Now, the Good News for Tesla - II

Non-linear Analysis of the Losses-Revenues Data To Estimate the Breakeven Point for Profitability

Above: Teslas Model S being driven near its factory at Freemont, CA on June 22, 2012. Below: From Elon Musks Facebook Profile Page. Tesla has publicly disputed the claims made in a New York Times article (by John Broder) on February 8, 2013, that the Model S performed poorly during a cold weather test drive between Washington DC to Boston. The negative publicity seems to have resulted in some canceled orders and a potential loss in sales revenues of about $100 million (1000 vehicles at $100,000 each). Teslas Freemont, CA, plant has a production capability of about 400 vehicles per week or 20,000 per year.
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Table of Contents
No.
1. 2. 3. 4. 5. 6. 7. 7.

Topic
My Facebook Post on March 1, 2013 My Facebook Post on February 28, 2013 Summary Introduction Profits (Losses)-Revenues Data for Tesla Motors Non-linear Analysis: The Power-Exponential Law Brief Discussion and Conclusion Appendix 1: Power-law m, n from linear regression References cited and related articles About the author

Page No.
4 5 7 8 10 11 17 22 25 30

Tesla 2009 Roadster The first model introduced by Tesla Motors, Inc.
http://www.roadandtrack.com/car-reviews/2009-tesla-roadster

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Model S Central Console, purchased by Edmunds, Inc. for $110,000 and extensively road tested. http://www.edmunds.com/tesla/model-s/2012/long-term-roadtest/introduction.html

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My Facebook Post on Mar 1, 2013 (~ 10:50 am)

DESIGNING FOR PROFITABILITY USING EXTENSION OF QUANTUM PHYSICS TO ECONOMICS

Couldn't help it folks, had to post this! At least on my computer, I can adjust the three parameters, m, n, and a, in the mathematical equation, y = mxne-ax, which describes the costs-revenues data for Tesla Motors (x is revenues and y is costs) and extrapolate to produce any desired level of profits! Now, I found the value of the parameter a, holding m and n constant (to match with 2012 cumulative quarterly data) so that Tesla Motors could start making a profit once they exceed sales (or deliveries as they put, car is made only after there is a commitment by the customer by advanced reservations) of 15,000 units per year. Current production capability is 20,000 units per year. This means the last 5000 units produce a profit. The first 15,000 units help them breakeven (recover fixed costs and the variable costs which increase as N, the number of units sold, increases). After that it is all profits. So, one plant can produce a profit of 5000 times $100,000 per unit (the current average price for Teslas Model S) or $500 million in profits. The profits per plant could potentially even go up to $ 1 billion --- at least on my computer!

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My Facebook Post on February 28, 2013 (~ 9:11 am)

Now, the Good News for Tesla - II Non-linear Analysis of the Losses-Revenues Data to Estimate the Breakeven Point for Profitability
Dear All: I have extended the calculations presented in the earlier document, uploaded yesterday, to arrive at an estimate of the breakeven revenue for Tesla Motors, Inc. A nonlinear model, which is actually a generalized statement of the famous Planck radiation law, is shown to fit the costs-revenues data for Tesla. Why is it relevant to talk about Planck's law here? You see, money in economics is just like energy in physics. Hence, we can associate new meaning to each of the mathematical symbols in Plancks quantum theory to arrive at the nonlinear law which describes the costs-revenues problem of interest here. The Revenues of a company are being converted into Profits. Not all of the revenues can turn into profits. Some of it must be given up as costs. This appears in the form of money that is distributed to employees, suppliers, shareholders, government, etc. To analyze the performance of an engine, like the modern engines used in our cars, planes, rockets, etc. we use the equation Energy In - Energy Out = Work. Now think of money replacing energy and we get the universal law which describes the financial performance of all companies, or the budgetary finances of the government, viz.

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Revenues - Costs = Profits (Losses) Receipts Outlays = Surplus (Deficit) Now, you can see how this analogy works. The profits of a company is just like the useful work done by an engine or a motor (which is transmitted by the powertrain to turn the wheels of a car and produce the desired motion, or work). The revenues of a company, or the governments receipts is just like energy in and costs, or budget outlays (government spending) is like energy out. Hence, energy in physics is just like money in economics. This is the simplest explanation for the generalization of the famous Planck and Einstein laws from physics and their application in economics, business, and finance theory. Plancks law is nonlinear but Einsteins law (which was applied to explain the photoelectric effect) is a linear law. We observe both linear and nonlinear behavior in physics and also in the financial world. The financial data for Tesla Motors is, perhaps, one of the most interesting examples that I have come across where the nonlinear behavior must be fully accounted for to analyze the breakeven point for profitability. It also emphasizes the importance of considering the rate of change, as we learn in calculus. Tesla has never reported a profit to date, since it became a public company in 2010. It witnessed a literal explosion in its revenues in the fourth quarter of 2012. Still it failed to report a profit. Will it report a profit in Q1 2013, or even after the full year of 2013? Taking into account the rate of change of costs with increasing revenues (and using the nonlinear model just mentioned), we can make some estimates. Now, read on, see link below, to see what the estimate is and how many of the Model S Tesla must deliver in 2013 to achieve profitability. Here is a truly American car company in the making with a futuristic all-electric vehicle. It embodies the American spirit of innovation. And, it is also a tribute to all the immigrants who came to this great country in the search of life, liberty, and the pursuit of happiness -- its CEO and co-founder, Elon Musk, is a South-African American immigrant. Ok, ok, it is all about $$$$$ and profits. Cheers. :) :) :)
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1. Summary
In a companion article (http://www.scribd.com/doc/127436107/Tesla-MotorsProfits-Losses-Revenues-Analysis-and-a-New-Measure-of-Profitability-MPR or click here ) it was shown, after reviewing Teslas quarterly profits (losses) and revenues data, that the rate at which costs are increasing with increasing revenues. Mathematically speaking, the derivative m = dC/dR, with C being the total costs and R the revenues, is decreasing although its numerical value (m > 1) is still positive and greater than unity. Recall that Tesla Motors, Inc. has never reported a profit (over the eleven consecutive quarters since becoming a public company in 2010), even with the literal explosion of revenues (in the fourth quarter of 2012). Hence, the slope m = dC/dR must be reduced even further for Tesla to become profitable in the first quarter of 2013, or even by the end of the full fiscal year of 2013. Can we predict the future course for Tesla Motors and how it might become profitable? Can we determine the breakeven point for profitability? This is explored here using a simple nonlinear model, y = mxne-ax, where x is the revenues, y the costs and m, n and a are constants whose numerical values can be deduced from the financial data. The derivative of this function is given by dy/dx = (n ax)(y/x). Hence the x-y graph, or costs-revenues graph, is a nonlinear curve, with a decreasing slope with a maximum point at x = n/a when dy/dx = 0. At the breakeven point, the revenues, x, is equal to the costs y. The breakeven revenue, and hence the units sold, is obtained by equating y = x = mxne-ax, or more easily by preparing a graph. Estimates of the units N sold for breakeven are thus obtained, with the breakeven revenue being at least 3 to 5 times the current revenues.

