lack of production efficiency as the main reason why they are losing money, saying that every single Model 3 that had been delivered so far was created by hand, which is costing way more than they are selling them for, which starts at $35,000. They are extremely backed up as they have tens of thousands of unfilled orders that people are starting to cancel their orders. If they don’t improve their production efficiency, not only will people will continue to cancel their orders, but they will also continue to lose money on every car they create. Nobody is sure how long they will continue losing almost 1 billion dollars per quarter before shutting down, but it is rumored that they only have 3.3 billion dollars of liquid capital remaining in the company, meaning that they will run out of money in the next year if nothing changes. Another reason that they are losing money at such a high rate is the amount of money and time they are putting in research for new car technology. The opportunity cost of this research is putting that time into working on production efficiency in order to be able to produce cars faster and for less money so that their AVC is no longer higher than their Average Price. Even if they spend more time on production paths and less money and time in research, experts predict that they will lose money every quarter until at least 2020, so many are wondering how they can possibly stay in business losing this obscene amount of money 4 times a year($671,000,000).
Works Cited
Assis, Claudia. “Tesla will be a money-Losing business until 2020, analyst says.” MarketWatch, 19 Sept. 2017, www.marketwatch.com/story/tesla-will-be-a-money-losing-business-until-2020-analyst-says-2017-09-19.
Bhuiyan, Johana. “Tesla posted a record quarterly loss as it ramps up production for its first mass market vehicle.” Recode, Recode, 2 Aug. 2017, www.recode.net/2017/8/2/16080552/tesla-q2-2017-earnings-still-losing-money-model-3.
Megan Geuss - Nov 1, 2017 11:40 pm UTC. “Sales up, revenue up, but still losing money: A Tesla story.” Ars Technica, 1 Nov. 2017, arstechnica.com/cars/2017/11/sales-up-revenue-up-but-still-losing-money-a-tesla-story/.
I really do agree with your argument that Tesla needs to increase their efficiency and really take their production into their own hands. Their vehicles are being made by hand, but not in an efficient way at all. This may be attractive to some customers because they feel as if it is a more personal purchase, but other people are getting anxious, simply because they want to get their hands on their new Tesla. In addition, this company really needs to control their spending in a more proactive way. They are putting all of their efficiency into their cars and none of it into their actual production. If they don’t change their actions, they may have to shut down because their revenue and average total costs are not aligning. In the end though, Tesla is such a large company and a highly-recognized brand that if they started to flake away - business wise - people would notice and their sales may increase because a lot of people do support their motives and values.
ReplyDeleteI agree that the Tesla company needs to be make their products more efficiently. If they were made more efficiently they would be able to sell more of the cars and it would generate more revenue. However, I don't think this car company is going to be anywhere close to being forced to shut down their business. A Tesla is a higher quality car that requires people to have a higher income. I mean look at other higher quality car companies such as: Audi, Mercedes, and BMW. They have been around probably longer or just as long, yet, they haven't gone out of business having a higher quality car. Although the Tesla company isn't efficient as possible making the product doesn't necessarily mean they are going to have to shut down but, because it's a higher quality product people will still buy their products even if they are made by someone other than a machine. Overall, if they decide to keep the process of making their cars by hand the company will still be running in the long-run due to the high quality of their product however, it would really benefit them and it would help maximize their efficiency and it would lead to them spending less money in the long-run, which leads to more revenue and profit.
ReplyDeleteI agree that Tesla should increase their efficiency in creating cars. However I don't think they will go out of business because even though their cars aren't sold as often, they have a popular name brand which makes people want to buy that brand of car. This is why they are able to increase the prices of Tesla cars because the brand name is desirable and shows wealth.
ReplyDeleteTesla is a very well known brand specifically because of the unique and popular design. I agree from your stance that Tesla should shut down because the marginal cost is greater than the marginal revenue and I think that the owner of Telsa needs to realize the difficulties that is coming up through their production of the cars. The cars may be unique and "cool" but if they are not making money and actually losing money than they are not being productive and they causing issues for their company. Your statement saying "f they don’t improve their production efficiency, not only will people will continue to cancel their orders, but they will also continue to lose money on every car they create," is very accurate and I agree completely with your stance on Tesla.
ReplyDeleteI agree, I think it would be in Tesla's best interest to shutdown because if their price is lower than the AVC the firm as a whole is losing money, which is also a really good connection to our past unit. Although Tesla is such a popular brand and has been for a long time, it wouldn't be beneficial for them to stay in business, and that shutting down unfortunately might be the only option.
