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Tesla Valuation based on ESG factors

Essay 2017 26 Seiten

BWL - Industriebetriebslehre


Table of Content

1. Introduction

2. StakeholderAnalysis

3. Current ESG situation
3.1. Environment
3.2. Employees
3.3. Customer
3.4. Community
3.5. Supply Chain
3.6. Corporate Governance

4. Materiality Analysis

5. Peer Group analysis and identification of industry leaders
5.1. CO2 emissions
5.2. Labor relations
5.3. Consumer privacy
5.4. Product safety

6. ESG’ simpact on Tesla’ sValue
6.1. CO2 emissions
6.2. Labor relations
6.3. Customer Privacy
6.4. Product Safety
6.5. Overall impact

7. Strategic Implications

8. Conclusion



1. Introduction

Tesla, Inc., formerly known as Tesla Motors, is an American automaker and energy storage company that specializes in producing electric vehicles (EVs), energy storage devices and photovoltaic panels. It was founded in 2003 by Martin Ebarhard and Marc Tarpenning, with Elon Musk as its chairman (Kumparak et al., 2015). With Palo Alto (California) as its headquarters, Tesla operates multiple production and assembly plants and large factories, with its main vehicle manufacturing facility in Fremont, California (Tesla, 2017a). Additionally, in 2016 Tesla acquired SolarCity with the aim of creating a company fully committed to sustainable energy, from energy generation and storage to transportation (Hull and Martin, 2016). Current product portfolio of EV vehicles includes Model S, Model X, Model 3, Tesla Roadster, and Tesla Semi, while its energy storage devices include Tesla Powerwall, Tesla Powerpack, solar panels and solar roofs (Tesla, 2017a).

In the following report, Tesla will be analyzed based on the environmental, social and governance (ESG) factors. Next, the issues with the highest materiality will be benchmarked against its closest competitors. Finally, impacts for Tesla’s valuation will be identified and strategic implications will be discussed.

2. Stakeholder Analysis

The following stakeholder analysis includes the most important stakeholders with regards to power, legitimacy and urgency. A complete stakeholder analysis is included in Exhibit A.

According to Starik (1995) a stakeholder affects or is affected by the actions of a company. Therefore, one of Tesla’ s stakeholders is the environment. In the case of Tesla, the impact on the environment is ambiguous, because Tesla produces CO2 emissions, but relatively less compared to internal combustion engines (ICEs) (Autovista Group, 2017). As climate change is a pressing issue, the legitimacy and urgency is high, while the power of the environment is low.

Another stakeholder is the government, especially due to its power and legitimacy. However, Tesla’ s actions are overall within the government’ s interest, as EVs reduce the CO2 emissions produced by transportation and consequently contribute to reduction of the effects of climate change.

In designing its vision, Tesla believes that employees are a critical success factor in its business model (Tesla, 2017b). Employees influence business productivity and performance, translating into high urgency. Employees are legitimate to express their opinion over the company’ s internal practices, however, they have generally limited power, for instance, regarding the decision-making at executive level.

Another stakeholder of crucial importance for Tesla is the management, in particular the CEO, Elon Musk. He is claimed to be the main value driver of Tesla’ s success and to be an irreplaceable asset for the company (Mullaney, 2017). The management has high power, due to its ability to carry out its will, despite resistance from investors or employees.

Customers are important stakeholders for Tesla, as its future mainly depends on the demand for new and existing models. They may seriously influence the financial performance of the company. Hence, customers have a high level of power. Urgency is created by issues, such as consumer privacy.

Investors and shareholders have shown confidence into the company, since its IPO. They have the most reasonable combination of power, legitimacy and urgency, because they provide capital. Elon Musk is the main shareholder of Tesla, holding more than 20% of the company, while different institutional investors hold an aggregate 29% (NASDAQ, 2017).

3. Current ESG situation

ESG factors, which include environmental, social and governance topics, are non-financial indicators, which are used to measure the company’ s behavior, for instance, the company’ s carbon footprint (Financial Times, 2017). ESG factors of mature companies are usually included in their sustainability report and can be benchmarked on financial platforms, such as Bloomberg. However, as Tesla is a relatively new company and more focused on achieving profitability as well as its mission, none of the two exist. Therefore, ESG factors have been identified through a qualitative analysis and the most relevant will be discussed in the following.

