GREEN BUSINESS IMPLICATION
GB-DB4: Tesla’s Model 3 Rush Costs Battery Maker
By Sean McLain | Nov 01, 2018
GREEN BUSINESS IMPLICATION: Electric vehicles (EVs) are green business to the extent that these represent an alternative to the fossil fuels that contribute to global warming. But batteries are EVs’ greatest issue. These represent 1/3 of the cost of the vehicle. Despite extensive research and development efforts, batteries are still too pricey and inefficient: they tend to be too bulky and heavy, require frequent charging, and are environmentally toxic to produce. It can thus be argued that EVs are for now more an environmental problem than a solution. Tesla managed to design chassis that are actually batteries that range around 232 miles per charge and roofs that are actually solar panels. But its EVs as well as those of the other brands, are too pricey to compete with the greater fuel efficiency of all gasoline new cars…Tesla’s cheapest model, the Model 3, starts at $35K. The cheapest electric car in the US last year was a tiny Mitsubishi that sold for about $29K. Furthermore, the EV charging infrastructure is still not as visible and available as gas stations in most countries.
SUMMARY: Tesla supplier Panasonic said its battery business lost money for a second consecutive quarter as production of Tesla’s Model 3 sedan accelerated. Panasonic had to add production more quickly than anticipated and hire more workers at the Nevada battery factory it jointly runs with Tesla, known as the Gigafactory. The increase in fixed costs pushed the business into the red, the company said.
QUESTION: What is the more general lesson here? Why in general is a growth spurt often the cause of declining rather than rising profitability?
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2 student responses:
1. The main cause of money loss for Panasonic is the launching production of the new battery cells at Tesla’s Nevada Gigafactory that drove up costs, but Panasonic believes the situation will improve once production fully ramps up. The article states that “The increase in fixed costs pushed the business into the red, the company said.” As production accelerates, Panasonic will lose money on those batteries initially, but the company expects to turn a profit next year.
2. When a growth spurt occurs in a company, they need additional resources to meet production needs. This is why Panasonic is losing money even though Tesla is making profit. Panasonic are supplying the batteries for Tesla’s cars, so when Tesla requires a higher production, Panasonic has to increase their fixed costs to meet Tesla’s needs. Therefore, a company will have to lose money in order to get more raw materials and to hire more workers to produce more goods. However, this does not mean that Panasonic will stay in the red. In fact, Umeda, Panasonic’s chief financial officer, expects to “reap the benefits of increased Tesla sales in the latter half of the[ir] … financial year.” Only time will show whether or not Panasonic will continue to stay in the red.