January 12th, 2019 by Zachary Shahan
Twitter user @ElonMuskScience created an interesting chart last year based on Tesla financial data and shared it with us.
I thought it was fascinating and worth a long story, but we never got around to diving deeply into the topic (well, I mean, since Maarten did back in May). But the time has come. Here we go!
This was the original tweet:
/ @Tesla / Q3 2018 📊
as predicted this month, the ramp up cycle is closed with a decent profit as it was in the last 2 cycles. Notably the ramp up cycles have shortened each time.$TSLA #TESLA @cleantechnica @Teslarati @ValueAnalyst1 @InsideEVs @teslanomicsco @vijaygovindan17 pic.twitter.com/0iySYOascV
— ElonMuskScience (@ElonMuskScience) October 24, 2018
And here’s a newer one:
Updated Tesla profit chart from Q1-2009 to Q4-2018 (est.). A exp. curve is forming. Tesla focus on efficiency gains leading to higher product profit margins. /W every profitable Q cash reserve grows & enough for future product ramps going forward. $TSLA $TSLAQ #TESLA #EMScience pic.twitter.com/AMYhqMMa8m
— ElonMuskScience (@ElonMuskScience) November 9, 2018
One basic point which all of the financial press seemed to ignore in 2018 is that it takes time to get a new product — especially something as complicated and costly as a car — through the production ramp and to profitability, but that doesn’t mean the whole business model is financially unsustainable. It just means that it takes time to make money on a new product.
Of course, professionals in the financial press have to know this — yet they continually ignored the point while covering Tesla and acting as though it could never make money and was essentially just a clever Ponzi scheme.
Just because Tesla was spending a lot of money on new products didn’t mean those products wouldn’t make the company a net profit eventually. That’s what we tried to explain over and over in 2018 when so much of the media was forecasting Tesla’s doom.
Anyhow, that’s the basic point you can take away from the charts above, but there’s a more interesting point highlighted by @ElonMuskScience here. That point is that the development cycle for Tesla vehicles — from initial development stages to actually making the company money — has been getting shorter and shorter.
“Ramp 1” in each of the charts represents the Tesla Model S’s path from its early stages of development to company profits. “Ramp 2” covers essentially the same cycle for the Tesla Model X, but that one comes in at 42 months instead of 51 months. (Note that both timeframes are quite short compared to normal vehicle development in the auto industry.)
The Tesla Model 3’s ramp — “Ramp 3” — showed a big reduction in the timeline, though, cutting the period down to just 24 months!
As you can see in the second chart, it also led to soaring profits. (Selling 63,000 cars a quarter at an average selling price over $50,000 = a lot of revenue.)
Of course, there’s development of the models that goes on before the ramp timeframes shown. Nonetheless, it is clear that Tesla has gotten much quicker at completing the process between showing a prototype and making money (in net) on that model.
What about going forward? The Tesla Model Y is supposed to be shown in the middle of March. It is supposed to go into production in China in 2020. And perhaps earlier in the US? Will it be approximately 2 years from the time the Model Y is shown and it is delivering a cumulative net profit for Tesla? Will it be 18 months?
We don’t actually have precise data to measure any this, as Tesla doesn’t break out costs and revenue by model in such a way. Historically, @ElonMuskScience and others have basically tracked the results based on overall company costs & revenue — as you can see above — but we won’t even have that method going forward, as Elon Musk expects the revenue from Tesla’s Model 3, Model S, and Model X will be enough to fund new product development & production ramps while maintaining a company profit.
The whole thing is pretty amazing when you step back and look at it. Tens of thousands of Tesla employees made magic happen by somehow bringing product after product to market, selling these through new sales channels for the auto industry, rising from a few hundred cars a quarter to nearly 100,000 cars a quarter in just ~6 years, and scaling up requisite manufacturing, service, supercharging, and sales networks all along the way.
You can see why so many in the auto world and financial world didn’t expect Tesla to succeed. Making it through one humongous product ramp was a challenge, making it through another one was another challenge, and making it through a super rapid and high-volume third one was yet another daunting challenge. If any of those product ramps went too badly — in terms of production or consumer demand — Tesla would have crashed into a deep crater of debt.
But it didn’t.
There were signs and historical precedence along the way to presume that Tesla would pull through. Nonetheless, Tesla had a seemingly unprecedented level of skepticism thrown its way, winning the title of most shorted company on the US stock market for much of 2018.
Now the company is employing 45,000 people and counting, and it appears to be in a very different period of its corporate life. There should be no more “bet the company” trials, as the real Elon Musk put it. The Model Y ramp, Tesla Semi ramp, and Tesla electric pickup truck ramp, while not walks in the park, should be easier to manage and fund thanks to lessons learned from the production ramps of the S-3-X model lineup. The revenue flowing into Tesla’s piggy bank from those pillar products should help as well.
That said, stay tuned — there could always be life-threatening challenges around the corner, and Tesla short sellers accounting for billions of dollars of bets against the company will be sure to notify us of any forming (or imaginary) thorns and stumbles.
To wrap up, I’ll return to comments Maarten made in 2018 in a handful of articles aiming to shed bright lights on Tesla’s present and future when so many people were focused on the darkness:
Early May: “It was my impression that the original plan for the Model 3 was self-financing through a slow ramp and incremental building of the assembly line. The number of reservations changed those plans. Tesla accelerated the development of the car and design of the production and shortened the ramp by a whole year. … I have a very strong impression that Tesla is only looking at self-financing for its future products and factories.”
Middle of May: “The long answer is in 3 fresh articles here on CleanTechnica. This first one examined the problems 450,000 Tesla Model 3 reservations created. In this second one, we have a long look at the profitability of Tesla products. We finish with the media madness about ‘Tesla Cash Burn.’ … But I think Tesla is secretly a potentially very profitable company. Or not so secretly, if you really pay attention to Tesla’s finances. …The only reason Tesla keeps reporting losses is because after launching each successful product, the next product is so much more ambitious that it can’t be financed out of the revenue streams of the company’s current products.
“To visualize this and make it easier to discuss, I have Tesla virtually split into separate companies, each providing a single product or service. Each company has its own financing, from sister companies or from the capital markets. Resources like design labs, research departments, specialized personnel, etc. are “sold” to sister companies for shares when no longer needed, mimicking the relationships between the parts of a consolidated company.”
Late May: “As usual, the rumors of Tesla’s demise are grossly exaggerated.”
Late May: “’Tesla bankwuptcy’ would perhaps be better termed ‘shorts losing their shirts.’ …
“As usual, the rumors of Tesla’s demise are grossly exaggerated. If you haven’t been fooled in the past 10 years, don’t start falling for the rumors now. ”
Indeed. Easier said now than in May of 2018. Kudos to Maarten for saying it then.
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