The Business Of
Cars | Tesla | How Do They Make Money?
Morning All!
So yesterday, we started Part 2 of The Business Of Cars. And we set the scene for the week, looking at how Tesla was founded, how Tesla skips dealerships, and how Tesla’s stock is valued so highly!
Today, we’re going to dive deeper into how the EV giant actually makes it money. Now unsurprisingly, Tesla being a car manufacturer, makes most of its revenue by… you guessed it - selling cars! But as we can see from the chart below, there are actually 5 different ways Tesla generates its monster $97 billion revenue!
So today, we’re going to focus on the largest segment - car sales. We’ll quickly look at the other revenue streams towards the end of the newsletter. But because selling cars makes up the bulk of Tesla’s business - let’s keep our focus here!
Now, when it comes to car sales, there’s 2 main drivers. (i) VOLUMES - how many cars did Tesla sell? And (ii) PRICING - what was the average revenue per car sold? We’ll kick off with volumes and then go to pricing. And to help us really understand how these drivers differ for different car manufacturers, we’ll compare Tesla’s figures to two other giants - Ford and Ferrari! The differences are incredible! Let’s dive in!
Tesla’s Growth… Powered By Climate Change + Software!
Okay, so first thing’s first. How many cars did Tesla sell in 2023? Well, the answer is 1,808,581 - so just under 2 million. And as we can see from the chart below, this figure has grown at an absolutely astonishing rate over the last decade. Back in 2013, only 22 THOUSAND Tesla cars were sold. Which means that the number of cars Tesla has sold has grown at an incredible rate of ~55% CAGR for the last decade!
But here’s a question - what’s caused this incredible growth in Tesla vehicles sold?! Well, the answer is a couple of things. First, Tesla has benefitted massively from the global push to address climate change. Because what’s one of the leading contributors to greenhouse gas emissions? Vehicles powered by fossil fuels!
And so, in a bid to get people to stop buying petrol-powered cars, what have governments around the world done? They’ve given individuals incentives to buy EVs. And they’ve set future dates after which car manufacturers can no longer sell ICE vehicles! These climate change drivers has seen electric vehicles grow from being <5% of new cars bought in 2020 to ~14% in 2022! With some agencies believing EVs made up ~20% of new cars sold last year!
We’ll touch more on the future of EVs on Friday. But the second factor that’s really helped Tesla sell cars at such a fast pace is the quality of their cars. It’s not an exaggeration to say that Tesla has completely revolutionised the car. From being vehicles with some technology in them. Tesla made cars that were basically ‘iPhones on wheels’!
The EV giant was the first car manufacturer to bring autonomous driving to commercial vehicles. They were the first manufacturer to install touchscreen tablets in their cars. And quite extraordinarily, the company can even update the software in their vehicles remotely… like how Apple do with our iPhones! To read more about how Tesla has transformed the car industry, check out this cracking article!
Okay, so we’ve seen how many cars Tesla sold in 2023. And we’ve looked at two of the major reasons why their growth has been so fast. But now, let’s see how Tesla’s 1,808,581 cars sold compares vs Ford and Ferrari! Well, hold on to your hats because this is fascinating.
In 2022 - latest available data - Ford sold ~4.2 million cars. So, more than double the number Tesla sold in 2023. But quite incredibly, Ferrari sold only ~13k cars! That’s less than 1% of the cars Tesla sold!
So, here’s a question - why do Ferrari hardly make and sell any cars?! Well, the answer is because Ferrari don’t want many people driving their cars! And we’ll come onto why in just a moment - because it’s very much related to pricing!
Oh So Elon Musk Actually Wants Tesla’s Car Prices To Fall…?
But before we get into Ferrari’s pricing. Let’s look at Tesla’s! How much do their cars get sold for on average? Well in 2023, the average revenue Tesla made from selling their 1,808,581 cars was ~$43k per car. However, as the chart below shows us, this average revenue/car figure has actually fallen pretty heavily from ~$78k in 2017!
Now, Tesla’s average revenue/car used to be even steeper than the $78k we see in the chart below! The Tesla Roadster when it first launched in 2008 sold for a whopping ~$110k. So yes, Tesla’s average selling price has been falling for some time now!
But here’s a question - why have Tesla’s prices been decreasing over the last decade? Well, the answer is pretty simple - Tesla have been releasing cheaper models! We just said that the Tesla Roadster (Tesla’s first car) was sold at a steep price of ~$110k. Well, guess how much the latest Model 3 is being sold for? ~$39k! A big drop! And a question here is - is this what Tesla and Elon Musk want?
Well, the answer actually is yes! Elon Musk doesn’t want to make Tesla a luxury, luxury brand like Ferrari that only the super wealthy can drive. He wants Tesla to be a mass market car - more like Ford. And in order to get normal people to drive Tesla’s, the price had to come down from ~$110k!
