{"id":12343,"date":"2016-11-04T16:21:04","date_gmt":"2016-11-04T20:21:04","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/teslas-7-billion-climate-change-problem\/"},"modified":"2016-11-04T16:21:04","modified_gmt":"2016-11-04T20:21:04","slug":"teslas-7-billion-climate-change-problem","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/teslas-7-billion-climate-change-problem\/","title":{"rendered":"Tesla\u2019s $7 Billion Climate Change Problem?"},"content":{"rendered":"

How could an innovative electric vehicle company have a $7 billion climate change problem? Tesla has made its name \u2013 and earned a 7x revenue multiple \u2013 popularizing electric sports cars that many hope will serve as a role model for how to clean up the 26% of U.S. carbon emissions from transportation.[1]<\/a>,[2]<\/a> However, supply and demand shocks related to climate change could jeopardize Tesla\u2019s survival.<\/p>\n

Tesla\u2019s thin supply chain may be the company\u2019s weakest link in adapting to climate change. While producing the bodies of its vehicles in-house, Tesla relies on a globally dispersed supply chain for over 3,000 parts.[3]<\/a> Of Tesla\u2019s 350 suppliers, the vast majority are \u201csingle source\u201d suppliers, i.e. the only places in the world that Tesla gets critical components, including its motors, brakes, microcontrollers, and batteries. Many of Tesla\u2019s suppliers rely on highly customized machinery and proprietary knowledge that are difficult to replicate quickly.<\/p>\n

We have seen what can happen to the global auto industry when natural disasters destroy supplier operations. In March 2011, the Tohoku earthquake and tsunami wreaked havoc on Japan\u2019s automotive industry. Carmakers a world away were buffeted by the aftershocks as they struggled, in some cases for months, to locate alternate suppliers for essential microcontrollers and automotive chemicals. Global automakers outside Japan lost half a million units of vehicle production in the aftermath of the tsunami as a result of supply chain shocks.[4]<\/a> Later that fall, after severe flooding wiped out 75% of Thailand\u2019s automotive suppliers, it took some global automakers up to six months to restore operations at their Thai factories.[5]<\/a><\/p>\n

With a changing climate, the incidence of extreme weather events will increase. Already, in the United States the average annual damage from severe storms and flooding has increased by 1,000% to over $17 billion since 1980.[6]<\/a> Never-before-seen \u201ccentury storms\u201d are also on the rise. In 2004 Brazil experienced its first-ever Atlantic hurricane, a phenomenon once thought impossible. In 2013 the Philippines faced \u201csuper typhoon\u201d Haiyan, the strongest typhoon on record. Even sunny California, where Tesla bases the bulk of its manufacturing is not immune. Hotter temperatures and prolonged drought have sparked the rise of extreme wildfires such as those in 2015 that burned 10 million acres and destroyed $3 billion of property.[7]<\/a><\/p>\n

All companies must wrestle with increasing risk to their operations both abroad and at home. \u00a0But Tesla, with its thin supply chain, faces a particularly costly challenge. A three-month supply chain disruption could easily cost Tesla over $1 billion in lost sales at today\u2019s production levels, and over $6 billion at 2018\u2019s projected output.[8]<\/a> Tesla states that it is looking to diversify its supply chain spurring industry rumors and numerous press articles about whether Tesla is courting battery suppliers in Korea even while building its Gigafactory with Panasonic in Nevada. However, Tesla\u2019s financial statements reveal a complacency around its supply chain resiliency, repeatedly disclosing that a majority of Tesla\u2019s supply chain relies on single-source suppliers.<\/p>\n

Tesla faces additional climate change risks on the demand side, although this time from climate change regulation. Electric vehicles produce 53% less lifetime greenhouse gas emissions than a conventional car, but their production \u2013 particularly the addition of large lithium-ion batteries \u2013 generates far more emissions at the start.[9]<\/a> The Union of Concerned Scientists estimates that a Tesla Model S requires 6 tons, or 68% more, carbon dioxide to produce than a similarly sized conventional sedan.[10]<\/a><\/p>\n

Tesla\u2019s long-term strategy to scale sales of its vehicles relies on reducing the cost of its current $75,000 Model S sedans down to a more affordable $35,000 Model 3 series. \u00a0However, should the U.S. government implement a carbon pricing scheme to reduce emissions of greenhouse gases, Tesla would immediately face a larger sticker price increase than its conventional vehicle competitors. Depending on the price of carbon, Tesla\u2019s Model S vehicles could face an additional $3,000 charge or more, twice the cost imposed on conventional vehicles.[11]<\/a> At Tesla\u2019s planned 2018 production levels, this difference in the carbon cost between Tesla and conventional vehicles would be worth $660 million on an annual basis, and that is before considering the price elasticity of vehicle purchases.<\/p>\n