3.1. Environment

Musk emphasizes that Tesla manufactures EVs, solar panels as well as energy storage in order to accelerate the transition to sustainable energy (Tesla, 2017c). It will be assessed what impact Tesla’ s products have on the environment throughout their lifecycle.

Production: The production of Tesla’ s EV and its batteries starts with the mining of raw materials, such as lithium. The sourcing from South America is prone to water-intensive (0.5mn gallons of water per ton of lithium) and water-polluting activities (Frankel and Whoriskey, 2016), while sourcing from Australia is problematic due the energy-intensive (thus C02-intensive) hard-rock mining technique (Foehringer Merchant, 2017). Further, raw materials, such as nickel, cobalt, aluminum and graphite, are prone to cause deforestation and water contamination (Foehringer Merchant, 2017). This environmental pollution takes place, because the excavation is treated with chemicals and approximately 99.8% is returned to the environment (Wade, 2016).

The Union of Concerned Scientists found that manufacturing conventional cars generates approximately equal amounts of CO2 as manufacturing EVs. However, manufacturing batteries adds about 15% CO2 emissions on top (Nealer, Reichmuth & Anair, 2015). Tesla’ s Gigafactory itself, which is used for the production of batteries, aims at net energy consumption of zero, by installing solar panels on its roof (Tesla, 2017c). Moreover, Tesla is taking steps to redesign its supply chains to be near its manufacturing unit in order to decrease transportation and latency costs (Lopez and McKevitt, 2017). Additionally, Tesla has taken steps to reduce C02emissions, generated by leather seats, by using synthetic, vegan material instead (Gilboy, 2017).

Battery Lifetime: Tesla is successful in the reduction of tailpipe emissions, and aims at its batteries being recharged entirely with solar power. However, as batteries are not entirely recharged with renewable energy, the CO2 emissions may just divert from the costumer’ s tailpipe to the utility firm (Wade, 2016). For instance, large customers of Tesla’ s energy storage units do not use them to store renewable energy, but to be charged during night, when energy from utility suppliers is cheap, and use the energy during the day (Westervelt, 2015). How much CO2 is produced largely depends on the region, as the energy source varies (Exhibit B) (Wilson, 2017). Worldwide, oil and coal still represent about two thirds of all energy sources (BP, 2017). Tesla might be able to increase the share of renewable energy usage with its subsidiary SolarCity.

A further factor to take into consideration is the weight of batteries, as heavy batteries are less efficient and generate more CO2 emissions (Autovista Group, 2017). As Tesla highly focuses on providing larger mileage-range for its customers, its batteries are larger than the ones of its competitors, thereby producing more CO2 (17.5 tons for Tesla’ s 100 kWh compared to 5.3 tons Nissan Leaf’ s 30 kWh battery) (Autovista Group, 2017). In the future, it is crucial to construct light vehicles, as heavier cars also consume more energy (Wade, 2016).

End of battery life: At the end of the life of a car battery, which usually has a lifespan of 300 to 500 charging cycles (at 100% of its original storage capacity), it is not allowed to be disposed on a landfill (Battery University, 2017; Richa, Babbitt, & Gaustad, 2017). According to Tesla and Panasonic, who jointly produce batteries at the Gigafactory, a program, called “Closed Loop Battery Recycling” , is implemented for all batteries that are returned, and they expect recycling rates to increase to 100% (Westervelt, 2015). Tesla itself reuses 10% of the battery’ s weight (the case and parts of electronics) and sells the rest to recycling firms, Kinsbursky Brothers in the US and Umicore in Europe, which are able to save 70% of CO2 emissions (Wade, 2016; Kelty, 2011). The weight of Tesla’ s battery packs (e.g. 0.5 tons for Model S) increases the recycling difficulties, as recycling companies are not used to these weight amounts (Wade, 2016).

Over its lifetime, an EV generates about 50% less CO2 emissions than a car with an ICE, even when taking into account that not all electricity is generated with renewable energy sources (Autovista Group, 2017; Nealer, Reichmuth & Anair, 2015). Therefore, the overall impact on the environment is positive compared to ICEs, but not necessarily when compared to its competitors in the EV market.

