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Ford vs Tesla in Research and Development (R&D) Spending

Ford (NYSE:F) is one of the leading automakers not only in the United States but also in the world. As of 1Q 2020, Ford recorded a market share of 13.6% in North America, making it one of the largest automotive companies in North America aside from General Motors.

Being a major automotive player, Ford has spent considerably on research and development (R&D). The spending on R&D is considered necessary especially for a company like Ford when it is racing to develop the next generation of products such as a series of all-electric vehicles that the company is planning to roll out in the coming quarters in 2020.

In this article, we will explore Ford’s research and development expense and compare it with that of Tesla over a period of time. We are using Tesla’s research and development costs as the reference and see how big the difference is between the two companies.

As we all know, Ford has been in the automobile industry for over a couple of decades whereas Tesla is still a relatively new player. As a result, it’s interesting to see how far has Ford gone in terms of R&D spending when compared to a new player in the industry.

Please note that R&D cost, budget, expense, spending, etc are used interchangeably in this article and are meant the same.

So sit tight and read on to find out more about Ford’s R&D budget relative to that of Tesla.

Ford vs Tesla in R&D Spending

Ford R&D spending

Ford R&D spending

The chart above shows Ford and Tesla’s research and development costs or spending from 2013 to 2019 on an annual basis.

As the chart shows, Ford’s R&D expenditure has been ticking higher year over year since 2013, increasing from $6.2 billion in 2013 to $8.2 billion in 2018 before dropping 10% year over year to $7.4 billion in 2019.

The same goes for Tesla when the company’s R&D expenditure has increased year over year since 2013 and reached the highest at $1.46 billion in 2018 before lowering slightly to $1.34 billion in 2019.

From a comparison perspective, Ford’s research and development expense has been much higher than that of Tesla for the past 7 years. In fact, Ford’s R&D expense of $7.4 billion in 2019 was more than 5X higher than Tesla’s R&D expense of $1.34 billion in the same year.

While Ford’s R&D spending has been much higher all the while, the gap between both companies’ R&D spending has actually narrowed down significantly in recent years. If you have noticed, the gap in terms of R&D spending was much higher back in 2013. For instance, Ford’s research and development spending of $6.2 billion in 2013 was 27X higher than Tesla’s R&D costs of only $0.23 billion in the same year. However, the difference has reduced to only 5X in 2019.

In general, we can conclude that Tesla’s research and development spending has been fast catching up with that of major automobile players such as Ford and General Motors. At the same time, Ford’s expense in R&D has only increased minimally during the same period. This trend is sort of expected as Tesla is still a relatively new player in the automobile industry and research and development may be the only avenue for the company to get an edge over most of its competitors. That’s why we are seeing an increasing investment in R&D for the company over the years.

As such, it’s not surprising for Tesla to spend heavily on research and development in recent years so that the company can dominate the electric vehicle space now and in the future.

Ford and Tesla R&D Expenses Growth Rates

Ford R&D spending YoY growth rate

Ford R&D spending YoY growth rate

The chart above represents Ford vs Tesla in research and development expenses year over year (YoY) growth rate between 2014 and 2019.

As the chart shows, Ford’s R&D growth had been in the high single-digit between 2014 and 2017. However, the growth rate has dropped significantly since 2018 to low single-digit value of 2.5% and has even turned negative to -9.8% in 2019. On average, Ford’s R&D spending YoY growth rate for the past 7 years was around 3%. This average figure is not something out of expectation as Ford is already a mature auto manufacturing company and I would not expect the company’s R&D costs to increase substantially now and in the future.

When we look at Tesla’s R&D growth between 2014 and 2019, the respective YoY growth rates had been much higher from 2014 to 2017 when the reported figures had been in the high double digits. For example, Tesla’s spending in R&D between 2014 and 2017 had consistently achieved a minimum of 50% growth rate in 3 out of the 4-year period. However, Tesla’s R&D growth has slowed down considerably in 2018 to only 2.8% and the figure has even dropped to -8.2% in 2019 which means Tesla has actually reduced its R&D expense in 2019 compared to 2018.

