Tesla Business Model – How does Tesla Make Money

Tesla is the most popular American all-electric cars and clean energy company based in Palo Alto, California. It is the most successful electric vehicle manufacturing company and a luxury brand that is also available in mid-price. 

In 2003, Elon Musk co-founded Tesla along with Marc Tarpenning, Martin Eberhand, Ian Wright, JB Straubel. Tesla, that is mostly known as an electric cars company, is quite more than that. It is a lifestyle, energy and automotive company that is working for the future of the world. Currently, it sells majorly in the US, Europe and China. The company reported rapid growth in China.

With the mission to help people over the world drive electric cars, the company produced multiple cars that made history. The company surpassed the “1 million mark of electric cars produced” in 2020. Also, the company is experiencing profits consecutively fifth time in financial quarters posting $331 million profits. The company is valued around $208 billion in the latest stocks in 2020.

Short History of Tesla

The shifting customer needs, technology advancements, new regulations on safety and vehicle emissions lead to increase in demand for electric cars. Hence, this all-electric cars company took over the lead. 

Tesla was founded on July 1, 2003 as Tesla Motors by Marc Tarpenning and Martin Eberhard. When Eberhard said he wanted to build a car manufacturer company that is also a technology company, they went public and raised $7.5 million in Series A funding in 2004 after Ian Wright joined the team. Elon Musk became the part of Tesla after he contributed $6.5 million in the funding. Thus, a couple of years after he sold PayPal, Musk joined Tesla. Later, Straubel joined Tesla, Musk became chairman of the board of directors and Eberhard became CEO of the company.

Since then Tesla was producing cars that made the world look at those. Though the company struggled with losses continuously in terms for years, it never looked back and always created hope. Not to mention, all credits to its business strategies by Musk. Musk is actively involved in designing, manufacturing and business strategies from the beginning. Also, you can’t deny one of the reasons for Tesla’s popularity is the brand image of Musk.

Coming back, as said Tesla has successful business strategies, let us have a look at them in the business model section below and let us also delve into how it makes money.

Key Products of Tesla

  • Model S – The best-selling plug-in electric car with 250,000 units global sales (as of 2018) after Nissan Leaf
  • Model 3 – All-time best selling electric car surpassing Nissan Leaf with over 500,000 units sold by March 2020
  • Model X – Mid-size crossover SUV. A not-cheap but not-a-conventional-SUV launched in 2015
  • Model Y – Started delivering from March 13, 2020
  • Roadster – Sports car which was in production from 2008 to 2012
  • Tesla Semi – All-electric Class 8 semi-trailer truck to be started delivering from 2021
  • Cybertruck – Will be delivered in 2020-2021

The newer version of Tesla Roadster and a car cheaper than Model 3 are yet to come in the future.

Key Highlights

Its brand, reputation, customer service and its network of charging stations are the key highlights of the company.

Brand: The brand that is mostly known for Elon Musk. Luxury, and high-quality are what it offers.

Customer Service: A unique self-service website for customers to design their own car, friendly rapport with customers to improve the product design and user experience.

Reputation: The good reputation of the company in terms of both efficiency and finances attract investors.

Charging stations network: The company initiated charging stations across the world for refueling and increasing the adaptability of electric cars. The app system in Tesla vehicles locate nearby charging stations.

Business Model of Tesla

The business model of Tesla is quite unique. Though Tesla didn’t make the first electric car, you have to admit that it is the reason why electric cars are hugely popular today. In fact, it’s mission is so powerful that it’s going to create a great impact in the automotive industry as well as the tech industry. Same as Musk’s SpaceX is doing currently in the space industry.

Read: SpaceX Business Model: How SpaceX makes money

The founders started Tesla with the mission of bringing the most compelling electric cars to the mass market, so that people can enjoy driving electric cars.

Luxury Cars

With such a beautiful mission that led to a successful business model, Tesla didn’t release the mass electric cars first. It initially delivered a luxury electric sports car, Roadster. The reason behind is understandable in Elon Musk’s statement “That was impossible to [release mass electric cars] for a startup company that had never built a car and that had one technology iteration and no economies of scale. Our first product was going to be expensive no matter what it looked like, so we decided to build a sports car, as that seemed like it has the best chance of being competitive with its gasoline alternatives.

