In this segment of Business Breakdowns, we look under the hood at Tesla. Jenny Rae Le Roux and Namaan Mian dissect Tesla’s business model.
The conversation also explores strategies for Tesla’s future, with each leader sharing the three key levers they’d focus on to sustain profitability plus hot takes about what's next for the automotive manufacturer.
Whether you’re a Tesla fan or aspiring consultant looking to build your business acumen, this episode delivers actionable insights and thought-provoking analysis you won't want to miss.
Business Breakdowns drops on the 1st and 3rd Wednesday of each month. Loving it or have ideas to grow the segment?
Reach out by sending us a text or email, and connect with Jenny Rae and Namaan on LinkedIn.
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- Tesla Investor Relations site
Transcription: Tesla Business Breakdown
Welcome to this episode of Strategy Simplified. We are going to do a business model breakdown, and today's is on Tesla. Tesla has made the news for lots of reasons that we're absolutely not gonna talk about today.
Our focus is really gonna be on how, if you were at Tesla today in a senior leadership position, or if Tesla hired you as an external advisor, what would you think about in terms of shaping Tesla for the future? That's different than if you would buy the stock price of Tesla today, or if you'd want to go work there. And those are really important separate conversations, but just not what the scope of this one is all about.
So let me kick off by just walking through a few of the key metrics for Tesla. But before we do that, let me introduce my colleague Namaan. Namaan's on with me today. We're gonna keep this spicy. Namaan, you have anything you wanna say for the intro before I dive in?
I just wanna say, this is not an investing podcast, it's a business strategy podcast. So if you came here looking for a stock recommendation or a price target, you're in the wrong place. If you came to figure out how Tesla's business operates and what Elon and the leadership team should be caring about, then you're in the right place.
We love talking about Tesla because it is one of the cases that we rotate through for our case competitions that we lead. And it's always a little bit of a different premise. We update it the day before every case competition based on exactly what's happening in the news and the new numbers.
But the key strategy really remains the same. And what we recommend for people is that they spend less of their time in a case competition and by proxy in a case interview on figuring out what the heck Tesla does at the minutia and figure out in the big picture how to keep it simple. So Tesla at its core is a high revenue business, $96.8 billion.
Interestingly, that is approaching a reasonably similar size to some of the large American automotive manufacturers, which I think is pretty fascinating. Tesla a few years ago was not even close. They were way, way behind.
Their annual operating income, $8.9 billion. So also kind of unlike a lot of the American automotive manufacturers, they're profitable and profitable at a higher level. The percentage of their revenue that's from the United States is about 52 percent.
That's interesting when you think about the logistics and potential growth opportunities for Tesla. 52 percent is pretty small. A lot of folks are much more concentrated inside the US.
They sell in a couple of different categories. So the first category is automotive sales, by far their largest segment. In fact, their automotive sales revenue is 81 percent out of everything.
And so the first thing that we think of is we should not try to grow outside of this core segment. Like we have to make sure we have a humming and buzzing core segment, and anything that needs to be fixed, optimized, et cetera, the majority of your attention is going to be focused on the more the majority of your sales are coming from. But they also have some higher profit segments, and they don't always break this out, but you can read into what some of the things are that they do and proxy it off of other industries.
They have a services and other category, which is usually for aftermarket purchases. They have an energy generation and storage business, that's a Tesla solar business. They have automotive leasing, so that will be in the kind of financing category.
It often is packaged into automotive sales, but it's important that you break it out. Economics are super different. And then automotive regulatory credits, which are actually a separate line item as well.
So recognizing that these are a couple of the core pieces of the business, I just want to acknowledge one more operating metric before I turn it over to Namaan to talk about the business model. The operating margin for Tesla was 9.2%. So I already gave you the operating income.
I already gave you the revenue, but 9.2%. It's really hard to look at that just in a vacuum, but industry standard, that's pretty decent from a starting place. Namaan, over to you. What the heck is Tesla's business model?
So Tesla's business model is actually pretty simple when you actually open up the hood, no pun intended. So you've mentioned a couple of different— Pun fully intended, Namaan. Sometimes the pun is intended, that's true.
So what does Tesla's business model actually look like? First, let me just start by saying this. I think Tesla is incredibly misvalued and misjudged because of the perception that it's a technology company, when it is actually an automotive company.
