Economics of the Electric Car

Tesla is the company that has propelled Elon Musk from obscurity to stardom. It’s hard to believe that the redundant electric vehicle market was made hugely popular by Elon Musk’s Tesla cars. Tesla cars are not an economy vehicle by any chance. Instead, the average price is close to $100,000.

Tesla has become a role model for many companies. It is now facing competition from high-end car companies like Mercedes and BMW. It is also likely to face competition from newcomers like Apple. The electric car’s market is sure to heat up in the future. But does it make economic sense? Or is it yet another startup bubble waiting to pop?

In this article, we will have a closer look at the success story of Tesla and the future of electric cars in general.

The Tesla Story

The Tesla story is remarkable because Elon Musk has created a formidable competitor for the auto giants. He has done it with resources that many of the car behemoths will consider being pocket change.

For instance, most of the parts that Tesla buys are outsourced. They are brought from pretty much the same vendors that the other companies buy from. The Tesla plant has been set up in a factory purchased from Toyota and General Motors for a mere $42 million.

Tesla’s brilliance has been in creating batteries that can be recharged easily. These batteries are bigger and more formidable than other electric cars. They give Tesla cars the rev that is missing in most electric cars.

Tesla has spent a total of $4 billion on its research and development. This number may sound big. However, we need to put it in context. Volkswagen spends $8 billion per annum on its research and development. Hence, Tesla has done a great job for a relatively small amount.

The problem is that Tesla is still unprofitable. It is still not able to fund its vehicles from the sale proceeds. Instead, they have to resolve to more and more share issues to fund the sales. Elon Musk believes this is a temporary situation which will rectify soon when the electric cars gain enough traction in the market. The company has set up an ambitious target of producing and selling 500,000 vehicles per year. It will be interesting to see whether Tesla can start generating a profit as it increases its business volumes.

The Problem with Fossil Fuels

The problem with fossil fuels is that we all know that eventually, they are going to end. There is considerable debate about when that might happen. However, there is virtually no doubt regarding the fact that it will happen.

Also, fossil fuels cause a huge amount of pollution. This makes a country have a large carbon footprint. Hence, there is a focus on finding alternate sources of energy that can be used to power cars.

However, the search has been difficult as most alternatives simply do not make economic sense. Also, it must be noted that oil companies are some of the most powerful corporations in the world with the deepest pockets. It is rumored that these firms have been deliberately undermining the research and development related to electric cars.

The Problem with Electric Cars

The problem with electric cars is that they are simply too expensive. While a few connoisseurs are buying the expensive ones, it is unlikely that the masses will purchase these vehicles. This is because even with all the technological advancement a decent battery which needs to be used in an electronic car cost around $16000. This is more than the cost of most mid-sized vehicles! Also, the car takes close to an hour to recharge and can run for only 140 miles in one charge. A network of gas stations does not exist for these cars to be able to charge and continue their journey.

Why Make Electric Cars ?

Companies are making electric cars despite the fact that they are too expensive now. This is because they expect the fuel prices to rise in the forthcoming years. Also, there is an expectation that the price of electric batteries will fall too. These prices have been falling less than 5% per year. Hence, there isn’t really enough traction in the electric car market. On the other hand, technologies like fracking have led to a downfall in the price of fuel making the cars even more expensive as compared to the competition.

Regulatory Pressures

The only real push for electric cars is coming from governments. Almost all governments want to reduce their carbon footprint desperately. Countries like China have started penalizing their car companies which do not produce fuel efficient cars. Also, governments have started investing heavily in the creation of a network of charging stations that will make it possible to drive electric cars even for intercity transport freely.

To sum it up, electric cars is still a futuristic idea. The economics of these cars does not make any sense as of now. However, given the corporate and government interest in this field, it is likely that rapid development might take place.

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.