Thread by @jpr007

AUTOMOBILES - A CAPITAL-INTENSIVE BUSINESS ?

People like to say that the Automotive Industry is a "Capital Intensive" business

But is that in fact the case ?

Let us examine this question using the VW Group's Automotive Business

Its Balance Sheet has €254.1 billion of Assets

1. VW's Automotive Sales Revenues were €184.247 billion in 2020, excluding the Financial Services business

2. To support this, VW had Automotive PP&E in the amount of €62.807 billion, or 34.1% of Automotive Sales

For comparison :

- Tesla has PP&E at 40.4% of Sales across its entire business

- Google has PP&E at 46.4% of Sales across its entire business

As a service business, Google is more capital-intensive by this PP&E measure

3. So how about the amount of Debt that VW Group uses to support all of these PP&E Assets ?

- frankly it is not much : €12.831 billion

- it turns out that factories can and do pay for themselves pretty quickly, as we have seen with Tesla

4. It also takes various kinds of Inventory to run an Automobile Manufacturing business, and VW has €39.1 billion of these or 21.2% of Sales

However, €19.5 billion of this working capital in Inventory is offset by money owed to suppliers as Trade Payables, so the net effect is only €19.6 billion

- Tesla has balanced this even further so that its Inventories are actually LESS THAN its Trade Payables by $2 billion

5. VW also has to fund its Accounts Receivable, which are €17.0 billion or 9.2% of Automotive Sales = 33.6 days of Sales

- this is not so much

- although Tesla is lower with 6.0% of Sales across its entire business

6. Those four items are basically what you need to run an automobile manufacturing company, and frankly they are not so huge relative to the Sales and relative to the Operating Cash Flows which those Sales should generate

- and this says that automobile manufacturing is not necessarily as "Capital Intensive" as it may first appear to be

7. However, these core items do not actually cover all of the items on the VW Group Balance Sheet allocated to their Automobile Business

8. On the Asset side there are two other major items that inflate the VW Group Automotive Balance Sheet :

- Intangible Assets in the amount of €67.8 billion

- Investments in the amount of €25.1 billion

Representing a total €92.9 billion of additional asset capital

9. On the Liability side there are also two major items that inflate the VW Group Automotive Balance Sheet :

- Unfunded Pension Obligations in the amount of €44.2 billion

- Other Liabilities in the amount of €47.1 billion

Representing a total €91.3 billion of Liabilities

10. The largest part of these four items does not relate directly to running an Automobile Manufacturing business with Sales of €184.247 billion

- they are there for other reasons

And their huge scale of ~€90+ billion can give a casual observer a misleading impression of the true capital needed to run such a business

11. As Tesla grows to a similar scale in terms of units and Sales Revenue, it will not need to carry as large of a Balance Sheet in terms of either Assets or Liabilities

- and it will therefore be inherently more capital efficient than the current form of VW Group Automotive