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. Daimler in third place with 10% is not even close!

Get down to Honda, Hyundai, Nissan, Toyota and Volkswagen and it’s a different world.

Related to money is energy consumption, and one more thing Elon Musk pointed out at the shareholder meeting was that energy consumption per vehicle produced has decreased – reducing emissions and saving money at the same time. From Tesla’s factory in California to the factory in Shanghai, the company has achieved a 17% reduction in energy consumption per vehicle.

The record operating margin helps the company achieve large and growing cumulative profitability. It may have been a difficult decade in Tesla’s accounting office leading into 2018 and 2019, but when Tesla flipped the script, cumulative profitability jumped relatively quickly. Elon’s joke today was, “And I think, um, it’s going to go up from here.”

Perhaps an easier way to look at this shift is in 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 nearly breaking even in 2018, to making a billion dollars in 2019, to making almost $3 billion in 2020, and so on. In the last 4 quarters, Tesla has generated $7 billion in free cash flow! Yowzers.

As an example of Tesla’s continuous focus on reducing operating costs and saving money, another chart shared earlier today shows how much Tesla has reduced its reliance on manufacturing robots. (Ironic, isn’t it? Just as it aims to make leaps forward in general AI robots, it’s drastically cutting back on the use of robots.) As the chart above shows, as the company has opened new factories , dramatically reduced the number of workshop robots used to achieve one unit’s production capacity. Even Tesla Model Y production in Austin and Berlin uses about half the number of robots per production capacity unit as Tesla Model Y production in Fremont, California.

The reduction in manufacturing robots comes largely 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 pieces of metal welded together, reducing the number of welds by more than 1,600!

“This is a testament to our materials team and a lot of molding technology. So we’re really rethinking the whole way a car is made, and yes, it’s a giant improvement,” Elon said.

“[Going from] Model 3, we’re about 30% of the robots used for Model 3 — a current Model Y.”

“We have also improved the layout of the 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 real long-term sustainable advantage of Tesla will be the production.”

There is much more to how Tesla continues to improve its operating margin, but the points above are a few highlights that show how manufacturing innovation has created this now industry-leading operating margin of >15%.

All images courtesy of Tesla.


 

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