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Tesla assessing a FDI project

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Howard Chang

on 20 June 2014

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Transcript of Tesla assessing a FDI project

Company Analysis
Mexico Automobile Industry

Eighth largest producer of vehicles

Major Exporter of Vehicles, 4th behind Germany, South Korea, and Japan

19 Major production facilities for light vehicles

Multiple OEM’s around Mexico

Great working relationship between Automakers and Unions

Incorporated in July 2003 by Martin Eberhard and Marc Tarpenning

In October 2008, Musk succeeded Ze'ev Drori as CEO

Introduced the first highway capable, all electric sports car to the public in 2006 – The Roadster

Sells their own products from company owned retail stores.

Products: Roadster ($109,000), Model S (57,400), “Blue Star” ($30,000)

Strengths
Market Leader and first mover advantage
In house R&D and manufacturing gives high levels of quality control.
Highly advanced R&D makes product line multifunctional.

Weaknesses
Low volume = less benefits of economies of scale
High costs compared to competition.
Young company, Longevity yet to be proven
Weak name recognition

Implementation Plan
Industry Outlook
Mode and Scale of Entry
Location
Staffing
Certain statements in this presentation, including statements relating to the ongoing development, quality improvements, production, supply chain, demand for and delivery expectations of Model S; the ability to achieve revenue and gross margin targets; and the ability of Tesla to execute on its new interactive retail strategy, future store, service center and Supercharger network opening and expansion plans; and statements regarding future vehicles such as right hand drive Model S, Model X and Gen III are “forward-looking statements” that are subject to risks and uncertainties. These forward-looking statements are based on management’s current expectations, and as a result of certain risks and uncertainties, actual results may differ materially from those projected. You should not rely upon forward-looking statements as predictions of future events. Although Tesla believes that the expectations reflected in the forward-looking statements are reasonable, Tesla cannot guarantee that the future results, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur.

The following important factors, without limitation, could cause actual results to differ materially from those in the forward-looking statements: delays in the ramping of production and delivery of Model S, including the ability of suppliers to supply parts at desired quality levels and quantities, market acceptance of electric vehicles in general and new Tesla vehicle models, specifically Model S and Model X; Tesla’s ability to control the costs associated with our business; Tesla’s ability to execute on its plans for its interactive retail strategy and for new store, service center and Supercharger openings as well as the risks and uncertainties identified under the section captioned “Risk Factors” in our quarterly report on Form 10-Q filed with the SEC on August 9, 2013. Except as required by law, Tesla disclaims any obligation to update information contained in these forward-looking statements.

Executive Summary
Offer opportunities never available before
Achieve revenue and gross margin targets by executing on new automobile assembly plant in Mexico.
Country Analysis
Country Analysis
Economic Environment

GDP in 2013 was $1.327 trillion USD
Economy was ranked 11th in the world in 2012
Member of OECD, WTO and NAFTA
Liberalization of trade has encourage firms to look at Mexico to take advantage of low cost labor and its proximity to the U.S.

Country Analysis
Country Analysis
Political System
Civil law system
3 major political parties: Institutional Revolutionary Party, National Action Party, Party of the Democratic Revolution
Current President: Enrique Peña Nieto (PRI)
Political Environment
Housing crisis
Political Risk Factor
Social instabilities (violence, robberies, drug cartels)
Distrust of the government
Oil production industry

Population
Estimated to be 120,286,655 on July 2014
Religion
77% of Mexico is Roman Catholic
Language
93% of Mexico speak the official language Spanish
Education
Primary school from age 6-12, Secondary (general or technical) from age 12-15, Higher Secondary (general or specialized) from age 16-19, University
90% of education budget goes to teacher salaries
In 2009, Mexico spent 5.1% of GDP on education

