The story of Tesla (TSLA, Financial) and its corporate debt, or lack thereof, will go down as a masterclass in conservative corporate debt management and equity financing for many capital-intensive businesses and industries. Makers of planes, trains, automobiles and any heavy industrial business that, if American financial history is any benchmark, have always been reliant on debt for their businesses, expansion plans and continued existence, should take note. Tesla is, for all practical purposes, virtually debt free 20 years after incorporation.
A capital-intensive business
The auto industry is, and always will be, a highly capital-intensive industry due to the significant amount of investment required to design, manufacture and market automobiles. Capital expenditures in this industry are high because of the high cost of materials, labor and equipment used in the production process. Additionally, automotive manufacturers require significant research and development investments to design and develop new models, meet regulatory requirements and stay competitive. This industry's capital-intensive nature means that companies require significant amounts of funding to cover the costs of production and operations, which often requires long-term investments and financial planning. Due to these factors, the auto industry is a capital-intensive industry that demands significant investment to achieve success.
Historically, capital-intensive businesses in the automotive sphere have been heavily reliant on debt financing to sustain their operations. The large amounts of capital required to design and manufacture vehicles, build factories and invest in research and development mean that companies in the industry often had to borrow funds to cover these costs. Debt financing allows companies to access large sums of capital, which can be used to purchase expensive equipment, cover production costs and fund expansion initiatives. However, reliance on debt financing can also be a double-edged sword, as it can result in higher interest costs and debt servicing expenses. Despite this, automotive companies have often turned to debt financing as a means of achieving their goals due to the significant capital requirements of the industry.
How Tesla bucked the trend
First, let's examine how America's other major automakers compare to Tesla on the debt front. The two largest American auto manufacturers are General Motors (GM, Financial) and Ford (F, Financial). There used to be a lot more companies that could have been added to this list but, unfortunately, they have all gone bankrupt or been consolidated into multinational conglomerates because they couldn’t manage their debt loads.
General Motors was incorporated in 1908 and is headquartered in Detroit, Michigan. It produces vehicles under brands such as Chevrolet, Buick, Cadillac and GMC. GM is one of the largest automobile manufacturers in the world and has a long and storied history.
Ford was founded in 1903 and is also headquartered in Michigan. It produces vehicles under the Ford and Lincoln brands and is known for its iconic Mustang sports car and F-series pickup trucks.
Both GM and Ford have played significant roles in the American auto industry and have had a significant impact on the global automotive landscape for well over 100 years.
Tesla was founded in 2003 by Martin Eberhard and Marc Tarpenning with the goal of accelerating the transition to sustainable energy. Elon Musk became the company's largest shareholder in 2004, which earned him a position as head of the board and the title of co-founder thanks to his financial contributions to the business. Musk was promoted to CEO in 2008, and his vision was to create a company that could build high-quality electric cars that were both efficient and "fun to drive."
Tesla's first car, the Roadster, was released in 2008, and it was followed by the Model S sedan in 2012. Since then, Tesla has expanded its offerings to include the Model X and Model 3, as well as solar panels and energy storage products. Tesla's success can be attributed to its innovative technology, sleek designs and commitment to sustainability.
More importantly for its financial situation, Tesla's mission has captured the attention of investors and consumers alike, making it one of the most valuable and influential automotive companies in the world. Through the power of a brilliant vision and Musk's efforts to hype up investors on social media, the price of Tesla stock soared to incredible heights once the electric vehicle craze really took off in 2020 onwards.
Thanks to its high valuation, Tesla has been able to utilize equity funding to keep its debt low. One of the primary advantages of equity financing is that it does not require repayment in the same way that debt financing does. Instead, equity financing involves selling ownership in the company to investors in exchange for funding. This dilutes existing shareholders, but that doesn't matter if investors are still bidding up the stock anyway. This means that companies like Tesla can use the funds raised through equity offerings to support their growth and expansion initiatives without worrying about the burden of interest payments or repayment obligations.
Tesla has also used its equity funding to pay down its existing debt obligations that were incurred before its stock price really took off. By reducing its debt levels, Tesla has been able to improve its financial position and increase its flexibility in terms of future financing options.
