After calculating the benefit of using the Tesla Model S on a per car basis, we extended our results further to aggregate the impact of the benefits of using this electric car for the US automobile sector as a whole. The conduct this analysis we created a model that would help us extrapolate the benefits of a single electric car to the US as a whole. The first step entailed sizing the automobile sector in its entirety. Below are the assumptions and calculations we conducted to size the market:
Using Year to Date information of unit sales of cars and light-duty trucks from the Wall Street Journal Automobile Database, we estimated the total number of vehicles that would be sold in 2013 and subsequently using the average transaction price per vehicle (USA Today, 2013), we valued the automobile sector at just under $500 Billion in 2013.
Given that the lowest base Tesla prices itself at is $66,070 for the Model S, it falls into the luxury car segment of the automobile industry. To determine the average transaction price for this segment, we used the Mercedes’ E-Class price of $51,900. To reiterate, this car was chosen based on two primary characteristics. The first is that along with the BMW 5 Series and Audi A6, the E-Class is one of the closest competitors to Tesla. The second reason is that amongst these competitors, it had the greatest sales volume and subsequently the highest market share. Based on this information,
Automobile Industry Metrics
Cars (YTD) 7,148,098
Light-Duty Trucks (YTD) 7,091,799
Total Number of Vehicles Sold (YTD) 14,239,897
Total Number of Vehicles Sold 2013* 15,534,433
Average Transaction Price per Vehicle $31,252
Car Market Valuation $485,482,102,957
we sized the luxury car segment at approximately $59 Billion or 12.26% of the entire industry. Using the IHS LV Production Data Set, we were also able to project that over the next 5 years, this
segment was expected to grow at about 6.52%. The calculations were conducted along the lines as those for the previous automobile valuation and are displayed below.
Finally, to size the market for Tesla, we first used information from their 10-K and 10-Q reports to determine the year the number of units sold from January until September. To estimate the cars sold from the final quarter of the year, we utilized the average number of vehicles sold from the first three quarters of the year. In total, we estimated that Tesla would sell 20876 cars in 2013. For the price, we used the cost of the base model S which is $66,070 and estimated that Tesla’s total 2013 market value is roughly $1.37 Billion Dollars. This equates to 0.28% of the total automobile industry or 2.32% of the luxury car segment. As illustrated in our previous cost benefit analysis, the per vehicle benefit of a Tesla is $19884.41 and given that Tesla plans to double its production next year, we estimated a 100% growth in car sales. The table summarizing the information is shown below
Luxury Car Market Metrics
Luxury Cars Sold (YTD) 1,049,258
Total Number Sold 2013* 1,144,645
Average Transaction Price per Vehicle $51,900
Luxury Car Market Valuation $59,407,080,218
Luxury Car Market Share 12.24%
% Growth in Segment 6.52%
Tesla Metrics
Car Sales Breakdown
January - March 5000
March - June 5150
July - September 5500
October - December* 5217
Total Car Sales 20867
Price of Tesla Model S $66,070
Tesla Market
Valuation $1,378,682,690
Tesla Auto industry Market Share 0.28%
Tesla Luxury Market Share 2.32%
Benefit of Using Tesla ** $19,884
% Growth in Car Sales 100%
*Average of previous quarter used for estimate
**Based on previous calculation
Based on the previous assumptions and calculations and using 2013 as our base year, we projected the increase in valuation of the luxury car market using the 6.52% segment growth rate up until 2017. Since the Fed has set a target inflation rate of 2%, we increased the average transaction price for the E Class by the same amount every year. Based on the above information, we were also able to extrapolate the number of vehicles actually sold. After completing this calculation, we then followed the same procedure to calculate the number of Tesla’s sold. The calculations showing the results are displayed hereafter:
LUXURY CAR
CALCULATIONS
2013 2014 2015 2016 2017
Luxury Car Market
Valuation $59,407,080,218 $64,546,030,285 $70,129,520,089 $76,196,004,095 $82,787,263,233 Avg Transaction
Price per vehicle $51,900 $52,938 $53,997 $55,077 $56,178
Number of Luxury Vehicles Sold
TESLA CAR
CALCULATIONS
Tesla Car Market
Valuation $1,378,682,690 $2,812,512,688 $5,737,525,883 $11,704,552,801 $23,877,287,713 Price of Tesla
Model S $66,070 $67,391 $68,739 $70,114 $71,516
Number of
Teslas Sold 20,867 41,734 83,468 166,936 333,872
Hence, as evident by the results based on our projections the number of Tesla’s sold will increase from 20,867 in 2013 to 333,872 by 2017. To better understand the alterations this would have on the broader luxury car market segment, we calculated the number of gas cars sold and then determined the increase in percentage of the total luxury car market share Tesla would have if it increased production by 100% every year, while the luxury car segment itself grew at a stable 6.52%.
