The EV maker has profit margins that its rivals envy.
Tesla is often seen as a unique case in the auto industry.
There is certainly the fact that the EV maker has managed to take a considerable lead over all its rivals in the West.
Its share of the global electric passenger vehicle market was 13% in the third quarter of 2022, according to Counterpoint. Volkswagen, the second-largest Western automaker in terms of electric passenger vehicle sales, has just a 4% market share.
Aside from Chinese automakers, notably BYD, whose largest shareholder is legendary investor Warren Buffett, Tesla is almost unrivaled in the West. For many consumers in North America and Europe, electric vehicles sometimes come down to Tesla.
This dominance is reflected not only in sales figures, but above all in profits. The Austin, Texas-based company has profit margins not found in the auto industry. Such margins are found among technology groups.
Tesla profit margins
Tesla’s automotive gross margin was 28.5% last year, according to its annual report. For comparison, Ford had an adjusted margin before interest and taxes of 6.6%, while GM said its adjusted Ebit margin in North America was 10.1% in 2022.
Between 2015 and 2020, the average profit margin of the world’s top auto companies was almost 7.5%, according to a report from ZT Corporate analyst Azhar Hirani.
“Profitability varies from company to company, but in general, premium car brands like BMW will see higher profit margins than mainstream and economy brands,” Hirani said. “However, there are exceptions to this rule, such as Volkswagen and Toyota, which show profitability potential.”
More often than not, critics of Tesla and Musk point out that the company benefits from having lower costs than legacy automakers. GM, Ford, Volkswagen, and other automakers have costs associated with their gasoline-powered car manufacturing activities. To this we must add the costs related to their dealer networks, etc. Tesla has no dealerships. The company sells its cars—the Model 3 sedan, Model S sedan, Model Y SUV, and Model X SUV—directly to consumers. Tesla also does not advertise unlike its rivals who spend millions of dollars on marketing.
Last year, for example, Ford’s total costs were up 15% last year, while GM’s were up 24.4%. Tesla’s operating expenses rose 1.6%.
Musk, however, believes that it is not just about cutting costs. For the billionaire, the secret of the long-term profitability of his company is also based on the product, that is, on the vehicles developed. This is what he just said in a thread on Twitter.
“Large traditional carmakers sell their cars at a real margin of below zero,” a Twitter account that regularly posts remarks from the techno king, as Musk is known at Tesla, posted on February 11. “Most of their profits come from selling replacement parts to their fleet, 70-80% of which have expired warranties. Like razors and blades.”
The statement ends with: “New car companies lack this advantage. They also lack sales and service infrastructure.”
Musk made this statement on September 6, 2021.
ATM
When reviewing his own quote, Musk took the opportunity to elaborate.
“This is the fundamental reason why Tesla was the first American car startup to achieve sustained positive cash flow since Chrysler some 100 years ago,” the billionaire said on February 11. “The product has to be compelling enough to overcome a fundamental cost.” disadvantage.”
Basically it’s about the car. It is true that the design of Tesla vehicles differs from other brands both inside and out. The lines are pure and simple. The Tesla vehicle prides itself on offering a completely different experience to its users, not only because of its power and the technologies it incorporates, but also because of its elegant and slightly futuristic design, which breaks with the stereotype of electric cars.
Tesla also relies heavily on the unprecedented interior volume and sense of space.
In addition, Musk and Tesla innovated by introducing wireless delivery of vehicle software updates with new features and functionality. When an update is available, vehicle owners are notified and given instructions on how to do it themselves. This keeps their vehicles up to date with the latest innovations and provides the automaker with a steady source of revenue through subscriptions for service updates.
The automaker increased its free cash flow by 51% last year to $7.6 billion despite huge investments in new factories, factory expansion and new tooling. As a result, the company’s total cash and investments increased $1.1 billion sequentially in the fourth quarter to $22.2 billion.
Thus, Tesla has a significant war chest in a pinch.
“We have sufficient liquidity to finance our product roadmap, long-term capacity expansion plans and other expenses,” the automaker said on Jan. 25. “In addition, we will manage the business in a way that maintains a strong balance sheet during this uncertain period.” .”
