In reading Tesla’s 4Q earnings release, what struck me immediately is that even though they added a lot of production capacity in 2019, both expanding Fremont considerably and building the entire Shanghai Gigafactory in 2019, they spent a little more than half as much on capital as they did in 2018, when they were ramping Model 3 but not building any major factories.
Tesla alluded to this in the last quarterly call and I wrote an article on this. This quarter is further evidence that Tesla can expand production quickly. They are planning to increase vehicle production at least 39% (from 360K to 500K). But they claimed in the letter today to have production capacity today of 640,000 vehicles a year, growing to a 740,000 rate as they ramp Model Y in Fremont. That is double the capacity of 2019. To do that and spend dramatically less than their depreciation is astounding!
Remember, depreciation is the charge you are making to write off the costs of your existing capital facilities. At a typical company, you have to spend the depreciation to just keep your facilities up to date.
For example, compare that to figures from the most recent Ford release:
Even though Ford is slightly shrinking vehicle production instead of doubling capacity, they are spending almost their whole depreciation charges on capital. Now this might be appropriate if they are spending a ton to convert to EVs, but I suspect the majority of the money is just building or updating plants to make a pickup or SUV that is 5% better than the previous model. That speed of innovation works when your competitors, like GM and Chrysler, move just as slowly as you do, but it doesn’t work if you are competing with a company focused on speed of innovation, like Tesla.
This continued focus on reducing capital costs is going to allow Tesla to do two important things:
- Grow at ridiculously high rates without asking capital markets for more money. (Editor’s note: This was also emphasized on the call in response to analyst questions.)
- Drive down the cost of electric vehicles to allow them to be affordable to more and more people.
Both of these will help Tesla toward achieving its ongoing mission of “accelerating the world’s transition to sustainable energy.”
Top photo courtesy Tesla
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