As Tesla raises prices, the company’s gross margin and profits are skyrocketing. The automaker blamed the price hike on rising costs. The company felt it was necessary to provide an explanation.
A market subject to strong tensions
Price increases have been one of the most significant developments in many sectors, including the automotive industry, in recent years.
Over the past two years, virtually every automaker has raised prices, including Tesla, which has done so nearly a dozen times. The automaker has repeatedly defended these price increases, pointing to rising inflation, driving up the cost of raw materials, and rapidly expanding logistics costs.
It is in this environment, during the last quarter, that Tesla recorded a record gross margin of 32.9%.
Why are Tesla’s margins higher?
Strong pricing power is one of the most likely and obvious causes of Tesla’s recent “outperformance” on this front. It is also one of the most obvious factors. Demand for its electric vehicles continues to exceed supply, indicating that customer interest in these vehicles is strong.
However, beyond that, Tesla’s operational efficiency and vertical integration may have played a key role. Avoiding the dealership model commonly used by traditional automakers, the company sells its automobiles directly to individual customers.
Calculated on a cost-per-car-sold basis, Tesla’s advertising spend for the year 2020 was less than a dollar per vehicle sold. By comparison, Ford’s ad spend for each vehicle sold in 2020 was $468, while General Motors’ ad spend was $394 per vehicle. The advertising budget for each automobile sold at Chrysler, which Stellantis owned, was $664.
For Tesla, priority to R&D
Tesla has prioritized spending large amounts of money on research and development, rather than fattening its marketing department.
The batteries are part of the vertical integration technique employed by Tesla. Although it manufactures some of its own, the company continues to source most of its components from outside suppliers.
However, it plans to continue to expand the capacity of its battery manufacturing plant and expects economies of scale to help it further reduce the prices of its products. In addition, it strives to improve its battery technology. The most recent models, the 4680 cells, are highlighted along three major axes, which are:
- their improved profitability,
- their ability to store even more energy,
- the greater autonomy they offer.
All these advantages should help the manufacturer to further lower the cost of manufacturing its vehicles.