Can Tesla Afford to Sell Vehicles with No Profit Margins?

Elon Musk shared a revelation that could be a premonition for the future: what if Tesla followed automotive conventions and sold vehicles with zero profit margins?

The statement was the most staggering and perhaps profound made during Tesla’s Q1 2023 financial results webcast:

“Tesla is in a uniquely-strong strategic position because we’re the only ones making cars that technically we could sell for zero profit for now, then yield actually tremendous economics in the future through autonomy.”

Forward-looking value of Full Self-Driving has been reiterated numerous times, and this is technically accurate: Musk is likely correct that once Tesla releases Full Self-Driving it will lead to the largest fleet asset value increase in history.

The value of an autonomous solution today is quite substantial, totaling more than the upfront cost of a $39,990 Model 3 for as long as Tesla maintains a competitive first-to-market advantage.

Tesla already recoups significant margin today through the $6,000 Enhanced Autopilot and $15,000 Full Self-Driving options. The latter of which is in a Beta phase that’s gradually improving over time, and is open to any Tesla owner that purchases or subscribes to Full Self-Driving.

Lest we forget that Tesla maintains industry-leading profit margins, even despite a series of price cuts that have been ongoing at a surprising pace.

These margins are in excess of 25%, which is expected to be maintained long-term although may be impacted in the short-term as Tesla’s focus is on the future.

Tesla is in a unique position where the automaker could hypothetically continue to drop prices as much as $10,000 throughout its lineup and still remain profitable. An emphasis on cost reduction through the rest of 2023 will only serve to drive that point further.

Thus, what if Tesla is planning to do the unthinkable: release a car that the automaker makes no gross margin selling?

It’s not that implausible: Tesla may be planning to do just that with its next-generation vehicle platform and specifically its $25,000 compact vehicle.

That platform and vehicle will serve as the foundation for Robotaxi, which is already interchangeable for what the platform is being called internally.

Tesla could sell millions of compact vehicles and have an even larger fleet of Robotaxis that support Full Self-Driving with the flip of a switch, thereby creating potential to recoup $15,000 or more of pure gross margin at a later date.

It’s the present-day automotive paradigm: conventional automakers typically only make several hundred dollars selling a new vehicle, even with the latest lineup of electric vehicles from the Ford Mustang Mach-E to the Hyundai IONIQ5.

Automakers traditionally don’t make a significant amount of profit on each new vehicle sold, and certainly not thousands of dollars per vehicle as Tesla has remarkably accomplished during the previous year. Gross margins on new vehicles can be net-zero or even negative on newer electric vehicles.

Instead, automakers recoup money by selling expensive OEM parts that generate profit throughout a vehicle’s lifespan. Meanwhile, franchise dealers are dependent on maintenance to remain consistently lucrative.

Tesla is attempting to avoid this by designing cars that require as little service and maintenance as possible, as “the best service is no service.”

That leaves Tesla with having to continue generating profit during the initial sale of each vehicle, only relying on the unique strategy of selling autonomous software down the line.

But what if Tesla changed its business model entirely tomorrow as a hypothetical experiment, adopting a more conventional automotive model where high-volume vehicles are sold with little-to-no profit?

Frankly this would both support Tesla’s mission of accelerating sustainability, and work in the future if Tesla can incentivize owners to purchase autonomous solutions and software subscriptions.

Musk did continue that “it’s still possible to sell at zero profit and have net-present value of future services.”

However, we don’t think it’s in Tesla’s best present-day interest: demand remains strong enough that outstanding orders exceed production, pricing compares increasingly well to internal-combustion alternatives especially after fuel savings and rebates, and it would be detrimental to the company’s market valuation.

That’s not to say that it’s not possible in several years from now that Tesla will settle on a lower margin to support the unprecedented volumes that the automaker is planning, as vehicles may be the least important aspect of Tesla in a decade as energy storage and artificial intelligence sectors grow.

If it did ever happen then it would be strategic, rather than a sign of a failing company.

In fact, we think Tesla could do it for the opposite reason: dropping prices so dramatically to the point that the automaker makes virtually no gross margin could be the greatest demand catalyst possible and is conducive to transitioning the global fleet to electric Tesla vehicles.

Presently, Tesla will take a temporary and minimal reduction in margin over the next year as cost reduction efforts continue with the end goal of re-investing to create a more affordable, complete future vehicle lineup.

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