It’s interesting to see how the automotive business of Tesla (NASDAQ: TSLA) stacks up against its bigger rival General Motors (NYSE: GM).
We know that Tesla is relatively new to the automotive industry and is a pure electric vehicle player.
On the other hand, General Motors or GM has already been in the automotive industry for more than several decades and has only jumped on the electric vehicle bandwagon as recently as a few years ago.
With both companies getting more and more ambitious in the automotive industry, I would like to see how both companies measure up to each other in terms of revenue and gross profitability despite the different business models adopted by each company.
With that said, Tesla is doing a retail-based business model, whereas GM’s business model is based on a wholesale concept.
Theoretically, I would expect Tesla’s gross margin to be worse than that of GM, considering the extra costs required to run its retail stores.
Let’s keep our fingers crossed at this point and read on to find out.
Automotive Revenue and Gross Margin
In this article, I am making a comparison of both automakers based on their automotive revenue and gross margin.
The automotive revenue measures only sales that come from automotive products, including sales of new and old vehicles as well as accessories and parts but excluding leasing revenue.
On the other hand, the gross margin is a profitability variable that produces the gross profit after deducting the costs of sales.
According to Investopedia, gross margin is a measurement of the efficiency of a company of utilizing its labors and raw materials in producing the goods.
Therefore, the more efficient a company uses its resources, the higher the gross margin the company can derive from the sales of the products since it can efficiently control the cost of manufacturing.
Aside from knowing the manufacturing efficiency, the gross margin also tells us about the pricing power of the products.
For example, we can have two companies producing goods at the same cost, but one company may have a more reliable brand which allows it to put a higher price tag on its products, thereby leading to a higher gross margin.
With that in context, we could find out a lot of information by just digging into the gross margin alone.
Let’s check them out!
Apple to Apple Comparison
Before we proceed further, I want to make it clear that I am comparing only the automotive sector of both companies.
Although Tesla and GM are major players in the automotive business, they have non-automotive business segments that contribute significant sales to the company revenue.
To do an apple to apple comparison, I need to exclude non-automotive revenue when comparing the automotive revenue and gross margin of both companies.
For GM, GM Financial is a business segment that provides automotive financing services and is not related to any of its car-making activities.
As such, I have excluded the portion of revenue related to GM Financial when measuring GM’s automotive revenue and gross margin in subsequent charts.
The following snapshot shows the portion of GM Financial in the income statement in which I have excluded in my calculation of automotive revenue and gross margin.
Tesla Energy and Leasing
Similarly, Tesla has non-automotive revenue which comes from the energy generation and storage products which I need to adjust when comparing the automotive revenue and gross margin with that of General Motors.
Also, Tesla’s automotive leasing revenue was excluded in the comparison.
The reason is that GM’s leasing revenue was classified as revenue generated under GM Financial and was not part of the automotive revenue as stated in its financial statements.
Therefore, I have stripped off leasing revenue from Tesla to do an apple to apple comparison with General Motors.
Tesla Regulatory Credits
The same goes for Tesla’s automotive regulatory credits which were also excluded when arriving at the final automotive revenue and gross margin.
Speaking of regulatory credits, General Motors does not have the privilege of selling any regulatory credits. The reason was that the company had not produced sufficient zero-emission vehicles to offset the emission that comes from fossil-fuel vehicles.
Again, I have stripped off Tesla’s regulatory credits revenue when measuring Tesla’s net automotive revenue and gross margin in order to compare the exact same numbers with that of GM.
Tesla Services and Other
You may have noticed that I did not exclude the “Services and Other” portion of revenue in Tesla.
Although this portion of revenue mainly relates to sales derived from repair and maintenance services, sales of car components as well as sales of used vehicles, it’s included as part of my measurement of automotive revenue and gross margin because General Motors has the same type of revenue segment in its automotive business.
The worst part is that GM had lumped this portion of revenue together with its automotive sector, which makes it difficult to exclude this portion of the revenue segment.
Here is an excerpt from GM financial statement regarding sales from “Services and Other” and “Used Vehicle”:
Proceeds from the auction of vehicles returned from daily rental car companies and vehicles utilized by our employees are recognized in Automotive net sales and revenue upon transfer of control of the vehicle to the customer and the related vehicle carrying value is recognized in Automotive and other costs of sales.
