October 27, 2021

Tesla invests in R&D, not advertising, and the results speak for themselves

Automobiles and advertising are symbiotic industries. The auto industry dropped over 14 billion bucks on ads in the US in 2018, a spend second only to that of the (much more fragmented) retail industry. Automakers advertise in every conceivable medium, from TV to radio to print to billboards to the internet—to say nothing of product placements, dealer support, public relations, press junkets and massive political contributions.

Above: Tesla has an emphasis on R&D (Source: Tesla)

In fact, considering that legacy automakers outsource most of the components of their cars, and in some cases even final assembly, to other companies, it’s not a stretch to say that marketing and advertising are their core functions.

One auto segment that’s notably absent from the constant advertising blitz: electric vehicles. This is very slowly changing—we’ve started to see a trickle of ads for the Chevy Bolt and others. However, until recently, the only ads featuring EVs were artsy Superbowl spots that were forgotten a week after the game. For decades, automakers have been insisting that consumers don’t want EVs, but some of us believe that, for better or for worse, what consumers want is what they see in ads—and what we see are almost exclusively gas-guzzling SUVs and pickups.

But wait—there is one automaker that spends nothing on traditional advertising (although it does lay out for events and other marketing efforts). And how has this company fared in the marketplace? Well, it has rapidly grown to be the largest automaker in the world by market cap, its vehicles consistently outsell competing models in their segments, and it has one of the strongest brands in the history of marketing, right up there with Harley-Davidson or the Grateful Dead.

So, does this mean that massive advertising expenditures are not necessary for automotive success? Well, it sure looks that way. Does this mean that automakers have been squandering billions on unproductive activities for the last century? Well, that could be. What else could the companies have been investing their money in all this time, and how much could they have improved their products as a result?

A recent article from Visual Capitalist looks at the per-vehicle amounts spent on advertising and R&D by some of the major automakers, and it makes interesting reading. The data, which comes from the companies’ official 10-K filings, covers the 2020 auto market.

Above: In the 'lab' with the Tesla fleet (Source: Tesla)

Of the five automakers considered, all except Tesla spend substantial amounts on ads—an average of $495 per vehicle sold. All also invest in R&D to improve their products—but none spends anywhere near as much as Tesla does.

For every car it sells, the California trendsetter plows $2,984 back into R&D, which is more than the US Big Three invest combined. It’s 2.5 times as much as Ford, the second-place R&D spender, and almost 4 times as much as Chrysler, the R&D laggard. Interestingly, Chrysler is also the biggest spender on advertising—$664 per vehicle.

It’s not a coincidence that Tesla’s vehicles are the most advanced on the road, and that the legacy brands are widely considered to be at least five years behind Tesla in terms of battery and software technology. Could they close the gap by moving some money from the ad budget to the R&D center?

“The balance of expenditures between R&D and advertising is part of capital allocation, a decision every business needs to make,” writes Visual Capitalist. “Generally speaking, more R&D can improve and advance the quality of your goods or service, relative to your competitors. If executed correctly, it has the potential to lead to greater pricing power.”

In the more enlightened boardrooms, there’s some soul-searching going on these days. Auto execs are calling crisis meetings, and one even asked the industry’s tormentor, Elon Musk, for ideas about how to dig the industry out of the oily hole it finds itself in. Here’s one: try spending less on inane ad campaigns, and more on bringing your products into the 21st century.