Tesla (TSLA 8.22%) reported solid performance for the first quarter, despite supply chain challenges. Of particular interest is the company's strong profit margins. Let's take a closer look at key factors that could be driving Tesla's industry-leading margins.
Tesla's margin climbed higher
In the latest quarter, Tesla reported a net profit margin of 17.7%. Though higher regulatory credits boosted the margin, it still comes to a very healthy 14.6% if we exclude the impact of regulatory credits.
Data source: Tesla. Chart by author.
Let's see how Tesla's margins compare with that of other automakers.
TSLA Profit Margin (Quarterly) data by YCharts
The above chart shows quarterly profit margins for five years up to Q4 2021 for top automakers. Ford's (F 2.38%) average profit margin during this period was 3.8%. Notably, Ford's Q4 2021 margin also includes the impact of a gain on its Rivian investment, which resulted in an exceptionally high margin. If we exclude that quarter, Ford's average margin drops to just 2.2%.
Similarly, General Motors' (GM 0.78%) average margin for the last five years was 3.7%. Volkswagen's average margin was 4.9%. Toyota generated the best margins among traditional automakers with an average of 7.7%.
So, Tesla's margin of 13.1% is way higher than what automakers generate on an average. It was also higher than the traditional automakers' margins in Q4 -- showing Tesla's performance in similar market conditions. Indeed, Tesla's industry-leading margins don't have a long track record, but they are topping peers for the last four consecutive quarters.
Why Tesla's margins are higher?
There can be numerous factors behind Tesla's high margins. Let's look at some most likely ones. To begin with, higher price per unit may trickle down to bottom-line profits. A high customer interest in Tesla's cars with demand exceeding supply gives the company significant pricing power.
But beyond that, the other key drivers could be Tesla's operational efficiency and vertical integration. The company sells cars directly to customers and does not use a dealership model that all traditional automakers use. Its marketing expenses are negligible compared to billions of dollars that other automakers spend.
Image source: Statista.
Based on per car sold, Tesla incurred no advertising expenditure in 2020. By comparison, Ford spent $468 in advertising per car sold in 2020, while the spend was $394 per car for General Motors. Stellantis' Chrysler spent $664 per car on advertising. Tesla, instead, focused on research and development.
Tesla's vertical integration strategy also includes batteries. The company makes its own batteries, in addition to buying them from suppliers. It intends to continue expanding its battery manufacturing capacity and expects that economies of scale will help drive costs down further. Moreover, it is improving its battery technology with the new 4680 cells. The company expects that 4680 batteries would be far more cost effective and provide improved range, helping bring the cost of vehicles further down.
Overall, there are several factors that help generate Tesla higher margins and the company looks well-placed to benefit from these in the future too.