AGGREGATE
COMPARISON 2013 2014 2015 2016 2017 Number of Gas
Vehicles Sold 1,123,778 1,177,542 1,215,305 1,216,517 1,139,782 Tesla/Luxury Car
Unit Ratio 1.86% 3.54% 6.87% 13.72% 29.29%
Hence, the above table illustrates the increase in the production of Tesla and thus an increase in its overall share in the luxury car segment.
Based on all of the above calculations, we then estimated the aggregate cost benefit the purchasing a Tesla Model S would have for the entire US market. To calculate this value, we multiplied the number of individual Tesla’s sold by the benefit per vehicle of using the Model S. Implicit in this calculation is the assumption that for a consumer buying a car in the luxury car market segment, he has two alternatives: a gas luxury car or an electric luxury car (i.e. Tesla). Hence, if the consumer chooses to buy the Tesla, he recognizes the $19884.41 benefit of purchasing the electric car rather than buying a gas car. Thus, using this methodology, we projected the increase in aggregate benefit of using Tesla based on the vehicle’s projected growth until 2017.
COST/BENEFIT
ANALYSIS 2013 2014 2015 2016 2017
Aggregate Benefit of
Buying Tesla $414,927,983 $829,855,967 $1,659,711,934 $3,319,423,868 $6,638,847,736
Net Present Value $10,414,534,795
Hence, the calculation illustrates the potential scale of benefit that electric cars, and specifically Tesla has for the US. From a benefit of $414Billion in 2013 If Tesla continuously double’s it production it has a total benefit of $6.6 Billion by 2017. Using a discount rate of 7% we also calculated the total NPV of switching to Telsa for the entire US at $10.4 Billion.
Therefore, as evident in the model, the benefits of using an electric car do not exist only on a per vehicle basis for also for the entire US a whole. Moreover, if Tesla increases its production and is able to drive significant consumer demand, it has the potential to take a significant portion of the luxury car market segment as well as have a net benefit for the economy as a whole.
9. Discussion
Conclusion:
In conclusion, the Tesla Model S is a more cost efficient and environmentally friendly alternative to its average gasoline counterpart. Based on our findings from the cost benefit analysis, each additional Tesla Model S vehicle inserted into the US market will result in an average net present value savings of $19,884 to the consumer, as compared to its primary gasoline counterpart, the Mercedes E350. The CBA took into account factors such as the purchase price and annual expenditures and upkeep of the Tesla Model S to that of the E350. Additionally, the CBA analyzed the various energy inputs that could be used to generate the electricity to power the Model S and compared their respective operating costs and more importantly, their subsequent environmental costs. We broke down the electricity sources for an average American household and calculated the quantity of carbon emitted per kWh. From this we were able to arrive at a portion of the
environmental cost for regular electricity consumption and used it in our Model S energy
consumption. Through our analysis, we can see that most of the overall savings that are reaped from transitioning to the Tesla Model S is primarily achieved through environmental benefits and the reduction of harmful emissions. On a per car basis savings to the consumer, however, tax credits and lack of gas fuel expenditure provide the bulk of upfront savings. Thus we can see that through the Tesla’s monetary incentive of lower costs to the consumer, one day we can hopefully see a beneficial impact to the environment.
