Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Supply Risk
We are subject to risks related to our dependence on suppliers, the majority of which are single source providers of parts or components for our products. Any inability or unwillingness of our suppliers to deliver necessary product components, including semiconductors, at timing, prices, quality, and volumes that are acceptable to us could have a material impact on our business, growth prospects, and financial and operating results. Fluctuations in the cost of materials, supply interruptions, or material shortages could materially impact our business.
We have experienced and may continue to experience cost fluctuations or disruptions in supply of input materials that could impact our financial performance. For example, the recent global semiconductor supply shortage is having wide-ranging effects across the automotive industry, and has impacted our operations and financial performance, along with those of many automotive suppliers and manufacturers that incorporate semiconductors into their products. In addition, there have been very sizable increases in recent months in the cost of key metals, including lithium, nickel, aluminum, and cobalt with volatility in pricing expected to persist for the foreseeable future. Furthermore, during the year ended December 31, 2021, we experienced increased logistics cost due to expedited freight associated with supply chain challenges. Given the current supply chain environment, we believe our production ramp and rate in our Normal Factory will be limited by the supply chain in the near-future. We continue to work diligently and collaboratively with suppliers to identify and head off problems or constraints as quickly as possible.
Inflation Risk
The United States economy has experienced various disruptions, including supply chain shortages which have contributed to increased inflation. The cost of input materials ( e.g. , sheet metal), components ( e.g. , semiconductors), and systems ( e.g. , seats) required to produce our vehicles has risen considerably. We expect higher than recent years’ levels of inflation to persist for the foreseeable future. If we are unable to fully offset higher costs through price increases or other measures, we could experience an adverse impact to our financial condition, results of operations, and cash flows.
Interest Rate Risk
Our cash, cash equivalents, and marketable securities primarily consist of cash on hand and highly liquid investments in money market instruments and United States government securities. We do not enter into investments for trading or speculative purposes. However, our investments are exposed to market risk due to fluctuations in interest rates. This may affect our interest income and the fair market value of our investments. However, due to the short-term nature of our investment portfolio, we do not believe a hypothetical 100 basis point increase or decrease in interest rates would have a material effect on the fair market value of our portfolio.
We are exposed to interest rate risk on our borrowings that bear interest at floating rates. A rising interest rate environment would increase the amount of interest paid on these borrowings. A hypothetical 100 basis point increase in interest rates on
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our floating rate debt would have increased our interest expense for the year ended December 31, 2021 by an amount that is not material.
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