Company Spotlight: Tesla

April 01, 2021

Perhaps no founder in recent times has been more brazen and industry changing than Elon Musk, founder and CEO of Tesla. His statements move industries; their cars have captured the imagination of millions; yet the company has yet to turn an operating profit after 15 years. Having worked for General Motors early in my career, I do have some idea of what a complex task it is to bring a vehicle to market. As if that were not enough, Tesla has more or less invented the category of “performance electric vehicles” as most prior versions of electric cars were utilitarian machines.

Now selling 500,000 cars per year, TESLA has made one technological breakthrough after another, yet their “profitability” over the past several years has relied on a strategy of selling regulatory credits to competing automakers who failed to sell the percentage of zero-emission vehicles that 11 different states require. The $3.3 billion from those credit sales - $1.6 billion in the last year alone – has kept Tesla in the black. Last year, Tesla’s profits were $721 million, meaning they’d have otherwise posted a loss were it not for the credit sales (CNN, February 1, 2021).

Why is it so difficult for TESLA to make money selling cars? Well for one thing, bringing a new car design to market is an incredibly expensive task. Design and manufacturing engineering costs are astronomical, as is their ongoing need to build out charging infrastructure. Then there is TESLA’s admirable focus on quality – I am told that other than the tires TESLA manufactures nearly everything in house – even the glass on their large computerized displays. TESLA seems to be taking the long-long term view and are unconcerned about immediate profits, but rather building an excellent product and thereby brand loyalty over the long term. (By the way, I don’t own the stock, nor the car, nor have I ever driven one.) The selling of regulatory credits is a band-aid bridge of financial engineering, which goes along with their other brilliant automobile engineering. However, such credits will not always be available, do not intrinsically add any value and relies on government choices to mandate products at the expense of other producers, industries and taxpayers. I do not fault TESLA for taking advantage of the competitive landscape as it exists. And I do believe they are on the path to building an incredibly loyal brand following, where people are willing to pay nearly anything to drive and live the TESLA brand. However, at some point, the company must turn a consistent operating profit, otherwise their highly valued stock may come back to earth. I admire TESLA and its entrepreneurial founder for showcasing their engineering feats, and I hope their financial performance catches up!