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What Will Bring Tesla Motors Inc (TSLA) Profits

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Tesla Motors Inc (TSLA)Doesn’t everyone love the business concept behind Tesla Motors Inc (NASDAQ:TSLA)? Its goal is to upend traditional thinking about the car industry. With battery-fueled cars, a commitment to be its own parts supplier, and providing direct sales to the customer means a lot of new ways of thinking about the automotive industry. Tesla has developed a different business model than that of other manufacturers like General Motors Company (NYSE:GM), often to these larger companies’ chagrin.

And what’s worse is that the General Motors Company (NYSE:GM) way is not working as well as Tesla’s, as GM has the lowest gross operating margin numbers in the business at 2.6% compared with Tesla Motors Inc (NASDAQ:TSLA)’s 7.3%. Although GM has been able to make $22 billion in profits over the past three years, it simply doesn’t have the panache that Tesla’s potential has.

Where Tesla should follow GM

GM’s reaped $3 billion in profit on $33 billion in revenue from China in 2012, where the company enjoys lower labor and legacy costs. And say what you will about the Chinese economy’s expected hard landing because the government there will do everything to stop the economy there from crashing. It needs to continue its march towards modernization and middle class growth. That means manufacturing and selling gobs of cars.

In 2012, General Motors Company (NYSE:GM) sold 2.8 million cars in China. In the United States it sold 2.5 million cars. The reason why is simply economies of scale: last year the Chinese bought over 19 million vehicles, while the U.S. market only bought 14 million.

And sales numbers there are being held back by the Chinese government, which means that there is pent up demand. In many municipalities like Shanghai, car demand is being curtailed through government license plate controls. Yet a mandate was set in 2012 for there to be 500,000 electric cars on the road in China (all-electric and hybrid) by 2015, and 5 million by 2020.

Tesla’s strategy in Asia so far

The company most recently opened its first Asian dealership in Hong Kong and has begun to ship cars there. According to Bloomberg, Tesla Motors Inc (NASDAQ:TSLA)’s business there will at least double the number of electric vehicles in Hong Kong. The government there has said there are only a few hundred registered electric vehicles right now.

The lack of any focus on electric vehicles in Asia, especially China, gives Tesla tremendous advantage. General Motors Company (NYSE:GM), which has a 14.6% share of the market in China, is having enough trouble selling the Chevy Volt and hybrid trucks to American consumers. Trying to innovate in China or change a model that is already working there is not something that GM wants to do.

Rate of charge at a Tesla Supercharger station. Source: Tesla

But Tesla Motors Inc (NASDAQ:TSLA) operates on doing things differently. One example of this is in infrastructure. Tesla is building a Supercharger network in the United States with 27 currently open and plans to build out access for 98% of the population of the U.S. and Canada by 2015. They could do the same thing in China, where roadway infrastructure still needs more road stops that are more common in North America.

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