Tesla is losing money. So what?

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In August 2015, analysts confirmed that Tesla Motors was losing money on every vehicle it sold. This created a rather disturbing reaction from investors and led to a continuous decrease in the company’s stock price since then. Wouldn’t it then be natural to say with worry that the more you sell, the more you will lose?

Tesla is losing money

According to analysts, Tesla’s decrease in performance and revenue should be a concern. It has been confirmed that the company loses more than $4,000 on every electric sedan Model S it sells. Analysts expressed their worries about the fact that Tesla Motors is running its factory at the highest capacity it has ever had, and yet gross margins are being reported at increasingly low levels. The report from the fourth quarter showed a gross margin of only 18%, quite lower than the expected 23%.

Despite that, Tesla Motors chose to stand behind its mission to “accelerate the world’s transmission to sustainable transport” and continue what they have planned. The losses don’t seem to have scared the company, and instead, Tesla has already announced the launch of Model X, an electric SUV.

The company plans to produce an average of 1000 Model X vehicles a week in the second quarter of 2016, but some analysts are skeptical about this number. Considering the numerous features of the new model, including the upward-opening rear doors, they say it is very complicated to manufacture.

Model S has been considered revolutionary for the market of luxury electric vehicles. The $70,000+ sedan raised the bar not only for the industry but for the company itself, making it harder for Tesla engineers to develop a follow-up model that meets the standards they have set themselves.

 

Tesla-Model-S

Image source: mashable.com

As a new strategic step, and a continuation to Model S, Tesla is developing a more affordable version of its electric sedan – the Model 3. Model 3 will start at about $35,000 and aim to boost total sales. Tesla hopes to reach the sales goal of 500,000 vehicles a year by 2020. The car will be about 20% smaller in size than the Model S and it will have a driving range of at least 200 miles on a single charge. The unveiling date for Model 3 is planned for March 31 of this year.

What made Tesla stock drop and reach its 52 week low was the release of the company’s annual report, which showed that Tesla took a loss of 320 million in the fourth quarter. The number came as a surprise to analysts who have predicted higher revenue figures. According to Tesla, the loss has occurred primarily because of production costs associated with its new crossover Model X and the launch of its new mainstream Model 3 sedan. In addition, the company has admitted its plans to raise more capital due to investment needs.

In the past six months, Tesla has changed its production numbers projections several times. The company plans to cut production targets for years to come in order to decrease the production spending. So far, Tesla Motors has been delivering between 50,000 and 55,000 cars a year. Now, with the launch of Model X and the future unveiling of Model 3, the company has promised to take this number to nearly 90,000. Despite the higher target, Tesla is still low on production in comparison to other major car manufacturers. A reference could be made to General Motors that sells more than 9 million vehicles a year.

So what?

The revenue losses from 2015 do not scare Tesla. On the contrary – the company is working in alignment with its mission and is finally allowing for larger access to its creations. As Elon Musk, Tesla’s CEO, claimed: Tesla Motors is planning to bring electric vehicles to the mass market. And these revenue losses and unstable stock prices might be the last obstacle on the way to achieving the company’s goal.
In order to make EVs more affordable and convenient, Tesla has undertaken several strategic and operational steps that bring the company closer to its goals, the first of which is focused on the actual products of the company. As announced by Musk, the new Model 3 will be an EV at a much lower price than its predecessors. This presumes higher sales and revenues, which in the long run would compensate the investments in development. The prices of current models position the company in the luxury segment, where early adopters are the dominant share of customers. Model 3, however, would aim to change that and bring the desired EVs to a wider audience.
Another benefit that comes out of the lower revenues is the increase in the value of the network of Superchargers across continents.

 

Tesla-Supercharger

Image source: electriccarsreport.com

The Supercharger is Tesla’s own charging stations for the all-time successful Model S and the newer models; it allows for a charge-up that takes minutes instead of hours. The network now includes over 600 stations and 3542 individual stalls across North America, Europe, Asia, and Australia, with a roughly 50% year-on-year increase in location numbers. It is quite logical that the value of Supercharger will surge with the increase in vehicle production and sales. The launch of the mainstream-priced Model 3 is likely to boost the sales and thus create demand for charging stations making them more valuable.

In order to achieve higher production and deliveries of the new Model 3, the company has invested in developing a Gigafactory project in Nevada. The factory required substantial short-term investments in order for the company to reach its target of 500,000 manufactured cars by 2020. Tesla states that by 2020, the Gigafactory will reach full capacity and produce more lithium ion batteries every year than the amount produced worldwide in 2013. Thanks to manufacturing innovations and the expected economies of scale, the batteries will be produced at much lower costs.

Whether or not Tesla’s loss of money is determinant for its future depends solely on the success of the company’s plan for widespread use of electric vehicles by 2020.

And how can this be determined? Analysts can only offer one side of the situation – what the numbers show. But this issue is a part of a bigger challenge. Are people all over the world familiar enough with electric cars to make a decision in favor of one? Is Tesla a trusted partner in this, and can it even be considered a mainstream brand?

Are the people who would choose Tesla enough to help the company sustain its operations at all?

These are the questions that only the future can answer. Only then can we say whether Tesla’s investments would go to waste or be a milestone in the company’s prosperous future.

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About the Author:

Dilyana Dobrinova is a nature & travel enthusiast. With a heart for books, scarves and vintage. Dilyana feels most inspired with a cup of tea in her hand and mellow jazz in the background. She holds an M.A. in International Marketing Management from the Berlin School of Economics and Law in Germany, and two B.As. in Journalism & Mass Communication and Business Administration.
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