Assessing a FDI in the Mexican Automotive Industry
April 30, 2014
Presented by

University of Texas-Arlington
School of Business-MBA

Jeff Do
Brian Maker
Holly Truong
Joe Munn
Chia-Hao (Howard), Chang

Mexico Automotive Industry
Green field strategy - wholly owned manufacturing plants in Mexico
Existing supply chain in auto industry could also support additional automotive components and parts
Control over knowledge-based capital, or the value can be easily dissipated through copying
Execute large entry scale - a $35 million dollar investment to build new automobile assembly plant
Reduce fixed costs and make car prices lower in order easier to attract more customers
Proposal
Located in Tijuana, Mexico
Make the exportation of vehicles to Latin and South America market easier
Obtain just-in-time support from local supply chain
NAFTA strengthened the integration of production and processing between the United States and Mexico
Compared to labor wages of $168.40 USD a day in U.S.A, that benefits of 340 pesos a day ($26.40) in Mexico.
Major Milestones
Secure new facility in Mexico by Oct 31st, 2014;
Hire and train employee by mid of 2015
New facility production vehicle quality is up to par with U.S. facility production quality by end of 2015
Successful completion of the new automobile assembly plant by 2016.
Re-evaluate current U.S. operation after new production facility become operational and profitable.
Build a new assembly plant in Mexico

The low cost assembly workforce

Save Tesla an estimated $33.5 million per year
Purpose of New Facility
Produce both model S and X at the same plant will increase efficiency

Drive down the cost of manufacturing and increase profit for both models
70% of Mexico population is Christianity, people who practice Christianity, value hard work, wealth creation, and frugality
Staffing plan calls for 1000 employees in Mexico
Employ U.S managers with the compensation packages
Cost Benefits and Payback Period
Total saving cost from labor wage:
Year
NCF
million
Cumulative NCF
2014
2015
2016
2017
($35)
0
$33.512
$33.512
0
$33.512
$67.204
Therefore, payback occurs between two and three years:
State and Quality of Infrastructure
President Calderon implemented the National Infrastructure Program in 2007 which cost $230 billion
Highway improvements reduced travel time by half
Railroads, airports and water ports are being upgraded to alleviate congestion and reduce travel times between cities
Mexico is building more water and sewer facilities to alleviate water sanitation problems
No more monopoly on telecommunications which equals better prices and services for customers
Modernize power plants, increase gas supply, increase generators to make the energy sector more efficient

Country Analysis
Taxation on Foreign Companies
Corporation tax rate estimated to be 37% if dividends are paid, 30% if not
16% value added tax on imported goods but can be waived
100% of all goods produced in Mexico must be exported. If goods stay, it will affect benefits to firm
Profit Repatriation
Currently no restrictions as long as the firm is in good legal standing and has met tax obligations

Country Analysis
Rules Governing FDI
Incentives
Duty-free importation of raw materials, equipment and machinery
Import duties paid on raw materials can be refunded if used in exported goods
Firms in their first or second year of operation can choose a one-time depreciation deduction for their assets
Firms may be able to purchase lands at reduced prices based on the benefit from their FDI
Mexican Bank for Foreign Trade and Nacional Financiera can participate with minority ownership in FDI and then withdraw once firm is doing well

Company Information
SWOT Analysis
SWOT Analysis Continued
Opportunities
Planned lower price option to compete for the mass market
Government programs and tax benefits
Expand battery technology to other markets.

Threats
Markets willingness to accept electric vehicles.
The “Big 3” car company’s competing in the same market with lower priced vehicles.
Steep drop in oil prices
A competitor having a breakthrough in alternative energy vehicles.(natural gas, ethanol, hydrogen, etc.)

Overall Strategy
Design, develop, and manufacture high performance fully electric vehicles and powertrain components.

Own the network of sales, service and Supercharger stations.

Rapidly develop and launch new technology

Maintain high quality levels and reduce costs

Key Numbers
Current stock price $199.85 (as of 4/27/14)
Market Cap $26.5 billion (approximately)

As of the most recent annual report:

Total Assets $2.41 billion
Total Liabilities $1.74 billion
Shareholders equity $667 million
Annual net loss $74.01 million
Total Cash $845 million

1,000 (employees) X 236 (working days per year) X ($168.4 - $26.4) = 33,512,000.
Why is Mexico Booming?
Proximity to the United States

Average Wage for a Union Worker is $3.00 an Hour

Utilization of NAFTA, EU, and South America Trade Agreements.

Rising Costs in Asia and Europe Home Countries

Potential Issues
Chronic Civil Unrest Due to Gangs
Some Automakers already do not allow executives to visit
Tax rates may increase
Increase in operating costs
Increase in salaries due to higher demand
Increase to bottom line
Increase in potential Tariffs

Q & A
Thanks For Your Time
Full transcript