To date, Tesla has focused its energies on stressing the total lifetime emissions reduction value of its vehicles, instead of the carbon emissions released during production. And this strategy is winning for now – in the United States, Tesla vehicles are eligible for a $7,500 Federal income tax rebate, more than offsetting the charge Tesla might face from a front-end carbon price. And that\u2019s before considering the ample state tax incentives.[12]<\/a> However, Tesla should have its regulatory strategy ready should Congress take up carbon pricing again.<\/p>\n

To be clear, the supply chain and carbon emissions challenges facing Tesla pale in comparison to the challenges facing the broader automotive industry. However, even a darling example of the fight against climate change is not immune from climate change\u2019s costly impacts. Hence, Tesla\u2019s $7 billion climate change problem is just a taste of the United States\u2019 $1.9 trillion climate change problem.[13]<\/a><\/p>\n

[1]<\/a> Devonshire Research Group, LLC. \u201cTesla Motors, Inc.\u201d March 2016. (http:\/\/www.devonshireresearch.com\/research\/Devonshire%20Research%20Group%20-%20Tesla%20Motors%20-%20TSLA%20-%20Public%20Release.pdf)<\/a>.<\/p>\n

[2]<\/a> U.S. Environmental Protection Agency. \u201cSources of Greenhouse Gas Emissions.\u201d 2014. (https:\/\/www.epa.gov\/ghgemissions\/sources-greenhouse-gas-emissions)<\/a>.<\/p>\n

[3]<\/a> Tesla Motors, Inc. \u201cAnnual Report for Fiscal Year Ended December 31, 2015.\u201d 2016. (http:\/\/ir.tesla.com\/secfiling.cfm?filingID=1564590-16-13195&CIK=1318605)<\/a>.<\/p>\n

[4]<\/a> Canis, Bill. \u201cThe Motor Vehicle Supply Chain: Effects of the Japanese Earthquake and Tsunami.\u201d The Congressional Research Service. May 2011. https:\/\/www.fas.org\/sgp\/crs\/misc\/R41831.pdf<\/a><\/p>\n

[5]<\/a> Haraguchi, Masahiko, and Upmanu Lall. \u201cFlood risks and impacts: A case study of Thailand\u2019s floods in 2011 and research questions for supply chain decision making.\u201d International Journal of Disaster Risk Reduction. 2014. (http:\/\/water.columbia.edu\/files\/2014\/10\/supply_chain_Thailand.pdf)<\/a>.<\/p>\n

[6]<\/a> Author\u2019s analysis of data from NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters. 2016. (https:\/\/www.ncdc.noaa.gov\/billions\/).<\/p>\n

[7]<\/a> Ibid.<\/p>\n

[8]<\/a> Author\u2019s analysis; assumes current production levels of 2,000 cars\/week and 2018 production levels of 9,600 cars\/week.<\/p>\n

[9]<\/a> Union of Concerned Scientists. \u201cCleaner Cars from Cradle to Grave.\u201d November 2015. (http:\/\/www.ucsusa.org\/sites\/default\/files\/attach\/2015\/11\/Cleaner-Cars-from-Cradle-to-Grave-full-report.pdf)<\/a>.<\/p>\n

[10]<\/a> Ibid.<\/p>\n

[11]<\/a> Assumes a fully-loaded carbon price of $220 per ton based on Moore, Frances and Delavane Diaz. \u201cTemperature Impacts on Economic Growth Warrant Stringent Mitigation Policy.\u201d Nature Climate Change. 2015. (http:\/\/www.nature.com\/nclimate\/journal\/v5\/n2\/full\/nclimate2481.html)<\/a>.<\/p>\n

[12]<\/a> (https:\/\/www.tesla.com\/support\/incentives).<\/p>\n

[13]<\/a> Davenport, Coral. \u201cEPA Warns of High Cost of Climate Change.\u201d The New York Times. June 22, 2015. (http:\/\/www.nytimes.com\/2015\/06\/23\/us\/politics\/effects-of-climate-change-could-cost-billions-epa-report-says.html?_r=0)<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

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