DeleteThe efficiency dilemma is serious for Tesla, they provide products people want but they can't supply enough right now to meet the demand. I believe they are too stretched out, producing too many different products at too low a price, they should specialize in the name of efficiency and create fewer different products and keep the price. Also, the new factory Tesla built might help the efficiency dilemma, but building that is costing Tesla money too.
ReplyDeleteI agree that Tesla needs to improve on their production efficiency as clearly are not able to produce at the volume being demanded. If the rumor is true that they have 3.3 billions dollars of liquid capital remaining, then they really are not doing very well considering their cost of production. In addition, I can understand why people are cancelling their orders as while the cars are cool, you wouldn't want to wait a long time for a car when there are other expensive and luxury cars you could potentially buy.
ReplyDeleteI like that you chose this topic because it's very interesting to read that the car that everyone values as one of the best types of cars and most expensive, is actually almost bankrupt and is continuing to lose large amounts of money from being too slow for consumers. As you stated, Tesla obviously does need to start doing something different in production because the way they're running their business right now is clearly at a loss. I would hate to see such a good quality brand shutdown for trying to take new risks in the automotive industry, but with people cancelling their orders and the brand recognition decreasing, it's hard to see the ways Tesla will come back out on top.
ReplyDeleteWould the addition of private investors seeking the long-term profits be able to keep a company like Tesla afloat until they are more efficient? And even if the production efficiency is low, is the brand recognition able to draw in customers? Or is the physical product more important than the name itself?
ReplyDeleteThis is a very interesting topic. If their AVC is greater than their price, this means that they should be shutting down. If they cannot cover their fixed costs or variable costs then they are losing more than they can make so it doesn't make sense for them to continue production. It will be very interesting to see if Tesla is able to come back from their losses since they have no plans of shutting down. Hopefully they can improve their product efficiency, but if not, they will be forced to shut down.
ReplyDeleteI agree that Tesla needs to increase their efficiency, and by a great margin. With an AVC higher than their price it is a wonder how they keep up with production at all. Taking money out of their expensive research and re-allocating to ramp up production could be something that the company needs. However they seem to be stuck between a rock and a hard place, as they are based on innovative technology. Hopefully they can find a way to better utilize their assets and fill their current orders before they are forced to shut down.
ReplyDeleteI agree that there are a lot of things that Tesla needs to improve, however, being the first to lead an all electric car company in the market would be a struggle for anyone. Tesla has been working on simplifying their manufacturing processes to cut cost. Every dollar that Tesla is getting back, they are reinvesting. Once they are only producing and at a high volume they will prosper.
ReplyDeleteDoes Tesla have any other source of revenue? Some companies can make profit or reduce losses through additional services/products. For example, Amazon usually takes a loss on the products they're selling in order to keep prices low, but they make a small profit through their web services.
ReplyDeleteTesla is relying on creating hype to draw in more customers that will pre-order their new truck, giving a large pool of money to work with and jump-start production. This seems like a very poor plan to me because it is essentially making promises on a gamble, and Tesla is already loosing public confidence with these losses.
ReplyDeleteTesla is going bankrupt due to production failure, because it is all crafted by hand, correct? Well they could put aside a chunk of cash from the research fund to research technology to increase the productions of the cars, instead of researching new types of cars. It would cause for a loss in research of cars, but in the long run, it would make the most sense. It would make creating cars cheaper and faster, allowing for more pre-orders of the new models for Tesla to fulfill, meaning an increase in revenue and a decrease in production costs and maintaining costs. I enjoy the Tesla company models, so I do not wish to see them go bankrupt, so I do hope they make the necessary changes to keep themselves afloat.
ReplyDeleteTesla is the new innovative car on the market that everyone dreams of or needs to drive. With Tesla marketing everyone keeps buying them because of all the things they promise. One thing that interest me is the ability to run on electricity not gas. But with everyone sudden spark of intrest in the company. They need to put out cars at warp speed which is bad. Because each time they do it they loose money.
ReplyDeleteI believe that Tesla could possibly recover from this situation if they could figure out a smarter way to increase the production of cars and not spend as much necessarily on research as of how it stands. As the market currently lacks a very large demand for electric cars, and cars of a similar general type to that of Tesla, I believe that they need to be cautious moving into the development of their industry. As you stated, they are currently backed up on orders, which is a good thing but if they are unable to fulfill these orders I believe that they might gain a negative reputation and sales might drop in the future due to a negative connotation being associated with their company in terms of efficiency.
ReplyDeleteTesla is one of the dream car companies that are out there. Investing in new car technology is great and all, however, filling orders should be a number one priority for them. If anyone is going to buy a car from them with the new technology, they need to trust that the company will be able to complete their order. If they don't worry about Tesla's issues now, they'll only see worse money issues later on.
ReplyDelete