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2. Introduction
In a companion article (see http://www.scribd.com/doc/127436107/Tesla-MotorsProfits-Losses-Revenues-Analysis-and-a-New-Measure-of-Profitability-MPR or click here), the quarterly and the annual profits (losses)-revenues data for Tesla Motors for the years (2007-2012) were analyzed using a simple linear analysis. Tesla has never reported a profit, either quarterly or annual. The quarterly data, since it became a public company in 2010, were analyzed in the article just cited, listed as Ref. [1].
Tesla Motors, Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share data)

Figure 1: Image of relevant section from page 12 of the Form 8-K filed on 2/20/13 by Tesla Motors, Inc. It was shown that although Tesla has: a) never reported a profit, even with a literal explosion in the revenues in the fourth quarter of 2012 (revenues went up from about $50 million in the third quarter to over $300 million in the fourth quarter and were almost eight-fold the one-year-ago value), and b) although the costs have also increased dramatically with increases sales revenues (since no profits in sight)
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the rate at which costs C are increasing with increasing revenues R, in other words, the derivative dC/dR, has actually been decreasing in 2012 and also between 2011 and 2012 (see Figures 6 and 7 in the above article). This may be appreciated by considering the cumulative profits, revenues, and costs data for 2012, see Figure 1 and also Table 1. Of immediate interest to us are the two line items highlighted by the arrows in the SEC filings the total revenue (column 2 of Table 1) and the net loss (column 3 of Table 1).

Table 1: Cumulative Quarterly Costs-Revenues Tesla Motors for Data 2012

Quarter ending
31-Mar-12 30-Jun-12 30-Sep-12 31-Dec-12

Quarterly Revenue, R
30.17 26.65 50.10 306.33

Quarterly Profits, P
-89.87 -105.60 -110.80 -89.93

Quarterly Cost, C
120.04 132.25 160.91 396.26

Cumulative Revenue
30.17 56.82 106.92 413.25

Cumulative Profit
-48.94 -107.84 -172.92 -254.41

Cumulative Cost
120.04 252.29 413.20 809.46

Cumulative values are the 3-month, 6-month, 9-month and the full year values Source: Tesla Motor Inc. Form 8-K, United States SEC, Fourth Quarter and full year 2012 http://files.shareholder.com/downloads/ABEA-4CW8X0/2330790475x0xS119312513-67177/1318605/filing.pdf

The basic equation of finance, which governs the operations of all companies, big and small, can be written as: Profits = (Revenues Costs) or P=RC ...(1)

Thus, we can compute the cost C given in the fourth column of Table 1. This is NOT the same as the line item called the cost of revenue in the consolidated financial statements. Rather it includes not only the cost of revenue but also all of the items listed under operating expenses, including the income taxes owed. The values in the fourth column are thus the total costs or the true costs of operation that we can now use to perform a breakeven analysis. This was discussed in Ref. [1] where we consider the simple case of a company making and selling N units of a single product (such as the Tesla Model S). It is
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readily shown that for this simple case, which can obviously be applied for Tesla Motors, the profits-revenues equation is given by P = [1 (b/p)] R a, where a is the fixed cost, b the unit variable cost and p the unit price. The total cost is the sum of the fixed cost and the variable cost, C = a + bN, and the total revenue R = pN. Thus, for this simple case, C = a + (b/p)R and the slope of the cost-revenue graph (C versus R graph) and the slope of the profits-revenues graph (P versus R graph) can be related to the fundamental triplet (a, b,p), although such an analysis of the financial data is rarely performed. P = [1 (b/p)] R a C = a + (b/p)R ..(2) ..(3)

In what follows here, we will use the mathematical symbols x and y instead of the descriptive notations C, R and P. The meaning of the symbols used will be clear from the context.

3. The Profits (Losses)-Revenues Data for Tesla

The cumulative revenues, profits, and costs in the last three columns of Table 1 ate the three-month, six-month, nine-month and full year values for these quantities. The graphical representation of the variation in the cumulative costs and the cumulative revenues is, however, very telling, as seen in Figure 2. One thing we can immediately take away from this graph is the dramatic change in the slope, for the fourth quarter of 2012. This slope is the derivative dC/dR of the mathematical function describing the C-R relation. Three values of the slope m = C/R can be computed between the various quarters and are given in the box attached to Figure 2. Although the slope has decreased and costs are rising at a much lower rate, notice that the smallest of the three slopes m = 1.29 > 1. In other words, costs continue to rise faster than revenues. The slope m must be reduced even further for Tesla to become profitable in the first quarter of 2013, or even by the end of the full fiscal year of 2013. This is an inescapable conclusion.
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900.00

Cumulative Costs, C [millions]

800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00 0.00

The slope m = C/R = 4.96, 3.21 and 1.29 has decreased between consecutive quarters in 2012.
100.00 200.00 300.00 400.00 500.00

Cumulative Revenues, R [millions]

Figure 2: The dramatic change in the slope of the cumulative costs versus cumulative revenues in 2012 for Tesla Motors, Inc. The rate of increase of costs, as measured by the slope of the graph has decreased. Can we predict the future course for Tesla and how it might become profitable and what exactly is required to attain this profitability? As we will see shortly, a rather simple, nonlinear, model can be used to describe how Tesla can approach the breakeven point.

