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Hello, friends! Tesla is the most valuable car company in the world now. Its market capitalization has crossed $1 trillion. It is so valuable that if we keep Tesla on one side, and look at the next 10 most valuable car companies, Ford, Honda, Volkswagen, Toyota, and BMW, the combined valuation of these 10 companies, would be equal to Tesla. What is so special about Tesla? What is Elon Musk's magic that has made this company so valuable? In today's article, let's understand Tesla's Business Model.
How Tesla Earns Money
At first glance, you'd think that if Telsa is such a valuable company, it must be selling a lot of cars. This isn't true, friends. Although it is certainly true that the number of Tesla cars sold this year, is much more than last year. It has good growth. But if you compare overall, the number of Tesla cars sold in 2021, or rather the number of Tesla cars that will be sold by the end of 2021, will be less than 1 million.
Here we have all the cars sold by all the companies worldwide. 75 million. It is estimated that around 900,000 Teslas would be sold this year. The overall market share of Tesla is only 1.2%. A meager market share, but an enormous valuation.
Profit Margin of Tesla
Come, let's look at the main Tesla products that are being sold that form the revenue of Tesla. Talking about cars, mainly, there are 4 very popular models of Tesla. Models S, 3, X, Y. The most expensive of them is the Model X. Around $99,900 for this car. Then, Model S at $90,000. Model Y at $55,000. And Model 3, the most sold Tesla car, it's also the cheapest Tesla car, at $42,000.
What is Tesla's profit margin in selling one car? To have a fair estimate, we can look at the Automotive Gross Margin. For Tesla, this is at 30.5%. It is believed to be a very high-profit margin. In comparison, in the past, it used to be around 27%. And now it has crossed 30%. It has seen good growth too. And if you compare it to the other car companies, it is more than in most companies.
Tesla Source of Revenue
Selling cars is the main source of revenue for Tesla. Most of the revenue earned by Tesla is from car sales. But it is not the only source of revenue. So what other sources of revenue does Tesla have? Its sources of revenue can be divided into 3 main categories.
First is the automotive. which includes the car sales. Apart from it, the Sale of Regulatory Credits is also included in it. The second is Servicing. Servicing the cars is also a source of revenue for the company. And the third main source is the energy business of Tesla. You might already know that Tesla doesn't sell cars only. It sells Solar Roof and Power Wall as well.
The concept of the Solar Roof is quite simple. If you have to install solar panels in your home, you can get them from Tesla. The Power Wall has also been created with the perspective of renewable energy. If you have solar panels in your home, but if there isn't much sunshine, where would you get electricity from? You need a place to store energy. Their Power Wall is an energy-storing device.
Combining all the revenue of Tesla, in 2020 it was around $32 billion. It is estimated that in 2021, it will be around $45 billion. Revenue is the amount of money that a company earns. The earnings of the company. Around 80% of the company's revenue is from the sales of Tesla cars.
Interestingly, friends, the money earned by Tesla is less than the money spent by Tesla. You'd wonder how this could be possible. Tesla has a nice profit margin. The cost to manufacture one car, allows it to get profit on sale at a 30% profit margin. On what is the money spent? Friends, the simple answer to it is Research and Development. Tesla is spending billions of dollars on researching and developing good technology. For this exact reason, Tesla had been a loss-making company for many years, up till 2019. 2020 was the first year when Tesla made a net profit.
Tesla doesn't spend any money advertising its cars. You'd wonder how this could be possible. How could a company sell its products without using ads? The simple answer is Elon Musk's popularity. Elon Musk is such a popular personality, with only one tweet, he can impact the price of Dogecoin. So you can imagine, such a popular person doesn't need to spend on advertising for the promotion of his company.
There is so much hype built up for Tesla, that it gets automatic media coverage from all the companies. There are so many new exciting features in their car, they present so many new and unique things, that people get curious about it and write on social media, discuss them, the media companies publish articles about it, news channels talk about it on TV.
Other car companies often sell their cars through car dealers. A third party is involved in between. You would've seen that when you go to buy a car, there is some dealership involved. Tesla doesn't do so. If you want to buy a car from Tesla, you can order it from their website directly. Or you can go to their showroom and buy a car from Tesla directly. So there are no middlemen. No need for negotiations. And Tesla doesn't lose money on commission either. The disadvantage of this model is that for Tesla, this increases their costs. They need to have their delivery centers. Hire staff there, carry out maintenance. Train the staff.