So if you listen to the Investor Relations team, they'll try to sell you all day long that Tesla is a tech company and should be valued like Microsoft, Meta, Alphabet, etc. But in reality, Tesla is much more similar to your Fords, your GMs, and your Stellantis of the world. So now that we've got that out of the way, let's talk about what the business model really looks like.
When you open up the hood of a Tesla, or at least of the Tesla business, what you find is that Tesla is a variable cost-based business. For every unit of production, for every unit that is sold by Tesla, every car that is sold, there is an incremental cost that they have to pay. That is the definition of a variable cost business.
In a variable cost business, you are focused less on volume and more on maximizing the contribution margin of each unit you are producing and selling. So now that we've got that out of the way, Jenny Rae, can you talk to us about the three metrics that you would manage to, keeping in mind that Tesla is an automotive company that's a variable cost-based business?
Yeah, Namaan, I'm really interested to see the ones that you lay out here. Mine are actually pretty simple, and I just want to acknowledge, this would be a starting place for me if I was in a case interview or before I walked into a meeting, but there are subtexts to each one of these, and there's a lot further that we could go. But just for the interests of the quick and dirty, these are the number ones that I'd look at.
Number one is the profit per model. I want to make sure that I'm emphasizing marketing and sales and development, placement on the website, promotions, et cetera, to the areas that have the highest contribution margin per model. To your point, Namaan, I do want to maximize pricing, but I don't want to only maximize that pricing for a single unit because Tesla actually has decent margins on their cars.
You can see that a lot of their margin isn't coming from another area of the business. Like the margin is coming largely from the automotive sales business. And so even though they have margin contributions that are at a higher rate in other places, you're going to focus on that automotive sale and you're going to focus on driving the maximum amount of profit in total, but specifically by thinking about which model you do it with.
So that's number one. For me, number two, I'm really interested in the services as a percentage of revenue. So Tesla has services as a part of their business.
They have a really strong integrated services team where you don't go get your Tesla fixed somewhere outside of their ecosystem. I think that's a sticky point. I think it's powerful.
I own a Tesla. I think it's a wonderful customer experience. It's a really remarkable part of their process. And I also still think it's underutilized. So I would really love to see that, which I imagine is a higher margin part of their business versus automotive sales, be like regular maintenance. There's not maintenance reminders to like pop in and have a hundred dollar wheel rotation.
I think there are opportunities for Tesla to drive incremental revenue there and to drive up their percentage of services revenue that they're not currently using with their infrastructure. And the last one is the repeat purchase rate. So while I own a Tesla, I don't love my Tesla, but I feel like even if I wasn't sure or I was on the cusp, I'm not sure that I would buy another one.
There, it has largely to do with some of the challenges of electric vehicles, not Tesla's specifically, but I don't love the limited range. I don't love the long charging times. I don't love the fact that the nearest charging station may be 40 miles away from where I am.
Just logistically, it requires more decisions in a day than I would like to get my car. And so that's not necessarily something they're going to be able to get me over the hurdle for, but let's say I love my Tesla. I've owned a Tesla for a couple of years and I've never been offered the next model.
And I feel like that's a missed kind of opportunity where you could keep me inside the Tesla family. And really Tesla's growth in the future, it's just beginning to approximate people returning their leased cars or replacing their cars and whether or not they choose a Tesla, I think is a very critical point in the company's future because you cannot get future adoption that is at the rate that you've gotten it so far that persists, so you have to go after repeat customers, you have to make sure that your customers are thrilled. And I'm not sure that they're doing what they need to do on that side of the business.
What about you? What are some of your key metrics you'd want to look at?
So Jenny Rae, my first was actually margin per model, and I won't talk about that because you've already done a great job of breaking that down. But the reason that was my primary metric is because we've seen Tesla reduce prices lately. And I'd want to know and see how that's affecting my margins, and if I'm optimizing my margins for my number two metric, which is product mix.
Because if overall margins are going down, there's a few different drivers that could be contributing to that. One could be product mix. He could be selling the same or even a higher volume of vehicles, but you could have more customers trading down from, say, like a Model X to a Model 3.
And so I'd want to know the breakdown and the percentage of revenue by model, so that I could take a look at my product mix and see if I was doing a good job of incentivizing my customers to trade up to more premium models or if they were deciding to trade down. The third thing that I'd be looking at is, at some level, diversifying my revenue streams further. So Tesla has its hands in a lot of different pies.
