How Does Tesla Make Money? Business Model of Tesla


How Does Tesla Make Money

Tesla is one of the most popular electric vehicle manufacturers in the world. However, unlike other vehicle manufacturers, Tesla has expanded into non-automotive sectors.

Tesla primarily makes money by manufacturing, selling, and leasing electric vehicles. However, it also makes money selling buyers software-locked capabilities on its cars, selling carbon credits to auto companies, and selling energy generation and storage systems.

Tesla Motors was founded in 2003 by Martin Eberhard and Marc Tarpenning. After a lawsuit in 2009, Elon Musk, JB Straubel, and Ian Wright were also recognized as co-founders.[1] Elon Musk is currently the CEO and face of Tesla.

The company draws its name from the famed electrical-mechanical engineer and inventor, Nikola Tesla. Tesla’s experiments with electricity contributed to the development of alternating current electricity supply systems and multiple fields of engineering. The company regards itself as a modern torchbearer of Tesla’s commitment to innovation in the domain of energy systems.

Tesla (TSLA) currently trades on NASDAQ after going public with a successful IPO in 2010.[2]

What is Tesla & How Does It Work?

Tesla is a manufacturing company best known for making and selling electric vehicles. However, Tesla also has a number of other business divisions. For example, they create monocrystalline solar panels, solar inverters, and solar batteries for home use.

Tesla currently sells four car models. These include the a five-door liftback sedan called Model S, a mid-size crossover SUV called Model X, a four-door fastback sedan called Model 3, and a compact crossover utility vehicle called Model Y.

However, Tesla also has three new models in preparation: a second generation version of Tesla’s discontinued sportcar called the Roadster, a Class 8 semi-trailer truck called Tesla Semi, and a pickup truck called Cybertruck.

Each Tesla model also can be ordered in many versions. Buyers can choose their car’s energy capacity, motor size, motor power, and equipment. The most affordable Tesla vehicle is the Model 3, which starts at $45,000 USD. The Roadster and Tesla Semi are projected to sell for well over $200,000 USD.[3]

Tesla is known for their distinctive door designs. They sometimes open vertically like on the Model 3 or in a way that resembles arched falcon wings like on the Model X.

All Tesla cars also come with a computer interface informing you of the performance of your car and allowing you to control its performance. Tesla vehicles have software-locked capacities. These can be unlocked for additional fees to get a performance boost. Where other car makers who have software capabilities will typically release new software only with the release of a new car model, Tesla regularly releases software updates for all its models.

Tesla uses distinctive materials in the production of their cars. For example, the chassis of Models S and X are made of aluminum rather than steel. Aluminum was chosen for its lighter weight, to compensate for the heft of the electric battery, and for the material’s strength.

Because aluminum is an expensive manufacturing material, Tesla pivoted to an aluminum-steel blend chassis for its more affordable Model 3.[4]

Some buyers have had safety concerns with Tesla vehicles. Tesla batteries are made largely of lithium, which, unless carefully handled, can burst into flames. Probably because of this, Tesla cars have, on rare occasions, spontaneously combusted.

The fires can be hard to fully extinguish because residual heat causes the battery to continuously reignite even after the flame is put out. In June 2022, after a parked Model S spontaneously combusted, firefighters resorted to submerging a re-combusting Tesla in a pool of water to completely put out the flames.[5]

Others have had safety concerns about the inability to open the car door from inside without a properly functioning electronic door locking system. This requires passengers to shatter the window or windshield to exit the car if the software malfunctions or power is lost.

In May 2022, a Vancouver man narrowly escaped death when his brand new Model Y spontaneously lost power and caught fire while he was driving it, trapping him inside the burning car.[6]

Another safety-related controversy centers on Tesla’s Driver-Assist systems. In 2020, carmakers were required to start reporting accidents related to driver-assist technologies. Tesla’s partially automated Autopilot system accounted for around 70% of such crashes in America, including numerous fatalities.[7]

In light of such accidents, Michael Brooks, acting executive director of the non-profit Center for Auto Safety, has called on the National Highway Traffic Safety Administration (NHTSA) to recall Tesla’s Autopilot system.[8] NHTSA has responded with an increased investigation of such incidents, but to date has not taken action.

Given this, some feel nervous about Musk’s continued commitment to releasing the Tesla Fully Self-Driving Car.[9] In January 2022, Musk stated that the FSD Beta model hasn’t been in an accident since October 2020. In May 2022, Musk declared the FSD would be on the market by May 2023.[10]

Some dispute Musk’s claim that FSD is nearly ready for the road. For example, safety engineer and secure software specialist, Dan Dawn, called Tesla’s FSD Beta “the worst commercial software I have ever seen.”[11] He has provided apparent evidence of Tesla’s FSD Beta cars failing simple tasks like avoiding running over a mannequin child. With consumer rights activists like Ralph Nader, Dawn is campaigning for politicians to immediately create regulations on all autonomous devices that include mandatory safety tests.[12]

Concerns have also been raised about the vulnerability of Tesla car software to hacking. Some Tesla car owners already exploit these vulnerabilities by hacking into their own car to unlock the software-protected capacities without paying Tesla’s unlocking fees.[13]

If FSD cars are just around the corner, this has some worries. Without effective cybersecurity, they worry that hostile agents could hack into a car’s operating system and remove control of the car from the driver.[14]

In 2015, Tesla opened Tesla Energy. This is a subsidiary branch of the company manufacturing clean energy generation and storage systems.