4. Nonlinear analysis: The power-exponential law

The decreasing values of the slope m = (C2 C1)/(R2 R1) of the three line segments in Figure 2 imply a nonlinear. Here subscripts 1 and 2 denotes any two (R, C) data points used to compute the slope m. The simplest nonlinear law, and one that has been widely used in many applications is the power law y = mx n . For n = 1, this becomes the straight line y = mx. The power-law index n can be
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either greater than or less than unity. For n < 1, the curve has a decreasing slope (the case of interest to us) and for n > 1, the curve has an increasing slope. The case of n > 1 describes acceleration in the growth of y with respect to x, such as the growth of the distance-time curve for a falling body, or a moving vehicle, in a controlled road test.
1400.00

Cumulative Costs, y [millions]

1200.00 1000.00 800.00 600.00 400.00 200.00 0.00 0 100 200 300 400 500 600 700 800 900 1,000

Power law model y = mxn = 15 x0.67 dy/dx = m(nxn-1) = n(y/x)

Cumulative Revenues, x [millions]

Figure 3: The dramatic change in the slope of the cumulative costs versus cumulative revenues in 2012 for Tesla Motors, Inc. is modeled here using the power law y = mxn where x is revenues and y is costs. The slope of the graph, dy/dx = m (nxn-1) = n(mxn-1) = n(y/x) decreases as both x and y increases. This means costs are increasing with increasing revenues but at a reduced rate. Hence, theoretically speaking, profitability can be achieved when the slope of the graph has reduced significantly compared to the slope computed in Figure 2 using the simpler linear model. The cost structure of Tesla suggests that this is indeed possible. It is this cost structure that is responsible for the decreasing slope that is observed already. Now, all we have to do is to extrapolate to higher revenues.
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The formula for dy/dx given here is based on one of the very first rules we learn in our elementary calculus courses. The most common example of n < 1 is encountered in the science of rheology the studies of deformation behavior of solids and fluids. The viscosity of a fluid, such as engine oil used in cars, is a measure of its resistance to deformation. Even a non-scientist is familiar with the viscosity number. The viscosity changes with increasing rate of stirring (or shearing) of the fluid. Motor oil is a simple fluid and is also called a Newtonian fluid with n = 1. In this problem, x is the rate of shearing and y the resistance offered by the fluid (the shearing stress). The graph is a straight line, y = mx, with a slope m, the viscosity. Such a behavior is called Newtonian behavior after Sir Isaac Newton (of the falling apple and gravity) who was also the first to conceive this mathematical law to describe the motion of a liquid between two parallel plates, or between two concentric cylinders, for example. The motion of engine oil in the narrow space between the rotating, or moving, and the stationary parts of a motor (such as used in the Model S) or an engine (such as used in conventional gasoline powered cars), is an example of such a Newtonian behavior. Paints, slurries, and solid-liquid mixtures, or suspensions of solids in a liquid, on the other hand, provide examples of non-Newtonian fluids with n > 1 and n < 1. The familiar ice cream, orange juice, and many fluids encountered in the food processing are examples of such non-Newtonian behavior. (The study of such a novel power-law fluid, or a non-Newtonian semi-solid mixture, was also the subject of my doctoral thesis at MIT, see Ref. [2,3] which also provides an extensive review of the literature on this subject. The process developed at MIT, in the 1970s, was eventually commercialized and is now being used to make lightweight automotive components at greatly reduced costs, see Refs. [4, 5]. These ideas can also be extended and applied to Tesla Motors, to develop lightweight components which will increase the range of the all-electric vehicle without making excessive demands on battery performance.) The power law model is also used to describe the effects of aerodynamic resistance, such as the acceleration characteristics of a vehicle moving at high speeds. In a controlled road test, the acceleration of the vehicle will decrease as a
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function of time (which can be modeled using the power law, this is being described in a separate article, Ref. [6]) due to the frictional forces produced by the surrounding air, which opposes the motion. To generate the theoretical curve in Figure 3, the numerical values of m and n in the power-law are determined first by preparing a graph of the logarithm of y versus logarithm of x. Since y = mxn, taking logarithms, logy = n logx + log (m). Hence the log x-log y graph is a straight line. The slope of this graph equals the power law index n. The intercept made by the graph on the log y axis gives the value of log m and hence m. The theoretical curves for various values of m and n can also be generated easily using a modern computer program such as Microsoft Excel. The latter procedure was used here to generate the graph in Figure 3. An excellent fit is observed with n = 0.67 (or n ) and m = 15.

2000.00

Cumulative Costs, y [millions]

1800.00 1600.00 1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00

A
y = mxn = 15 x0.67

B
y = mxn = 9.77 x0.67

Breakeven line, y = x
0 200 400 600 800 1000 1200 1400 1600

Cumulative Revenues, x [millions]

Figure 4: One approach to profitability is suggested here, see discussion in the main text.
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1,600.0

Cumulative Costs, y [millions]

A
1,400.0 1,200.0 1,000.0 800.0 600.0 400.0

Breakeven line, y = x
200.0 0.0

0.0

200.0

400.0

600.0

800.0 1,000.0 1,200.0 1,400.0 1,600.0

Cumulative Revenues, x [millions]

