Tesla Motors Company - Macroeconomic Variables - Case Study Example

Tesla Motors Company Tesla Motors Company Introduction Tesla Motors Company specializes in theproduction of electric cars and components of an electric powertrain vehicle. The company has so far produced various models of vehicles such as the Tesla Roadster an electric sports car, Model S, Model X and Model 3. The company targets the global markets having sold more than 2,250 Roadsters between years 2008 and 2012. The major markets of Tesla`s products are the United States, Canada, Asia, Australia and Europe. The company also produces lithium-ion battery packs which they sell to the Toyota and Daimler companies for the installation of their cars. Tesla Motors has had various macroeconomic factors affecting the demand for their products and the supply of the raw materials from their supplier. This essay discusses the macroeconomic factors affecting the demand and supply of Tesla vehicles. Consumer Income The higher the consumer`s income, the higher the demand. Tesla`s product demand has always been affected by the level of the consumer`s income. This is because, Tesla`s products are expensive compared to other company`s products. They are only affordable to consumers with a high level of income (Shao et al., 2011). Consumers with low income cannot afford nor sustain Tesla`s car due to its expensive cost and maintenance cost respectively. In the United States, the consumer income level has been as illustrated below since 2011 to 2014. Figure 1 (“US Per Capita”, 2015). The consumer income has been rising since 2011 to 2014 depicting the rise in consumer buying power. Due to this increase, the demand for Tesla`s cars was expected to also increase steadily. Unfortunately, the demand for Model S was as illustrated below. In 2012, there was a low demand for the car but in 2013, it increased. In 2014, the demand declined by a small margin but still a considerable amount of cars were bought. That means, the increase in the number of vehicles bought in 2012 to those bought in 2014, was due to consumer income increase. The consumers had a high buying power, and they could, therefore, afford the expensive Tesla`s cars (“US Per Capita”, 2015). Table1 Years No. of Model S cars sold 2012 2558 2013 18195 2014 16750 The table above shows how the sales increased corresponding to the increase in the consumer income as illustrated in figure 1. Prices of Tesla`s Cars The prices of the Tesla`s cars are high compared to other companies. For instance, Toyota cars cost as low as $30,000 while Tesla`s car costs $57000 minimum. For instance, the S Model 2014 costs about $69,900 - $93,400 (U.S. News, 2015). This has affects its product`s demand because many consumers whose income is lower cannot afford to buy the cars because demand is a function of prices and other macroeconomic variables. Tesla`s prices have also been consecutively increasing forcing the customers to shy away from buying the products. This was the reason the demand of Model S decreased in 2014 despite the increase in consumer income. Consumers could not afford the high prices of Model S car. For instance, the prices of Model S have been increasing since 2011 to 2014 as illustrated below. Figure 2 (“New Tesla Cars”, 2015; U.S. News, 2015; Blankenship, 2012). The low demand characterized by high prices, reduces the supply of the Tesla`s Model S to the market. The surplus produced could be stored in the company`s warehouses while reducing the production due to lower demand. Inflation The inflation affects the economy of a country by increasing the prices of goods and services. Whenever the prices of goods in an economy increase, consumers tend to shy away from buying the products by reducing their consumption or moving to similar products until the prices reduce again. Tesla`s products have been affected by the inflation rate in the United States since 2011 as illustrated below (“US Inflation”, 2014). Table 2 Years No. of Model S cars sold 2012 2558 2013 18195 2014 16750 Figure3 (“US Inflation”, 2014). According to the figures above, the demand for Model S increases as the inflation rate decreases. For instance, in the year 2012, the inflation rate was high and correspondingly, the sales of Tesla`s Model S was low an implication that the demand for the car was low. In 2013, the inflation rate was extremely low, which corresponded to the highest sale of Tesla`s Model S in US. This implies there was a high demand for this model in the market. Furthermore, the inflation affects the prices of raw materials in addition to, other overheads used by Tesla in the manufacture of its cars by hence increasing the costs of production, which forces the company to reduce production due to low demand in the market. For the company to satisfy the low number of consumers, it will have to use a few raw materials compared to when producing for a large consumer base. Interest Rates Usually, demand of various products decreases when the interest rates increase. This is due to the interest rates` effect on the aggregate demand. The aggregate demand includes the consumption, which includes