When you take simple math in the auto industry, and apply it to the principle of the dollars spent and received, divided by the number of cars sold, you can certainly come up with some interesting stories. Just like any manufacturing company what car companies don’t tell you is just as or more important than what they do tell you. As companies that have and use some of the highest amounts of cash in the world and this cash is used in the hundreds of millions of dollars every year for a variety of reasons.
The fact that car companies use cash in such a way sometimes causes them to think the public is stupid enough to believe their stories about taking losses on vehicles. These companies seem to want to prey on our emotions and lead us to believe that they are cash poor in order to bring us the vehicles we want. If a company were to actually lose money every time they sold a vehicle they would not be in business for very long and simple business smarts will tell you the more items sold the farther in the hold the company would be, so why would they keep on doing business?
This is actually the story we were told about Tesla Motors which claimed it took a loss of $4,000 on each and every Model S that was sold during the second-quarter of this year. The numbers do back up that statement with 11,532 sold and a reported loss of $47 million which does come out to $4,000 per car. Even though that math is somewhat sound, what you don’ see or realize is that the money Tesla is spending to develop their new vehicles is a huge part of the equation that must be considered.
For several years Tesla has been working on the Model X crossover SUV that is to be battery powered and has vertical opening doors. Thus far Tesla has spent $831 million on this project and plans to spend another $700 million to bring the Model X to market. This is more than what many car companies estimate to spend when it comes to a new car coming to market, but this is Tesla and they are doing things a bit differently, which does cost more than the normal vehicle in all ways.
What should be taken into account is the fact that this money for the Model X would be part of an entirely different account than the Model S and we would then see the profits that are really being made. To give an idea, the $47 million in reported losses all account for the $359 million that was spent during the same quarter to work on building the Gigafactory, which would certainly reflect a huge amount of profits for the cars sold if this were taken out of the equation.
Tesla is not the first company to ever try and state that a car costs more to build than it does. Chevrolet tried to say that each Volt cost $250,000 to make and then this number was dropped to $80,000 which was still very much far-fetched. Its accounting reporting like this and the story from Tesla that create a look at the money a car company makes that seems to beg the question of why they are still in business. Of course these numbers are not anywhere near accurate and for actual accountants a look at the books would reveal the fact that these companies are really making good profits on their models, as I said, if you lost money on every item you sold it would be time to get out of business quickly.
If we take the numbers from the second quarter alone, the reported $47 million in losses and subtract the spending of $359 million the difference is $312 million in the positive. This divided by the Model S sales comes out to $27,055 made on each of these vehicles. This is of course a simple math formula, but it gives you an idea of just how ridiculous the claim that a company can make really will be when they tell you the take a loss on each vehicle sold.
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