Is Tesla Greenwashing? A Research Paper by Luca Forcella
Research Question: To what extent have Tesla’s sustainability-related investments contributed to changes in its profitability between 2018 and 2023?
Extended Essay
Subject: Business Management
Word Count: 3715
Table of Contents:
Introduction
While sustainability initiatives have become widespread among corporations, their actual contribution to profitability remains unclear. A sustainable initiative focuses on specific actions or a strategy undertaken by a business to reduce its environmental impact or long-term environmental or financial income. Businesses may receive tax incentives or benefits if they switch their business model to fit a more eco-conscious framework (Steinmann et al). Approximately, 80% of customers mention that they are willing to pay more for sustainable products, representing how being seen as more eco-conscious may be an advantage for businesses (Francois Faelli). Tesla is no exception to this, and has also developed new sustainability related initiatives alongside other financial and strategic decisions. Tesla is an American based primarily electric vehicle manufacturer which in recent years has diversified in selling other renewable energy products. Of note, Tesla differs from its competitors in that they only sell electric vehicles. This essay will evaluate to the extent Tesla’s sustainability-related initiatives contributed to changes in profitability between 2018 and 2023, in conjunction with the impact of other strategic business decisions, mainly the impact of economies of scale and their pricing strategy.
Methodology
This essay uses STEEPLE, Porter’s Generic Strategies, and descriptive financial statistics to help differentiate from the increase in profitability from sustainable initiatives and those that are driven from other strategic business decisions. STEEPLE was chosen because it is an accessible tool available with publicly accessible knowledge, to assess the qualitative nature of external factors relative to Tesla such as technology, consumer attitudes, and environmental issues. Porter’s Generic Strategies is used to analyze Tesla’s competitive advantages in relation to market opportunities and the changes made to their manufacturing and pricing of their EVs. Lastly, descriptive financial statistics was chosen to identify and compare trends in Tesla’s profitability, over a period of time. This is useful as it provides quantitative data to identify with more certainty the possibility of financial performance being linked to sustainability-related initiatives. Information was drawn from both primary and secondary sources, including Tesla’s official annual reports from 2018 to 2023, while also analyzing credible secondary sources such as Reuters, The International Energy Agency, and Bain and Company, to fully grasp Tesla’s profitability within the time period. One limitation of reporting secondary sources is that even though they are from reputable websites some may be misleading due to the lack of impartiality.
Sustainability-Related Initiatives
1.1 Supercharger Network
Tesla’s sustainable initiative of the Supercharger Network strengthened its brand differentiation and increased their sales of EVs, however this was offset by the 256% rise in capital expenditure that negatively impacted their profitability. Superchargers are high-speed charging stations that expedite Tesla’s vehicle charging for long distance travel. By creating a network of superchargers around the world, Tesla has been able to increase their market share and differentiation within the electric vehicle market. Primarily, these superchargers reduce consumers’ anxiety around running out of charge while driving for long distances. Looking at Tesla’s Supercharger Network in terms of the STEEPLE framework, both technological and social opportunities have contributed to the growth of the electric vehicle industry, thus increasing Tesla’s vehicle sales. For example, according to Bain and Company in a survey from 2023, of 23,000 people, 64% of them reported high levels of concern about sustainability (Francois Faelli). In this STEEPLE analysis this represents a social factor as there is a growing consumer market willing to purchase products prioritizing sustainability. The survey indicates that there was already consumer awareness in 2023 with 64% expressing concerns on the environmental impact. Beyond just social pressures, creating a new market for eco-conscious consumers, technological advancements such as their Supercharger Network has allowed them to capitalize on these advancements. However, even though Tesla was able to capitalize on both of these external opportunities, there were economic threats attributed to the high initial investment in building these supercharger networks. For example, the growth in Tesla’s capital expenditure increased from 2.5 billion in 2018 to 8.9 billion in 2023, representing a 256% increase in expenditure between these 5 years, as shown in Figure 1.