Okay, so we know that the average price is falling as Tesla tries to become less ‘luxury’ and more ‘mass market’. But question - if that was Elon Musk’s plan all along, why did he start selling his cars at such a high price to begin with?
Well, there are a couple of reasons. But the main reason is that the cost of lithium ion batteries - the batteries that power electric vehicles - was super high back in 2008. We’ll see tomorrow that lithium ion batteries are one of the biggest costs for EVs. And because of their high costs in 2008, Tesla simply couldn’t price their cars too cheaply or else they’d have made a loss selling them! More on this tomorrow!
Alrighty, so we’ve seen Tesla’s cars sold at an average price of ~$43k in 2023. But how does this pricing compare vs Ford and Ferrari? Well, the chart below (using 2022 figures) paints a pretty astonishing picture. Whilst Ford’s average revenue per vehicle was ~30% below Tesla’s at ~$35k. Ferrari’s average revenue per vehicle was an absolutely whopping ~$328k! So, as we can see from the chart below - Ferrari sell far fewer cars than Ford or Tesla… but at a far higher price!
But question - how do Ferrari maintain such high pricing? Well, it’s all about exclusivity! What do I mean? Well, it’s a little bit like LVMH in the luxury fashion world. When we looked at The Business Of LVMH, we saw that whilst H&M had 4,465 stores around the world. Christian Dior (owned by LVMH) only had 250 stores globally! Now, why does Christian Dior only have 250 stores? Wouldn’t having more stores mean more people could buy their products?
Well, yes that’s true. And that’s exactly why Christian Dior don’t have more stores! Christian Dior don’t want just anyone to be buying their products. They want the exclusivity, the luxury, the elite. They know that by keeping supply down, demand will be high. And hence people will pay high prices to be in the exclusive club!
Okay, so that’s the fashion world. But is there a similarity in the car world? Well, yes! Ford, the 2nd largest producer of cars in the world have a whopping 9,611 points of sale. There are 9,611 dealerships where people can go to buy Ford cars. Tesla have 1,208 locations. But guess how many dealerships sell Ferrari cars globally? Just 196!
And the reason is very similar to what we saw with Christian Dior. Ferrari have maintained that exclusivity for their product. They don’t want just anyone to be buying their cars. They want the exclusivity, the luxury, the elite. And they too know that by keeping supply down, demand will be high. And hence people will pay high prices to be in the exclusive club! Sounds familiar!
Tesla and Nvidia - No Wonder Those Stocks Are So Popular!
Okay, so let’s wrap up. We’ve looked at the two main drivers that determine Tesla’s car sales - (i) VOLUMES - how many cars do they sell, and (ii) PRICE - at what price do they sell their cars. And the equation below nicely sums it all up for Tesla in 2023.
But just before we close for today, let’s briefly touch on a couple of the other ways Tesla makes its money. First up, services! So, what do we mean by services? Well, we know Tesla sell cars. But is this the only interaction Tesla has with their customers? No! These individuals who buy their Teslas will need to get their cars serviced at least once a year - and Tesla will charge them for these services! And this services segment actually made Tesla a whopping $8bn in revenue in 2023!
And by the way, this is pretty similar to what we saw last week in The Business Of AutoNation. We saw that AutoNation make most of their revenue from selling cars. But then they also make a good amount of revenue from servicing those cars! The screenshot below shows us some Tesla cars getting serviced.
The third revenue stream we’ll look at for Tesla is what they call ‘Energy generation and storage’. So, what does this mean? Well, this newsletter’s getting on the longer side so I’ll keep this super brief. But basically, Tesla doesn’t just sell cars! They also sell energy products (like solar panels) and energy storage solutions (like home batteries). And they make ~$6bn from this energy division! For those of us who are interested in energy storage, I recommend giving this article a read to learn more!
Okay, let’s put it all together. The chart below shows us how Tesla’s overall revenues have grown since 2008. And it is an incredibly unique sight. The company’s revenue has grown at a simply ludicrous rate of ~79% CAGR for the last 15 years! That is miles above any kind of growth rate we’ve previously seen on TBO - even Nvidia! Although, Nvidia’s data centre revenues have grown at 62% CAGR since 2014. No wonder these 2 stocks are two of the most popular in the world right now!
30th Jan 2024
And that’s a wrap! I hope you enjoyed breaking down how Tesla makes its money. Tomorrow, we’ll crack on with looking at the company’s margins. And we’ll look at the cost of producing a Ferrari vs a Tesla vs a Ford. Because these costs play a huge role in how these car manufacturers price their cars!
Have a fabulous day!
The Business Of Team