In an article that quickly received significant attention, Reuters reported that Tesla loses more than $4,000 on every Model S it sells. Bad news generates views, so other outlets were quick to run with the story. It is, after all, a juicy story to run.
Considering that Tesla only sells a single model, if it were really losing $4,000 on every single car it sold, the company would be in serious trouble and probably headed for even more bad news. After all, when a company loses money on every unit it sells, there’s no way to make a profit, and eventually the company goes bankrupt. It’s proof of a bad business model, and for the Americans who think an electric car company is automatically a bad business model, seeing Tesla go under would further reinforce their beliefs.
The thing is, though, when you dig a little deeper into the Reuters article, the reality of Tesla’s situation is much less dire than the headline would have you believe.
First, you have to look at where the statistic in question came from. It was calculated using Tesla’s reported operating losses from the last quarter – $47 million. Divide that operating loss by the 11,532 vehicles the company delivered during the quarter, and you get approximately a $4,000 loss per vehicle.
If Tesla kept that practice up over the long run, it would obviously be a bad thing because it’s spending more money than it’s bringing in, but so far, there’s no evidence to support the idea that the Model S is being sold for less than it costs to make. We don’t know exactly how much Tesla makes per car, but we have every reason to believe the Model S is sold at a profit.
Elon Musk knows he can’t build a successful company on the back of a single model, though, so he has Tesla gearing up to begin production of the Model X, a crossover SUV, this quarter. The more-affordable Tesla Model 3 sedan is also in the early stages of design and development.
In order to sell the Model X, Tesla has to have somewhere to assemble it, but it can’t stop making the Model S to do so. A large company like Ford or General Motors has more of an ability to retool an already existing factory to build a new car, but the production lines for the Model X have to be all new, and that costs a lot of money.
Investing in new product lines is smart spending because the company will probably make quite a lot of money on the Model X, but that revenue is all in the future, while the cost of prepping the factory for production had to be paid upfront. Unfortunately for Tesla, the cost of bringing a new vehicle to market is somewhere around $1 billion, whether the company doing so is big or small. GM has plenty of cash on hand to cover that, but for the much smaller Tesla, covering those costs is going to require a larger percentage of its cash piles.
There’s also an additional cost for Tesla: Unlike most of GM’s vehicles, Teslas run on electricity that has to be stored in batteries, and in order to meet that need for batteries, Tesla has had to invest in getting its battery-producing “gigafactory” up and running. That factory is essential, mostly because the economy of scale it will provide will be the only way Tesla can get the cost of the Model 3 down low enough to meet its $35,000 price goal.
You can’t deny that Tesla has several major obstacles to overcome in the next two years, and it doesn’t have the cash on hand to continue spending more than it makes in the long run. But at the same time, Tesla is still a relative infant in the auto industry. It has to fill out its lineup, build its production facilities, and continue investing in research and development. It’s an expensive process, but the fact that it’s going through that process doesn’t mean there’s any reason to panic.
Yes, Tesla reported an operating loss last quarter, and yes it spend $359 million of its cash reserves, but the company isn’t losing $4,000 on every single car it sells. That would be a misrepresentation of the facts.
If you want to look for a predictor of how Tesla will do in the future, keep an eye on how the launch of the Model X goes. If everything goes smoothly, and if the Model X ends up being as popular or more popular than the Model S, then it will probably at least stay stable until it’s time to launch the Model 3. If the Model X is a flop for Tesla, though, then it might be time to panic.
Until then, there’s no reason to believe the sky is falling.