Hence, the company sold nearly 2500 Roadster cars by January 2012 (before ending the production).

Moreover, that was their business strategy as producing sports cars first generated revenue for the company to manufacture the mass electric cars.

Network of Charging Stations

Building a network of charging stations all over the world is its next strategy as refueling is the major obstacle in adoption of electric cars. However, it has built 16,103 Superchargers in 1,826 stations worldwide. It operates 908 stations in the US, 520 in Europe, 398 in Asia, 98 in Canada, and 16 in Mexico. Thus it is growing the network gradually to ease refueling and also as a strategy to drive people’s minds towards electric cars.

Control over Sales

Tesla sells its cars directly to the customers through their website, showrooms or service centers managed by Tesla staff. Through the website, the company lets customers customize their car design. Also, they eliminate dealerships in between them and customers. Thus they are able to stay closer to their customers and also control the sales, which is an underrated business strategy.

Tesla’s business model is unique (as said above) as it has complete control over all sales and services unlike other car companies. In fact, this is the reason for its raising stocks after the IPO.

The company stands out from its competitors in the industry in terms of financial ratios too. It is similar to that of companies in the tech sector as investors believe in future earnings despite losses.

Moreover, Tesla does manufacture cars but not every part of the car. Yes, you have heard it right!

It gets original equipment (all other hardware other than battery, charger and electric motor) from Toyota, Osaka and Daimler.

It also partners with other companies for research and development and other missions whenever required.

Tesla only manufactures battery, charger, electric motor and completely works on software and design of the cars.

What goes into Tesla’s Products?

Electrical vehicle superior knowledge, battery system, cooling system, automation, big data technologies. It majorly invests in marketing and distribution

Costs & Expenses

As a technology based car manufacturer, Tesla incurs many expenses. However, as it buys equipment from other suppliers, the costs are improved to at least some extent. It only bears material cost, manufacturing cost, labour, research and development cost, selling and administrative cost, restructuring, general costs, taxes and other costs.

How Tesla Makes Money?

Now comes the interesting part – how does this innovative all-electric car and solar energy company make money.

Tesla generates money in two ways.

Automotive Segment 

This includes selling vehicles, leasing services, access to charging stations, software updates and other services. As aforementioned, the company avoids dealerships and sells cars, offers services, software updates directly to customers either online or in its service centers. Thus it avoids middlemen costs whilst also avoiding gaps between company and customers.

In addition, the company manufactures luxury sports cars, mid-price cars and also trucks for commercial purposes. That being said, Tesla has delivered thousands of cars till date which made a major revenue and has over 650,000 pre orders of Cybertrucks alone. UPS already reserved over 125 Semi-trucks. Thus, it is clear that Tesla cars and trucks make a major contribution to its revenue.

Moreover, Tesla alike other traditional car companies leases vehicles, gives loans and bags interests.

The automotive segment makes over 94% of total revenue and 98% gross profit.

Read: PayPal Business Model here

Solar Energy System

This includes construction, sales and storage of solar energy systems. Tesla produces home batteries, power wall, solar panels, solar roofing etc. It sells the products for cheap and yet makes profits. The system powered by Solar energy makes 2% of gross profit.

As Tesla is associated with electric cars that not only benefit people but also the earth, it receives some benefits from the US Government.

Government funds Tesla for some of its projects like electric train manufacturing and also offers tax incentives.

The best part is Tesla, though struggled to earn profit in the last five fiscal years, it recently posted profits in the last four quarters. It posted $331 million of net income in Q3 2020, thus hitting the milestone of profits in the fifth consecutive quarter.

Finally, Tesla’s customers are the main revenue generators. Wondering who its customers are.

Who are its customers?

  • Luxury car lovers
  • Commercial uses such as for transport or shipping business
  • Fans of sports cars
  • People who prefer Self-driving and green community

Final Thoughts

So, this is how Tesla makes money. It makes money in the same way other companies make, but it’s strategies and business model is incomparable. In fact, that is the reason why investors show interest in the company despite it experiencing losses previously. 

In contrast, the situation is changing, the company has seen profits for the fifth time consecutively this year. Moreover, no matter what, it maintains a good relationship with customers to seek customer feedback and provides better experience. Also, it constantly works on software development, designs to deliver the best products.

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