Our analysis was conducted by assigning a monetary value to the majority of the costs and benefits being analyzed in order to achieve the most robust and thorough evaluation of the Model S’s impact on the US market as a whole. In doing so, we were able to analyze the various effects that each cost and benefit had on the consumer and environment, on a granular level. In the end, we
simply sought to reveal what the exact monetary gain or loss would be after injecting a Tesla Model S into the US market, taking into account any and all costs and benefits.
Using the results from this per-car CBA, we then conducted an analysis to understand these effects on an aggregate level. In order to do this, we created a model that forecasts future growth for the Model S and assumed an eventual 100% market share of the electric luxury automobile market. This yielded a projection wherein Tesla will hold 2.32% of the overall luxury automobile market. Additionally, we project that the Model S’s yearly sales will exceed 333,872 units by 2017, grossing over 23 billion dollars in total revenue.
We then took a deeper glance at some of the more unquantifiable costs and benefits of the electric car. While these factors were fairly few in number, we still addressed the electric car’s current lack of safety precautions for bikers due to the fact that it emits no sound, its rather inconvenient hassle of having to plan ahead on which charging stations to stop at for longer trips, and the chore of having to remind oneself to plug one’s car in when one is at home. Similarly we acknowledged Tesla’s intricate use of cutting edge technology for media features in the car, its incredibly quiet cabin while driving, and the fact that it has the best consumer safety rating ever given. While these sorts of costs do have an effect on the average consumer’s purchasing decision, they do little to reveal the global impact that the Model S will have on the automobile market and on the environment in comparison to the Mercedes E350.
Ultimately, the Tesla Model S far surpasses its gasoline counterpart in almost all aspects, both quantifiable and unquantifiable. Boasting a sleek luxury design, a sport-enthusiast performance and environmentally friendly impact of zero emissions, the Model S just makes sense as the next step in automotive innovation. Along the way there will surely be many road bumps, from detrimental changes in policy to lack of proper infrastructure and the eventual presence of threatening competition, Tesla will meet adversity as it always has. Only time will tell just how
quickly Tesla will grab hold of the automotive market; but one thing is for certain, the future is Tesla.
Considerations/Limiting Factors for Study
While we sought to perform a fully comprehensive analysis of the impact of the Tesla Model S on the automobile market we naturally ran into some limiting factors that affected the credibility of our study. We controlled for as many of these limiting factors as possible, however, there remain factors that we can’t fully account for and must simply address for future consideration.
One such factor arises from the current lack of appropriate energy grid infrastructure. Specifically there is worry that the current electricity grid system is not designed to withstand the future influx and dependency on green energy. Electricity derived from wind and solar power is too volatile in its supply and intensity. Because mass surplus one day and desperate shortage the next day can occur when electricity is derived from wind power or sunlight, consistency is almost impossible to attain with the usage of green energy. This essentially renders the electricity grid useless because the entire point of the electricity grid is to provide sustainable and consistent electricity power to everyone in the nation and if stability cannot be ensured then complete meltdowns can occur in the form of widespread blackouts and complete power failures. The implications of this potential fault on our study are quite large. Assuming that the market share of Tesla does grow to what we have estimated, we would be putting extreme amounts of stress on these power grids across the nation and would heavily depend on their consistency to supply power in order for Tesla to remain a viable automotive option. While there is evidence of precautions being taken against this threat of
instability of the grid via natural gas backup systems, the threat still remains as an important consideration to keep in mind moving forward.
Additionally, we made several assumptions in our Benefit Cost Analysis comparing the single electric car to the single gasoline car. These assumptions though grounded on solid data may not be representative of the real world scenario. For instance, the price projections of premium petrol as well as average electricity costs are difficult to verify. Also, the annual mileage traveled for each car and the type of usage of car were simplified to the greatest extent.
