This article was written by Benjamin Bosis, Brown ’20. It is one of two Intercollegiate Finance Journal (IFJ) articles co-published this fall under a new partnership between the DBJ and the IFJ. To find out more about the IFJ and the partnership, please click on the author profile below.

The Transport Revolution is Coming

When Russia successfully launched the first satellite, Sputnik, into space, the whole world suddenly became invested in the progress of completely new technologies – and Americans had some serious ground to regain. John F. Kennedy knew that setting a goal would be half the battle, so he urged congress that “This nation should commit itself to achieving the goal, before the decade is out, of landing a man on the moon.” It was only with the drive to achieve that aim that America did just that.

Technology has long been a means to power, but in today’s world we often see such battles between corporate entities rather than political ones. According to Elon Musk and other business leaders, the future lies in self-driving cars, and, like JFK dictating the mission to the moon, Musk is now conveying his vision of automated driving to the American people. Already, many of the biggest companies in the U.S. have broken into a full-on sprint to be on the right side of the coming transportation revolution.

A Battle Between Giants

Google, General Motors, Uber, Mercedes-Benz, Tesla, and Lyft have made huge strides in automated vehicle (AV) development. Even Apple, who leads America’s technology sales by a whopping $200 billion a year, is reportedly planning to get in on the corporate rush. These important players come from one of two completely different perspectives and corporate incentives. The tech giants who started the movement towards unmanned vehicles are secure in other products, but see autonomous vehicles as a new and potentially huge source of income. The auto giants, on the other hand, have an almost existential dependence on cars, and face much higher stakes in keeping their brands relevant.

Despite their decidedly distinct backgrounds, members of each side have begun to choose partners across the aisle, sharing their knowledge in an attempt to get ahead. GM recently invested $500 million in ride-sharing service Lyft, and announced plans to equip an autonomous Lyft fleet with GM cars. The same partnership exists between Volvo and Uber, which use each other’s technology exclusively in their pursuits; whereas Google and Daimler, focusing on more limited aspects of the AV market, remain independent. Though most thoughts on Apple’s efforts are largely speculative, they would most likely also avoid any significant partnerships in order to control their long time vision, which at this point remains unclear.

Your Mission, Should You Choose to Accept it

All of the competitors agree that automation will shape the next era of transport, but opinions differ on how driverless cars should be implemented in the new age. Uber and Lyft envision the disappearance of car ownership entirely. In particular, Lyft plans to market each of its products as part of a larger network of vehicles that, instead of belonging to any one individual, operate 24/7 to carry customer after customer from point A to B. Transportation would become an exclusively service phenomenon, eliminating the need for anyone to actually own a car. Perfectly suited to urban environments, the plan for driverless cities could lead to larger sidewalks and an often-fantasized-about end to traffic jams. The interconnected fleet would vastly decrease the overall number of cars, which would in turn decrease pollution and make almost all parking lots obsolete.

Despite all the excitement for AVs in the tech world, Tesla founder Elon Musk is betting that Americans won’t give up the freedom of car ownership so easily. As the first company to actually place semi-driverless technologies in the hands of individual consumers, Tesla has demonstrated a commitment to autonomy not only for the car-driving-software, but for the car owner as well. Ultimately, the vision that will triumph is the one most adaptable to American life. Individually owned cars could be more suited to America’s huge expanses; as cell providers have shown, ‘nationwide coverage’ often leaves out many people in rural communities. And for most, having a car means not only being able to go wherever you want, whenever you want, but more importantly, knowing that no one can stop you. That quintessential ‘American’ quality may give Tesla’s plan for the future a bit of an edge.

Anxiety and Fear — Obstacles to Adoption

Legislators across the country have reacted very differently to the prospect of self-driving cars their public roads. California, usually the center for this kind of tech development, has driven some companies’ efforts elsewhere by considering significant regulations. Their potential laws would require all autonomous vehicles to have brakes, accelerators, and a steering wheel as cautionary measures inside the car, which would also necessitate a human operator in all test vehicles. The federal government, clearly hopeful for what the industry could do for the American manufacturing economy, has remained extremely lenient and supportive, necessitating only minimal safety precautions and reserving the right to require reports of all tech failures from any company.

Consumer enthusiasm, on the other hand, is another animal entirely. Many Americans have safety concerns about vehicle automation. Robots may not make mistakes, but programmers can, and the idea of having no recourse whatsoever in the case of a tech malfunction is not something to be taken lightly. Investors are particularly wary, as seen when Tesla’s stock dropped 3.2 percent only hours after their first fatal crash was reported. The reputations of companies hoping to put fully driverless cars on the road are proving paramount to their ability to do so.