Figure 5: A second approach to profitability is suggested here with the breakeven point shifted to higher revenues. We now consider potential paths to achieving profitability using this cost-revenue (C-R) diagram. This is illustrated by the additional graphs prepared in Figures 4 and 5. Lets start with Figure 4. The red line in Figure 4 is the breakeven line. Costs equal revenues when we move along this line. Thus, y = x and the breakeven line is a special case of the power law model with m = 1 and n = 1. The upper curve labeled A will eventually intersect the breakeven line (because of the decreasing slope) but at values of revenues that are well outside the scale of this graph. The curve labeled B, with a smaller value of m = 9.77 intersects the breakeven line at x = 1000, or revenues of $1 billion. The breakeven revenue is obtained by equating y = x = mxn , which means xn-1 = 1/m or by solving the equation logx = log m/(1 - n). It is simpler to just to prepare the graph, or make a table of x and y values.
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The intersection point for curve B (solid blue dot), at x = 1000, is a little more than three times (3.26 times to be exact) the current revenue level for Tesla Motors ($300 million). Hence a Tesla must more than triple its sales to achieve profitability. A second approach to profitability is described in Figure 5. The curves A and B are the same as in Figure 4. Curve C (small dashes) is the graph of the power-exponential law y = mxne-ax = 15x0.67e-0.000225x. The numerical values of m and n are the same as for curve A. Thus, curve C is curve A multiplied by the exponential factor, which is less a fraction less than one. Hence, the revenues are always lower than for curve A. Notice how a very small positive value of a = 0.000225 is sufficient to create the deviation from curve A as revenues x increase. The numerical value of a was adjusted to show this deviation. Also, the curve C follows the data points at the higher revenues more closely. At small revenues, curve C merges into curve A. The intersection point of curve C (unlike curve A) is thus within the scale of the graph. The breakeven point is, however, at a higher revenue than deduced from curve B at about $1400 million, or about 4.6 times current revenue level. In other words, Tesla can achieve profitability by increasing sales by at least a factor of 5. These are obviously theoretical speculations but, nonetheless, show that a) the current cost structure of Tesla Motors, as revealed by the cumulative revenues-cumulative cost curve (actual data points), will lead to profitability with increasing sales revenues, and b) it is possible to estimate the potential increase in unit sales required to achieve the breakeven revenues. Tesla Motors reported delivery of 2400 vehicles (with production being 2750) in the fourth quarter of 2012. The total vehicle deliveries were 2650 (production 3100) for the entire full year; see page 8 of the Form 8-K SEC filing cited. Thus, to achieve the breakeven level production must increase to about 15,500 per year. The current manufacturing capability is about 400 per week or 20,000 per year, well within reach of the breakeven revenues projected here.
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5. Brief Discussion and Conclusion

The nonlinear power-exponential explored here to explain the cost-revenue data is merely a curve-fitting model. In order to be more meaningful, we must understand the physical significance of the three parameters m, n and a in this model. Perhaps, then we can actually start designing manufacturing processes, and the sales and marketing processes, to achieve the predicted profitability. The simpler case of a linear law was discussed earlier in Ref. [1]. As noted briefly already, the total cost C = a + bN, the sum of the fixed cost and the variable cost with N being the units sold. The total revenue R = pN. Hence, profits P = (R C) = [1 (b/p)] R a. The slope of the profits-revenues graph equals h = 1 (b/p). Since C = a + bN = a + (b/p)R, the slope of the costs-revenues graph will be equal to b/p, in the simple case of a linear law. More generally, when nonlinearity is observed, the slope of the C-R graph can again be related to the unit variable cost b and the unit price p. The nonlinearity implies that the parameters b and p are not truly constant but vary as a function of revenues, or number of units, N, produced and sold by the company. Thus, in brief, the three parameters introduced in the theoretical model, linear or nonlinear, can ultimately be related to the unit price p, the fixed cost a and the unit variable cost b. In this context, attention must be called to a recent analysis of the profits-revenues data for Kia Motors Ref. [7], and also Apple Inc., Refs. [8,9] These have been presented in separate articles, see reference list. For both these companies, the total number of units sold N is known (total vehicle sales, the number of iphones, ipads, Macs, ipods, etc.). This provides a remarkable confirmation for the breakeven model described here and in Ref.[1]. A similar study of the emerging data for the Tesla Model S might also provide new insights into the theoretical model building (as opposed to purely statistics based models) that is now being suggested as an integral part of financial data analysis.

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Finally, it should also be noted that the power-exponential law, y = mxne-ax, with x being revenues and y being profits (instead of costs), can also be used to explain the appearance of a maximum point on the profits-revenues graphs for several companies. Some examples are the old General Motors, before its bankruptcy, Ford Motor Company, Yahoo Inc., AirTran (which was forced into a merger with Southwest Airlines) and many others; see reference list.
10.0

Annual Profits, y [$, billions]

5.0

A
0.0

B
-5.0

-10.0

-15.0

-20.0

20

40

60

80

100 120 140 160 180 200 220 240

Annual Revenues, x [$, billions]