Figure 1: Tesla's supercharger network capital expenditure increased by 256%, from $2.5 billion in 2018 to $8.9 billion in 2023. Calculated by Luca Forcella using data from Finbox.
This increase in expenditure explains why Tesla’s profitability decreased, at least in the short term with a decrease in 7 percentage points with its gross profit margin falling from approximately 25.3% in 2021 to 18.3% in 2023. (Finbox). However, even though investments impacted their short term profitability, there is no clear evidence of whether the supercharger technology decreased their long term profitability (Tesla). By 2023, Tesla generated $96.8 billion in revenue and approximately $15 billion in net income. This indicates how the decrease of profitability was only a temporary strain in the short term, however, it paved the way for increased sales of EVs due to accessible charging stations.
1.2 Powerwall and Megapack
Tesla’s energy-storage products, the Powerwall and Megapack, used the same differentiation strategy towards home and grid-scale energy storage, adhering to EU supportive government policies despite it impacting their short-term profitability. This amount of saved carbon emissions reflects the impact that Tesla has on the environment. Looking at Tesla’s investment into Megapacks and Powerwalls in terms of environmental opportunities on the STEEPLE framework, many environmental government policies allow companies to benefit if they invest in these sustainability related investments. An example of a prominent environmental policy that companies can benefit from is the Green Deal Industrial Plan, created by the EU, which provides incentives and subsidies if consumers buy electric vehicles in exchange for gas fueled cars. The impact of this environmental policy is reflected in 2022 where more than 90% of electric vehicle sales in the role benefitted from EV-encouraging policies (International Energy Agency). These government policies created a growing market for sustainable infrastructure that both the Megapack and the Powerwall conveniently aligned with. Therefore, as more consumers switched towards sustainable infrastructure due to these government policies, Tesla’s demand increased which helped increase their overall sales revenue. This strategy allowed Tesla to increase their prices to be higher than their competitors while still maintaining those eco-conscious consumers that were attracted to their company due to these sustainable policies. For instance, Tesla’s Model Y costs $43,990 dollars (Tesla) which is 2,390 dollars more than Hyundai’s Ioniq 6 at $41,600 (Hyundai).
Even though Tesla’s investments into both Megapacks and Powerwalls allowed them to differentiate within the electric vehicle industry, additionally they also allowed them to fit into the favourable conditions thereby benefiting from government policies. It was however increasingly expensive and heavily decreased their short-term profits. This decrease in short-term profits is manifested in Tesla’s spending on research and development and how it increased from $1.46 billion in 2018 to $4 billion in 2023, representing a 172 percent increase over that 5 year period (Tesla). Nevertheless, the later financial results suggest that this negativity was short-term. Tesla’s Energy Generation and Storage revenue increased by 112% from $6 billion to $12.8 billion between 2023 and 2025, while gross profits increased by 233%. This suggests that profits increased substantially after 2023. It does therefore suggest that the pricing strategy contributed to the profitability during the period studied.
1.3 Force Field Diagram
Total Driving Forces = 11 Total Restraining Forces = 12
Figure 2: Force field analysis of the driving and restraining forces behind Tesla's sustainability-related investments. Created by Luca Forcella.
Weighing the driving and restraining forces behind these two sustainable investments shows the restraining forces outweigh the driving forces only marginally, yet, Tesla proceeded with these investments anyway. The driving forces behind the sustainability-related investments were measured at a total of 11 out of 15, while the restraining forces totaled 12 out of 15. I scored high capital cost as the strongest restraining force considering it was a 256% increase in capital expenditure. Tesla appears to have accepted lower short-term returns because it believed the long term value of leading the sustainable-vehicle market outweighed the immediate cost.