the amount of money consumers put aside for spending. An increase in the interest rate makes people fear borrowing money from financial institutions due to the high interests associated with the rates. This has affected the demand of Tesla`s products. This is because many of the consumers buy the vehicles by use of borrowed loans from financial institutions. Therefore, due to high interest rates consumers cut down their consumption rates and consequently avoid taking their loans to purchase luxury goods. For this reason, the demand for the companys cars just like any other commodity goes down. According to data from the World Bank, the real interest rates, which are the lending rate, offered by the financial institutions have been as follows in the U.S. Table 2 Year Real interest rates (%) 2011 1.2 2012 1.4 2013 1.7 (“Real Interest Rate”, 2015) According to the data above, the real interest rates reduced continuously from 2011 to 2013. In reference to the Model S sales made in these years, the high real interest rate in 2012 characterized low demand of this model. This ideally meant that loans were not affordable and very few consumers could afford Model S. In the year 2013, the interest rates were extremely low, which translated to the high sales made in 2013. Many consumers at this time were in a position to access and finance the loans thus increasing their buying power. Energy Prices Tesla`s cars use electric power energy to run compared to other cars that use gasoline, which is extremely expensive (Azar, 2009). In the United State, cost per kWh of electricity varies according to states. For instance, according to the United States Department of Energy, electric energy cost 11.55 cents per kWh in the Common Wealth of Virginia while, in California, it cost 30 cents per kWh an implication that energy prices will defer in different states (“How much does”, 2015). According to Department of Energy in US, the average cost per kWh is 11.55 cents. Since Tesla`s Model S Car consumes about 42kWh, for the battery, to be fully charged, it will cost an average of $4.85. The electricity charge is higher compared to the gasoline and diesel charges in the US. For instance, the price of gasoline is $2.5 to $3 in US. This is extremely low compared to the $4.85 of electric power. The high prices of electric power have, therefore, reduced the demand for Tesla`s products because consumers prefer cars that are efficient. Moreover, the management of Tesla Company will be forced to adjust to the demand of the products and thus moderate their production systems. This means that if the demand for Model S declines, the company will reduce production to push the already manufactured products to the consumer. The suppliers of Tesla will also be indirectly affected by the demand decreases; thus, reducing their supplies to the company. Conclusion Ultimately, the demand and the supply of products in Tesla Motors Company have been properly conducted through various macroeconomic factors have affected their running. These factors either increase or decrease the demand or supply. Those that lead to the increase of demand or supply contribute to the profit margin of the company. On the other hand, elements such as high prices, inflation high-interest rates and reductions in consumer income, which affect demand and supply negatively, reduces the revenues of the company. Thus, have to align themselves strategically with macroeconomic variables to be able to maintain their revenues. Tesla Company despite being affected by these factors, has remained in business producing the best cars and parts globally, especially in the electric cars industry. References Azar, J. (2009). Electric cars and oil prices. Available at SSRN 1474023. Blankenship, G. (2012). 2013 Model S Price Increase. Retrieved from http://www.teslamotors.com/blog/2013-model-s-price-increase How much does charging a Tesla Model S cost? Retrieved from http://www.quora.com/How-much-does-charging-a-Tesla-Model-S-cost New Tesla Cars - Find 2015 2016 Tesla Car Prices & Reviews - Motor Trend Magazine. Motor Trend Magazine. Retrieved from http://www.motortrend.com/new_cars/01/tesla/ Real Interest Rate (%) | Data | Table.(2015). Retrieved from http://data.worldbank.org/indicator/FR.INR.RINR Shao, S., Pipattanasomporn, M., & Rahman, S. (2011). Demand response as a load shaping tool in an intelligent grid with electric vehicles. Smart Grid, IEEE Transactions on, 2(4), 624-631. U.S. News, (2015). Best News. Retrieved from http://usnews.rankingsandreviews.com/cars-trucks/Tesla_Model-S/2014/ US Inflation in April Jumps, Annual Inflation Rate at 2% | US Inflation Calculator. (2014). Retrieved from http://www.usinflationcalculator.com/inflation/us-inflation-in-april-jumps-annual-inflation-rate-at-2/10001324/ US Per Capita Disposable Personal Income (Monthly, SAAR, USD). Retrieved from http://ycharts.com/indicators/per_capita_disposable_personal_income Voelcker, J. 2011. 2012 Tesla Model S Prices, Options, Specifications Released. Retrieved from http://www.greencarreports.com/news/1070912_2012-tesla-model-s-prices-options-specifications-released Read More