Tesla Energy has three main product lines:

  • They sell solar energy generation systems including Tesla Solar Panels, Tesla Solar Roofs, and Tesla Solar Inverters.
  • They also sell energy storage systems including the Tesla Powerwall and the Tesla Megapack.
  • Finally, they sell a Virtual Power Plan software program to manage solar installations. These are used in homes, businesses, and even whole communities.

 

Business Model of Tesla

Tesla is a manufacturer that began offering pre-ordered cars. At the time, pre-ordering cars was a unique business model in the automotive sector. This is generally not a profitable model for the sector unless it is targeted at wealthy customers, which Tesla vehicles traditionally were.

However, even after Tesla’s introduction of cheaper vehicles like the Model 3 there was significant demand and long waitlists. This helped generate interest in their cars and gave the company great PR.

Over the years, Tesla has been able to catch up with the demand. However, they still sell cars via an order process. One benefit of this model for Tesla is that when they create a vehicle, they know the vehicle is sold, and they even have a $250 deposit on that car.[15] Therefore, the time between production and payment is shortened. That reduces their capital costs compared to traditional automotive companies.

From the consumer perspective, the order process might be a downside. Rather than being able to drive away with a new car from the lot the day you pay, you have to wait months for your preordered car to be manufactured and shipped.

The pre-order model touches on another unique feature of Tesla’s business model, which is their small dealerships. Because vehicles are preordered, a Tesla dealership doesn’t have many cars on its lot. This is smart from a business perspective because land is traditionally a significant expense for traditional dealerships. With fewer cars on their lots, Tesla requires far less real estate to make sales.

Tesla’s business model is also unique in offering in-car ‘performance boosts.’ These are upgrades to your car which you access for additional fees. The fees for these upgrades can be significant. Tesla charges as much as $10,000 for a single additional capacity.

One area where Tesla has struggled in recent years is in preventing car-owners from hacking into their own cars to upgrade the system without paying Tesla’s fees.[16] As more customers learn how to do this, the company will see some of their performance boost revenue evaporate.

Another interesting feature of Tesla’s business model was their acceptance of Bitcoin and other forms of cryptocurrency as payment. This attracted wealthy customers who are Bitcoin enthusiasts. However, it has also put the company at risk of fluctuations in the cryptocurrency market.

This has benefited the company by allowing them to profit like they did in July 2022 when Tesla booked a $64 million profit from its sales of Bitcoin.[17] However, the value of the Bitcoin the company held had gone down $500 million in total from its height.[18] Currently, Tesla only accepts Dogecoin.[19]

Tesla is unusual among vehicle manufacturers in offering services unconnected to cars, like solar energy generation and storage. Having developed an original battery design for their vehicles, Tesla was able to monetize the design for other uses such as home electricity.

That’s an uncommon revenue stream for a car company to develop. For that reason, Tesla often tried to talk about itself as a clean energy company rather than an automotive company.

Despite having expanded beyond the auto sector into the energy and battery manufacturing, Tesla continues to partner with Panasonic to manufacture Tesla’s lithium-ion car batteries. However, in 2020, Musk announced an ambitious plan to halve the costs of vehicle production by mass-producing its own car batteries without Panasonic.[20] They hope to eventually outcompete Panasonic and other battery companies.

Tesla offers somewhat more expensive electric vehicles than other auto manufacturers that are pivoting to electric including General Motors and Volkswagen. Whether Tesla will maintain its dominant spot as an electric vehicle manufacturer may depend on Musk’s plan to independently produce its own car batteries.

It remains to be seen whether Tesla will meet its goals in this area, though they currently don’t seem to be on track to doing so.[21]

Despite bringing in a considerable amount of revenue during 2021, the company had significant research and development, administrative, manufacturing, and materials costs. The company generated $44 billion in revenue that year but only had net income of $5.6 billion.

This, however, was a significant improvement over 2020 when the company made just $862 million and 2019 when the company lost $775 million. Despite being in a sector with significant expenses, the company seems to be rapidly and consistently improving their revenue.

 

How Does Tesla Make Money?

Tesla makes money in four ways. These are from selling and leasing vehicles, selling performance boosts, selling energy systems, and selling carbon credits to other automakers.

