Tesla Now Poised To Be A Powerhouse After Failing To Deliver Profits For Years

Tesla has become incredibly profitable.

After reporting its first ever annual profits for 2019 this January, the first time that the company had made an annual profit despite using the strict accounting measures for judging net income and losses, the United States based electric car maker followed that up with a successful first quarter of 2020 despite the novel coronavirus pandemic hitting businesses and economies.

The company was forced to close down its factories in California and Shanghai during the first quarter as the pandemic spread in the US and China.

Analysts said that the key to the profitability of the company is the product itself because electric vehicles are far less complex to manufacture compared to the conventional ones with internal combustion engines. This was aided by existence of no unions in the company which has been actively opposed and engineered by the company founder and CEO Elon Musk.

In a note to investors in January, the company predicted “further cost efficiencies should allow Tesla to ultimately reach an industry-leading operating margin.” And the company led the industry in terms of the profit at least in the first quarter bucking its previous reputation of falling short on aggressive targets set by Musk.

In the March quarter the gross profit margin of Tesla was at 20 per cent compared to the 17 per cent for Toyota and Volkswagen and the much lesser 10 per cent of General Motors, Ford and Fiat Chrysler.  For the last three quarters, a profit margin of 18.8 per cent or better has been maintained by the company.

Analysts now say that there is reason for believing in the profit guidance given by Tesla.

Perhaps most importantly, there now are reasons to believe Tesla’s profit guidance.

“EVs are not just profitable,” wrote Morgan Stanley auto analyst Adam Jonas in a recent note. “When they’re made at scale with the right cost structure they can be extremely profitable.”

The competitive advantage for Tesla is the less complex process of making electric cars compared to the conventional ones that use more complex internal combustion engines and the nonunionized labor force. About just about one third of the moving parts are needed for electric cars compared to ones with internal combustion engines while electric car making needs almost one-third less employees compared to the traditional gas-powered car manufacturing.

“Proving that EVs are more profitable than [internal combustion engines] helps surmount a major impediment to investment in the tech and broader adoption… as well as recognition by investors that moving to EVs doesn’t have to come at the sacrifice of profitability,” Jonas said in his note.

Analysts however see some hear term challenges such as in reporting a profit for the second quarter. Even as almost half of the second quarter is over, the company has just been able to restarting production at its main plant in Fremont, California, as well as its Nevada battery factory. Both had been forced to be shut down because of the  novelocronavirus pandemic in the US.

Analysts also raise questions about the demand for its cars when global economic gloom is being predicted by analysts because of the pandemic.

(Adapted from CNN.com)

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