Tesla Capital Expenditure (CapEx): A Closer Look

The auto industry is highly capital-intensive by nature. That’s why there were only two auto companies in the United States that didn’t file for bankruptcy when the recession struck: Ford and Tesla. For Tesla, investing in production, new product development and technology is a must and as a result their capital expenses have soared in the last ten years. It’s highly likely for the trend to continue as Tesla chases its dream to build a million cars.

Tesla Annual Capex from 2008 to 2017
Tesla Capital Expenditure from 2008 to 2017

Between 2008 and 2017, Tesla spent a whopping $8.116 billion towards capital expenditures. Add the $1.26 billion the electric car maker spent in the first half of 2018, you are looking at a cool $9.37 billion since 2008.

Tesla invested heavily in Model 3 production, which explains the surge in Capex over the last eight quarters. But the rate has come down a bit. Tesla spent $1.265 billion during the first two quarters of 2018, which is 16.2% lower than the $1.511 billion the company spend during the same period last year.

Tesla was initially expecting capital expenditures for 2018 to come in at a bit more than the $3.41 billion the company spent in 2017. Now it expects to spend slightly less than $2.5 billion.

Capital expenditures in 2018 are expected to support increases in Model 3 production capacity at Gigafactory 1 and the Tesla Factory, and for building additional stores, service centers and Superchargers.

However, we have significantly reduced our projections for capital expenditures by focusing on the critical near-term needs that will benefit us primarily in the next two years.

At this stage, we are expecting total 2018 capital expenditures to be slightly below $2.5 billion. Ultimately, our capital expenditures will develop in line with Model 3 production, our profitability and our operating cash generation. – Tesla Q3 Earnings Report

The original Gigafactory has been one of the biggest cash burners for Tesla in the last five years. Tesla has used cash of $2.589 billion towards Gigafactory 1 construction since 2014. But even that spending has come down sharply in the last months as Tesla used cash of $402.4 million towards Gigafactory 1 construction during the first half of 2018, 46.2% less than the $758.2 million the company spent during the same period last year.

Tesla’s Spending on Gigafactory 1.(2014 to 2018)

Tesla’s capital expenditure has been coming down this year compared to last year because of the massive investment the company made in the last four quarters to ramp up Model 3 production. Between the third quarter of 2017 and second quarter of 2018, Tesla has gone from building zero Model 3s per week to more than 5,000 Model 3s per week.

With most of the infrastructure already in place, the company is expecting a further slowdown in Capex as it increases production of Model 3 from 5,000 units per week to 10,000 units. Tesla attributed the slowdown in spending to increasing production efficiency.

During the second quarter earnings call Tesla CEO Elon Musk told analysts that “by simplifying production lines, by speeding them up, by, in some cases, everything is being done manual instead of automatic, and in other cases, having be done automatic instead of manual, we’ve been able to achieve dramatic improvements to the output of existing lines, which means that our CapEx growing from 5,000 cars a week to 10,000 cars a week is a tiny fraction.”

He added: “CapEx growing from 5,000 to 10,000 is a tiny fraction of the CapEx needed to grow from 0 to 5,000 Model 3s. This is, I think, very good news for capital efficiency of the company.”

Does this mean that Tesla’s Capex will keep edging lower?

Not possible, because Tesla wants to keep moving towards an annual production capacity of a million cars or possibly even more. As Tesla keeps building more integrated production-enabled Gigafactories around the world, their Capex is going to be heavy. Tesla now expects Gigactory 3 in Shanghai, China, to cost around $2 billion dollars for an initial annual production capacity of 250,000 units.

Tesla will need another eight to ten billion dollars to increase production capacity beyond 1.5 million cars per year. It might take many more years, but the point is, without billions of dollars in investment, production capacity will not grow.

Tesla’s Capex is slowing down because Tesla has already done most of the necessary investments to increase production in its existing facilities, and construction of the new production facility in China will need another 6 months to a year to kick off. It’s a brief period of lull or breathing space for Tesla to take a closer look at its spending patterns, identify areas where it can pull things back, increase cash flow and improve its bottom line.