Tesla Operating Margin #1 In Industry
One of the highlights of the annual Tesla shareholder meeting held earlier today was a graph showing that Tesla has risen to #1 in the auto industry in terms of operating margin. Luxury car companies known for their solid operating margins and gross profits are solid steps below Tesla now. The brand with the second highest operating margin, BMW, is a few percentage points below Tesla’s +15% operating margin. Third-placed Daimler, at 10%, isn’t even close!
Get down to Honda, Hyundai, Nissan, Toyota, and Volkswagen, and it’s a different world.
Related to money is energy use, and one more thing Elon Musk pointed out in the shareholder meeting was that energy use per vehicle produced has come down — cutting emissions while saving money. From Tesla’s factory in California to its factory in Shanghai, the company has achieved a 17% reduction in energy use per vehicle.
That record operating margin helps the company achieve large and growing cumulative profitability. It may have been a difficult decade in the Tesla accounting office leading into 2018 and 2019, but once Tesla flipped the script, cumulative profitability jumped relatively fast. Elon’s joke today was, “And I think, uh, it’s going to go up from here.”
Perhaps an easier way to look at this shift is the chart above showing annual free cash flow generation. The company went from spending a few billion dollars more than it made in 2017 to almost breaking even in 2018 to making a billion dollars in 2019 to making almost 3 billion dollars in 2020, and so on. In the last 4 quarters, Tesla has generated $7 billion of free cash flow! Yowzers.
As an example of Tesla’s continuous focus on reducing operating costs and saving cash money, another chart shared earlier today shows how much Tesla has been reducing its reliance on manufacturing robots. (Ironic, eh? Just as it’s aiming to make leaps forward in general-AI robots, it is drastically cutting its use of robots.) As the chart above shows, as the company has opened new factories, it has dramatically reduced the number of body shop robots used to achieve one unit of manufacturing capacity. Even Tesla Model Y production in Austin and Berlin uses about half the number of robots per unit of manufacturing capacity as Tesla Model Y production in Fremont, California.
The reduction in manufacturing robots comes in large part from a shift to large castings. The colorful comparison above shows it well enough. The Austin-made Tesla Model Y has two pieces of metal where the Tesla Model 3 has 171 separate metal pieces welded together, cutting the number of welds by more than 1,600!
“This is a testament to our materials team and to a lot of casting technology. So, we’re really rethinking the whole way in which a car is made, and, yeah, it’s a gigantic improvement,” Elon said.
“[Going from] Model 3, we’re at about 30% of the robots used for Model 3 — a current Model Y.”
“We’ve also improved the layout of he factory. So, the factory is close to a single monolithic factory with a straightforward flow. […] We do a lot in Fremont, but the flow is complex, and it’s not an easy flow. So, we’re really rethinking the factory. Like, the really long-term sustainable advantage of Tesla will be manufacturing.”
There’s much more to how Tesla keeps improving its operating margin, but the above points are a few highlights showing how manufacturing innovation has created this now industry-leading >15% operating margin.
All images courtesy of Tesla.
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