3.2. Employees

Employee rights: Employee rights play an important role in the automobile industry and most assembly line workers form trade unions. However, Tesla’ s factory is the only non-unionized assembly plant owned by an American automaker (Tesla, 2017b). Consequently, workers have less power, which increases Tesla’s flexibility, however, might lead to conflicts. After the introduction of a confidentiality agreement, which did not allow workers to discuss Tesla products with the press, workers accused the company of illegally surveying and coercing workers (Automotive News, 2017). Furthermore, Tesla is accused of discouraging unionizing, going as far as dismissing the workers for taking actions to establish those (Daily Mail, 2017). Besides, Tesla puts its workforce under constant pressure to meet production commitments. Hence, the workers are faced with unscheduled overtime. As a result, the United Automobile Workers (UAW) have attempted to organize the workers, and have contacted the National Labor Relations Board regarding the issue (McKevitt and Patrick, 2017). Furthermore, Tesla is faced with lawsuits from female and black employees, claiming discrimination. Tesla introduced a diversity panel, which however consisted of only one woman and six men, reemphasizing the issue of diversity and discrimination (Mascarenhas, 2017).

Employee health, safety and well-being: Employees face significant safety risks in producing Tesla’ s cars, which has been addressed by the UAW. Recently, Tesla undertook numerous actions in order to prevent injuries as well as negative media impact. First, Tesla introduced an Ergonomics Team, which works hand in hand with engineers on the design process. Secondly, a Safety Team was created in each department to increase safety and suggest improvements. The actions have led to a 30% reduction in direct workforce injuries, and a 52% reduction in loss of production time resulting from injuries, from Q1 2016 to Q1 2017. At the end of Q1 2017, the factory’ s total recordable incident rate (TRIR), the leading metric for workplace safety, was 4.6, which shows a 32% performance above the industry average of 6.7 (Tesla, 2017d).

Employee compensation: Lastly, UAW criticized Tesla for its low wages policy, far below the industry average. In fact, the majority of Tesla’ s workers earn between $17 and $21 per hour, whereas the average auto-worker in the U.S. earns over $25 per hour. However, Elon Musk emphasizes that equity compensation should be taken into account in relation to the total compensation (Felton, 2017).

3.3. Customer

Customer Privacy: Tesla faces the issue of customer privacy, due to an exceptionally detailed access to customer data. Tesla collects “(1) information from or about you or your devices; (2) information from or about your Tesla vehicle; and (3) information from or about your Tesla energy products” (Tesla, 2017e, para. Customer Privacy Policy). As Tesla’ s cars provide the opportunity to install software updates remotely, Tesla gets exhaustive access to customers’ and cars’ data (driven mileage, most visited places, payment information, phone calls and other personal data). While other car manufacturers only have access to customer data, when they visit a service center. Moreover, Tesla has access to the data of second-hand buyers, as every buyer of a used Tesla has to create a Tesla account to download software updates. In September 2017, a lawsuit was filed accusing Tesla of misusing customers’ driving license information for marketing purposes. If Tesla loses the trial, it may be forced to pay high fines to its customers, which will have a detrimental effect on the company’s reputation (Vacar, 2017).

Product safety: Tesla’ s cars are promoted as some of the safest cars in the world. In 2013, Model S received National Highway Traffic Safety Agency’ s best safety rating in history (Tesla, 2013). However, in 2017, Model S has been granted only a moderate safety rating by another agency (Been, 2017). It may be explained by lack of improvements in its technology within the older models. Recently Model X and Model 3, the newer models, have again achieved the best results in a crash test among cars in a similar class (Lambert, 2017; Logan, 2017). In the future, Tesla should focus on also updating its older models, while designing and producing new models.

3.4. Community

In July 2014, Tesla opened its patents to the public in order to encourage other automotive companies to move to EV manufacturing, which has been one of Tesla’ s main contributions to the society as a whole (Musk, 2014). Moreover, the company declared that it was not going to induce any lawsuits against competitors, who wish to use Tesla’ s technologies (Musk, 2014). With respect to the amount of resources and time that Tesla has invested in R&D and technology advancements (Dyer and Gregersen, 2016), many perceive it as a very generous move. Further collaboration might accelerate the development of infrastructure and power­charging stations (Reuters, 2017). These steps have been taken due to Tesla’ s vision is to transition to clean energy and due to the urgency that Elon Musk sees to react to climate change (Thomson, 2017).



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Tesla Valuation Bewertung ESG Social Factors

Titel: Tesla Valuation based on ESG factors