Most companies undertake some of kind research and development (R&D) activities and spend certain amount of their revenues to develop new products and improve services. The amount of funds being poured into R&D will depend on the companies’ business models. For example, a research based companies such as those involved in drugs and software development will most likely spend a considerably 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 cost 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 GM over the past 7 years from 2013 to 2019.
As seen from the chart above, GM spent quite consistently on R&D, averaging around $7.4 billion per year over the past 7 years. On the other hand, Tesla’s spending on R&D had been steadily increasing during the same period and reached record high at $1.5 billion in 2018 before declining slightly to $1.3 billion in 2019.
While GM’s spending on R&D has been consistent over the years, 2019 represents the lowest in terms of R&D costs for the company and the amount spent on R&D was only $6.8 billion in 2019, a year on year decline of -13% with respect to 2018.
Even though 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 was $6.8 billion in 2019, a figure which was 500% more than that of Tesla.
Similarly, GM spent about $7.8 billion on research and development in 2018, an amount that was again 5X more than Tesla’s R&D spending of $1.5 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 only 5X in 2019. I believe sooner or later, Tesla may catch up or even surpass GM in R&D spending.
Comparing the absolute value alone does not tell us much about the size of the R&D activity. We need to look at the costs with respect to revenue to find out how large the R&D budget is relative to revenue that both companies have allocated.
R&D Expenses to Revenue Ratio: 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 7 yeas from 2013 to 2019.
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 2019, averaging around 5% over the 7-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 record high at 18% revenue in 2015. However, Tesla’s ratio started to plunge since 2016 and hit the lowest level at only 5% revenue in 2019.
In 2019, both Tesla and GM’s spending on R&D activities was 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 in 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 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 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 2020 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 and GM R&D Growth
The chart above shows GM and Tesla’s R&D spending growth rate for the past 6 yeas from 2014 to 2019.
Tesla’s R&D spending growth has been quite significant from 2014 to 2017, averaging around 60% each year before the percentage started to plunge in 2018 to only 6% of growth and turned negative at -8% in 2019.
On the other hand, GM’s R&D spending growth has been in the single digit range all the while but turned negative in 2017 and 2019 at 10% and 13% 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 -8% and -13% respectively.
In general, Tesla’s R&D growth rate averaged around 40% from 2014 to 2019 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 $6.8 billion in 2019 was the lowest among the 7 years from 2013 to 2019. Comparing this figure to Tesla, GM’s R&D spending was roughly 500% more than Tesla’s figure of only $1.3 billion in 2019.
While the amount of R&D expenses for GM was 5X more than what Tesla spent in 2019, 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.
As seen from the chart, from 2013 to 2015, Tesla’s R&D spending ratio rose quickly from 11% to 18% revenue whereas GM’s R&D spending ratio has more or less stayed in the same range at 5% during the same period. However, the gap of R&D ratio between Tesla and GM were closing in in 2019 at 5% when Tesla’s figure was seen de-accelerating since 2016 and reached the lowest at 5% revenue in 2019.
The reason for the decline of Tesla’s research and development expenses ratio from 2016 to 2019 could be due to cost control measures carried out by the company or revenue growth that had been much faster than the company could expand its research and development budget.
In terms of growth rate, both companies, Tesla and GM, had seen their respective R&D spending declined significantly in 2019 to -8% and -13% respectively compared to the prior year.
While Tesla’s R&D budget growth rate turned negative in 2019, the average figure was still around 40% for the past 7 years which is much better than GM’s average R&D expenses growth rate of -1% over the same period.
In other words, GM’s R&D expenses have roughly stayed in the same level in average from 2013 to 2019.
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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