Another thing that we must keep in mind for our study is the fact that Tesla is likely to release a cheaper, more affordable electric car in the future. There is news that the new electric car will be made much more available to the general public sitting at a MSRP of around $30,000. We can expect many of the same efficiency features to be present, minus the sports-like performance and extreme luxury that the Model S brings to the table. Such a vehicle being introduced to the market would greatly change the way that our growth projections are set, not to mention the difference in a CBA that the new electric car would have against a similarly priced gasoline automobile. More than likely, the introduction of such a car would actually increase Tesla’s market share even more than the Model S will, due to its easier to swallow price point and mass production scale. This would,
however, likely result in fewer sales of the Model S as most people are seeking to make the transition to electric cars to maximize their savings which will more than likely be achieved more optimally with the purchase of the cheaper Tesla vehicle. It is important to keep this in mind when we question the excessive price of the Model S and realize that that price reflects a premium luxury vehicle, and must be compared to a like vehicle such as the Mercedes E350 for fairness sake.
One of the main issues within our growth projection model is the assumption that Tesla will have 100% market share of electric premium vehicles. For the purpose of our growth projections we used the 100% figure so that we could estimate more precisely the exact growth rate of Tesla Model S cars sold in the next 5 years and how that figure would compare to the growth and sales of
with a more accurate market share growth rate for Tesla in the luxury electric vehicle market. The Model S is simply too new, so we chose to set the Model S as the global standard for the luxury electric vehicle and then project our future sales and market share values based off of that
assumption. Obviously, this is not the case in reality, however, for the purpose of this study it lets us focus on more of a comparison between gasoline and electric vehicle sales as opposed to getting caught up in the micro details of how many of those new luxury electric vehicles are likely to be Tesla Model S’s. The implication of this assumption is that our growth projections and sales figures for the Model S in the next 5 years are likely to be marginally overstated.
Similar to what was hinted at above, Tesla is not guaranteed to have a monopoly on the luxury electric car market. In fact, competition is already beginning to heat up between Tesla and some major automobile industry players such as BMW. BMW has recently announced the release of the i8 and i3 hybrid and fully electric car, respectively. The i8 is a luxury sports hybrid and is
reportedly sold out for its first year’s release while the i3 electric car is already sold on over 10,000 orders. This not only poses a threat to Tesla’s market share in the electric vehicle sector but more importantly, may pose a major threat to Tesla’s basic ability to even stay in business. Due to the massive scaling opportunities of a large company like BMW, they can easily cut costs way below what Tesla can keep up with. This may drive prices too low for Tesla to match and could eventually force them completely out of the market across all their electric car models and ultimately out of business entirely. Tesla must continue to differentiate themselves from the competition with new features and upgraded infrastructure across the US if they hope to stay relevant. As mentioned earlier if the abundance of supercharge stations can continue to increase and the battery swapping stations can be more widely implemented, then Tesla will have a massive advantage and head start to winning over the share of this initial electric car market surge.
Although some of these limiting factors hold this study back from its full potential, as long as they are acknowledged as close considerations moving forward, I believe time will allow some of them to be resolved in the future. Ultimately, however, the limitations are outweighed by the relevance and usefulness of the study in trying to determine the impact of the Tesla Model S on the automotive industry and environment, making the paper a step in the right direction moving forward.
10. Group Contributions
Andrew Bak – Double majoring in Economics & East Asian Studies. Andrew contributed to the section entitled “Choosing an Electric Car”.
Pranav Gandhi – Majoring in Economics. Pranav contributed to the section entitled “Introduction”. Harsh Hiranandani – Double majoring in Economics & Political Science. Harsh contributed to the section entitled “Aggregate Benefit of Tesla”.
Rohan Manthani – Double majoring in Economics & Biology. Rohan contributed to the section entitled “Comparing the Average Electric and Gasoline Cars: A Cost Benefit Analysis of a Single Electric Car Compared to a Single Gasoline Car”.
Jameson Moriarty – Double majoring in Economics & Natural Science. Jameson contributed to the sections entitled “Aggregate Befit of Tesla” and “Discussion”.
Varoon Rai – Double majoring in Economics & Political Science. Varoon contributed to the section entitled “Comparing the Average Electric and Gasoline Cars: A Cost Benefit Analysis of a Single Electric Car Compared to a Single Gasoline Car”.