Figure 6: The annual profits and revenues data for Ford Motor Company (1990-2011) obtained from the annual reports of the company. The two theoretical curves superimposed here are graphs of the equation y = mxne-ax + c, which is a simplified version of Plancks radiation law (also called Wiens law and used by Einstein in his famous 1905 paper where he proposed the idea of light quanta, in Wiens law c = 0). For the upper curve A: m = 0.076, n = 1.65, a = 0.01058 and maximum point is at revenues of x = xm = $156 billion. For the lower curve B: m = 0.075, n = 1.75, a = 0.01167 and maximum point is at revenues of x = xm = $150 billion. These curves, it may be argued, are exactly similar to the radiation curves observed by physicists of the late 19 th
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century in their studies of black body radiation. The scatter in the data can thus be interpreted as due to a property similar to the temperature T. Planck defines temperature T as the derivative of the change in energy U with change in entropy S, i.e., T = dU/dS or 1/T = dS/dU. In the profits-revenue problem money plays the role of energy and entropy is associated with the many different conceivable states of the company that can lead to the same fixed total energy (money, or revenues). This is Figure 2 from Ref. [1] Money in Economics is Just like Energy in Physics: Extending Plancks Law Beyond Physics, http://www.scribd.com/doc/120324960/Money-in-Economics-is-Justlike-Energy-in-Physics-Extending-Planck-s-law-beyond-Physics At low revenues, profits increase as revenues increase but the profit margin decreases. Hence, the slope of the slope of the P-R graph is positive, but decreasing slowly giving rise to the maximum point. As revenues increase further, profits actually decrease. Financial analysts wonder about the erratic variations in the profit margins but rarely prepare the x-y graphs such as those illustrated here and in the other related articles cited in the references. The power-exponential law y = mxne-ax is a very famous law which was proposed by Wilhelm Wien, in the second half of the 19 th century, to explain his empirical observations on the radiation spectrum for a heated body. Experiments revealed a maximum point on the x-y graph applicable for this problem. Here x is the frequency and y the intensity of the radiation. However, the appearance of this maximum point could not be explained. Wien proposed this law, as a curve-fitting device, being the simplest of all models that reveals a maximum point, without offering any theoretical explanation for the significance of the three parameters m, n, and a in this law. When the exponential factor e-ax is introduced into the power-law, y = mxn, the indefinite rise in values of y (although at a decelerating or accelerating rate depending on n > 1 or n < 1) is truncated and a maximum point is introduced. Wien received the Nobel Prize in Physics, in 1911, for this contribution. A theoretical explanation was eventually offered by Max Planck, when he developed quantum physics in a famous paper first presented on December 14, 1900, Ref. [10]. Plancks law is a slightly modified version of Wiens law and can be generalized and written as:
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y = mxn [e-ax/(1 + be-ax) ] + c

..(4)

In Plancks original law b = -1 and c = 0. The simple truncating factor e-ax which yields the maximum point is now replaced in Plancks theory by factor within the square bracket, [e-ax/(1 + be-ax) ]. Planck showed that this truncating factor, also called the cut-off factor, arises naturally when we derive the expression for the average energy of N oscillators (or particles). These N oscillators, or particles (conceived as being electrically charged bodies), vibrate at various frequencies and radiate electromagnetic energy. Planck imagines a distribution of particles in various energy states, with N0 particles having the lowest energy 0, then N1 having the next level of energy , then N2 having the next level of energy 2, and so on. He then arrives at the expression for the average energy using classical statistical argument, which had already been developed by Boltzmann [11]. This is the brief explanation for the exponential factor introduced in the power-law. Now, just think of money in economics as being similar to energy in physics. Instead of distributing a fixed total energy between N oscillators (like Planck did), we are distributing elementary money units between say N products or entities that are sold by a company. Even with just one product, the Tesla Model S, there are actually three different battery packs offered and various options. Hence, there is a distribution of energy in the form of money in the financial or economic system. Perhaps, this provides a simple explanation for the successful application of the power-exponential law, as we see here with the financial data for Tesla Motors, and also with many other companies, as described in the reference list. Indeed, we can go through Max Plancks famous derivation of his law, see Ref. [10,12], step by step and replace every mathematical symbol he uses, pretending energy is the same as money. Planck also introduces another important notion, called entropy, which is a measure of the extent of chaos or randomness. This notion too can be extended from physics to financial and economic systems. Thus, at least in the mind of the present author, the power-exponential law can be justified as merely a manifestation of the more complex state of a real world financial or economic system, with tens, hundreds, thousands, even millions, of
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micro scale entities (e.g. sectors of the economy, divisions of a company, the stocks in the stock market, and so on). One final point is the introduction of the nonzero c in equation 4. The x-y graph has a nonzero intercept. This too was introduced into physics by Einstein in 1905 when he used the simpler version of Plancks law, the Wien law y = mx ne-ax, to describe radiation in the form of light. Einstein associates the same two properties, energy U and entropy S associated by Planck, with light radiation. Then he shows that the expression for the entropy of light implies that it can be thought of as a stream of energetic particles, each having the elementary energy conceived by Planck. He then applied this idea of a stream of light particles (now called photons) to explain a puzzling phenomenon called the photoelectric effect, see Refs. [1318]. In this process, when light shines on a metal surface, a portion of the photons energy, , must be given up in order to produce an electron with the energy K. Thus, K = ( W) = (hf W) where W is the energy to be given up. The K-f relation is thus linear, with a slope h and intercept c = - W. This linear law follows from the power-exponential law, as a special case with n = 1, a = 0, and b = 0. The energy unit = hf where h is the universal constant introduced by Plank. This photoelectric process is similar to the process of profits generation. Some of the money, in the form of revenues (analogous to of Planck, or the elementary energy of light particles, or photons) must be given up in the form costs which is like the W, or the work function in Einsteins law. Thus, using these elegant analogies from physics, we can provide at least a modicum of justification, or explanation, for the power-exponential law and why it seems to be so successful in explaining the financial data for Tesla Motors here, and for many other companies in the modern world. Money in economics, or the business world, is just like energy in physics. Or is it vice versa? Plancks law was successful in explaining the radiation spectrum for heated bodies, at the very dawn of the 20th century. Then, in the 1990s, as the 20th century was coming to a close, physicists found that the same law can be used to explain the relics of the spectrum of the radiation from the Big Bang that created the Universe, Refs. [19-22]. John C Mather and George F Smoots III received the Nobel Prize in
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1996 for this experimental confirmation of the Big Bang theory. Figure 7 is the famous CMBR (Cosmic Microwave Background Radiation) graph taken from the Nobel lecture slides of Dr. Mather. Exactly similar graphs, with different meanings attached to the parameters m, n, a, and b, can be generated to explain the financial data of companies which reveal a maximum point on the profits-revenues graph, see examples for Yahoo Inc., Ford, General Motors, in the reference list.