Overall, Tesla's use of equity funding has been a key factor in helping the company to keep its debt low and maintain its financial stability. By using a combination of equity and debt financing, Tesla has been able to manage its finances effectively and support its growth and expansion initiatives without overextending itself.
It would be easy to say that Tesla can do this only because the company, and its stock, have boomed over the past three years. This, of course, is true, but it should be noted that GM and Ford have seen their shares boom at different times over the last 120 years for various periods of time, and they never took the same path to raise sufficient equity and rid themselves of debt.
GM and Ford have both seen opportunities over the past century to utilize equity to negate debt, or to just pay it off. During the early 1900s, the automotive industry was in its infancy and there was a great deal of speculation and excitement surrounding the potential for this new technology. This led to a number of booms in automotive stock prices, particularly during the years leading up to World War I. Obviously, hindsight is 20/20, but given the run up of Tesla’s stock in the last decade, it’s interesting to see how 100 years of automotive bankruptcies, failures and bailouts have informed their management of how to effectivley utalize equity and debt.
One of the most notable examples of an automotive stock boom during this period was the rise of GM. Founded in 1908 by William Durant, GM quickly became one of the most successful and influential automobile manufacturers in the world. By 1915, GM had consolidated several smaller automakers and had become the largest automobile manufacturer in the world, with a market capitalization of over $1 billion.
Other notable automotive companies that experienced stock price booms during this period included Ford, which went public in 1919, and Chrysler, which was founded in 1925. These companies were able to capitalize on the growing popularity of automobiles and the rapid expansion of the American economy during the early 20th century.
If history is any judge of American automakers' debt, and domestic auto manufacturing as a whole, debt is the main reason only two American companies are even on this list next to Tesla. Since horseless carriages started losing ground to the automobile, extreme amounts of debt and bankruptcies have plagued every single car manufacturer in America. Here is a very brief highlight of some of the domestic auto manufacturers that have either declared bankruptcy, restructured, or needed government bailouts since 1900.
- Studebaker: One of the earliest American automobile manufacturers, Studebaker struggled during the Great Depression and eventually filed for bankruptcy in 1933.
- Packard: Packard was a luxury automaker that faced financial difficulties in the 1950s due to competition from other luxury brands. The company merged with Studebaker in 1954 and eventually went bankrupt in 1958.
- American Motors Corporation: This company was formed in 1954 through a merger of several smaller automakers. The company struggled financially in the 1970s and was eventually acquired by Chrysler in 1987.
- Chrysler: Chrysler faced financial difficulties in the late 1970s and was bailed out by the U.S. government in 1979. The company faced financial difficulties again in the late 2000s and was bailed out by the government again in 2009.
- General Motors: GM faced financial difficulties during the 2008 financial crisis and was bailed out by the U.S. government in 2009.
- Ford: While Ford did not require a government bailout during the 2008 financial crisis, the company did face significant financial difficulties and had to restructure its operations to remain competitive.
Currently, barring any loan restrictions or covenants, Tesla could pay off the entirety of its debt today with the company’s cash on hand. Below I will outline these three American companies’ corporate debt, market capitalization, total sales, cash and their surplus/deficiency in cash to debt.
Big 3 American Auto manufacturer stats (information from most recent financials publicly available)
Total Long Term Debt
Debt Minus Cash
$17 Billion SURPLUS in Cash
Tesla currently could pay off all its debt tomorrow as it currently sit on a surplus of $17 billion dollars of cash minus corporate debt. Unlike the two other largest automakers in the U.S., Tesla is not beholden to creditors. In 20 years, Tesla has accomplished something that the rest of the automakers haven’t been able to accomplish in 120 years.
Granted, the modern-day U.S. equity market is the hottest equity market in history in terms of the sheer volume of cash that flows into it. Never before has such a demand for equity been available, not even in the U.S. 100 years ago, so it's entirely possible that even if GM and Ford had decided to raise more equity to pay down their debt, it may not have been the right decision - it's hard to tell with the gap of time. However, I believe the mentality that an automaker must carry loads of debt is a thing of the past.