China and the Road to 30%+ Gross Margins

[EV2BFREE]

Hey guys,
I just put up an article hosting on seekingalpha about Tesla and the importance of China. I figured we could have a more meaningful discussion here rather then in the comment section on seekingalpha. Let me know what you guys think!

Tesla Motors Inc (TSLA) news: China And The Road To 30%+ Gross Margins - Seeking Alpha

 

[Ludus]

Well researched. At the price point Tesla has announced, the Chinese market is huge. I was also struck by 2013 sales numbers for Mercedes S class at more than $200k. At $122K Tesla is competitive with mid models of Mercedes, BMW, Audi. I suspect this will produce a lot of buzz among Chinese car buyers in this demographic and they will all be very aware of the details. They may be able to afford to pay more, but I very much doubt anybody likes the image of having grossly overpaid for something compared to others.

It really looks like Tesla will be able to sell as many top of the line models as it can produce for the foreseeable future. It reinforces the idea that they are production constrained rather than demand constrained.

I'd be interested in your take on Tesla's production limits over the next 5 or 6 years. They have made a virtue of necessity, producing most components in house. If nobody makes what you need and you don't need large volumes initially it's the only choice. Now that future demand seems more solid, will major suppliers compete for Tesla component business? Will outside capital flow into building up Tesla's production capacity by flowing into suppliers? Tesla's model S platform has the virtue of high level modularity. Compared to ICE cars it's strikingly simple and assembled from only a few major components. Will it be as hard for Tesla to ramp up to building millions of cars as it now seems if major suppliers come onboard to build components?

 

[EV2BFREE]

According to the recent Q&A in Germany, Elon Musk said that they would not build the factory and machines required to produce batteries until they know the makeup of the Gen III. If the Gen III is to debut at an autoshow in early 2015, they should know for the most past the battery makeup of the vehicle. They have from about that point until they start producing the initial Gen III vehicles to use the batteries made from the giga-factory on the Model S/X. With the Panasonic deal they should have much of the battery supply for the Model S and Model X covered "With this agreement, the two companies update and expand their 2011 arrangement to now supply nearly 2 billion cells over the course of four years." Tesla could slowly ramp up production of the battery machines in the factory and use these machines to make additional batteries for the current models that Panasonic cannot provide. The genius of the reservation system allows them to judge rather well how many batteries will be used and where the cars will be sold in the coming months. I think they would use the approach similar to what they are doing with the Fremont factory. They are expanding the production line piece by piece so they don't build out everything and have half of the machines sit there idle.

 

[MikeC]

Excellent article. I didn't know they were only selling 85s there - I wonder if they may just keep it that way and not bother selling 60s there at all.

I'm optimistic that they exceeded 25% in Q4. They were always confident that they were going to hit 25% and had a roadmap to do so, mostly by the expected increases in volume which dilute the fixed costs. Since they produced more than the initial 20k target, I am hoping that they got to 27+%. They have to save something for the Q4 ER after releasing the news about 6900 deliveries early, right?

 

[vgrinshpun]

Excellent article. I didn't know they were only selling 85s there - I wonder if they may just keep it that way and not bother selling 60s there at all.

I'm optimistic that they exceeded 25% in Q4. They were always confident that they were going to hit 25% and had a roadmap to do so, mostly by the expected increases in volume which dilute the fixed costs. Since they produced more than the initial 20k target, I am hoping that they got to 27+%. They have to save something for the Q4 ER after releasing the news about 6900 deliveries early, right?

In their Jan 15 research note on TSLA Deutsche Bank guided for 27% margin in Q4. Given the history of their analysis, the 27% is in the bag.

http://www.streetinsider.com/Analyst+Comments/Tesla+Motors+(TSLA)+Turns+Sentiment+Around+with+Volume+Announcement+-+Deutsche+Bank/9057361.html

 

[EV2BFREE]

Also mentioned in Oslo, the goal is to reduce cost/kWh by 30%. I vaguely remember JB mentioning that the battery cost was below 25% of the cost of the total vehicle. Lets use an example of a $100k car with the battery pack cost of $25k. If they can reduce that $25k down to $17.5k they will be adding another ~7% to the already high margins. Tesla will be able to sell the same vehicle for the same price and they will be able to pocket an additional 7% of the cost of the car. Lets say they can hit a 30%+ margin in Q1 2014, they will be able to hit 35%+ in the coming years JUST with battery cost reduction. This is without increasing manufacturing efficiency or obtaining better pricing power on larger volume production. According to the transcript provided by brianman, The goal is an even more substantial 40% by the time the Gen III comes out. Once again, that is just a reduction in the cost of the battery which is the most expensive part of Tesla's vehicles.

 

[AudubonB]

You may wish to be careful, EV2B, about conflating "cost" and "price". No Model S has cost Tesla Motors $100K. A good mean price to use for a Model S is $100K.

This is not pedanticism. It makes a great deal of difference when you begin to parse costs, and even more so when you start to get to assessing margins.

 

[EV2BFREE]

You may wish to be careful, EV2B, about conflating "cost" and "price". No Model S has cost Tesla Motors $100K. A good mean price to use for a Model S is $100K.

This is not pedanticism. It makes a great deal of difference when you begin to parse costs, and even more so when you start to get to assessing margins.

I thought that JB was saying the cost of the battery was 25% of the "price" of the vehicles. Perhaps I could have worded it differently but that is what I meant based on what I understood from JB.