Figure 7: The microwave background radiation spectrum - the relic of the Big Bang that created the Universe. The equation of the mathematical curve describing this radiation spectrum was developed by Planck in December 1900. The radical idea of an elementary quantum of energy (E = hf), later also used by Einstein, was introduced to develop the mathematical equation, which can be written as y = mxn [ e-ax /(1 + be-ax)] + c, with b = - 1 and c = 0 in Plancks original law. Here x is the frequency and y the intensity of the radiation and m, n, a, b are constants. Einstein uses the simpler version, with
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b = 0 and c = 0, and hence y = mxne-ax, to show that light can be thought of as a stream of particles each having the energy hf. The nonzero intercept is introduced later, by Einstein, to explain Lenards photoelectric observations. The above graph is a copy of the slide used by Nobel laureate John C Mather in his Nobel presentation.

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6. Appendix 1 Linear Regression for Power law parameters

As noted in the main text, the numerical values of the power-law parameters, m and n were determined by curve-fitting using Microsoft Excel. This yields the values of m =15 and n = 0.67 . The calculations presented here show that these values are virtually identical to the values obtained by linear regression analysis. Since y = mxn , taking the natural logarithms, ln y = n lnx + ln m. Hence, the graph of ln x versus ln y is a straight, as we see in Figure 8. The slope of this straight line equals n, the power-law exponent. The intercept made by this straight line on the vertical axis (the ln y axis) equals ln m and so m is also fixed.
9.00 8.00

Natural logarithm, ln y

7.00 6.00 5.00 4.00 3.00 2.00 1.00

ln y = n lnx + ln (m) = 0.703 ln x + 2.569 with r2 = 0.956

ln (m)

0.00 0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Natural logarithm, ln x
Figure 8: The double logarithmic plot to determine the two power-law parameters. The graph is a straight line with slope n =0.703 and the pre-exponent m = 13.05. The power law curve with (m, n) having these values is plotted in Figure 9.

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Cumulative Costs, y [millions]

1800 1600

1400
1200 1000 800 600 400 200 0 0

y = mxn = 13.05 x0.703

The slope m = C/R = 1.294

Breakeven line, y = x

200

400

600

800

1000

1200

Cumulative Revenues, x [millions]

Figure 9: The power law curve with m = 13.05 and n = 0.703, the values deduced by linear regression using the double logarithmic plot. The slope of the power law curve, y = mxn, changes continuously as x increases and is given by the expression dy/dx = n(y/x). Considering the (x, y) pairs Q3 2012 and Q4 2012, the slope at Q3 2012, when x = 106.92 and y = 413.2 is equal to 0.703* (413.2/105.92) = 2.297. The slope at Q4 2012, when x = 413.25 and y = 809.46 is 0.703* (809.46/4132.5) = 1.538. The slope of the straight line segment joining these two points, h =1.294 = (809.6 413.2)/(413.25 106.92) . Since the slope of the power-law curve is slightly higher at Q4 2012 (than the slope of the straight line segment), the power curve intersects the breakeven line at a large value of revenues x = 5787.9, or about $5.8 billion. At an average price of $100,000 per vehicle, the units sold N = 58,000, or roughly three times current production capability (20,000 vehicles per year). The slope is decreased when the exponential factor e-ax is added. The intersection point with the breakeven line then occurs at smaller breakeven revenue. This is illustrated again in Figure 10.
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2400

Cumulative Costs, y [millions]

2200

y = mxn = 13.05 x0.703

2000
1800 1600 1400 1200 1000

800
600 400 200 0 0 400 800

y = mxne-ax = 13.05 x0.703 e-0.000268

1200

1600

2000

2400

Cumulative Revenues, x [millions]

Figure 10: The power-exponential curve y = mxne-ax is small-dashed curve. The numerical value of a was chosen to EXACTLY MATCH the Q4 2012 data. The numerical values of m and n can determined using statistical principles (linear regression, as discussed) when a = 0, and we are dealing with a pure power law. The numerical value of a can be determined for the special case of n = 0, from the semi-logarithmic plot ln y = ln m ax, logarithm of y versus x, when we are dealing with the pure exponential law y = me-ax. The slope of the semi-log plot equals a and the intercept equals ln (m). When both n and a are nonzero, the present author is not aware of any statistical principles that can be applied to determine all the three parameters. However, if data is reliable and can be trusted and we observe the deviation from the pure power law, the numerical value of a can be fixed so that the new power-exponential curve passes through at least one of the deviating (x, y) pairs. This procedure was used above and yields a = 0.0002680. The intersection point with the breakeven line now occurs at x 1500 or $1500 million, or $1.5 billion in sales revenues. The number of units N sold, at an average price of $100,000 now
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equals about 15,000 per year which just matches with current production capacity of 20,000 vehicles per year. Profits are then made only from the sale of the last 5000 vehicles. Hence, further empirical observations over the next several quarters will offer additional insights regarding the operation and thus the parameter a in the exponential factor within the power law.

7. References cited and related articles

1. Now, the Good News for Tesla: Analysis of the Profits (Losses)-Revenues Data and a New Measure of Profitability (MPR and MCR), Published Feb 27, 2013, http://www.scribd.com/doc/127436107/Tesla-Motors-Profits-LossesRevenues-Analysis-and-a-New-Measure-of-Profitability-MPR 2. The Deformation and Rheological Behavior of Partially Solid Tin-15% Lead Alloy, Sc. D. Thesis Dissertation, by V. Laxmanan, Department of Materials Science and Engineering, Massachusetts Institute of Technology, Cambridge, Mass (1979). 3. Deformation of semi-solid Sn-15pct Pb Alloy, by V. Laxmanan and M. C. Flemings, Metallurgical Transactions A, Dec 1980, vol. 11 pp. 1927-1937, see http://link.springer.com/article/10.1007%2FBF02655112?LI=true 4. Process for manufacturing spheroidal hypoeutectic aluminum alloy, issued to V. Laxmanan, US Patent N0. 5009844, Issued April 23, 1991. 5. Gas-assisted molding of thixotropic semi-solid alloy, US Patent No. 5787959, issued to V. Laxmanan, Robert J Hoye, Jayprakash U Raisoni, Suresh D Shah, Issued Aug 4, 1998. 6. A Simple Universal Vehicle Acceleration Law Deduced from Empirical Observations, V. Laxmanan, to be published. 7. Kia Motor Company: A Disappearing Brand http://www.scribd.com/doc/99333764/Kia-Motor-Company-A-DisppearingBrand, Published July 6, 2012. 8. The Perfect Apple II, Taking a Second Bite, A Simple Methodology for Revenues Prediction, http://www.scribd.com/doc/101503988/The-PerfectApple-II Published Jul 30, 2012,