While Tesla’s expense in research and development has slowed down in recent years, the company still managed to achieve an average figure of nearly 40% in R&D growth between 2013 and 2019.

In short, we have observed that both companies’s R&D spending has slowed down significantly in recent years, be it Tesla or Ford. We have seen that both companies’s R&D costs have increased between 2014 and 2017, albeit at a slower rate for Ford. The year of 2018 marked a turning point for both companies when Ford and Tesla have lowered their R&D costs substantially which has resulted in only single digit growth rates of 2.5% and 5.8% respectively.

By 2019, both companies, Ford and Tesla, have actually cut their research and development spending, resulting in YoY negative growth rate of -9.8% and -8.2% respectively.

In summary, the automobile industry must have been in pretty bad shape since 2018, causing major automakers such as Ford and Tesla, irrespective of new or established companies, to cut their research and development spending.

Ford and Tesla R&D Costs to Revenue Ratio

Ford ratio of R&D spending to revenue

Ford ratio of R&D spending to revenue

Looking at just the absolute value of the research and development costs alone does not tell us much about the budget or size of the R&D of the respective companies, whether Ford or Tesla. As such, we have to analyze the R&D expenses with respect to revenue in order to gauge the seriousness of the companies in allocating the much needed R&D spending.

With this said, I have created the chart above that illustrates Ford and Tesla’s R&D expenditure with respect to their annual revenues for the past 7 years.

Let’s first look at Ford’s ratio of R&D budget with respect to the company revenue. As the chart shows, Ford’s ratio has increased steadily from 2013 to 2018, albeit at a slower rate. Accordingly, Ford’s ratio has increased from 4.2% in 2013 to 5.1% in 2018 before lowering slightly to 4.7% in 2019. The result is pretty much consistent with what we saw in the chart of growth rates where Ford’s spending in research and development had been in the high single-digit growth rates between 2013 and 2017.

In short, Ford’s R&D budget with respect to total revenue averaged around 5% for the past 7 years which is quite reasonable considering that the automotive industry has been a slow growth industry and the technology hasn’t changed much for over a decade.

On the other side of the coin, we are seeing a much higher ratio for Tesla. Between 2013 and 2017, Tesla’s R&D budget with respect to revenue had been above 10% and even reached as high as 18% in 2015. However, the ratio had declined since 2015 and reached the lowest level at only 5.5% in 2019.

On average, Tesla’s R&D budget with respect to revenue totaled around 11% which was more than twice the ratio of Ford. In short, Tesla has spent twice as much as the budget of Ford on research and development with respect to revenue.

By 2019, we can see that Tesla’s ratio of R&D spending to revenue has declined significantly and approached that of Ford at the 5% level. In the coming quarters, if the automotive industry does not improve, I doubt that the research and development budget of both companies or even of the entire industry will improve to the level seen in 2018.

The low growth situation is further worsened by the COVID-19 outbreak in 2020 which has ravaged the entire automotive industry not only in the U.S. but also globally. As such, the R&D budget with respect to revenue for both Ford and Tesla should only decline further by the end of 2020.

Conclusion

To recap, we have seen that Ford’s research and development spending has been much higher than that of Tesla between 2013 and 2018. In 2013, Ford’s R&D expense was 25X higher than Tesla’s R&D expense but the ratio has narrowed down to only 5X difference in 2019, indicating that Tesla has been racing to close the gap in terms of R&D spending in order to get an edge over its competitors.

Both companies, Ford and Tesla have reported that their R&D expenditure was lower in 2019 compared to 2018 at $7.4 billion and $1.34 billion respectively, representing a year over year decline of -9.8% and -8.2% respectively for Ford and Tesla.

Tesla’s spending on R&D with respect to revenue ratio had been much higher between 2013 and 2017 but the ratio has declined to only single digit since 2018 and only 5.5% by 2019. At this ratio, Tesla was having the same R&D to revenue ratio with that of Ford, indicating that both companies were having roughly the same R&D budget relative to total revenues.

References and Credits

1. Financial figures and data in all charts in this article were obtained and referenced from financial statements available in Ford SEC Filings and Tesla Sec Filings.

2. Featured images in this article are used under creative commons license and sourced from the following websites: Ford Asia Pacific.

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