Tesla, Ford and General Motors all released their 2021 earnings information recently. Ford and GM earnings appear to be excellent until those earnings are compared to Tesla earnings. There are stark financial differences between Tesla and both Detroit automakers (maybe all legacy automakers) during 2021. Tesla’s earnings performance must leave the CFOs of legacy automakers scratching their heads in disbelief.
Tesla margins are more Apple-like than a traditional automotive company. The company’s automotive gross margin of 29.3% is two and a half times better than GM and over three times better than the automotive gross margin at Ford.
Why does this discrepancy exist?
Is Tesla a more efficient manufacturer than Detroit allowing it to generate a better gross margin? Can the difference be explained because Tesla only produces EVs, which contain fewer components and require less labor to assemble? Is the company’s gross margin supremacy more about its vehicle pricing power ? Maybe the discrepancy is due to Tesla not giving away any margin to automotive dealers like legacy automakers. Possibly the difference is due to all of the above!
Tesla’s U.S. market share will grow to 18%, compared to GM’s 12% and Ford’s 10% by the year 2030 - Adam Jonas from Morgan Stanley
The margin story gets even worse for Detroit when comparing EBIT margin (earnings before interest and taxes). Tesla’s EBIT margin is three times better than GM and nearly seven times better than Ford. Marketing and advertising expenses alone must play a major part in this EBIT margin difference. Legacy automakers spend billions of dollars every year on advertising. Tesla spends nothing on advertising. If the company can forego significant marketing and advertising expenses in the future, legacy automakers will struggle for years to close this EBIT margins gap with Tesla.
Do any of these financial differences disappear once Ford and GM begin producing more electric vehicles? This seems doubtful to Morgan Stanley automotive analyst, Adam Jonas. In a recent report, Jonas has Tesla attaining 10% market share in the U.S. through 2026 (verses 14% and 11% for GM and Ford respectively). More importantly, Jonas has Tesla generating $300 billion of revenue by that time, while GM and Ford remain stuck at approximately $150 billion. If Jonas is correct, Tesla would generate $64.8 billion EBIT in 2026 with Detroit automakers only generating, at most, $10.9 billion EBIT.
I recall, Elon Musk using the phrase, “game, set, match” when comparing Tesla to legacy automakers. Without an aggressive and sustained change in the business model of legacy automakers like Ford and GM, Tesla might cruise to future dominance in the industry.
What I’m Reading, Watching, and Hearing
LG battery division seeks global dominance after blockbuster IPO - Financial Times
4 Lessons From ARK’s Rapid Rise and Fall - Barron’s
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