Tesla turned in some solid numbers for its quarterly earnings Monday, reporting more than $1 billion in net income — 10 times more than in the same time last year — and vehicle sales that almost doubled for the three months that ended in June.
"Public sentiment and support for electric vehicles seems to be at a never-before-seen inflection point," Tesla wrote in its second-quarter letter to investors.
But while there is little doubt that the California-based automaker is benefiting from surging demand for electric vehicles, it does face a number of challenges. Most immediately, they include the shortage of microchips that has hammered industry production plans, leading a number of key competitors, such as Ford, to warn of big hits to earnings in the second quarter and beyond.
Tesla has already reported that production topped 206,000 vehicles during the second quarter despite the shortage, but CEO Elon Musk issued a cautionary note last month when he said the company's "biggest challenge is supply chain, especially microcontroller chips."
"Never seen anything like it," he said. "Fear of running out is causing every company to over-order — like the toilet paper shortage, but at epic scale."
Tesla has now reported its seventh consecutive quarterly profit. Most of what it earned previously came from the sale of zero-emission vehicle credit to competitors. Those sales are expected to slip as other manufacturers launch their own EVs. But Q2 suggested Tesla won't need to rely on ZEV credits much longer, with the unexpectedly strong earnings coming almost entirely from retail sales of its EVs.
In Tesla's early years, Musk said his biggest goal was to push for a massive transformation of the global auto industry. There is no question that has happened. In recent months, automakers have lined up to announce massive electrification plans. Mercedes-Benz last week said it plans to sell nothing but battery-electric vehicles by 2030. Stellantis, the giant formed by the merger of Fiat Chrysler Automobiles and France's PSA Group, outlined aggressive targets of its own just the week before.
Demand is already rising quickly in Europe and China, the world's two largest markets for electric vehicles. But even in the U.S., electric car sales doubled during the first half of this year, with Tesla dominating the market.
Sales are expected to grow in key global markets, and Tesla has been on a hiring spree. And it will clearly need more staffing, not only at its two existing plants, in Fremont, California, and Shanghai, but also at the two assembly plants it is preparing to open in Texas and Berlin.
The German factory has not come without some controversy. Tesla has faced unexpected pushback from the environmentalists whom it expected to be its biggest backers. And that has delayed the opening of the facility — which it desperately needs as it faces growing competition across the European Union.
Already, it has fallen behind key rivals like Volkswagen and Stellantis in the E.U. in overall EV sales. Worse, competitors are taking aim in both China and the U.S. — and with increasing success. Industry data show that the Ford Mustang Mach-E, the Chevrolet Bolt and the Volkswagen ID.4 have collectively taken more than a dozen points of market share from Tesla this year. And a flood of new electric vehicles is in the shadows.
GM hopes to beat Tesla's high-profile Cybertruck pickup to market later this year with its Hummer EV, and Ford is racing to bring out its competing F-150 Lightning.
"To be frank, there is always the possibility that Cybertruck will fail," Musk acknowledged this month, although he suggested that would more likely be the result of its edgy design than the competition's coming after it.
Tesla, meanwhile, faces a number of other challenges:
- A year ago, the company announced plans to bring out an entirely new battery, dubbed the 4680, which was supposed to be cheaper to produce and potentially able to deliver greater range and other advantages.
- Tesla also faces growing concerns about safety issues related to its Autopilot technology, with several dozen investigations underway by the National Highway Traffic Safety Administration.
Despite such concerns, Musk remains as bullish as ever about Autopilot, and a recent announcement helps explain why. The technology carries a hefty price tag, and going forward, users of the autonomous system will contribute a steady stream of revenues. Tesla will begin charging $199 a month for the basic Autopilot and $99 more for the more advanced version.
If even half of all the new Tesla vehicle buyers this year were to opt in to the base system, they could generate more than $1 billion in revenue annually. And the figure would grow accordingly every year.