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9. The Perfect Apple: How it can be destroyed, Published June 7, 2012, http://www.scribd.com/doc/96228131/The-Perfect-Apple-How-it-can-bedestroyed 10.The Quantum Hypothesis, by Max Planck, in Great Experiments in Physics, Edited by Morris H. Shamos, Dover Publications (1959), Toronto, Ontario, pp. 301-314. English translation of Plancks paper with his derivation of the radiation law using concepts of entropy and energy. . 11.What is Entropy? June 3, 2012, http://www.scribd.com/doc/95728457/Whatis-Entropy 12.Plancks Blackbody Radiation Law Re-derived for the general case, May 30, 2012, http://www.scribd.com/doc/95329905/Planck-s-BlackbodyRadiation-Law-Rederived-for-more-General-Case 13.The Photoelectric Effect, by Albert Einstein, in Great Experiments in Physics, Edited by Morris H. Shamos, Dover Publications (1959), Toronto, Ontario, pp. 232-237. Nice explanation citing Einsteins original paper. 14.On a heuristic point of view about the creation and conversion of light, by A. Einstein, this is the translation of Einsteins original paper on light quanta.
http://hermes.ffn.ub.es/luisnavarro/nuevo_maletin/Einstein_1905_heuristic.pdf

15.Einsteins Quanta, Entropy, and the Photoelectric Effect, by Dwight. E. Neuenschwander, Nice explanation of Einsteins original paper. http://www.sigmapisigma.org/radiations/2004/elegant_connections_f04.pdf 16.On a direct determination of the Plancks h, by Robert A. Millikan, ftp://ftp.aquila.infn.it/users/nardone/INTRODUZIONE%20alla%20FISICA%20 MODERNA/ARTICOLI%20ORIGINALI/QuantRad/Millikan%20PE%20effec t%20Phys%20REv.pdf , Millikans original 1916 paper, published in Phys. Rev. Vol. VII, pp. 355-390. 17.The electron and light quant from the experimental point of view, http://www.nobelprize.org/nobel_prizes/physics/laureates/1923/millikanlecture.pdf Nobel lecture, May 23, 1924, by Robert A. Millikan. 18.100 Years of the Photoelectric Effect, by P. C. Deshmukh and S. Venkataraman https://www.physics.iitm.ac.in/~labs/amp/EPEE_PCD_SV.pdf Nice review of the discovery of the photoelectric effect and Einsteins law, see also http://www.scribd.com/doc/96780245/100-Years-of-Einstein-sPhotoelectric-Effect
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19.Nobel Prize to Mather and Smoots for CMB Anisotropies, by Sean Carroll, http://blogs.discovermagazine.com/cosmicvariance/2006/10/03/nobel-prize-tomather-and-smoot-for-cmb-anisotropies/ in Discover, October 3, 2006. 20.Nobel presentation Slides of laureate John C Mather,
http://www.nobelprize.org/nobel_prizes/physics/laureates/2006/mather-slides.pdf

21.From the Big Bang to the Nobel Prize and Beyond, by John C Mather, December 8, 2006, see pp. 82 to 85, remarks about error bars for measurements
http://www.nobelprize.org/nobel_prizes/physics/laureates/2006/mather_lecture.pdf

22.Cosmic Microwave Background Radiation Anisotropies: Their Discovery and Utilization, by George F Smoot III, Nobel lecture, Dec 8, 2006, p. 113
http://www.nobelprize.org/nobel_prizes/physics/laureates/2006/smoot_lectur e.pdf

****************************************************************

Related articles dealing with the analysis of the financial data for several companies based on the methodology described here for Tesla Motors
(Yes, the Extension of Plancks law, as conceived here, and its generalization, helps us understand the financial data for more complex financial systems) 1. Money in Economics is Just like Energy in Physics: Extending Plancks Law Beyond Physics, Published Jan 14, 2013, http://www.scribd.com/doc/120324960/Money-in-Economics-is-Just-likeEnergy-in-Physics-Extending-Planck-s-law-beyond-Physics 2. Google: A Lovable One-trick Pony, July 1, 2012, http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology 3. Kia Motor Company: A Disappearing Brand http://www.scribd.com/doc/99333764/Kia-Motor-Company-A-DisppearingBrand, Published July 6, 2012.

