If you keep up with the auto industry, you have already seen many headlines stating that Tesla Motors loses $4,000 on each Model S it sells.
So... Tesla sells a Model S for $70,000, when it costs $74,000 to manufacture?
Technically – yes.
But the number is largely misleading, and I’ll explain why.
Tesla released its second-quarter earnings, reporting:
- $47 million in operating losses
- 11,532 cars sold
Simple division ($47 million / 11,000 cars) gets us the headlined $4,000 loss per car.
But that doesn’t exactly make sense.
Not all of the $47 million lost were spent on building and distribution Model S vehicles.
And for added credibility, I’ll quote Reuters:
Automakers consume cash to pay for assembly line equipment, including metal dies and plastic molds, as well as testing to meet safety and emissions standards. A typical new car can cost $1 billion or more to engineer and bring to market.
Reuters also said:
[Tesla] said it plans $1.5 billion in capital spending this year, mainly to launch its Model X, battery powered sport utility vehicle with eye-catching, vertical-opening 'falcon wing' doors. Tesla reported $831 million in capital spending during the first half of the year, indicating it will spend roughly another $700 million.
To paraphrase, a good chunk of the $47 million loss was invested in the company’s future.
Tesla spent $360 million last quarter alone on developing its Gigafactory and on preparing the production of its Model X.
If we look in the past, we can actually observe the same misleading math hit the headlines when Chevy released its Volt. Some articles went as far out as to report that each Chevy Volt cost the company $250,000 in production costs, after which the number dropped to $80,000.
And why were these ludicrous numbers reported in the first place?
Hey - it’s great for headlines.
Automakers would never reveal the actual cost of manufacturing a vehicle.
The bottom line is that Tesla is not making a profit on each Model S it sells.
But it’s also not losing $4,000/car.
The truth is somewhere in the middle.
And if I ever get a look at Tesla’s account books – I’ll let you know.