Services and Other
Services and other revenue primarily consists of revenue from vehicle-related service arrangements and after-sale services such as maintenance, vehicle connectivity, and extended service warranties. For those service arrangements that are bundled with a vehicle sale, a portion of the revenue from the sale is allocated to the service component and recognized as deferred revenue within Accrued liabilities or Other liabilities. We recognize revenue for bundled services and services sold separately as services are performed, typically over a period of fewer than three years.
Therefore, to compare the similar types of revenue and gross margin of both companies, I have kept the “Services and Other” revenue segment in my measurement of automotive revenue and gross margin for Tesla.
Research and Development Costs
In terms of costs and expenses, GM has lumped its research and development expenses under the automotive cost of sales as shown in the following snapshot and excerpt extracted from its financial statement.
Research and Development Expenditures
Research and development expenditures, which are expensed as incurred in Automotive and other cost of sales, were $7.8 billion, $7.3 billion and $6.6 billion in the years ended December 31, 2018, 2017 and 2016. We enter into cost sharing arrangements with third parties or nonconsolidated affiliates for product-related research, engineering, design and development activities. Cost-sharing payments and fees related to these arrangements are presented in Automotive and other cost of sales.
On the contrary, Tesla’s research and development expenses was separated from the automotive cost of sales and was classified under operating expenses.
To compare both companies as similarly as possible, I have added Tesla’s research and development expenses back to its automotive cost of sales.
The problem is that not all research and development expenses were spent in the automotive sector. Some of the R&D expenses may have been spent on the energy business.
As such, I have derived a percentage that is consistent with the ratio of automotive revenue to total revenue. This figure comes out to be around 80%.
In other words, Tesla automotive revenue as a percentage of total revenue is around 80%.
Therefore, I have assumed that around 80% of research and development expenses were spent in the automotive segment.
This 80% of R&D costs were then added to Tesla’s automotive cost of sales to arrive at a gross margin that is consistent with that of GM.
Finally, it seems like we are all set with the adjustments and assumptions.
Automotive Revenue: Tesla vs GM (Quarterly)
The above graph shows the comparison of the adjusted quarterly automotive revenue between Tesla and GM over the past 5 years from 2015 to 2020.
As discussed, Tesla’s automotive revenue has been adjusted to include the “Services and Other” revenue portion while excluding certain revenue portions, including leasing, energy, and regulatory credits to match that of GM for an apple to apple comparison.
It’s very clear from the chart that GM’s automotive revenue has been much higher than that of Tesla.
In fact, in the latest quarters of 3Q 2020, GM’s automotive revenue was nearly 5X bigger than that of Tesla.
However, the difference was much bigger 5 years ago at roughly 35X when Tesla’s adjusted automotive revenue was only slightly less than $1 billion at that time.
In just 5 years, Tesla has managed to close the gap with GM, reflecting the remarkable growth that Tesla has achieved in the automotive industry.
Also, GM’s quarterly automotive revenue has declined quite significantly over the years.
Respectively, GM achieved a revenue of nearly $40 billion in 2016 on a quarterly basis.
However, GM’s automotive sector has declined steadily and reached only $30 billion as of Q3 2020 on a quarterly basis.
Between 2018 and 2020, GM’s automotive revenue stayed relatively flat at $35 billion.
On the flipped side, Tesla’s adjusted automotive revenue has grown from a quarterly revenue of roughly $1 billion in 2015 to more than $7 billion in 2020.
Throughout the 5 years, Tesla’s quarterly automotive revenue has grown more than 700% on a sequential basis.
Automotive Revenue: Tesla vs GM (TTM)
The prior quarterly chart may not clearly reflect the trend of both plots.
Therefore, I have created the trailing 12-months (TTM) chart above to smooth out both plots.
From a TTM perspective, we can clearly see that GM’s automotive revenue has been declining whereas Tesla’s automotive revenue has been increasing in the past 5 years.
As of 2020 3Q, GM’s automotive revenue totaled slightly over $100 billion whereas Tesla’s figure reached slightly above $20 billion on a TTM basis.
From this comparison, GM’s automotive revenue was about 5X higher than that of Tesla.
For your information, Tesla’s market cap has already reached beyond $500 billion as of this article was published whereas GM’s market cap was only $60 billion.
