TESLA: The Trillion Dollar Company of Elon Musk | Understanding Tesla's Challenges in the Market: Tesla Business Case Study thumbnail

TESLA: The Trillion Dollar Company of Elon Musk | Understanding Tesla’s Challenges in the Market: Tesla Business Case Study

We all know Tesla as the most powerful disrupterof the automobile revolution. And in spite on the pandemic, while all otherautomakers were struggling to make a profit, Tesla was very elegantly profitable with aprofit of 721 million dollars. And as soon as it hit profitability, the stockprice of the company shot up by 740 percent in 2020 alone. And not just that, even in q2 of 2021, Teslareported a record profit of more than $1 billion. So on the outset, it looks like Tesla is onits way to become the undisputed king of the automobile revolution, right?.

Well, not really, as it turns out, there arethree critical indicators that state that in 2021, Tesla is in deep, deep trouble, andhow they navigate through this situation will eventually determine not just the stock price,but also the fate of the company in the automobile revolution. The question is, what exactly are these troubles? And from the investor’s standpoint, what arethe factors that you need to keep an eye on before you invest into Tesla or similar companiesin the automobile market? This video is brought to you by Vauld, butmore on this at the end of the video. The first threat to Tesla is the over relianceon something called the regulatory credits.

To tell you about it, ever since the carbonemission concerns have risen, Governments all around the world have introduced incentivesfor automakers to develop electric vehicles, which are also low carbon emitting cars. In this regulation, car companies are requiredto produce a certain number of ZEVs, or zero emission vehicles. And this number is based on the total numberof cars sold in a particular state. For example, if General Motors, Honda andToyota produce 100 cars, they are required to produce 10 zero emission vehicles. And if they cannot produce 10 ZEVs by theend of the year, they will have to pay hefty.

Fines to the respective government, whetherthat’s the US government or the European government. But on the other side, if you look at Tesla,Tesla is actually producing hundreds ZEVs already because all of its cars are electricvehicles. So technically, they have produced 90 ZEVsextra as compared to the mandate. Therefore, they earn Extra Credits equivalentto 90 ZEVs. Now, what General Motors, Toyota and Hondacould do is that, because they cannot produce ZEVs by themselves, they will buy 10 creditsfrom Tesla, just so that they can comply with the regulations. So this way, nine companies can buy 10 ZEVscredits each from Tesla, for which Tesla will.

Charge them a fees. And these fees are nothing but pure profitsfor Tesla. This is how the regulatory credit system works. And you know what? These regulatory credits are so critical toTesla, that in 2020, when they actually posted a profit of $721 million, $1.6 billion actuallycame from regulatory credits, which means, had they not sold those regulatory credits,Tesla would have been in a massive loss. So practically, they made more money sellingregulatory credits than they did by selling cars.

And this is where the problem lies. The issue with this strategy is that whilethese credits may help Tesla in the short term, as soon as other companies enter theEV market, Tesla will no longer be able to make money through credits. For example, if you look at stellantis, stellantisis the largest buyer of Tesla’s credits, and they bought $2.4 billion worth of creditsfrom Tesla. But now, they are planning to roll out theirown electric vehicles by next year itself. Therefore, within just two years, this $2.4billion of profits are going to be wiped out of Tesla’s balance sheet.

And even if you look at q1 2021, while netprofit of Tesla was $438 million, they actually got $518 million in revenue from sales ofregulatory credits. And this is how, Tesla has been over dependenton regulatory credits in order to make their balance sheet look good. But that’s where another twist actually camein. In the very next quarter itself, that’s q2of 2021. While Tesla recorded a net income of $1.14billion, only $354 million came from the sales of regulatory credits. If you see, they have decreased their dependenceon regulatory credits by a large extent.

And just when everything looked fantasticon paper, and investors were happy about it, another big big trouble actually began creepingin from the other side of the globe. And this is what ladies and gentlemen bringsme to the second chapter of this episode, and that is Tesla’s love affair with China. Now if you look at the Chinese EV market,it is by far one of the fastest growing markets in the world. In fact, in spite of the pandemic, the globalsales of EV increased by 43% in 2020 in China, and China alone accounts for 1.3 million EVs,which is 41% of all EVs sold worldwide, and Tesla story with China began in 2019, whenthey got an exclusive permission to build.

Their Giga factory, and Tesla became the firstforeign manufacturer to own 100% of their factory in China. Secondly, Tesla was also given a loan of $614million for the construction of the factory by China itself. Thirdly, the entire Giga factory was completedwithin a record time of just 160 days. That includes everything starting from gettingthe permits all the way up to the construction of the plant. Whereas in the US, in spite of it being thehome ground of Tesla, it took them close to two years to complete their Giga factory.

On top of that, Tesla cars also bought a 10%tax exemption in China, which made them the first foreign manufacturer to receive thistype of exemption without having a local joint venture partner. And even during the pandemic while all othercompanies were struggling to get N95 mask, Tesla was able to get N95 masks for its workersand the Chinese government itself provided buses for the workers to travel to the plantsin order to keep them safe, and to keep the manufacturing going. Therefore, in 2020, Tesla was able to deliveralmost half a million vehicles and set a quarterly record of delivery of 180,000 vehicles.

As a result, Tesla’s overall revenue increasedfrom $24.6 billion in 2019, to $31.5 billion in 2020. And the revenue from China itself grew by100%, from just $3 billion in 2019, to $6.6 billion in 2020. If you see, that’s 20% of the entire revenueof Tesla in 2020. Until this point, everything looked like afairy tale, right? Well, that’s when as soon as 2021 started,China started behaving like China. In February 2021, a group of Chinese authoritiesheld talks with Tesla after consumers complained about acceleration irregularities, batteryfires, software upgrade failures and other.

