Elon Musk has done it again!
The internet has been rife with recent news of Twitter being bought over by Elon Musk, the richest man on earth.
44 billion dollars — is the price that Elon Musk paid for Twitter. Calling him a ‘future visionary’, The New Yorker believes that Elon’s motive behind buying Twitter is because he has some political and social beliefs about how Twitter should be run.
As big as a star Elon Musk is, Tesla is even bigger. With the recent developments, the name ‘Tesla’ is synonymous with Elon Musk and innovation. But, it has always not been the case. Through a series of radical thinking and constant innovation, the rise of Tesla was evident. None of the failures or even the threat of bankruptcy was able to destabilize their larger and bigger goal-one that gets affordable electric cars on the road. A stock controversy, not too long ago, had sparked conversations resulting in Elon Musk losing over $30 billion. This came to light when Musk had decided to sell over 10 percent of his Tesla stock to pay back the federal government around $15 billion in income tax. But, these recent developments don’t deter Tesla from becoming the next big thing, not only just in the automobile industry but also in spaces like artificial intelligence and software! And as Musk’s aspiration reaches a new height of turning Tesla into a $2 Trillion business, it also needs a plan, investments, innovations, and a market!
And there’s no bigger untapped market than India.
It was in early January 2021, that Elon Musk confirmed Tesla’s India launch on the channel that he now owns, Twitter. He soon received interest from state governments who sought a mutually rewarding partnership.
Telangana minister KT Rama Rao invited Tesla CEO Elon Musk on Twitter by writing, “Hey Elon, I am the Industry & Commerce Minister of Telangana state in India. I will be happy to partner with Tesla in working through the challenges to set shop in India/Telangana. Our state is a champion in sustainability initiatives & a top-notch business destination in India.” Similarly, Navjot Sidhu (Punjab Pradesh Congress Committee chief) wrote to Elon to set up Tesla’s unit in the state’s industrial hub Ludhiana through a Tweet, “I invite @elonmusk, Punjab Model will create Ludhiana as a hub for Electric Vehicles & Battery industry with time-bound single-window clearance for investment that brings new technology to Punjab, create green jobs, walking path of environment preservation & sustainable development,”
With almost a billion people in the market to penetrate, Tesla has taken that first big step. On January 8, 2021, Tesla incorporated Tesla India Motors & Energy Private Limited in Bengaluru, to start the journey and start selling cars from 2022 onwards. Therefore, it only makes it imperative to dig deep and analyse the working capital of Tesla and what it will take them to penetrate the Indian market.
Rise of Tesla with the Master Plan
Tesla did not always mean to be what it is today. Although now it feels synonymous with Elon Musk, it was founded by Martin Eberhard and Marc Tarpenning as Tesla Motors in July 2003, after they sold their eBook company for $187 million. They decided to venture out with the aim to build a quicker, better, and more fun to drive than the gasoline vehicles. Tesla was inspired by GM’s failed attempt and decided to take the market by storm. GM’s EV1 model did score points from the engineering standpoint but didn’t put enough dent in the sales. Therefore, they abruptly dropped it.
However, Tesla believed that they could improve engineering and make space for EVs. In 2004, X.com founder Elon Musk invested $50 million and became the largest shareholder of the company. Next, in 2006, Musk took the reigns and released a genius plan to succeed. The plan was simple where at first it was decided to design a sports car that effectively paves the way for other affordable EV cars. In 2008, Tesla released its first electric car called Roadster which showcased an unprecedented range. Next, Tesla focussed on building the new Model S sedan which had already garnered enough public attention. It was followed by the inexpensive model range. Soon, they focused on making affordable Sedans and bringing down the price of the car.
Now, Tesla has branched out, therefore, building electric cars is not their only goal. From constantly innovating to building gigafactories and solar energy products, Tesla has grown by leaps and bounds. From the investment of Daimler to the association with Panasonic, Tesla has gone big. Tesla’s market capitalization stood at $785.68 billion at the end of Oct. 7, 2021, and reported total revenue of $31.5 billion for the 2020 fiscal year.
Can Tesla Succeed in India?
With Tesla’s move to India, it only shows that Tesla wants to venture into the potential Indian market too. The Indian car market is a small car market with about 3.5 million cars sold in a year compared to the 25 million sold in China. Car ownership is still low as people rely on two-wheelers (21.3M) and three-wheelers (790k) to get to places.
