Introduction
Tesla’s Key Features
In 2003, a group of engineers and developers founded Tesla intending to create and improve electric cars and related components. One of their fundamental goals is the invention of zero-emission vehicles and fuel cells, and the development of artificial navigation intelligence and neural networks. They are also continually reducing the emission of pollutants in their factories located in California and Shanghai. Tesla do it through compliance with international environmental standards and comprehensive multi-tasking training of workers.
It is noted that “Tesla believes the faster the world stops relying on fossil fuels and moves towards a zero-emission future, the better” (About Tesla, 2020, para. 1). Since 2016, Tesla’s new ideological guideline has been to ensure the maximum financial availability of its products for the mass consumer. Model S and Model X proved that electric cars could be fast, safe, and efficient vehicles. Model 3 and Model Y made these qualities more accessible to people.
Tesla’s Key Metrics
Tesla, as an innovator and outsider in the automotive manufacturing industry, is showing stable positive numbers. It is even despite events such as the COVID-19 epidemic, which caused the company to close a factory temporarily in California. According to the Q2 2020 Update (2020, para. 1), “$535M increase in our cash and cash equivalents in Q2 to $8.6B.” It is also important to mention that “operating cash flow less capex (free cash flow) $418M in Q2” (Q2 2020 Update, 2020, para. 1).
A number of measures taken by the management made it possible to reduce the company’s losses caused by the shutdown and even maintain some financial growth. According to Q2 2020 Update (2020, para, para. 2), “$327M GAAP operating income; 5.4% operating margin in Q2.” Moreover, the same source notes that “$104M GAAP net income; $451M non-GAAP net income (ex-SBC) in Q2” (Q2 2020 Update 2020, para. 2). The company has been showing gradual and stable profitability for four quarters in a row.
Tesla’s Key Organization Recourses
Tesla’s three essential resources are people, capital, and raw materials. Tesla respects labor rights and strives to improve the safety of workers in the production environment. Official reports show that safety numbers are on the rise, and injury rates are gradually falling (Impact Report 2019, 2019, pp. 40-41).
Moreover, Tesla hold one of the top places in the world in terms of labor safety (About Tesla, 2020, para. 3). The company management encourages diversity, encourages, and talented people (Impact Report 2019, 2019, p. 44). Tesla also has significant financial resources. According to McDonald (2019, para. 7), “the company ended 2018 with a total of $3.7 billion in cash and cash equivalents.” It is also important to note that “as of the end of 2018, its debt-to-equity (D/E) ratio was 1.63%, which is lower than the industry average” (McDonald, 2019, para. 7).
Tesla’s production process includes three primary raw materials. According to Chen (2018, para. 7), “Tesla uses a formulation called NCA (nickel, cobalt, aluminum) that is already very low-cobalt.” The decline in the use of cobalt is associated with the complexity of the extraction and its toxicity.
Tesla’s Market Objectives and Challenges
At the moment, there are two marketing goals for Tesla. One of them is PR through social networks and media such as Twitter and YouTube. With a successful media campaign, Tesla is the third most mentioned car company on the web (Folschette, 2019). The second fundamental goal is to achieve the maximum affordable price for electric cars and related products.
The only obstacle to achieving this is long-term debt. Tesla has a long-term debt of $ 9.4 billion and, according to McDonald (2019, para. 10), “in April 2019, Tesla said it planned to raise another $2 billion through long-term debt or equity share positions.” That is why some investors do not trust Tesla’s promises and plans.
Tesla’s Long Term Sources and Their Impact
Owners of Tesla
Institutional investors are the primary long-term sources of Tesla. They currently hold 63% of all their shares (McDonald, 2019). Leading positions are held by such legal entities as Baillie Gifford & Co., Capital Research & Management Co., The Vanguard Group, Inc., BlackRock Fund Advisors, and Fidelity Management & Research Co. (Tesla Inc, 2020).
It is also important to mention Fidelity Management & Research Co., Jennison Associates LLC, SSgA Funds Management, Inc., JPMorgan Investment Management, Inc., Goldman Sachs & Co. LLC (Private Banking), BAMCO, Inc (Tesla Inc, 2020). However, they are not Tesla’s only financial sources.
Mutual Funds
Mutual funds are also an integral part of Tesla’s long-term sources. According to Hayes (2020, para. 1), a mutual fund is “…is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks…” The most significant and well-known mutual funds are American Funds Growth Fund of America, Vanguard Total Stock Market Index Fund, American Funds New Perspective Fund, Vanguard International Growth Fund, and Invesco QQQ Trust (Tesla Inc, 2020).