Economies of scale
2.1 Gigafactories Expansion and Vertical Integration
Tesla’s Gigafactories, for in house battery creation enabled vertical integration where Tesla could control the manufacturing, distribution, and supply of its batteries, reducing the average cost per vehicle. Gigafactories are massive, specialized manufacturing facilities that are designed to produce electric vehicle batteries at immense scales (Tesla). These Gigafactories enabled Tesla to reach economies of scale, which are the cost advantages a business can leverage due to expansion, where the average cost per unit decreases as scale increases (Investopedia). The Gigafactories allow Tesla to produce batteries in much larger quantities. The fixed costs can be spread across the production, technology and equipment which in turn lowers the average fixed cost of battery production and thereby lowers the overall manufacturing cost of each vehicle. Before vertical integration, Tesla had to buy batteries from external suppliers such as Panasonic or other battery distributors, which made each car more expensive to manufacture and reliant on external availability, however, with Gigafactories, Tesla could also reduce their reliance on external suppliers. Looking at descriptive financial statistics, Tesla’s vehicle sales increased from 245,240 vehicle sales in 2018 to 1,800,000 vehicle sales in 2023, representing a 634% increase in sales in just 5 years, as shown in Figure 3.
Figure 3: Tesla's vehicle sales increased by 634%, from 245,240 units in 2018 to 1,800,000 units in 2023. Calculated by Luca Forcella using data from Tesla's Form 10-K annual reports.
In comparison to the previous 5 years, Tesla had a 990% increase in sales between 2013 to 2018. During this time, Tesla increased their manufacturing capacity and by 2018, Tesla was operating Gigafactories in both Nevada and New York (Tesla). This expansion in manufacturing likely directly contributed to the increase in vehicles sold in this period. The increase in sales cannot be fully attributed to the increase in manufacturing capacity providing the ability to rapidly scale, as there were likely other factors such as increased brand awareness and the introduction of new car models, however it can be seen as a hugely important factor.
2.2 Impact on Profitability
Between 2021 and 2023, Tesla’s net profit margin, which measures the percentage of revenue that remains as profit after all operating costs are deducted, rose from 10.3% to 15.5% while their gross profit margin, which measures the percentage of revenue left after deducting cost of good sold, fell from 25.3% to 18.3%. This increase in the amount of profit suggests that Tesla became more efficient as a company, partly due to the expansion of the Gigafactories, allowing them to produce more vehicles at a larger scale. This suggests that economies of scale helped reduce the average cost per vehicle and directly contributed to the positive financial impact. Similarly, this increase suggests that their Gigafactory expansion was successful, where the increase of their net profit margin came right around the time of the expansion of their Gigafactories, with Tesla expanding from two to four Gigafactories by 2023, with the opening of Shanghai, Texas and Berlin. This gross margin decline likely suggests Tesla had to lower their prices to remain competitive and maintain their market share. This decrease suggests that even though the production increased significantly, Tesla may have had to reduce their prices to make sure they remained competitive in the already competitive electric vehicle market and increase their market share. Tesla earned less revenue per vehicle due to the fall in the gross profit margins from the price reductions. The lower prices however, were offset by the increased production and economies of scale. Their revenue from 2021 to 2023 increased $14.997 billion net income suggesting that they were not impacted from lowering their prices. This competitiveness is seen through how overpopulated the electric vehicle market is (IEA). As a result of these lower prices, Tesla was able to sell more, however, their profit per unit sold decreased dramatically. It is challenging to pinpoint exactly the reason for the profitability of Tesla’s sales as the company does not publish profit numbers for vehicles.
2.3 Cost Leadership Strategy and Market Share
Figure 4: Tesla's net and gross profit margin, 2018–2023. Calculated Luca Forcella using data from Tesla's Form 10-K annual reports (SEC, 2021; SEC, 2023).
The lower cost production per vehicle enabled Tesla to make use of a cost leadership strategy, where they cut their prices heavily while still increasing the number of vehicles sold as competition grew. Ultimately, Tesla improved their cost to build by 50% between 2018 and 2023.
As shown in 2.2, Tesla lowered their prices which affected their profit per unit, but their overall profit margin was not impacted because their low costs balanced the price cut and allowed them to reach a new demographic of consumers with a cost conscious focus.