While in the passenger vehicle category it is mostly dominated by Maruti Suzuki (1.2 M) followed by Hyundai and Tata. Suzuki controls over 50 percent of the market share with GM leaving India and Ford reducing its operations significantly.
However, India’s auto industry has been growing and is the fifth largest automotive market in the world, right now. Besides, it is only expected to grow by 11.3% from 2020 to 2027. Still, car ownership remains uncommon.
Most importantly, India is a cost-conscious market as there are a lot of cheaper options available while the luxury segment remains small at just 1 percent. But, that’s expected to grow too at about 6 percent in the next five years. Therefore, it’s only fair to say that the EV market in India is only in its nascent stage as bigger companies like Maruti are also planning to launch EVs in association with Toyota.
Tesla’s entry into India is highly anticipated but it will mostly be out of reach for regular consumers. Earlier, Tesla had cut prices by 10 percent for the China-made Model 3 and they would want to go as aggressively as possible to get market share in India too. With charging infrastructure still not up to the mark, and power outages especially during monsoons, it might be an uphill task for Tesla. Besides, many Tesla technologies like autonomous driving might not work for Indian roads.
Negotiation Between Tesla and the Indian Government
One thing that Tesla has is a strong loyal brand following, much like the ardent fans of Elon’s latest buy — Twitter. But, will that turn into sales? Experts think that importing to India is the best possible thing for Tesla. But, import tariffs and China’s tussle with India are the major threats. With India’s tariffs going as high as 100 percent on pre-made products, it might become a problem. Much like the European, US, and Chinese governments, the Indian government(GOI) has also taken steps to introduce EVs. GOI is also ramping up and making big moves to support sustainability and make a better and greener future with Electric Vehicles.
GOI approved a $1.4 billion electric vehicle incentive scheme and other incentives for battery producers and also incentivized the local car producers to make electric vehicles in India instead of importing it. However, this is probably not the priority of the Indian government with unemployment and GDP at stake. Therefore, it remains unclear whether Tesla is working with GOI as it did with China to get the ball rolling. Moreover, Tesla will face increasing competition from local manufacturers like Tata Motors, Mahindra and Mahindra, etc., and the gasoline vehicles too. But, if Tesla develops a frugal solution then they might get a chance to go and dominate the market. However, before that, they need to arrive at a conclusion with the GOI on the tariff charges and other aspects. As it looks like, only time will tell how soon Tesla gets in and how better they get their sales running!
How Much Working Capital Will Tesla Need To Come To India?
Tesla’s debut in India may seem unexpected even after months of negotiations. While Audi, Mercedes-Benz and Hyundai India, which sell electric vehicles imported to India, supported Tesla’s stance, Ola Electric and Tata Motors are concerned. The company is at an impasse with the Modi government, which wants Musk to commit to making electric vehicles locally before granting subsidies or removing tariffs that make Tesla imports prohibitive.
When Tesla opened pre-orders for its Model 3 electric sedan in India in 2016, Arun Bhat, a businessman from the southern city of Bangalore and avid fan of Elon Musk, was the first from the country to book the car in batches — a dream come true for Arun.
In October, Tesla’s market capitalization topped $1 trillion after car rental company Hertz said it had ordered 100,000 of its vehicles. Tesla reported deliveries of 499,550 vehicles in 2020, better than analyst estimates but below the company’s target of 500,000. Deutsche Bank said in a report Friday that it expects Tesla to deliver about 1.5 million vehicles this year, although the chip shortage remains a risk to production.
Tesla said on Sunday that it had delivered 936,000 vehicles in 2021, up 87% from the previous year, despite a shortage of computer chips that have disrupted car production worldwide. Since March 2020, the Model 3 has been the world’s best-selling electric vehicle ever, with global sales of over 810,000 units from the outset through December 2020. In 2015, it became the best-selling electric car in the world along with the legendary Tesla model.
In Tesla’s European market, buyers of its vehicles enjoy a 25 percent exemption from VAT paid by buyers of internal combustion engine vehicles.