There are also Vanguard Extended Market Index Fund, Scottish Mortgage Investment Trust, American Funds Insurance Series – Growth Fund, Harbor Capital Appreciation Fund, and JPMorgan Large Cap Growth Fund (Tesla Inc, 2020). Consequently, the question arises of how they influenced Tesla’s performance.
Tesla Performance in 2018
Tesla is still new to the car manufacturing industry and is experiencing some difficulties in terms of monetary gains and losses. Despite rapid economic growth and a financial leap in the mid-10s, 2018 was marked by a deterioration in financial performance for Tesla (McDonald, TK, 2019). According to O’Kane (2019, para. 2), “total revenue for 2018 was $ 21.4 billion – another record for the company – though Tesla still posted a $ 1 billion loss across the year.”
Moreover, according to McDonald (2019, para. 8), “at the end of 2018, the company had a capital surplus of $10.2 billion, with just over $4.9 billion in stockholder equity.” It is mainly due to the long-term perspective of Elon Musk, who views the 30s and even 50s as Tesla’s economic and industrial heyday. Moreover, it is because of the high cost of new inventions. These factors scare off new investors and raise suspicions among existing ones.
Tesla Performance in 2019
Tesla’s performance for 2019 is similar to the trends of 2018, but the overall situation looks much better. Tesla was able to sell a record number of its cars and reduce financial losses (O’Kane, 2020). According to O’Kane (2020, para. 2), “it lost $862 million in 2019.” It is also important to mention that “Tesla’s market cap, as of August 2019, is $38.817 billion” (McDonald, 2019, para. 8). This kind of news and statistics greatly encouraged investors.
Moreover, Elon Musk expected that 2020 would be the year of Tesla’s self-sufficiency. However, a multitude of social phenomena of 2020 has changed the predictions of Tesla and many other companies.
Different Methods of Evaluation of Investment Proposals
Method of Urgency
One of the most basic and easiest ways to invest is a method of urgency. According to Shivam (n.d., para. 2), “in many situations in the life of a business concern, an ad hoc decision is needed in respect of investment expenditure.” It is aimed at achieving any short-term goals or solving problematic projects. For example, a similar technique was used during the 2008 economic crisis, when the economy was rescued by constant, fast, and significant investments. Therefore, this evaluation system is not suitable for such an enterprise that lasts three years.
Method of Pay off and Payout
The Method of pay off and payout is created by the interrelation between two critical parameters, which are time and money. Economists calculate in how many years the project will pay off with the help of this model. Further, the management decides whether it is worth investing in a particular event or not. Moreover, this method implies such a principle as the pay-back period. According to Shivam (n.d., para. 2), “the pay-back period is the number of years during which the income is expected.” This evaluation model is acceptable for the conditions suggested in the instructions.
Method of Unadjusted Return on Investment
Economic specialists using an unadjusted return on investment method operate within the framework of the accounting concept. It is important to note that this method has many other names and abbreviations (Shivam, n.d.). Such economic terms as the rate of return, income, and investment have a meaning depending only on the environment or a specialist.
The main rule of this method is that “the rate of return is expressed as a percentage of the earnings to the investment in a particular project” (Shivam, n.d., para. 7). Due to its contextual nature and various available mathematical models, this method is suitable for project conditions.
Method of Net Present Value
The net present value method is conventionally recognized by economists as one of the most effective valuation models. Experts that use this method establish their calculations on discounted cash flow and time-adjusted methods (Shivam, n.d.). The term of the net present value means the mathematical residual between the total present values of such parameters as cash inflows and outflows (Shivam, n.d.). This model is considered universal, which means that the model of net present value is suitable for an enterprise that lasts three years and requires $1 million.
Method of Terminal Value
This method of terminal value implies a constant circulation of investments in the market environment within the duration of one project. Therefore, when implemented into one project, investments move into another economic niche and become reinvestments of the next category. It is important to note that “… and thus avoids any influence of the cost of capital on cash inflows”(Shivam, n.d.). An important point of this model is that the investments of the last year of the project will not be able to become reinvested. The duration of three years allows the terminal value method to be effective taking into account the conditions prescribed in the project.