Selling and Leasing Vehicles

Tesla historically made the bulk of its income selling and leasing vehicles. However, in 2021, there were reports that Tesla had begun losing money from sales and leases of vehicles in 2020.[22]

But that problem seems to have been fixed as Tesla did unexpectedly well in auto sales in 2021.[23] In 2021, the company made $44.1 billion in auto sales and $1.6 billion in auto leasing against costs of $32 billion for car sales and $978 million for car leases respectively.

This was an improvement over the company’s 2020 results. That year the automaker sold $24 billion in cars and made $1 billion on car leases against cost of $19.6 for car sales and $563 million for car leases.[24]

While Tesla’s auto sales have traditionally been within America, in 2021 Tesla successfully expanded into international markets. The company saw a significant increase in sales in China.

Beyond selling its clean energy products, Tesla makes a substantial profit selling carbon credits to other auto companies who failed to meet government regulations on selling electric vehicles. This has been an important source of income for Tesla in recent years, and according to some reports its primary source.[25]

 

Performance Boosts

Tesla charges car buyers for what it calls performance boosts. These are capabilities or software upgrades to their car that buyers pay a one-time post-purchase fee to access. Tesla’s onboard software blocks those capabilities from the customer unless they pay for them.

These performance boosts are not cheap. They are generally a few thousand dollars each and can unlock significant engine performance improvements.

Tesla does not share in their annual report how much they make from these after-market upgrades. However, there is an underground community around Tesla owners teaching each other how to hack their cars to get these upgrades for free.[26]

energy system sales (e.g., its solar panels and home battery systems) account for only about 5% of Tesla’s total revenues. Tesla has never made income from these sales. In fact, they lose income from it. Tesla’s strategy with energy system sales appears to be a long-term one.

 

Energy Systems

Tesla opened its Tesla Energy in 2015. They sell energy generation systems, energy storage systems and software programs for managing solar installations for homes, businesses, and communities.

Tesla’s energy system sales accounted for only about $2.7 billion of Tesla’s total revenues in 2021. However, the company spent $2.9 billion on that division that year. Tesla has yet to make income from its energy division.[27]

Tesla’s strategy with energy system sales appears to be a long-term one. They are likely investing in expanding to new markets.

 

Carbon Credits

Beyond selling its clean energy products, Tesla makes a substantial profit selling carbon credits to other auto companies who failed to meet US state government regulations requiring them to sell a certain proportion of electric vehicles.

As these car companies are not meeting their quotas themselves, many have been buying carbon credits from Tesla. This has been an important source of income for Tesla in recent years. In fact, without the income from carbon credits the company would have struggled in recent years.

In 2019, the company received $594 million in automotive regulatory credit revenue and still lost $775 million. In 2020, the company received $1.5 billion in regulatory credit revenue and made a profit of $862 million.[28] Without that income, Tesla wouldn’t have been profitable that year.

The company didn’t rely so heavily on carbon credits in 2021. They only brought in $1.4 billion in carbon credits and made a net income of $5.6 billion.[29]

 

Tesla Funding, Valuation & Revenue

Tesla (TSLA) is currently a public company trading on the NASDAQ. The company went public in 2011 with a successful IPO.[30] Its shares debuted at $4.92 but in August 2022 they had skyrocketed up to $908 per share. That gave the company a valuation of $949 billion.

Prior to going public, Tesla had raised $20.2 billion in venture capital funding during 38 funding rounds. Notable investors include Soros Fund Management and Industrial and Commercial Bank of China.[31]

Tesla has made good progress in increasing its revenue and profit in recent years. In 2021, the company generated $44 billion in revenue with a net income of $5.6 billion. That was up considerably from 2020 when the company had a net income of just $862 million and 2019 when Tesla lost $775 million.[32]

YearTotal RevenueNet Income
2019$24.5 billion($775 million)
2020$31.5 billion$862 million
2021$53.8 billion$5.6 billion

 

Is Tesla Profitable?

Tesla achieved profitability in 2020. The company made a profit of $862 million that year and a profit of $5.6 billion in 2021.

The company seems to be steadily increasing its revenue and profit. However, Tesla is currently making big infrastructure investments in its battery plants. It has also yet to make a profit from its Tesla Energy division.

 

Conclusion

Tesla is a company that has been in the news practically since its inception, and the reason for that is simple: it’s doing things differently.

Tesla has been a leader in the electric car industry, and it has made great strides to increase its market share in the past few years. The company has done so by offering a quality product at an affordable price.

Tesla’s business model is one that is both unique and innovative, and while they have had their ups and downs over the years, they remain committed to both their vision.

Tesla’s current business model is based on selling electric cars directly to consumers through company-owned stores and online rather than through traditional dealerships. This allows them to keep costs down for their customers while also making sure they get all their money from each sale instead of paying commissions to other companies or individuals who might not have their best interests at heart.

The company also offers financing options for those who do not have enough money upfront but still want something new and exciting under their hoods!

It’s important to note that every business has its own intricacies that determine how it should be run. What works for one business might not work well for others. That being said, Tesla is a great example of a company that is changing the auto industry through innovation — and with great results!

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