As a result, investors are expecting Tesla to perform even further in the future when they slapped a sky-high market valuation on Tesla.
Automotive Gross Margin: Tesla vs GM (Quarterly)
As discussed in prior paragraphs, Tesla’s cost of revenue has been adjusted to include a partial portion of research and development expenses to match that of GM for an apple to apple comparison.
Aside from r&d costs, some of Tesla’s non-automotive related revenues such as leasing, energy, and regulatory credits were also excluded when measuring the gross margin.
As seen from the chart, Tesla’s adjusted gross margin has been much worse than that of GM from 2015 to 2017.
However, Tesla’s adjusted gross margin improved remarkably from 2018 to 2020.
In the early periods, Tesla’s automotive gross margin has been mostly negative, reflecting the heavy losses that the company has incurred.
Tesla’s gross margin started to improve during 2018 as seen from the positive gross margin which hit more than 15% in 2018 and 2020 on a quarterly basis.
However, Tesla’s adjusted gross margin tumbled again in early 2019 and hit nearly 0% in 1Q 2019.
Nevertheless, Tesla worked on its gross margin again throughout 2019 by launching a series of restructuring to cut costs.
Other than restructuring, Tesla also achieved a record delivery of Model 3 when its Gigafactory Shanghai started production in early 2020.
As a result, Tesla’s automotive gross margin reached more than 10% in 3 consecutive quarters and surged to 15% as of 3Q 2020.
At the same time, General Motors’ automotive gross margin started to decline in 2019 and dropped to negative territory in early 2020, due mainly to the COVID-19 disruption.
On a long-term basis, we can see that Tesla’s improved gross margin has surpassed that of GM in recent quarters, particularly in 2020.
During the same period, GM’s automotive gross margin stayed roughly flat at 10% and declined significantly to less than 10% since 4Q 2019.
In short, Tesla can now attain the level of profitability that GM has achieved in the past.
Automotive Gross Margin: Tesla vs GM (TTM)
Again, the quarterly chart may not clearly show the trend of the plots.
As a result, the TTM chart above has been created to showcase Tesla and GM’s gross margin comparison.
As seen from the TTM chart, the trend clearly shows that both plots are going in the opposite direction.
Between 2015 and 2020, Tesla’s automotive gross margin has been slowly improving as opposed to the declining trend of GM’s automotive gross margin.
In fact, Tesla’s adjusted automotive gross margin has outperformed that of GM since 2020 Q2 from a TTM standpoint.
Accordingly, Tesla’s automotive gross margin reached more than 10% in Q2 2020 and topped out at nearly 13% by Q3 2020 on a TTM basis.
In contrast, GM’s automotive gross margin reached its lowest at only 7% in 2020 Q2 and improved slightly to 8% by 2020 Q3 on a TTM basis.
The TTM chart clearly shows that Tesla has attained the level of gross profitability that GM has achieved in the past and even outperformed that of GM by 3Q 2020.
In short, Tesla is capable of achieving the same gross margin as that of General Motors when Tesla’s production volume reaches certain thresholds.
Is Tesla catching up with GM in sales and gross margin? Yes, Tesla has been fast catching up in both revenue growth and gross margin as seen from the results.
However, there is still a lot of improvement to be done for Tesla, especially in revenue growth when Tesla’s sales are still 5X less than that of GM.
However, Tesla has been fast closing the gap with General Motors in revenue and even gross margin.
Over the 5 years, Tesla has managed to reduce the revenue difference from 35X in 2015 to just 5X as of 3Q 2020.
During the same period, GM’s automotive revenue has been stagnant and has even declined since 2017.
I believe it is just a matter of time before Tesla finally reaches the size or even outgrows GM in sales and revenue.
Although Tesla’s revenue was far less than that of GM, Tesla could achieve an adjusted gross margin, which is about the same as GM in Q1 2020 and surpassed GM by Q3 2020 on a TTM basis.
In summary, Tesla has the capability to surpass the results of GM not only in the gross margin but in sales in the future.
Despite additional costs of operating retail stores as opposed to the wholesale-based business model of GM, Tesla can still successfully achieve the level of gross margin which is the same as General Motors.
Therefore, Tesla’s valuation of over $500 billion in market capitalization is more or less justified judging from its growth potential in the future.
References and Credits
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