Method of Benefit-Cost Ratio
Experts apply time adjusted techniques when using the Method of benefit-cost ratio. It is important to note that “… is also called Profitability Index or Desirability Factor” (Shivam, n.d.). This method is, in many ways, similar to the method of net present value, which was described above. It is why the benefit-cost ratio method model is also seen as a universal one. The relationship between the present value of the benefit and the present value of cost is the primary indicator of benefit. This method is applicable within the conditions of a given project, just like the method of net present value.
“Beyond Budgeting” Concept
The Meaning of Beyond Budgeting
Beyond Budgeting is a new system for managing and organizing a company or business based on criticism of budgeting. According to Yvanovich (2019, para. 2), “it represents a new management philosophy which is more agile and adaptable…” This managerial phenomenon emerged from informational and software development companies. Olaf et al. (2019, p. 161) note that “Beyond Budgeting (BB) is a holistic alternative MCS, designed for knowledge-based organizations.”
This system is aimed at adapting to constant market and economic changes. Beyond Budgeting criticizes standard budgeting for time-consuming, time-short, costly, inaccurate, risking, controlling, and unproductive nature (Yvanovich, 2019). Beyond Budgeting implies twelve fundamental ideological principles, which fall into two categories, such as leadership fundamentals and management processes (Yvanovich, 2019).
Leadership fundamentals include purpose, values, transparency, organization, autonomy, and customers. The term “management processes” stands for rhythm, targets, planning and forecasting, resource allocation, performance evaluation, and rewards.
The Secret of the Popularity of Beyond Budgeting
Such signs of a post-industrial society as the development of information technology and an expanding service sector have significantly influenced the sphere of business and economy. It led to the emergence of such a phenomenon as Beyond Budgeting. Beyond Budgeting has become popular because it is a dynamic system, which is why it has become so popular in the current startup era.
According to Yvanovich (2019, para. 7), “the beyond budgeting model is well-suited to industries with an accelerating pace of change.” Also, newly formed businesses and companies undergoing voluntary or crisis transformations can find significant advantages in Beyond Budgeting. Companies that are always reforming and improving during their existence can also greatly benefit from Beyond Budgeting.
Newness as a Disadvantage of Beyond Budgeting
While Beyond Budgeting represents a new ideological system for managers, economists, and marketers, it is not without its flaws. One of the critical shortcomings of this system is its newness. It will not work for the static type of industries and companies that have been around for decades. It is because a change in an organization can cause devastating consequences like a domino effect.
As mentioned above, this Beyond Budgeting model emerged in the post-industrial environment, and therefore it is more suitable for businesses of the current period. This conclusion leads to the next fundamental flaw of Beyond Budgeting.
Adaptive Nature as a Disadvantage of Beyond Budgeting
In most cases, adaptability is an unconditional positive property of any system, not only economic. However, it is a critical flaw for Beyond Budgeting. This thesis is explained by the fact that, apart from adaptability, this system does not offer any long-term prospects, which are a point for macroeconomists. Olaf et al. (2019, p. 163) note that “…there is no framework that enables the assessment of the potential advantages of BB implementation.” Beyond Budgeting is primarily aimed at microeconomic politics and trends. This model does not allow forcing and allocating funds for projects that, in the short-term paradigm, seem economically unprofitable.
Conclusion
Tesla is, by far, one of the most unique and successful projects of the twenty-first century. It is also the undisputed pioneer of the green car manufacturing industry. Tesla’s economic indicators show positive trends at the moment, but its financial model is not without flaws and shortcomings. The available human and financial recourses, as well as raw materials, comprehensively help to achieve the market and ideological goals that were set by Elon Musk.
Tesla has a large number of major institutional investors represented by the owners of Tesla and mutual funds. They are Tesla’s long-term sources of money. It is these financial sources that allowed Tesla to maintain positive economic performance during the recession in 2018 and 2019. Monetary policy to reduce prices for electric cars allowed to meet record demand last year. Tesla’s management hopes to achieve complete financial self-sufficiency in 2020 and aim to become industry leaders by 2050.
Analysis of different methods of evaluation of investment proposals made it possible to identify those mathematical models that will be most effective and acceptable for Tesla. Method of urgency, method of pay off and payout, method of unadjusted return on investment, method of net present value, method of terminal value, and method of benefit-cost ratio were considered. The only method that doesn’t fit Tesla’s model is the urgency method.
A review of such an economic phenomenon as Beyond Budgeting showed that this could be suitable for solving Tesla’s financial problems in 2018 and 2019. Combining the methods for evaluating investment proposals and Beyond Budgeting would allow Tesla to achieve its goal much earlier.
Reference List
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