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4. Three Types of Companies: From Quantum Physics to Economics, May 24, 2012, http://www.scribd.com/doc/94647467/Three-Types-of-Companies-FromQuantum-Physics-to-Economics 5. Some Examples of Corporate Financial Behavior, June 4, 2012, http://www.scribd.com/doc/95906902/Simple-Mathematical-Laws-GovernCorporate-Financial-Behavior-A-Brief-Compilation-of-Profits-Revenues-Data 6. The Air Tran Story: The Merger and the Maximum Point on the ProfitsRevenues Graph, August 14, 2012, http://www.scribd.com/doc/102832984/The-Air-Tran-Story-The-Merger-andMaximum-Point-on-Profits-Revenues-Graph 7. The Future of Southwest Airlines, August 14, 2012, http://www.scribd.com/doc/102835946/The-Future-for-Southwest-AirlinesThe-Unknown-Story-of-Rising-Costs-and-the-Maximum-Point-on-ProfitsRevenues-Curve 8. A Fresh Look at Microsoft after its Historic Quarterly Loss, Published July 25, 2012, http://www.scribd.com/doc/101062823/A-Fresh-Look-at-MicrosoftAfter-its-Historic-Quarterly-Loss 9. A Second Look at Microsoft after its Quarterly loss, Published July 30, 2012, http://www.scribd.com/doc/1015181/A-Second-Look-at-MicrosoftAfter-the-Historic-Quarterly-Loss 10.Yahoo! Inc. Quick Look at recent profits-revenues trends, Published Oct 1, 2012, http://www.scribd.com/doc/108514055/Yahoo-Inc-Quick-Look-atRecent-Profits-Revenues-Trends 11.Yahoo! Inc. Maximum Point on the Profits-Revenues Graph, Published Oct 1, 2012, http://www.scribd.com/doc/108512834/Yahoo-Inc-Maximum-Pointon-the-Profits-Revenues-Graph 12.GM Before the Bankruptcy: Maximum point on the profits-revenues graph, http://www.scribd.com/doc/103938349/GM-Before-the-Bankruptcy-MaximumPoint-on-Profits-Revenue-Graph , Published August 25, 2012. 13.The New GM: A Brief Analysis of the Profits-Revenues Data, http://www.scribd.com/doc/103600274/The-New-GM-A-Brief-Analysis-of-theProfits-Revenues-Data-through-1Q2011, Published May 9, 2011 and again on August 22, 2012, Discussion of the new GM data from 1Q2010 to 1Q2011. 14.Why Cant GM be more like Microsoft? The New GM Just May be. http://www.scribd.com/doc/103607023/Why-Can-t-General-Motors-be-morelike-Microsoft-The-new-GM-may-just-be Published August 22, 2012.

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15.Amazon.com Profits-Revenues Analysis: My Facebook Posts, Jan 18,2013, http://www.scribd.com/doc/120933845/Amazon-com-Profits-and-RevenuesAnalysis-My-Facebook-Posts 16.Amazon.com, Analysis of the Profits-Revenues Data, Published Sep 24, 2012, http://www.scribd.com/doc/106881274/Amazon-Profits-Revenues-DataAnalysis 17.The Future of Facebook I, May 21, 2012, Power law behavior with n < 1, http://www.scribd.com/doc/94325593/The-Future-of-Facebook-I 18.Mount Profit Revealed by Ford Motor Company, May 29, 2012, http://www.scribd.com/doc/95140101/Ford-Motor-Company-Data-RevealsMount-Profit 19.The Clinton Budget Surpluses, http://www.scribd.com/doc/105819500/TheClinton-Budget-Surpluses-Treating-Government-like-a-Business, Published Sep 13, 2012 , Google financial data for early years may be found in Table 2. 20.The Amazing US Government Surplus (Deficits)-Receipts Relation during the Clinton Presidency, http://www.scribd.com/doc/105821230/The-AmazingUS-Government-Receipts-Surplus-Relation-during-the-Clinton-Presidency, Published Sep 13, 2012. 21.A Brief Review of the Historical US Government Receipts-Surplus (Deficit) Relation, http://www.scribd.com/doc/106003088/A-Brief-Review-of-theHistorical-US-Government-Surplus-Receipts-Relation, Published Sep 15, 2012. 22. The Efficiency of the Government Compared to the Thermal Efficiency of a Heat Engine, Sep 18, 2012, http://www.scribd.com/doc/106220758/TheEfficency-of-Government-Compared-to-Thermal-Efficiency-of-a-Heat-Engine

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About the author V. Laxmanan, Sc. D.

The author obtained his Bachelors degree (B. E.) in Mechanical Engineering from the University of Poona and his Masters degree (M. E.), also in Mechanical Engineering, from the Indian Institute of Science, Bangalore, followed by a Masters (S. M.) and Doctoral (Sc. D.) degrees in Materials Engineering from the Massachusetts Institute of Technology, Cambridge, MA, USA. He then spent his entire professional career at leading US research institutions (MIT, Allied Chemical Corporate R & D, now part of Honeywell, NASA, Case Western Reserve University (CWRU), and General Motors Research and Development Center in Warren, MI). He holds four patents in materials processing, has co-authored two books and published several scientific papers in leading peer-reviewed international journals. His expertise includes developing simple mathematical models to explain the behavior of complex systems. While at NASA and CWRU, he was responsible for developing material processing experiments to be performed aboard the space shuttle and developed a simple mathematical model to explain the growth Christmas-tree, or snowflake, like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e.g., freezing of all commercial metals and alloys, freezing of water, and, yes, production of snowflakes!). This led to a simple model to explain the growth of dendritic structures in both the ground-based experiments and in the space shuttle experiments. More recently, he has been interested in the analysis of the large volumes of data from financial and economic systems and has developed what may be called the Quantum Business Model (QBM). This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money, i.e., energy in physics is like money in economics. Einstein applied Plancks ideas to describe the photoelectric effect (by treating light as being composed of particles called photons, each with the fixed quantum of energy conceived by Planck). The mathematical law deduced by Planck, referred to here as the generalized power-exponential law, might actually
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have many applications far beyond blackbody radiation studies where it was first conceived. Einsteins photoelectric law is a simple linear law and was deduced from Plancks non-linear law for describing blackbody radiation. It appears that financial and economic systems can be modeled using a similar approach. Finance, business, economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton. During my professional career, I also twice had the opportunity and great honor to make presentations to two Nobel laureates: first at NASA to Prof. Robert Schrieffer (1972 Physics Nobel Prize), who was the Chairman of the Schrieffer Committee appointed to review NASAs space flight experiments (following the loss of the space shuttle Challenger on January 28, 1986) and second at GM Research Labs to Prof. Robert Solow (1987 Nobel Prize in economics), who was Chairman of Corporate Research Review Committee, appointed by GM corporate management.

Cover page of AirTran 2000 Annual Report Can you see that plane flying above the tall tree tops that make a nearly perfect circle? It requires a great deal of imagination to see and photograph it.
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