Back

Tesla Doesn't Make Money by Selling Cars.💀🔥 This Sounds Tricky, Right! When Elon Musk was building Tesla’s electric vehicles, he encountered a stark reality of the auto industry: new car sales alone rarely generate profits. In a widely cited interview, Musk shared that a leading automotive investor quipped to him that “car companies don’t make any money on new car sales; they make all of their money selling parts to the existing fleet” This razor-and-blades business model creates a massive barrier for new automakers, since they start without the lucrative replacement-parts revenue stream that established players rely on . Today, Tesla’s own “services and other” segment-which includes parts, maintenance, and repairs-generated roughly $8.3 billion in fiscal year 2023, representing just under 9 percent of total revenue but commanding higher margins than car sales . Understanding this dynamic sheds light on both Tesla’s strategy and the broader challenges facing EV startups. ✅️ Tesla’s Business Model Beyond Car Sales ✅️ Vehicle Sales vs. Aftermarket Revenue Tesla’s automotive segment-which includes vehicle sales, regulatory‐credit sales, and services-accounted for over 90 percent of its total revenue in fiscal year 2024, with pure vehicle sales comprising the lion’s share . However, the margins on new‐car sales are razor-thin: Tesla’s automotive gross margin declined to around 17 percent in 2024, down from a peak of 27 percent in 2021 . In contrast, its services segment-encompassing parts, maintenance, and other vehicle‐related revenue-reported a 5.9 percent gross margin in late 2023 and grew 37 percent year-over-year, reaching $8.3 billion . ✅️ Diversification: Credits, Energy, and Software Tesla has deliberately diversified beyond selling cars. In Q3 2024, while vehicle sales hit $20 billion, substantial profit also came from selling carbon credits and its expanding battery and solar business . This diversification is partly why some analysts argue Tesla “isn’t a car company” at its core but rather an energy and software innovator . ✅️ The Golden Steering Wheel Anecdote In June 2022, during a conversation with Tesla Owners of Silicon Valley club leaders, Musk recounted receiving Germany’s Golden Steering Wheel award and meeting a renowned automotive investor at Axel Springer headquarters . The investor predicted Tesla’s failure and bluntly explained the industry’s profit engine: “Car companies don’t make any money on the new car sales. They make all of their money selling parts to cars - to the existing fleet. So when the warranty runs out…you can sell high-margin replacement parts for the fleet and sell new cars at effectively zero margins.” Musk noted that roughly 80 percent of a car fleet is out of warranty at any time, making replacement parts a perennial, high-margin revenue source that new entrants lack. ✅️ Why Parts Matter More Than Cars 1. High Margins on Replacement Parts Once a vehicle’s warranty expires (typically after four years), owners pay out-of-pocket for the parts and labor. These items often carry gross margins significantly above those on new vehicles . 2. Steady Recurring Revenue An established automaker with millions of vehicles on the road has a reliable aftermarket business. Tesla’s $8.3 billion in services revenue in 2023 demonstrates how even a growing EV maker depends on this segment . 3. Barrier to Entry Without an existing fleet, startups cannot tap this aftermarket. To compensate, they must price new vehicles at a premium-demanding a product so compelling (e.g., superior autonomy, design, or brand) that customers willingly pay above incumbent prices . ✅️ Implications for New EV Entrants Capital Intensity: Developing a parts and service network requires massive upfront investment in distribution, logistics, and inventory. Scale Challenge: Startups must rapidly scale deliveries to seed a future parts business-a catch-22 if early production is limited. Razor-Blades Strategy: Like printers and ink, selling cars at minimal or zero margins can win market share, but only if an aftermarket profits stream exists later.