Vehicle problems. In response, Tesla had no other option but to apologize and comply. In March 2021, China does security review of the vehicles because they were concerned that, the information could be send back to the United States. Why? Because Tesla’s automated driving featuresrelied on camera systems as if, the Chinese government did not know this at all. Then in April 2021, Tesla makes headlinesat the Shanghai Auto Show. Why?.

Because a Tesla car owner out of nowhere,starts protesting against Tesla. And this angry woman climbed on top of themodel three, and repeatedly yelled,” Tesla’s brakes don’t work”. And soon enough, the Chinese media, whichis largely controlled by the government itself, starts posting this on social media and eventuallyit goes viral. And suddenly, Tesla is no longer the favouritebrand of the Chinese people. As a result, Tesla sales in China start plummetingand it goes down by 27% from March to April, and orders go down by 50% from April to May. And at the same time, its Chinese rivals likeBYD are looking at a year on year growth of.

189.62% and a month on month hike of 27%. Now this begs the question, if at all Chinais doing this intentionally, why are they doing it and how is sabotaging Tesla goingto benefit them? Well, there are two reasons. Number one, China has been known to stealintellectual property from foreign companies, especially American companies. In fact, this was one of the primary reasonswhy Donald Trump actually got angry and started a trade war between US and China. Secondly, Tesla’s entry to the Chinese markethas compelled companies like NIO and BYD to.

Enhance their performance and raise theirstandards. Eventually, it has accelerated the EV revolutionin China. This is the story of Tesla’s affair with China. And apart from that, not just in China, evenother places like US and Europe, the competition has started eroding into the market shareof Tesla. In February 2021, Tesla recorded a sales growthof only 5.4%. And when look deeper, you will see that Ford’sMustang E is actually eating into Tesla’s market share, as it became the third highestselling electric car in the US in February 2021.

Meanwhile, in Europe, VolksWagen’s Electricmodel has beaten Tesla to become the top selling EV maker in 2020. And lastly, General Motors announced thatit will increase its EV and automated vehicle investment to $35 billion from 2020 to 2025. So all in all, Ford, General Motors and Volkswagen,all of them are racing towards the untapped market at the bottom of the pyramid. And this is a market segment that Tesla isnot able to cater to, or is not willing to cater to. Therefore, the three threats looming overTesla in 2021 are number one dependence on.

Regulatory credits and number two is China’sorchestrated threat towards Tesla, and lastly, giants like Ford, GM closing into the EV spacewith affordable vehicles for the bottom of the pyramid, which is eventually eroding intoTesla’s market share. And this begs the question, as investors inthe automobile space, what are the factors that you need to keep an eye on before youinvest into Tesla or similar companies? Before we move on? I want to thank our partners for today’s episode,and that is Vauld. Did you guys know that out of the $438 millionof profit that Tesla made in q1 2021, $101 million came from selling Bitcoin, which isclose to 20% of their net income, and the.

Reason they stated for the sale was the amountof energy that Bitcoin uses to be mined, and it was also stated that Tesla would resumeallowing Bitcoin transactions when 15% of the energy use to mine Bitcoin is derivedfrom clean energy sources. This is a reason why energy efficient cryptocurrencieslike polygon matic and ripple have been on the rise. So if you’re a long term crypto enthusiastwanting to invest into energy efficient cryptocurrency, you can do that using the Vauld app. Vauld is an earn, borrow and trade platform,which essentially works like a crypto bank. And just like how you get interest, wheneveryou deposit your money in your bank, vauld.

Pays you an interest on your crypto deposits. For example, if you buy one XRP, you will be getting a fixed return of 6.7% on our investment on top of your XRP returns. And these interests can even go up to 12.68%on stable coins, which is even better than your bank fd returns. And vauld also has this cool feature whereyou can create an AIP where you can do SIP in one crypto or a basket of crypto. And later on, Vauld will do the hard workand automate your investments. So if you’re a long term player in the cryptomarket, and if you love their idea, use the.

Link below to download the Vauld app. And before you get into crypto, just keepone thing in mind guys, this especially for the teenagers, please don’t treat crypto asa get rich quick scheme and only invest as much as you can afford to lose. So if you invest 1000 rupees and you loseit, it should in no way affect your life or your family’s life. If this is very, very clear to you. Now let’s talk about the pointers that you’resupposed to keep in mind before you invest into Tesla or similar companies.

Number one, Tesla is at a crucial positionin 2021. And had it been some normal automaker, you could directly say that it’s in bad state. But in this case, you are looking at ElonMusk, and you just cannot neglect the musk effect. Therefore, Tesla could come out with gamechanging business strategies to reduce its dependence on regulatory credits. And when they do, it’s obvious that Teslastock price is going to shoot up. So from the investor standpoint, keep an eyeon these business strategies and as students of business take note of these business strategiesbecause they are golden lessons that you can.

Learn from and apply to your business. Number two, keep an eye on every single governmentsubsidy that is being rolled out in India. Because while we have our eyes on Tesla, Mahindraand Tata are going to play a vital role in the EV revolution of India. I’ll also attach a ticker tape blog in thedescription, which will help you grab a better understanding of the same. And thirdly, keep an eye on the strategicpartnerships that are being formed between automakers. For example, Toyota is partnering with Panasonicfor batteries.

Ford is partnering with red wood materialsfor battery recycling. Because people, these strategic partnershipsand their outcomes will largely impact the future of these players in the market andeventually determine where they stand in the EV revolution. And yes, keep an eye on the US-China tradewar, because there’s something very interesting happening over there, which will help youlearn some very important geopolitical lessons.

That’s all for today guys. If you learned something valuable from this post, please make sure to share it with your friends on social media. And for more such insightful business and political case studies, please subscribe to our newsletter. Thanks for giving your precious time to Reading our Blog.

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