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Tesla's 2020 Profit Didn't Come From Selling Cars, But Regulatory Credits

For years, Tesla followers have pointed a finger at electric vehicles built by the rest of the automotive industry - as few of them as they were - and highlighted the fact those companies were selling their EVs at a loss.
2021 Tesla Model S 20 photos
Photo: Tesla Motors
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That, they said, showed how unprepared those manufacturers were to embrace the new technology (which wasn't really new) and stand any chance against Tesla's highly competitive vehicles. Well, guess what? It's 2021, and Tesla still isn't making a profit by selling EVs.

Wait a minute, Tesla has just declared a $721 profit for 2020, so what are we on about? It may sound weird, but both statements are true: Tesla did have a record year delivering just short of 500,000 cars and finishing with a substantial positive net income, and yet, if its income relied strictly on the cars it sold, the year would have ended with a negative balance.

The difference came, ironically enough, from the coffers of various legacy car manufacturers. There are currently eleven states (California, Colorado, Connecticut, Maine, Maryland, Massachusetts, New York, New Jersey, Oregon, Rhode Island, and Vermont) that require automakers to sell a certain percentage of zero-emission vehicles.

Fail to do that, and they can buy regulatory credits from other manufacturers who exceed their quote. Since Tesla only makes EVs, it obviously has plenty of those credits to go around for anyone willing to come up with the money, and since it's the law, they kind of have to.

According to CNN Business, this tactic has earned the Palo Alto carmaker $3.3 billion over the past five years, with the bulk of it ($1.6 billion) coming in 2020. If you do the math, you'll see that even with 500,000 vehicles sold, Tesla would have still registered a loss of over $800 million if it weren't for the money paid by the companies that are slower to react to the changes in the market.

The question now is whether this is a sustainable business plan for Tesla in the medium to long run. With more and more signs of manufacturers finally making serious efforts on the EV front, the 2020 situation looks increasingly less likely to repeat.

According to the same publication, Tesla is well aware of that. "This is always an area that's extremely difficult for us to forecast," said Tesla's Chief Financial Officer Zachary Kirkhorn. "In the long term, regulatory credit sales will not be a material part of the business, and we don't plan the business around that. It's possible that for a handful of additional quarters, it remains strong. It's also possible that it's not."

Detractors could see this as their turn to point the finger at Tesla claiming this was the reason why the company afforded to sell its cars at what could be considered discount prices. But they'd be wrong. From a strictly automotive point of view, Tesla's revenue from selling EVs outweighs the costs associated with building the cars, so it is making a profit. $5.4 billion, to be exact, so it's quite a big one.

It's actually the company's very ambitious expansion that drives expenses so high and gives those regulatory credits such an important weight. Considering the company's incredible growth rate, the very fact it managed to register a profit is remarkable and shows that Tesla's business plan, while risky, can also be highly rewarding. How else would you describe a company that sells just 500,000 cars out of a global total of 70 million and yet has a stock value roughly equal to that of the next 12 carmakers combined?
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About the author: Vlad Mitrache
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"Boy meets car, boy loves car, boy gets journalism degree and starts job writing and editing at a car magazine" - 5/5. (Vlad Mitrache if he was a movie)
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