This strategy is where a company aims to be the lowest-cost producer in its industry to increase their market share (Solutions Hub Editorial Team). According to Car Buzz, Tesla’s Model 3 and Model Y prices dropped approximately $21,000 from October 2022 to October of 2023, suggesting to the extent that Tesla was able to use economies of scale to their advantage to lower their prices and remain competitive within the electric vehicle market (Anthony Capretto). This in turn allowed Tesla to create a new market of cost-conscious consumers. In 2023, the average price fell by 25.1% while the average price paid for an electric vehicle fell by 17.7% from January to December which was due to the aggressive price cuts (Kelly Blue Book). These lower prices contributed to Tesla selling more vehicles. There is a correlation showing that the decision to reduce prices did in fact increase sales even though the profit per vehicle was lower. Tesla’s US market share fell from 79% in 2020 to 56% in 2023 as competition grew (Cox Automotive). Although Tesla did see a decrease in market share, due to an increasingly competitive and rapidly growing market, a decline of only 23 percentage points still leads to Tesla being a relatively successful player in the electric car industry.
2.4 Evaluation of Economies of Scale
The 2021 semiconductor shortage shows how Tesla’s vertical integration helped them gain a competitive advantage over other car distributors, since its in house chip design let it keep production running despite competitors like Ford having to pause production. The pandemic led to a decrease in the amount of readily available semiconductor chips, which are the electronic components of every device including the batteries that are in Tesla vehicles. This shortage of semiconductor chips was due to the lack of open chip factories during the pandemic. This lack of supply led to car companies like Ford and Toyota shutting down production lines because they could not get enough chips, where Ford lost over $2.5 billion dollars due to this inconvenience in 2021 alone (Julia Musto). Since Tesla had the preexisting infrastructure of Gigafactories, they were able to design their own chips and due to their vertical integration were able to adapt their car’s software to accommodate these in house chips rather than waiting for an external supply. However, this advantage came with Tesla having to take on capital expenditures that a company outsourcing these chips would not have to bear. This paradox shows that the same vertical integration that contributed to Tesla’s capital expenditure as noted in section 1.1, helped them respond to the semiconductor shortage in 2021 by continuing to manufacture and sell vehicles while other manufacturers struggled with production constraints.
Ultimately, Tesla’s Gigafactory expansion that resulted in them being able to take advantage of economies of scale, heavily increased their profitability within 2018 and 2023 marked through the increase of the net profit margin. It is worth mentioning that there was a decline in gross profit margin likely due to external market factors, however, the data required to interpret the effect on profitability is not publicly available, limiting analysis of this ratio.
Pricing Strategy
3.1 Price Reduction and Gross Profit Margin Impact
Figure 5 :Tesla's gross profit margin fell from 25.3% in 2022 to 18.3% in 2023, following six separate price reductions in 2023. Calculated by Luca Forcella using data from Tesla's Form 10-K annual reports.
Facing rising competition, Tesla cut their prices six times between 2022 and 2023, and their net profit margin barely moved. This solidifies the argument that their cost-saving strategies such as economies of scale helped outweigh those price cuts. According to Reuters, Tesla had reduced the prices of its electric vehicles to stay competitive within the electric vehicle industry (Lienart and White). Tesla knew that to increase their market share, which decreased from 2018 to 2023, they were going to have to trade off the higher price of their vehicles. This is supported by the decrease in their gross profit margin that showed a decrease in Tesla’s profit per unit. Tesla felt pressured to lower their prices as the competition increased with global electric vehicle sales exceeding 14 million in 2023 (International Energy Agency). Returning to the STEEPLE framework, this increase of companies entering the electric vehicle industry reflects the external economic threat that led them to respond with these price reductions. By reducing their vehicle prices, Tesla made it possible that their vehicles could be accessible to a younger and environmentally and price conscious population. In 2023, 72% of potential buyers cited environmental factors as their primary driver and 70% cited fuel savings as major motivations (Pew Research Center, Deloitte).
