Tesla has a major advantage over the competition. How can Elon Musk maintain such high margins?

Tesla is undoubtedly a very interesting company. It is probably still an EV car company from every possible angle. But that doesn't just come with the territory - they must have a recipe. And they do. And Elon Musk has just revealed it to us,

Elon Musk - genius entrepreneur and until recently the richest man on the planet

Tesla $TSLA+3.0% is often considered the best and most powerful car company in general. What is certain is that the electric car manufacturer has managed to gain a considerable lead over all its competitors in the West. Not so much in Asia, but that's for another article. Elon Musk is extremely afraid of BYD. Will this company bring Tesla to its knees?

According to the data, its share of the global passenger EV market was 13% in the third quarter of 2022. Volkswagen, the second Western automaker in terms of passenger EV sales, has only a 4% market share.

Apart from Chinese carmakers, especially BYD, whose main shareholder is legendary investor Warren Buffett, Tesla has almost no competitors in the West. This dominance is reflected not only in sales figures, but above all in profits. The Austin, Texas-based company has profit margins not found in the automotive industry. Such margins are found in technology titles, for example.

Tesla's margins are truly impressive. Source

According to Tesla's annual report, gross margins in the automotive industry were 28.5% last year. By comparison, Ford had an adjusted margin before interest and taxes of 6.6%, while GM said its adjusted Ebit margin in North America in 2022 was 10.1%.

But the average automaker margin is drastically different. Source

More often than not, critics of Tesla and Musk point out that the company benefits from having lower costs than legacy automakers. GM, Ford, Volkswagen and other automakers have costs associated with gasoline car manufacturing operations. Add to that the costs associated with their dealer networks, etc. Tesla has no dealers. The company sells directly, it doesn't spend on advertising and it doesn't spend on dealers.

For example, Ford's total costs rose 15% last year, while GM's rose 24.4%. Tesla's operating costs increased by 1.6%. This is fascinating even in a good situation. Let alone last year.

But Musk says it's not just about cutting costs. For the billionaire, the secret to his company's long-term profitability is also based on the product, in other words, the vehicles developed. He said as much in a Twitter thread a few years back.

"The big established car companies sell their cars at low to zero margin," he tweeted on February 11, 2021, "In fact, most of their profits come from selling spare parts for their fleet, 70 to 80% of which are out of warranty."

https://twitter.com/elonmusk/status/1624549227908202496

"This is the fundamental reason Tesla is the first new American automaker to achieve sustained positive cash flow since Chrysler roughly 100 years ago, he tweeted this week. "The product has to be compelling enough to overcome a fundamental cost disadvantage."

We probably all know Tesla's chart

How to interpret it? Simple - Musk doesn't want to make money selling parts like everyone else. He wants to make a profit straight from selling cars.

In addition, Musk and Tesla have innovated by introducing the delivery of software updates in vehicles with new features and functions. When an update is available, vehicle owners are notified and given instructions on how to perform the update themselves. As a result, their vehicles are continually equipped with the latest innovations and the automaker has a steady source of revenue from subscription fees for service updates.

The automaker increased its free cash flow by 51% last year to $7.6 billion, despite huge investments in new factories, factory expansions and new tooling. As a result, the company's total cash and investments increased sequentially by $1.1 billion to $22.2 billion in Q4.

This leaves Tesla with an important war chest in case of need.

"We have sufficient liquidity to fund our product roadmap, long-term capacity expansion plans and other expenses," the automaker said Jan. 25. "In addition, we will manage the business to maintain a strong balance sheet during this uncertain period."

That's the whole Elon Musk secret. Of course, his advantage and disadvantage is that he doesn't have a long history. But it seems more likely to be the better option.

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions

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