Pittsburgh: A Case Study for Acceptance

In the face of growing hesitance, Elon Musk has insisted that it would be “morally reprehensible to delay release simply for fear of bad press or some mercantile calculation of legal liability.” While some seem to agree with his logic, that may not have been a good thing for Tesla. Across the country in Pittsburgh, Uber in particular has taken advantage of commercial testing allowances. Pennsylvania lawmakers, who clearly have more to gain than those in a state already home to some of the biggest companies in the world, have made no signals toward any major regulation so far. This leniency is largely a continuation of America’s laissez-faire industrial tradition. Not only is the ability to test in Pittsburgh catapulting Uber’s project forward, but the jobs and attention that came with Uber are helping to rejuvenate the long industrial legacy of the city.

Through steel, Pittsburgh became of the biggest economic powerhouses in the United States, and helped to lift the U.S. to the wealthiest nation in the world; but since leaving the industrial frontier it has fallen into relative obscurity. Now Uber’s entrance, catalyzed by the harsher regulating in California, is giving many of the students at Carnegie Mellon University a reason to stay. Their high volume of robotics talent will prove to be key to both Uber and Pittsburgh as they blaze a trail in the automation industry; for Uber, it has already meant taking the lead in the development race. That lead may continue to grow if other companies cannot find testing grounds of their own.

They’ll Get Here When They Get Here

Nevertheless, in all the excitement of the current flurry of AV activity, companies have declared decidedly optimistic timelines – typically ranging from 3 to 6 years – for their progress toward commercial production. Tech analysts at McKinsey, however, have taken stock of expert opinions and constructed a more realistic one.

The initial process leading up to product release may finish as early as 2019, as companies predict. Most experts believe, however, that there will be a much slower adoption of the cars lasting until 2030, while safety data accumulates and customers uncertainty decreases. Any state of 100 percent implementation – such as an eventual outlawing of human drivers – would not likely come before 2050. So for those of you hoping to own a completely autonomous car, that hands-free commute might not be so far off; Lyft CEO John Zimmer’s vision of the intelligent, interconnected, super-efficient fleet is a far less likely eventuality. But whether they’re Teslas, Volvos, or anything else, self-driving cars are coming; and a brighter, cleaner future is coming along with them.

The wait is over. On March 31st, in front of a selected crowd of 800 people and an enormous online audience, Elon Musk unveiled Tesla’s new Model 3. The sleek new addition to Tesla’s line of electric vehicles is an affordable version of the futuristic luxury, built for the masses. According to the Los Angeles Times, by 10 p.m. that day, individuals had already placed 133,000 preorders.

On top of its sleek design, Tesla’s Model 3 will boast a range of at least 215 miles per charge, the power to accelerate from 0 to 60 miles per hour in six seconds, and the capacity to seat five adults. The car also boasts special features such as a tablet instead of ordinary knobs and controls, a rear windshield and roof made out of a single sheet of glass and an autopilot features. The car will have an average price of $42,000. As of April 7, there were 325,000 pre orders for the model, totaling up to $14 billion dollars in potential revenue.

While the unveiling has undoubtedly bolstered Tesla’ stock value (rising 15 percent as of April 6, just a week after its unveiling) and raised expectations for its future performance, the overwhelming response to the Model 3 has undoubtedly created many challenges that Tesla must overcome to capitalize on its new vehicle. Some of these obstacles, critics argue, could significantly damper Tesla’s expectations and performance.

Without a doubt, the greatest challenge Tesla faces is increasing the scale of its operations. According to Transport Evolved, the company currently produces an average of a little more than 52,000 cars per year. Based on the large influx of pre-orders, analysts predict that Tesla will need to raise production to 300,000 cars a year, 200,000 more cars than it has produced since its inception. Moreover, the company is already failing to reach its current production target. According to the Las Vegas Review, the first week after the unveiling of the Model 3, Tesla announced that it had fallen short of its weekly goal of producing 16,000 cars by 1,000. Increasing its production would require hiring more skilled laborers, buying more raw materials and having more production sites – all of which would require large amounts of new capital. Tesla is already an incredibly capital intensive company, burning through $400 million in cash each quarter. According to a Barclay’s report, analysts estimates that the company will need to raise $11 billion of additional capital in the next five years, which is very demanding considering that the company has yet to have a profitable quarter.

