Most companies undertake some kind of research and development (R&D) activities and spend a certain amount of their revenues to develop new products and improve services. The number of funds being poured into R&D will depend on the companies’ business models.
For example, research-based companies such as those involved in drugs and software development will most likely spend a considerable amount of their sales on R&D.
R&D is crucial for the long-term survival of a company. A company will probably not survive for long if it loses its competitive advantages to its competitors and this could be due to the research and development that does not work out for the company.
As a result, it’s worthwhile to dig into the research and development spending especially for companies like Tesla (NASDAQ:TSLA) and General Motors (NYSE:GM) in which their survival will largely depend on their successes in creating the next big revolution in the all-electric race.
In this article, we will look at and compare exclusively the research and development spending of both Tesla and GM.
We will look at the absolute R&D costs of both companies and make a comparison to find out who has the upper-hand when it comes to creating the next big products in self-driving and energy-efficient electric vehicles.
It will be interesting to find out the amount of cost being spent on research and development for both GM and Tesla. It will be even more useful if we look at the research and development cost relative to revenue and track the trend of the respective spending over a long period of time.
The following couple of charts will do just that. So sit tight and read on!
Research and Development Spending: Tesla vs GM
The graph above shows the annual research and development spending for both Tesla and General Motors over the past 8 years from 2013 to 2020.
As seen from the chart above, GM spent quite consistently on R&D, averaging around $7.3 billion per year over the past 8 years.
On the other hand, Tesla’s spending on R&D had been steadily increasing during the same period and reached a record high at $1.5 billion in 2018 before declining slightly to $1.3 billion in 2019.
As of 2020, Tesla’s R&D spending increased slightly to $1.5 billion, representing year-over-year growth of 15%.
While GM’s spending on R&D has been consistent over the years, 2020 represents the lowest in terms of R&D costs for the company and the amount spent on R&D was only $6.2 billion, a year on year decline of 9% with respect to 2019.
Although Tesla’s research and development expenses had increased tremendously over the years, the amount spent had been far less than that of GM. For instance, GM’s R&D expenses in 2020 were 400% higher than that of Tesla.
Similarly, GM spent about $6.8 billion on research and development in 2019, an amount that was again 500% more than Tesla’s R&D spending of $1.3 billion during the same year.
While Tesla has spent considerably less on R&D compared to GM, Tesla has been quickly closing the gap with GM in terms of research and development expenses over the years.
For instance, the gap was 36X back in 2013 but the difference in absolute value has been reduced to 4X in 2020.
In addition, Tesla’s R&D spending has been on the rise in the past 8 years whereas GM’s R&D spending has been on the decline.
I believe sooner or later, Tesla will catch up or even surpass GM in R&D spending in the near future.
Comparing the absolute value alone does not tell us much about the size of the R&D activity.
In this aspect, we need to look at the costs with respect to revenue to find out how large the R&D budget is relative to the revenue that both companies have allocated.
Ratio of R&D Costs to Revenue: Tesla vs GM
The chart above shows the ratio of R&D expenses with respect to revenue or sales, expressed in percentage, for the previous 8 years from 2013 to 2020.
The ratio measures the amount of revenue that goes into research and development for both Tesla and GM.
It tells us how serious the company or how big the budget is when it comes to allocating a portion of revenue or sales into innovating and developing new products and services.
Of course, the higher the percentage, the bigger and better the R&D activity will be for the company.
From the graph above, the ratio for GM has been quite consistent from 2013 to 2020, averaging around 5% over the 8-year period.
In contrast, the ratio for Tesla has been on a roller coaster ride. From 2013 to 2015, the ratio was seen increasing significantly, reaching a record high at 18% revenue in 2015.
However, Tesla’s ratio has started to plunge since 2016 and hit the lowest level at only 4.7% revenue in 2020.
In 2020, both Tesla and GM’s spending on R&D activities were seen converging at the same level which was roughly 5% revenue.
At this level, both companies allocated the same portion of revenue to R&D even though on an absolute value basis, GM’s allocation was much bigger than that of Tesla.
Before that, Tesla’s research and development costs as a percentage of revenue had been much higher than that of GM, as seen from the current chart between 2013 and 2017.
The reason for such a high portion of revenue allocation could be that the company was relatively a small automotive player and it needed to ramp its R&D to rival its much bigger competitors.
Nevertheless, Tesla may have slowed its R&D spending with respect to revenue in recent years. From the graph above, you can see that the ratio has been de-accelerating since 2016.
The reason for the slow down in R&D spending could be due to the capital saving initiatives carried out by the company in recent years.
Besides, Tesla has not been able to make a meaningful profit all the while and may have taken steps to cut back on its R&D expenses.
Another explanation for the decline of the ratio could be due to revenue ramp which had been much faster than Tesla could ramp its R&D activities especially in 2018 when Tesla started to deliver the Model 3.
As a result, revenue expansion since 2018 and 2019 had been remarkable and that may have caused a temporary dip in the R&D ratio.
If this is the case, the ratio will certainly rise again in 2021 and onward when Tesla gets back on track in R&D spending.
For this reason, we will need to wait for more data to come in the next couple of quarters to figure out whether Tesla had really cut back on research and development or this is just a temporary dip in R&D spending.
Tesla vs GM in R&D Growth Rates
The chart above shows GM and Tesla’s R&D spending growth rates for the past 7 yeas from 2014 to 2020.
Based on the chart, Tesla’s R&D spending growth has been quite significant from 2014 to 2017, averaging around 60% each year.
Since then, the growth rates have started to plunge to only 6% in 2018 and even turned negative at -8% in 2019.
However, Tesla’s R&D growth was back on track in 2020 when it reported an 11.2% year-over-year growth compared to the prior year.
On the other hand, GM’s R&D spending growth has been in the single digit figures all the while but turned negative in several years that range from 2017 to 2020.
As of 2020, GM’s research and development costs declined for the 2nd time in over 2 years. For example, GM R&D growth was -12.8% and -8.8% in 2019 and 2020, respectively.
Both companies, Tesla and GM, have reduced their respective research and development costs the most in 2019 as seen from the negative figures at -12.8% and -8.2% respectively.
In general, Tesla’s R&D growth rates averaged around 40% from 2014 to 2020 which is considerably in much better shape than GM’s R&D growth rate which averaged around -1% during the same period.
GM’s R&D spending of $6.2 billion in 2020 was the lowest among the 8 years from 2013 to 2020. However, this figure was still 400% more than Tesla’s figure of $1.5 billion in the same year.
While the amount of R&D expenses for GM was 4 times more than what Tesla spent in 2020, Tesla has been quickly closing the gap with GM in research and development expenses as the gap was much bigger back in 2013 which was at 36X during that year.
The absolute R&D spending does not tell us much about the size of the allocation with respect to revenue. As a result, we looked at the ratio of R&D expenses with respect to revenue to find out the proportion of revenue being allocated to R&D for both companies: Tesla and GM.
The ratio for Tesla and GM was about the same in 2020, indicating that both companies allocated about the same proportion of revenue for research and development.
References and Credits
2. Featured images in this article are used under creative commons license and sourced from the following websites: Steve Rainwater.
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