US PROBE INTO TESLA CAR FIRES RAISES PROSPECT OF MODEL RECALL

In class assignment Managerial EconomicsPrajakta Talathi (GSEP13CMM031)

The analysis of Tesla car, Model S from an economist point of viewArticle taken from FT, 20th November 2013, Page number: 15

Figure 1: The probe by the National Highway Traffic Safety Administration affects 13,108 Model S vehicles

Historical Background of Electric Cars:

Electric cars are built using the technology of one or more electric engines using electrical energy stored in the batteries. These cars were popular in 19th Century and 20th Century until the advances in Combustion Engine and mass production of these engines came into picture. Earlier electric cars were city-driven cars, not suitable for highways and long distances.

With the advancement in battery and power management technology and the increasing oil prices especially during 2008, electric cars became popular once again. These cars were also the outcome of need to reduce the greenhouse gas emissions.

Electric Car Manufacturers and Market:

In 2012, electric car sales were led by Japan having 28% market share, followed by the US with a 26% share, China with 16% and France with 11%.

The highest top selling highway capable electric car is Nissan Leaf in Japan. Electric cars are one of the most fiercely contested battlegrounds in the industry, with groups such as GM, Renault-Nissan and BMW battling to bring the technology into the US Automobile mainstream, while warily watching newcomers.

One of the newcomers in the US Automobile Market is Tesla Motors’ Model S.

Tesla Motors’ Model S:

Tesla Motors was founded in 2003 by Silicon Valley engineers to bring about a revolution in the Automobile Industry by accelerating the transition to electric mobility. After successful launch of Tesla Roadster, Tesla is now into producing Model S, marketed as “the Safest Car in America”. The strong sales of the Model S, has transformed the carmaker from ambitious upstart to investors’ darling. Today Tesla Motors’ has $ 23 Billion market capitalization which is nearly half of that of GM.

With the announcement of Model S, the share price of Tesla Motors quadrupled in the first nine months and reached its highest of $ 194.5 in September 2013. The first battery fire on 1st October 2013 followed by two other battery fires over the past five weeks have put a meteoric rise in its share price into reverse.

Model S controversies:

The National Highway Traffic Safety Administration (NHTSA) has begun a probe, it said, after two fires in the US caused by road debris striking the car’s battery, which in the Model S is situated in the undercarriage. This probe will nearly affect the sale of already produced about 13,000 cars.

The CEO, Mr Musk said last week there would be no recall. In case the NHTSA found a fault in the battery placement, Tesla would have to raise the ground clearance on its cars.

Overcome the Model S Controversy Situation:

Apart from altering the design, Tesla will also have to extend its warranty terms to cover fire damage and retrofit all Model S cars. Moreover, Tesla will also have to spend large in developing new Marketing strategy by offering a better, enhanced version of the car. This situation is similar to Tata Motors’ Nano which faced the issue of excess heating and burning of AC component. Tata Motors then halted their production and revamped the engine of Nano to produce more efficient and safer cars.

To cover the damage, Mr Musk also said that “You are more than four and a half times more likely to experience a fire in a gasoline car than a Model S”.

Competition:

Electric cars face severe competition from Combustion engine cars owing to the Mass Production and engine efficiency. This “economies of scale” need to be implemented in the electric cars as well. No doubt Tesla will get the advantage of being one of the first of its kind, but will soon face severe completion from other big manufacturers.

Other Economic Factors:

Similar to the externalities faced by the sale of Combustion motor cars, electric cars will also face issues in future.

As of today pricing and trade-off between comfort-and-design and environment-friendly is a major issue. Tesla is effectively handling the comfort and design factor. But on the pricing it is at par with the other non-electric cars. In order for the car to be economic it should be within the range of $10,000 to $11,000 which is the range of other economical cars. But the Model S price is around $ 30,00 which does not satisfy the need of economical car as the buyer will save of gas, but spend to purchase the car.

Other Complementary Business:

With the advancement of technology, along with gas stations, the business complementary to Electric cars like Electric-gas charging Stations will also boom. The battery industry will also flourish.

Risks:

Since the backbone of electric cars is electricity charged batteries, when the price of electricity increases in future, the demand for this car will reduce.

Alternative:

Around 20-30 years in future, when even exhaustive resource like electricity will also become expensive, there will be a tremendous market for the demand of Solar charged batteries and cars using these batteries.