To make matters even worse, Tesla’s lull in production and lack of profitability shows no signs of changing in the near future. Given the Model 3’s low profit margins and the company’s ever-growing capital requirements, it is possible that Tesla won’t be able to turn an immediate profit once the Model 3 has been released. In addition to the low margins, the rise in commodity lithium prices will raise production costs and possibly the sale price of the car itself. Noted by many investors as “the single most valuable commodity of the tech-driven future,” surging demand and short supply has caused the price of lithium to skyrocket. According to USA Today, the price of lithium carbonate more than doubled in November and December of last year alone. According to Breitbart, analysts predict that global prices of lithium will increase by another 20 percent before 2018. A key part of the production of the Model 3, lithium is used to construct the batteries Tesla uses in its cars. The company has already invested about $5 billion in its “Gigafactory,” a production site for these lithium ion batteries. According to the Financial Posts, Tesla is already trying to avoid the raising cost of lithium by moving to different lithium carriers. There is one catch: the companies that Tesla is in discussion with have never actually mined lithium. Tesla’s hope is that by creating these new partnerships, it will be able to circumvent the monopoly that its current suppliers have on the commodities price. Tesla has already agreed to buy the minimum tonnages of Lithium from Pure Energy Materials Limited and Bacanora Minerals, conditional on whether they are able to meet grade, tonnage, and most importantly, Tesla’s target price range.

Tesla will also be using up its federal tax credits as production increases. While many Tesla buyers are attracted by the notion that buying the car would result in $7,500 worth of tax credits, the reality is that these credits decrease as Tesla produces more cars. After the production of 200,000 more cars, Tesla will be left with substantially less tax credits. According to Extreme Tech, within a year of the Model 3 release, there may be no credits at all.

Tesla will also face formidable new competitors in the electric car market, an industry once deemed its “home ground.” Ford Motors recently announced that it would invest an additional $4.5 billion in electric vehicles by 2020, adding 13 new vehicles to its product portfolio. General Motors’ battery powered Chevrolet Bolt is also expected to launch in 2016. Faraday Future, a company that some analysts foresee as Tesla’s main future competitor, also announced that it aims to launch a next-generation luxury electric car by 2017. The entrance of these competitors will put pressure on Tesla’s business model, as any possible failure to deliver its expectations could push consumers to seek alternatives from one of these companies.

Without a doubt, Tesla’s unveiling of the Model 3 paved way for the history of electric vehicles. What may have initially caused Tesla to celebrate, however, will ultimately test the limits of this innovative company in its ability to strategize, expand and deliver. Only time will tell if Tesla will become the mammoth in electric vehicles that some predicted it would be. One thing is sure: getting there will be a challenge.

Energy efficient vehicles are in vogue. Beyoncé posted an Instagram photo with her husband Jay-Z inspecting his new Tesla Model S in the background. Steve Wozniak, co-founder of Apple, is even an audacious Tesla fan. The cars are sleek and impressive – the cars are a mark of status.

But the relatively untapped market for Tesla, the Silicon Valley heavyweight founded by CEO Elon Musk, is under pressure. Faraday Future a US-based and Chinese-backed company focusing on electric vehicle development, has gained substantial momentum since its launch in 2014. Although Faraday likely hopes to stay out of Tesla’s radar while in its initial stages, some information has been shared with the public.

Here’s what we know. The brains behind Faraday’s project are mostly from Tesla’s former management. Faraday’s five leadership thinkers – four of which are former Tesla employees – are backed by Chinese billionaire Jia Yueting. And this backing is huge; Yueting plans to pour billions into the company. Yueting, owner of Leshi TV, China’s version of Netflix, provides Faraday with a substantial cushion given his net worth of over $7 billion. According to Don Reisinger of Fortune, Faraday plans to spend over $1 billion on a manufacturing facility in North Las Vegas to start things off.

What makes matters even more interesting for Faraday are the tax deductions it has received from the state of Nevada. Motivated by the creation of jobs and the potential for economic development, Nevada has granted over $335 million USD to Faraday with the high hopes that the over 4,500 direct jobs created by the investment will yield over $85 billion USD in direct economic impact over the next 20 years. This long-term hope is by no means conservative, but in comparison to Tesla, these numbers make sense. Tesla began construction on a factory in Sparks, Nevada and welcomed a $1.3 billion incentive bundle from the state. Nevada expects Tesla’s manufacturing plant to yield up to $96.9 billion over the next 20 years. According to the Nevada Governor’s Office of Economic Development, the state plans to have a 26% boost in state GDP because of Tesla alone – no wonder they lured Faraday with the same incentives. Jonas Peterson, the chief executive of the Las Vegas Global Economic Alliance, remarked on economic incentives and tax breaks for Faraday by saying that “[t]he truth is we got a heckuva deal.”