For three years, Tesla has cited high import duties as the reason for not launching in India. Roads and Transportation Minister Nitin Gadkari warned the automaker against supplying cars built at the Shanghai plant for sale in India, recommending that Tesla vehicles be built locally. During a meeting between Musk and Modi in September, Tesla spoke of the economic unsustainability of investing in India with the current tax structure. However, after years of pitching the idea of selling Tesla to India, Musk has yet to figure out how to do it, even as his focus on the market intensifies.
By comparison, its US car prices are just $44,690, which essentially means the company will face a 100 percent import tax in India. To finance the expansion of production capacity for its vehicles and batteries, the company does not expect to make a big profit until 2020. Musk said during Tesla’s Q2 conference call that it would be profitable next quarter, producing 7,000 vehicles a week (5,000 Model 3s and 2,000 Model S and X). At the same time, however, 50,000–55,000 Model 3s were produced in the third quarter, and the company hit that target by delivering 55,840 Model 3s and producing 53,239 vehicles.
However, despite Moody’s dire forecasts and Tesla’s gap between forecasts and profitability, Musk repeatedly said throughout the year that he would not raise funds. As of the end of 2018, the company had a capital surplus of $10.2 billion with just over $4.9 billion of equity. To spur its expansion, Tesla said in April 2019 that it plans to raise an additional $2 billion through long-term debt or equity over the next few years.
In other words, once Tesla burns through $5.7 billion, it will have to re-enter the capital markets or do something more radical. Of course, if Tesla can’t re-enter the capital markets, it’s just an existential crisis. Instead, keep in mind that Tesla remains a loss-making public company with $11 billion in long-term debt trying to scale and survive in a capital-intensive industry with tight margins. But there’s a huge difference between wealth and income, which is exactly why Elon Musk’s weekend Twitter stunt a while ago, asking his followers to sell his 10% of Tesla stock is both exciting and annoying.
Analysts say Tesla should raise money by returning to the public markets, but CEO Elon Musk has repeatedly said that’s not an option. Tesla’s capital structure appears to be confusing for investors. In addition, Tesla will incur significant capital expenditures. Second, as reported by 10-K, Tesla ended the fourth quarter with $3.77 billion in accounts payable to suppliers.
The only way Tesla gets cash below the stock line is if he spends the money building a car and then rents it out. Another billion dollars is the equity line Tesla is using to fund outright new car leases until those contracts are packaged and sold in an asset-backed vault.
In October, Tesla said it intended to build its first production vehicles at both plants by the end of 2021, but it is not known if it has reached that goal. On May 20, 2010, Tesla and Toyota announced a partnership to work on the development of electric vehicles, which included a conditional future investment of US$50 million by Toyota and Tesla’s purchase of a $42 million car part of the former NUMMI plant. On January 7, 2010, Tesla and battery manufacturer Panasonic announced the joint development of nickel-based lithium-ion batteries for electric vehicles. That same year, Tesla also built charging stations in both the US and Europe, allowing Tesla owners to charge their cars for free.
In April 2019, Musk announced that Tesla intends to launch an autonomous taxi service using more than 1 million Tesla vehicles by the end of 2020. Tesla aims to help accelerate the transition to sustainable transportation and energy through electric vehicles and solar power, Musk said. Tesla is growing rapidly around the world, expanding production and sales in China, awaiting approval from the German government to start production of electric vehicles at its Giga plant in Berlin, and preparing for Tesla’s production in Austin, Texas.
Tesla’s Fremont, California plant is one of the most advanced automotive factories in the world, with 5.3 million square feet of manufacturing space and 370 acres of offices. After the City of Fremont approved Tesla’s expansion plans in 2016, the company will nearly double the size of the facility to nearly 10 million square feet, creating thousands of new jobs over the next few years. Musk eventually became president of the company before taking on the role of chief executive officer (CEO).
The report deals with the working capital management of two well-known companies, Tesla and NIO. They believe that Musk will be able to pull the rabbit out of his hat again and get an intact Tesla through the second half of 2019 through a combination of electric vehicle loans (ZEV loans) and financial engineering. Their proposal follows Musk’s post saying Tesla still faces “many problems” from the Indian government. Another reason for the delay, he said, was India’s attitude towards clean energy vehicles, such as diesel or petrol cars, “which are not in line with its climate goals”. In August, Tesla executives, including India’s political chief Manuj Kurana, presented the company’s demands to the PMO in a closed-door meeting, saying the tax was too high, Reuters reported.
Think Working Capital, Think CredAble!