3.2 EV Price War and Competitor Disagreement
Tesla’s price reductions were a deliberate strategy to pressure competitors and they succeeded. This is manifested through how Leapmotor’s sales fell 86% while Tesla’s sales increased by 35%. However, if the price cuts reduced profit per car more than lower production costs could make up for, Tesla’s sales could increase while its profitability decreased. Therefore, pressuring competitors does not prove that the price war improved Tesla’s profitability. Tesla purposefully used aggressive price cuts to put pressure on competitors with a Huawei representative suggesting that “If we don’t cut prices, we really can’t survive.” (Lienart & White)
Figure 6: Following Tesla's 2023 price cuts, Leapmotor's sales fell 86% and Xpeng's fell 60%, while Tesla's sales rose 35%. Calculated by Luca Forcella using data from CNN.
Thus, Tesla was able to afford this price war within the electric vehicle market due to the fact that they were able to take advantage of economies of scale from the expansion of their Gigafactories. In Tesla’s case, however, Figure 6 and their stable net profit margin indicate that the price war did not affect their profitability. These economies of scale gave Tesla a financial advantage which other companies without such advanced infrastructure could not match.
Tesla’s adoption of this pricing strategy allowed them to lower their prices in order to increase their sales revenue within the electric vehicle market while also knowingly accepting the trade off of lower gross profit margins to enable higher sales volume, increase market reach and competitiveness. However, Tesla’s use of this pricing strategy is a representation of its most aggressive form as the gross profit margin fell from $20.35 billion in 2022 to $17.7 billion in 2023 as it reduced prices; however, ultimately the gamble paid off, as the strategy helped increase sales and strengthen its position. Furthermore, it also significantly impacted their gross profit margins, showing that Tesla chose market share over profitability, however they did remain profitable generating $15.0 billion in net income in 2023 despite only investing $3.97 in Research and Development (Tesla).
Conclusion
Looking at all three factors, economies of scale had the most direct impact on Tesla’s profitability, while its pricing strategy shaped how that advantage was used, and sustainability initiatives contributed more to brand value rather than to a direct increase in profitability. This ranking is based on each factor’s effect on the net profit margin because the net profit margin reflects Tesla’s profitability after factoring in the costs and expenses. Economies of scale, for example, directly reduced per-unit costs which enabled Tesla to take advantage of a pricing strategy which increased their market share, whereas the sustainable initiatives effects on profitability remain difficult to pinpoint without the data available. However, their 256% increase in capital expenditure alongside their 172% increase on research and development during the expansion of their infrastructure, suggests that they placed greater financial pressure in the short-term onto Tesla rather than increasing their profitability drastically within this investigation until 2023. It can be noted that Tesla’s profitability did not increase at the same rate, as the higher costs continued to place pressure on the profit margins. It is likely that the investments were not realized by the end of this study in 2023, but at a later date. Moreover, Tesla’s advantage of economies of scale were the most significant contributor to their profitability improvement within the time frame, shown through their net profit improvement, but the fact that their gross profit margin decreased alongside that increase suggests that the pricing strategy was also involved. Tesla’s pricing strategy demonstrated how they accepted lower profit margins to increase their market share particularly as its US electric vehicle market share fell from 79% in 2020 to 56% in 2023 (Cox Automotive). This does not suggest that the strategy was unsuccessful, as Tesla did remain profitable while using a lower price to strengthen their competitive position. Ultimately, Tesla’s sustainability related initiatives helped them increase their brand awareness and differentiation, while economies of scale and pricing strategy demonstrated a more direct impact on their profitability within the time frame of 2018 and 2023. One limitation of this analysis is that many sustainability related initiatives take longer than the time frame shown and therefore the accurate picture from the investments may not be fully realized yet. Furthermore, the limited published information from Tesla makes it difficult to separate the financial impact of sustainability related initiatives which restricts the depth of the analysis. However, investments such as the Supercharger Network may have supported profitability indirectly, by making the vehicles more accessible to consumers. This contributed to an increase in vehicle sales and thereby contributed to higher total profits.
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