Is Tesla losing $4000 per car sold? Nope, it’s capital investment for future sales

It’s time to retell the “no, the automaker isn’t losing $n,000 per car, they’re investing in the future” story.  Following last week’s quarterly financial results report from Tesla Motors a long string of news articles have proclaimed something like “Tesla burns cash, loses more than $4,000 on every car sold”.  That makes Tesla look bad – that to sell a Tesla Model S costs the company $4,000 more than what they get from the deal.

This isn’t the first time this has been trotted out.  Back in 2011 the story going around is that it cost GM $200,000 to make each Volt, and therefore GM was losing its shirt on the car, and would have to close down production, because of course everything Obama does is a failure.  At that time the reasoning was based on reasoning like:

  • take all expenditures
  • divide by the number of cars sold
  • that’s the cost per car

As I wrote back in December 2011, that line of reasoning is bogus.  Most of the expenditures are in plant equipment which will be used for the manufacture of thousands of vehicles over a multi-year period.  What’s necessary is to look at the Cost of Goods Sold figure, because that’s where the Manufacturer discloses the cost to make and sell each vehicle.

Likewise, the current round of articles today are deriving the $4,000 figure by dividing Tesla’s declared loss ($47 million) by the number of cars sold, and coming up with $4,000 per car.

The problem is that Tesla Motors is currently has huge capital expenditures on plant equipment and building up car inventory prior to launching sales of the Model X.  Starting in Q3, the current quarter, Tesla plans to rapidly ramp up Model X production, and sales, because that car is finally ready to be sold to the public.  Getting to that point isn’t magical that costs $0.  Tesla had to spend gobs of money getting to this point.

That’s Capitalism in action – a Capitalist invests their Capital in new factory equipment, so that later they can reap rewards by building products with that factory equipment.

Let’s look at a Reuters article, “Tesla burns cash, loses more than $4,000 on every car sold“.  It starts with this sentence:

The Silicon Valley automaker is losing more than $4,000 on every Model S electric sedan it sells, using its reckoning of operating losses, and it burned $359 million in cash last quarter in a bull market for luxury vehicles.  The company on Wednesday cut its production targets for this year and next.

If that’s all you read, you’d be justified in thinking Tesla Motors is a loss and about to croak.

As of this writing (August 11, 2011) the price for TSLA shares is at $236, on Wednesday (August 5) it had been at $270, and the all-time-high for TSLA was July 20 at about $282 per share.  Ergo, TSLA has lost about 1/5th of its value in about 3 weeks, and most of the loss came since the Q2 financial results were revealed on Wednesday.

The Reuters article was honest enough to go on from that opening statement, and to discuss capital expenditures and whatnot.  Those who had the patience to read all that will have learned this:

  • “Tesla had just $1.15 billion on hand as of June 30, down from $2.67 billion a year earlier”
  • “Automakers consume cash to pay for assembly line equipment… A typical new car can cost $1 billion or more to engineer and bring to market”
  • “The company said it plans $1.5 billion in capital spending this year” — the money is going into preparations for Model X production, and building the Gigafactory

In other words, Tesla is in a crunch for money and the expenditures are actually investments in plant equipment.  Over the next period of time that money will fuel the following product moves:

  • Beginning production/sale of the Model X, slated to go on sale in Septemer/October 2015
  • Beginning production/sale of the Tesla Energy product line in 2015
  • Finishing construction of the Gigafactory during 2016
  • Shifting production of Tesla Energy products, and vehicle battery packs, to the Gigafactory as soon as it’s ready to go

During 2017 there will be another burst of capital expenditures as Tesla starts production of the Tesla Model 3.  Initially that car will be producing at a 100,000 car/year quantity, quickly ramping up to 200,000 cars/year within a couple years.

In May 2015 I wrote a similar story – Tesla Motors runs huge loss to build up car & battery production capacity

In January 2015 I predicted that Tesla would need to build several automobile and battery factories by 2025 in order to meet corporate growth projections.

Q1 2013 was the one-and-only quarter when Tesla Motors showed a profit.  The quarter prior, ending December 31 2012, the company had run up a large loss.  Why?  Again it was related to ramping up production, that time for the Model S.  The company made large capital expenditures, built out plant equipment etc, and got the Model S into full production.  Ever since the company has been almost entirely self-funded from Model S sales, but it took several quarters of large losses due to capital expenditures.

In April 2015, a story went around that Tesla Motors nearly died in early 2013 and had sought a buyout by Google.  According to the story, the losses had been so steep that Tesla nearly ran out of cash.  Instead of being bought out, Tesla suddenly renegotiated the terms of the Federal loans, did a fundraising round, completely paid off the federal loans, and ended up with enough cushion in the bank to ride through until the period that Model S sales grew enough to support the company.

 

About David Herron

David Herron is a writer and software engineer living in Silicon Valley. He primarily writes about electric vehicles, clean energy systems, climate change, peak oil and related issues. When not writing he indulges in software projects and is sometimes employed as a software engineer. David has written for sites like PlugInCars and TorqueNews, and worked for companies like Sun Microsystems and Yahoo.

About David Herron

David Herron is a writer and software engineer living in Silicon Valley. He primarily writes about electric vehicles, clean energy systems, climate change, peak oil and related issues. When not writing he indulges in software projects and is sometimes employed as a software engineer. David has written for sites like PlugInCars and TorqueNews, and worked for companies like Sun Microsystems and Yahoo.

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  1. Pingback: Tesla’s cash burn rate a speed-bump on the road to success, we hope | The Long Tail Pipe

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