Research and development (R&D) are activities company take to innovate and introduce new products or services. The R&D is crucial for the long-term survival of a company. Without research and development, a company will not remain competitive for long.
Most companies will spend a reasonable amount of costs on research and development to create the next generation products or to enhance the existing one. It’s no exception for General Motor (GM) and Tesla when they are racing to develop the next big products such as self-driving and energy efficient electric vehicles, hoping that the next big products could drive revenue growth in future.
It’s interesting to see how much costs are being spent on research and development for both GM and Tesla. It’s even more useful when we compare their respective research and development costs and the percentage of these costs with respect to revenue.
The following graph shows the comparison of R&D expenses for both GM and Tesla and the next graph followed shows the respective R&D costs with respect to revenues.
Research and Development Costs Comparison
The graph above shows the research and development costs comparison between Tesla and GM for the past 6 years from 2013 to 2018.
For GM, the company only discloses its R&D costs at the end of the year. As such, the YTD data is not available for GM in the chart above.
From the data above, GM spent quite consistently on research and development, averaging around $7.5 billion per year. On the other hand, Tesla spending in research and development had increased tremendously from 2013 to 2018.
In 2013, Tesla spent $0.2 billion in R&D but in 2018, the spending in R&D had increased to $1.5 billion, an 800% increment from 2013 number.
Even though Tesla research and development costs had increased tremendously over the years, the costs in R&D for Tesla is still far less than that of GM. In 2018, GM research and development expenses was 500% or 5X more than that of Tesla whereas in 2013, GM R&D costs was 30X more than what Tesla had spent in that year.
As you can see from the graph above, Tesla is quickly closing the gap with GM in terms of research and development expenses over the years. I believe sooner or later, Tesla will catch up or even surpass GM in R&D spending.
Comparing the absolute value of research and development spending alone does not tell us much about the size of the company R&D activity. We need to look at the R&D costs with respect to revenue to find out if the company is serious about developing the next generation of products.
Research and Development Expenses to Revenue Ratio
The chart above shows the percentage of R&D costs with respect to sales. The ratio measures how much revenue goes to research and development spending. It tells us how serious the company is in innovating and staying ahead of its competitors. Of course, the higher the percentage, the higher the attention that the company is paying to its research and development activities.
From the graph above, the figure for GM had been quite consistent, averaging around 4.5% over the 6-year period. On the other hand, the figure for Tesla had been on a roller coaster ride. The percentage reached the highest level at 18% in 2015 but had dropped off to the lowest level at 7% in 2018.
Over the 6-year period, research and development costs as a percentage of revenue for Tesla had been much higher than that of GM. The reason for such a high percentage for Tesla could be that the company is still a small automotive player and it needs to ramp its R&D to rival its much bigger competitors.
Nevertheless, Tesla may have slowed down its R&D spending with respect to revenue since 2016. From the graph above, you can see that the ratio has been de-accelerating since 2016. In 2018, Tesla R&D to revenue ratio has dropped to a point where it was almost the same as that of GM.
The reason for the decline in R&D spending for Tesla could be due to the capital saving measures taken by the company. Besides, Tesla has not been profitable over the years and may have taken steps to cut back on its R&D expenses.
The other reason 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. Tesla has started ramping its Model 3 delivery since 2018. As a result, the revenue expansion in 2018 and 2019 had been remarkable. That may have caused a temporary dip in the percentage of R&D costs with respect to revenue. If this is the case, the percentage will certainly rise again in the second half of 2019 or early 2020.
For this reason, we will need to wait for more data for a couple more quarters to figure out if Tesla had really cut back on its research and development costs.
GM spent about 5X more than what Tesla spent in research and development costs in 2018. In 2013, GM research and development expenses were 30X more than that of Tesla. Tesla is fast closing the gap in terms of research and development spending with General Motors in 2018. The growth in R&D spending for Tesla is about 800% over the 6-year period.
Tesla research and development costs to revenue ratio has been declining since 2016 and is getting close to the level same as GM in 2018. The reason for the drop could be due to cost control measures taken by Tesla or revenue growth that had been much faster than Tesla could expand its research and development activities.
GM research and development had been consistent over the 6 year period and its percentage of R&D expenses to sales had also been consistent over the 6-year period at around 5%.
The authors wrote this article themselves, and it expresses their own opinions. The authors are not receiving compensation for writing the article. The authors have no business relationship with any company whose stocks are mentioned in this article.
2. Featured image was obtained from Steve Rainwater.
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