They run charging infrastructure across the country. They have solar storage. They do financing for their vehicles.
And a lot of these other diversified revenue streams, Jenny Rae, I think speak to your last metric, which was around repeat purchase rate. In an ideal world, you will up the repeat purchase rate. To drive incremental revenue though, from those customers or other customers, maybe what we can do is diversify revenue streams.
Because charging infrastructure, solar storage, these things are recurring steady revenue for Tesla. You can almost take this kind of revenue to the bank. This kind of revenue is not dependent on tax credits or tariffs to ensure that my pricing stays competitive in the marketplace.
And I have a bigger moat around these. So I should have some more muscle that I can bring to this market in terms of pricing power, et cetera. And so I think that there's some advantages structurally that Tesla has in its other lines of business that even though they're small, they're high margin, and there's potential for growth there that I'd be looking to maximize if I was at Tesla.
That's awesome. Well, just we could talk about this for 100 years, but I want to wrap up with a hot take. My hot take on Tesla is that we will see a new diversification of Tesla-powered vehicles that will be premium models in their segments.
So think golf carts, think scooters, I think mobility vehicles. I think that that up market electric vehicle trend has significant market opportunity. And when you look at their P&L now, manufacturing other types of vehicles for the electric market at a premium is a playbook that Tesla has repeated a few times already.
And I think they have the ability to go after that. So get in line for the Tesla golf cart, but it's coming.
I love that. I love that. Mine's similar but different.
So I think that by 2030, you're going to see Tesla release like a standard pickup truck in the US market and a luxury SUV in the US market. I think what they're going to try to do is go up market in terms of the products and the vehicles that they're offering. And most of their business, their highest margin business is in the US.
And this is also the most protected market for them because terrorists prevent the entry of lower-cost Chinese alternatives. And so in this market specifically, you have the ability to compete against some of the mid-sized pickups that are on the market already, like coming out from companies like Ford and GM, that are okay, but don't necessarily provide a premium EV experience. And I think that Tesla's ability to scale production will give them the ability to offer a more premium pickup and a more premium luxury SUV at a very similar price point to other US competitors.
I think the big issue for them is going to be fixing their production capacity issues. We haven't talked about that today, Jenny Rae, but at their factories across the US and really across the world, they've been running into capacity issues. And until those get sorted, I don't think you're going to see this prediction come to pass, which is why I'm saying in the next six years, you'll start to see some of these new models roll off the line.
So then let's say that it doesn't happen. I have a final hot take that I'm going to lay out there. I think you will have Tesla convenience stores in the next few years.
I think you're going to be able to buy a coffee from a Tesla robotic machine at each one of the charging stations. I think you're going to be able to get a car wash from a Tesla robot or maybe a human. But I'm imagining a very robotic, sleek, automated type of set of services.
You have a 20 to 40 minute charge time at a lot of these superchargers. And usually, they're placed in places where you can go to a restaurant or you can do some grocery shopping. But what about vehicle opportunities when you're there?
What if you could have somebody do a $20 car maintenance check where they go around and they check your tires and they check your windscreen? And if there's a maintenance issue, they schedule you for the next piece of maintenance. I think there's an opportunity to create an experience like you would have, you know, going in and grabbing a candy bar, getting some of the items that you would get at a convenience store, which in convenience stores, that's their higher-merchant business.
I think that Tesla has some opportunity to keep people in the ecosystem and create some stickiness.
I love that. There are some Mercedes dealerships here in the US that have done a really good job of that. Building a community of owners where you come in, there's coffee there, there's services there, there's merchandise there, there's the potential for upsells there.
And then there's a communal kind of Mercedes owner feel when you're in the dealership in that kind of owner section. So I think Tesla pursuing that kind of model seems like a really reasonable hot take to me. I like that.
Well, thanks so much, Namaan. I hope you enjoyed it. Just thinking about Tesla a little differently, not just the car or the owner, but the business model.
And I think there's a lot again to talk about. Do you agree? Do you disagree?
What do you think are the hot takes on Tesla? Where do you think they would go? And what would you be thinking about if you were in leadership or advising Tesla?
Make sure that you leave us a comment. Thanks so much for joining.