The Business Of
Cars | Tesla | What Do They Do?
Morning All!
Hope you had a great week. Last time, in the first part of our The Business Of Cars series, we explored the business model of AutoNation. And we saw that whilst AutoNation helps car manufacturers like Ford and Toyota sell their cars to the public...
… there is a very popular car manufacturer that doesn’t sell their cars through dealerships! It’s the highest-valued car manufacturer in the world - Tesla!
Now, Tesla doesn’t need too much of an introduction. Their cars are well-known - one of the highest selling electric vehicles globally. Their CEO is well-known - the most followed person on Twitter (X). And their stock is well-known - one of the most actively traded stocks in the world!
But this week we’re going to dive into some less well-known parts of the business! And ask some less obvious questions. Like - why don’t Tesla use car dealerships? What costs are needed to become a car manufacturer? And why do margins differ so much between Tesla, Ford and Ferrari? Well, we’ll get into all of that + much more this week. But for now, let’s set the scene for the week!
Elon Musk: CEO and Founder
Okay, so we haven’t mentioned his name yet. But it’s impossible to talk about Tesla without talking about their CEO - Elon Musk. Now, first thing’s first. Elon Musk is not the founder of Tesla. I repeat, Elon Musk is not the founder of Tesla! The founders were actually two less well-known chaps called Martin Eberhard and Marc Tarpenning - pictured below.
So, how did Elon Musk get involved in Tesla? Well, he was actually Tesla’s first big investor! Back in 2003, Eberhard and Tarpenning - students at Stanford University - had been studying the possibilities of making a car run on ‘alternative fuels’ and wanted to create their own car company. At around the same time, Elon Musk had made his millions from selling PayPal to Yahoo. And was looking for investment opportunities in the electric vehicle space.
After meeting Eberhard and Tarpenning, and hearing their idea for a car company called Tesla, Elon Musk decided he wanted to invest! Musk actually gave the founders $6 million of his own money so they could get Tesla up and running! Now, the story of how Elon Musk has become the face of Tesla is pretty incredible. We don’t have time to go through it all now - but for anyone interested, I’d highly recommend giving this article a read!
From The Roadster To The Cybertruck!
Okay, so we know Tesla is an electric vehicle manufacturer. But here’s a question - do Tesla only sell one type of car or do they sell several? Well, the answer is several!
Back in 2008, Tesla released their very first car - The Tesla Roadster. And after moderate success, this sports car model was discontinued in 2012. But the success grew from there! As you can see below, the Roadster has been followed by 4 more models over the last decade - the Model S, Model X, Model 3 and Model Y. And there’s the odd-looking Cybertruck to follow soon!
AutoNation? Who Needs AutoNation?
Now, I want to quickly touch on a point we made right at the beginning of this newsletter. Tesla is very different to normal car manufacturers like Ford and Toyota for a number of reasons. The main one being that Tesla sells only electric vehicles. But another huge difference between Tesla and other car manufacturers is HOW they sell their cars. Tesla don’t sell their cars through car dealerships!
Back when the Tesla Roadster was first released, Tesla said, ‘why do we need to use AutoNation and those other car dealerships to sell our cars? Let’s just sell to our customers online and through our own showrooms!’ The graphic below illustrates how Tesla’s sales model differs from Ford’s in the US.
Now, why did Tesla want to skip dealerships? Well, one main reason is because of margin! As we saw last week, when car manufacturers like Ford sell their cars to dealerships, they sell their cars to dealerships at a bit of a discount (called the wholesale price). And then the car dealerships will sell the Ford cars at a higher price (called the retail price) to people like me and you.
But what if a car manufacturer could skip the dealership and sell directly to consumers? They could sell to consumers at the higher retail price instead of the lower wholesale price! The graphic below shows us how Ford could make more revenue by using Tesla’s ‘direct to consumer model’!
Now, whilst that all sounds great. There is a reason why Ford don’t do this in the US and why Tesla was the first manufacturer to ever adopt this ‘no-dealership strategy’. And the reason is because it is the law in America that car manufacturers can’t sell directly to consumers - they have to sell through dealerships!
But then how did Tesla get around this law? Well, the law actually states that car manufacturers who ALREADY SELL through car dealerships, can’t then sell directly to consumers. So, Ford already sells through dealerships (like AutoNation) - and hence can’t sell directly to me and you. But Tesla - a new car manufacturer - who didn’t have any dealerships to begin with - were kind of exempt from this law!
However, despite their exemption, this ‘no-dealership strategy’ has still been an issue in several US states. We can’t go into too much detail now, but as an example - in Texas, Tesla aren’t allowed to sell cars directly to citizens. To read about how Tesla get around these restrictions, check out this article!
Why Is Tesla So Much More ‘Valuable’ Than Other Car Manufacturers?
Alright, let’s wrap up! And let’s touch on a pretty incredible part of the Tesla story - its valuation. In the graphic below, we can the logos of the 10 highest valued car manufacturers in the world. The green sphere on the right shows us that 9 of these companies have a combined stock market valuation of ~$785 billion. But Tesla - just by itself - is valued at an astonishing ~$679 billion! These market values may be a couple of days out!
Now, with those kind of valuations, you’d be forgiven for thinking that Tesla was the biggest car manufacturer in the world. Surely a company that’s valued so highly must be selling lots of cars right? Well, as we can see below, no - not quite!
In 2022, Tesla sold ~1.4 million cars globally. But this put them only in 15th place! Toyota was the #1 car manufacturer, selling a whopping ~9.6 million cars in 2022!
So, here’s a question - why is Tesla valued so highly compared to other car manufacturers? Even though they don’t sell anywhere near as many cars?
Well, this newsletter’s getting a bit long so we’ll answer this question throughout the week! And on Friday, we’ll look at some of the exciting, upcoming EV manufacturers (below) who are looking to dethrone Tesla!
29th Jan 2024
And that’s a wrap! A lot to look forward to this week. Tomorrow, we’ll look at how exactly Tesla makes its money!
Have a fabulous day!
The Business Of Team