But Yueting’s massive investment of billions is rather odd given that the company has yet to sell any vehicles and has only 500 employees. What Yueting’s decision reflects, however, is a strong sense of confidence in the Faraday leadership team’s potential going forward. The company plans to release seven vehicle models over the next few years. In addition to these releases, the company plans to grow substantially. Faraday will provide over 4,500 jobs through their Nevada manufacturing site, and these employees will earn an average wage of over $22 an hour. This, in turn, will present over 9,000 indirect community jobs that will support Faraday’s manufacturing center. Given Tesla’s public offering price of $17 in 2010 that jumped to over $275 in 2015 and projections for Faraday to yield over $85 billion in direct economic impact over the next 20 years, Yueting’s decision and confidence make sense.

To shock the public, Faraday released their new, sleek FFZero1 model that boasts 1,000 horsepower and the ability to go from 0-60 mph in 3 seconds. But it isn’t just the technology behind these cars that will be so revolutionary for Faraday. What will make Faraday stand apart from its competitors are its novel manufacturing methods.

Faraday Future has designed a Variable Platform Architecture (VPA), a modular engineering system optimized for electric vehicles. According to Faraday’s leadership team, this modular, Lego-like assembly will “enable Faraday Future to minimize production costs, deliver exceptional quality and safety, dramatically increase its speed to market, and could easily support a range of vehicle types and sizes.” This is the factor, if executed according to plan, that will likely push Faraday beyond competitors like Tesla.

Simply put, Richard Kim, Faraday’s head of design, explained that Faraday will be “something cool. Something bold.” Kim further elaborated that he wants to improve the user experience of driving – which in more black and white terms suggests that they are developing a self-driving “autonomous car.”  Faraday’s director of communication recently stated that the company hopes to “help further define the driverless world….As much of an automaker, we are a technology company as well.”

Faraday Future plans to release its first fully electric vehicle some time before 2017 and plans to unveil a series of vehicles thereafter. While its current model, the FFZero1 is a luxury vehicle, many speculate that Faraday’s other models will not be so expensive. A cost estimate for the FFZero1 has not yet been released, but many speculate that the cheaper cars that Faraday will soon release will hover around $58,000 USD. In a recent report from the International Energy Agency (IEA), the report noted that over the next ten years, investment in energy efficient passenger vehicles will offer the largest market opportunity for energy efficiency deployment. To add, investment in these environmentally friendly vehicles will represent over 60% of the efforts directed toward energy-efficient technologies aimed toward lowering greenhouse levels in the atmosphere. The market craves a cheaper alternative with energy efficient capabilities – Faraday could potentially deliver.

Regardless of the company’s internal gains, the state of Nevada will be reaping the benefits from Faraday’s production. Economists speculate that Faraday’s production will boost Nevada’s exports with over 95% of Faraday’s market expected to be outside of the state. In addition, starting in 2018, Faraday will offer $1 million a year for six years to the state’s education system – this number is not enormous but is a warming gesture regardless.

Faraday the potential for a remarkable future ahead of them given their well-structured management and strong cash foundation. The company’s plans are still elusive, but their hints have been absorbing. Aside from the vehicle, its manufacturing plans will be state-of-the-art, and its technology for anonymous driving would greatly decrease driving-related accidents. Faraday Future is pushing forward with the clean energy initiative in bold but secretive fashion. As Nick Sampson, Faraday’s senior vice president of engineering remarked, “Our mystery is obviously something that has become a hallmark.” In order for Faraday to out-perform Tesla, this hallmark impression has to transition away from mysterious words and toward revolutionary action. Clean energy transportation is evolving, and Faraday can lead the charge.

Few would disagree that Tesla, which has generated a buzz throughout the entire United States business community, holds a bright future. Tesla Motors, founded in 2003, designs, develops, manufactures and sells electric vehicles and parts. The Palo Alto-based firm is the leading company in the production of electric cars and parts. The electronic auto manufacturer has managed to completely change the way society views both cars and the way we purchase them.

Elon Musk, the firm’s CEO and possibly one of the greatest entrepreneurs in history, has grown Tesla into a force that conventional automakers will have to reckon with in the future. Tesla seeks to create a culture around their products and presents them in a strategic manner to achieve this goal. The presentation of their business is done in a simple and clean style. Even though Tesla has had a negative income since its founding, this coming year could be the first time Tesla sees profits. Their impending success can be linked to their creation of a unique culture, releasing of additional products, and their patented lithium battery technology. However, skeptics still criticize Tesla for its future investment in infrastructure that will be necessary for its cars to be more widely used. However, this should not be a concern for investors.

