Most companies undertake some kind of research and development (R&D) activities and spend a certain amount of 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 certainly spend a larger portion of sales on R&D.
R&D is crucial for the long-term survival of a company. A company will be losing over time if it loses its competitive advantages and this could be due to the research and development activities that may not have worked 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 competitive advantages will largely depend on the successes in creating the next breakthrough in the all-electric race.
In this article, we will look at and compare the research and development spending of both Tesla and GM.
Let’s take a look at the following topics.
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 9 years from fiscal 2013 to 2021.
As seen from the chart above, GM spent quite consistently on R&D, averaging around $7 billion per year over the past 9 years.
On the other hand, Tesla’s spending on R&D had been on a steady rise during the same period and reached a record high of $2.6 billion in fiscal 2021, up more than 70% from 2020 and doubled that of 2019.
While GM’s spending on R&D has been consistent over the years, the amount declined significantly in fiscal 2020 to only $6.2 billion, a record low for the company since 2013.
Nevertheless, GM dramatically boosted its research and development budget in fiscal 2021 to as much as $7.9 billion USD, a rise of 27% from 2020 or 16% from 2019.
Although Tesla’s research and development expenses had risen tremendously over the years, the amount spent had been far less than that of GM. For instance, GM’s R&D expenses in 2021 were about 3X higher than that of Tesla.
Similarly, GM spent about $6.2 billion on research and development in fiscal 2020, an amount that was 4X higher than that of Tesla.
While Tesla’s R&D budget had been much lower compared to General Motors, Tesla is on track to close the gap with GM in terms of research and development expenses.
For instance, the gap was far bigger back in 2013 at 36X but the difference was only 3X as of 2021.
In addition, Tesla’s R&D spending has been on the rise in the past 9 years whereas GM’s R&D spending had only grown in fiscal 2021.
Prior to 2021, GM’s R&D spending had been on a decline as shown in the chart above, and reached only $6.2 billion in fiscal 2020, a record low for the company.
I believe sooner or later, Tesla will catch up or even surpass GM in R&D costs.
Comparing the absolute value alone does not tell us much about the size of the R&D activity.
Therefore, we need to look at the R&D costs with respect to revenues which will be shown in the next discussion.
R&D Costs 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 9 years from fiscal 2013 to 2021.
The ratio measures the intensity of research and development activities for both Tesla and General Motors.
From the ratio, we can find out the size of the research and development budget with respect to revenue or sales.
Of course, the higher the ratio, the bigger and higher the R&D activity is for the company.
From the graph above, General Motors’ ratio has been quite consistent from fiscal 2013 to 2021, averaging around 5% over the 9-year period.
In contrast, Tesla’s ratio has been on a roller coaster ride.
Between 2013 to 2015, Tesla’s ratio was seen increasing significantly, reaching a record high of 18% revenue in 2015.
However, Tesla’s ratio has started to plunge since 2016 and reached only 4.8% revenue as of 2021.
Prior to 2021, both Tesla and GM’s spending on R&D activities were seen converging at the same level which was roughly 5% revenue in 2020.
These ratios indicate that both companies allocated the same percentage of revenue to R&D activities 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 chart for the period between 2013 and 2017.
Over the years, Tesla’s ratio was seen declining and has now reached about the same level as that of General Motors.
What’s surprising is that General Motors’ ratio which came at 6.2% in 2021 has even exceeded that of Tesla.
Therefore, from the perspective of R&D activities, GM certainly has a much higher and bigger budget compared to Tesla and the end result is that GM’s research and development activity is far more intense.
R&D Expenses Growth Rates – Tesla Vs GM
The chart above shows GM and Tesla’s R&D spending growth rates for the past 8 years from 2014 to 2021.
Based on the chart, Tesla’s R&D spending growth was the highest in early years, averaging around 60% from 2014 to 2017.
However, Tesla’s R&D growth rates have plunged to only 6% in 2018 and even turned negative at -8% in 2019, illustrating a reduction in the R&D budget.
In fiscal 2020, Tesla’s R&D growth was back to positive again at 11.2% and the growth rate was even higher in 2021 at 73%.
In contrast, GM’s R&D spending growth had been far lower compared to Tesla as shown in the chart.
As seen, GM only managed to grow its R&D spending in single-digit growth rates in most fiscal years.
What’s worse was that GM experienced a decline in R&D costs consecutively in 2019 and 2020.
The company reported only a positive growth rate in R&D expenses in 2021, notably at 27%, a record high for General Motors.
In short, Tesla’s R&D growth rates have been far superior to that of GM in most fiscal years.
On average, GM’s R&D growth came at only 1.9% while Tesla’s figure was a massive 40%.
In most fiscal years, Tesla spent far fewer expenses on research and development compared to General Motors.
Besides, the ratio of R&D spending to revenue for both companies has converged at the same level as of 2021, indicating that both Tesla and GM have allocated the same portion of revenue on research and development.
While Tesla’s allocation on R&D has been far less, the growth rates have been far more impressive than that of GM, averaging around 40% compared to GM’s 1.9%.
In short, Tesla has aggressively boosted its R&D spending over the years as the electric vehicle is still a relatively new technology in the automobile sector.
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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