Tesla Model S
The Tesla Model S

Walking into a Tesla store, one could very easily mistake it for an Apple retail store. This is because Musk adopted a business strategy very similar to what Apple used to recover from the Dotcom bubble in the early 2000s. On May 19, 2001, former Apple CEO Steve Jobs announced that the company would be opening its first two retail stores in Glendale, CA, and MacLean, Virginia. Initial responses to this revolutionary business decision were very negative. One analyst was even quoted stating that the decision for Apple to open a retail store was foolish and that he predicted failure within two years. However, Apple’s decision had the opposite effect and has allowed the company to grow into the largest firm by market cap in the world. Musk has taken their business strategy and combined it with an equally revolutionary product. The Tesla retail stores have the same simple layout as an Apple store. They seek to change the car buying experience by eliminating the dealers. When customers purchase a Tesla, they go to a retail store that has just a few floor models for customers to view. This strategy allows Tesla to cut out the middleman dealer and thus retain greater profits while also creating a culture of simplicity that customers appreciate.

Tesla’s current battery technology has been proven for many years. The electric car manufacturer spent the first five years developing and testing its first car, the Tesla Roadster, before it was released in 2008. The Roadster, which had a starting price of $105,000, was an electric sports car that had a 245-mile range. This was the only car available until the creation of the Tesla Model S in 2013. With the Model S, Tesla hoped to expand its product from the luxury sports car market into the market for everyday driving cars. Tesla was able to improve upon its previous car by increasing the battery charge length and by expanding the car to a more practical size. Currently, the Model S is the only car available to purchase, but customers can also reserve the next model, known as the Model X. This car be a four-wheel drive sports utility vehicle that will also have sports car handling.

The Interior of the Model S
The Interior of the Model S

The Model X uses four separately controlled electric motors, one for each wheel, to achieve its four-wheel drive. This technology is revolutionary because it allows the car to make slight changes to each wheel’s speed while cornering to maximize its driving ability. Conventional four-wheel drive cars have one drive shaft that links power from the engine to four tires. This does not allow for the car to make slight changes to the wheel speed to achieve the handling that the Model X will have.

The final car that Tesla will be releasing in the foreseeable future, which could happen as early as the first quarter of 2015, is in the $30,000 range yet still retains some of the luxury amenities of the $60,000+ Model S. This will create a Tesla option that is affordable for the average person, a market currently overlooked by the company.

The final major contributor to Tesla’s future success is their patented lithium battery technology. When Tesla was first desigining a battery, a major concern with the batteries was affordability. At the time, the average lifespan of laptop computers was greatly improving and there was a large surplus of lithium batteries that were designed for laptop computers. Tesla saw this as an opportunity to build their batteries around the already available cheaper batteries. Tesla is currently the only manufacturer that has found a way to create an affordable yet powerful lithium battery for cars. Consequently, other automakers have been forced to purchase batteries from Tesla for their own electric cars in order to keep pace with demand. Even though this revenue is a very small portion of Tesla’s overall revenue, the barriers faced by other companies to produce a lithium battery prove that Tesla has created and patented something that is truly revolutionary.

Even with all the success that Tesla has seen, skeptics continue to question the firm’s ability to grow in the future, citing that Tesla will have to make great investments in infrastructure in order to compete with conventional gasoline-powered cars. A current problem facing many Tesla owners is that they cannot travel great distances with the Model S, which has a battery life of 300 miles. Tesla has attempted to solve this problem through the use of “super charger stations,” which can completely charge a Model S in about one hour and fifteen minutes. However, the stations are sporadic, which makes long distance traveling with the Model S inconvenient. Currently the only cross country trip that can be made is along the northwest to southeast diagonal. Fortunately, Tesla plans to have almost all regions of the US covered by the end of this year. This investment in charging stations should pay off in the long run and should have no effect on the profitability of Tesla.

Similar to how Steve Jobs grew Apple into the most succesful company in the world, Musk has not only developed a revolutionary product but has also developed the Tesla culture. Established on the principle of simplicity, Tesla’s culture can be seen in every aspect of its business. The retail stores are appealing to the eye but also provide enough information for customers to make informed decisions. The Model S, which has truly redesigned the way that people look at cars, has the performance of a sports car while still preserving the fuel efficiency of an electric car. The entire concept of the Model S was formed around the creative thinking to use cheap lithium batteries originally built for laptop computers. While cynics may criticize Tesla for a lack of infrastructure, this problem will be short-lived. Musk has created the car of the future.