TMC is an independent, primarily volunteer organization that relies on ad revenue to cover its operating costs. Please consider whitelisting TMC on your ad blocker and becoming a Supporting Member. For more info: Support TMC

Economic Trade-Offs to Building Model 3

Discussion in 'Model 3' started by eisbock, May 8, 2017.

  1. eisbock

    eisbock Member

    Joined:
    Dec 16, 2015
    Messages:
    667
    Location:
    United States
    Yes, I'm fully aware of the recent conference call. I was references things Elon said in the past. He was certainly hyping up Model 3's production to be other-wordly, and now we learn it's just regular-worldly. After all, we were supposed to see huge gains in economies of scale with Model 3, which would give us Tesla quality at a cheaper price, but apparently it's just going to be built like every other car? This basically confirms that Model 3 is a cheaper car with the battery premium. If GM or Nissan can't build a premium car for $35k, how can Tesla?

    If Model Y's production is truly as fast and streamlined as Elon says, maybe we'll get the car everybody really wanted at the "affordable" price point, instead of the Compromise 3 in the interim.
     
    • Like x 1
  2. cdub

    cdub Future Model 3 owner / Current original Leaf owner

    Joined:
    Oct 7, 2014
    Messages:
    533
    Location:
    Glendale, CA
    But we ARE seeing huge economies of scale with the Model 3. Remember the gigafactory? Remember how in the TED talk Elon says the fast video of the cells coming out was SLOWED DOWN?

    The car was purpose built for ease of construction so they don't have all of the problems of the past with the Model S & X.

    It's going to be built the same speed as normal cars because Fremont is a normal car factory. That says nothing about the quality of the Model 3 which I believe is going to be great.
     
    • Like x 3
  3. Dynastar

    Dynastar Member

    Joined:
    Dec 7, 2015
    Messages:
    232
    Location:
    Billings, MT

    This is the value car compared to the S. It can't be the jack-of-all-trades wonder car, it has to make compromises. Those compromises will be a deal killer for some, them's the breaks.
     
    • Like x 2
  4. R.S

    R.S Member

    Joined:
    Mar 8, 2015
    Messages:
    469
    Location:
    Munich, Bavaria, Germany

    He still has a point, though.

    We keep hearing, even from pro EV outlets like electrek, they had multiple articles over the last couple weeks, that the Bolt will cost up to 9k more to build than what it will sell for. So if GM couldn't even achieve a 0% gross margin on a 45k EV, I can't see any possibility how the Model 3 will be much better and achieve a 25% gross margin, while maintaining a 45k ASP.

    The Bolt isn't really big, or has a nice interior, or anything really that would make it expensive as a traditional car. Tesla will surely save quite a bit on the battery, but surely not 10k. Motors and inverters could also be cheaper, but Tesla would have to save $11,250 and deliver a better product. I fail to see how that would be even possible.
     
  5. RobStark

    RobStark Active Member

    Joined:
    Jul 2, 2013
    Messages:
    4,169
    Location:
    Los Angeles
    Bolt is a converted Cruze with economies of scale of 30k units per year. It is manufacturing its battery pack in Korea and assembling the Bolt in Michigan.

    Model 3 is a ground up BEV design with economies of scale at 500k plus units per year. Tesla is manufacturing the battery pack in Nevada and assembling the vehicle in Fremont CA.

    This is like comparing Porsche pre VW AG takeover with economies of scale at 30k units per year vs BMW at 2M per year.
     
    • Like x 5
    • Disagree x 1
  6. Dan Detweiler

    Dan Detweiler Member

    Joined:
    Apr 21, 2016
    Messages:
    509
    Location:
    Canton, Georgia
    What everyone fails to remember is that GM has absolutely no interest in making the Bolt profitable. It is a compliance car plain and simple. If it were profitable it would just reinforce the idea that ICE vehicles are going to be a thing of the past in short order. They have absolutely zero interest in that becoming reality.

    Dan
     
    • Like x 8
    • Informative x 1
  7. Laban

    Laban Member

    Joined:
    Feb 27, 2016
    Messages:
    149
    Location:
    Sweden
    It's more than the battery pack:

    The Chevy Bolt will have a host of LG components wrapped inside it

     
    • Like x 3
    • Informative x 1
  8. R.S

    R.S Member

    Joined:
    Mar 8, 2015
    Messages:
    469
    Location:
    Munich, Bavaria, Germany
    So you think they'd rather burn money than build a profitable car? Even at just 40k units globally, 10k in losses per unit is massive. It could lower their yearly profits by as much as 5%. Not sure if that would be called "no interest".

    But economics of scale shouldn't have an influence over how expensive parts and labour are for GM. They build 10 million cars a year, economics of scale would mean they could produce and purchase even cheaper than Tesla.

    I don't want to say I doubt that Tesla will be successful with it's Model 3, or that it will be a great and competitive vehicle. But especially the comparisons drawn to the Bolt sometimes make me question the whole thing. And I really doesn't help that this FUD is spread by pro EV outlets. Because honestly, GM making a massive loss on each Bolt, just parts and labor, while Tesla making a gigantic gross margin on the Model 3, which is believed to be more upscale, just won't work.

    Economics of scale is something that gets thrown around a lot in these discussions, but essentially there is no difference if there are 2, or 5 production lines, to the cost of parts and labor. Batteries will be cheaper for Tesla and so might the inverter and motor, but that just won't cover the costs.
     
    • Disagree x 2
    • Like x 1
  9. dsvick

    dsvick Active Member

    Joined:
    Jun 10, 2016
    Messages:
    1,249
    Location:
    NE Ohio
    To use your analogy if I frequently have large chairs that I need to throw away I would have bought a garbage can that couldn't accommodate them. Since I only infrequently need to do so, I can get by perfectly well with my small garbage can and can take the occasional large object to a dumpster somewhere.

    I understand your point but ultimately it comes down to the fact that the model 3 was designed with a trunk, regardless of the reason, that's what Tesla decided to do. If a hatch is more convenient for some then they'll need to wait for the model Y. If you're in the market for a car and a sedan with a trunk will work for you for most of your needs than you could probably get by with that car, otherwise it isn't the car for you.
     
  10. MP3Mike

    MP3Mike Active Member

    Joined:
    Feb 1, 2016
    Messages:
    3,355
    Location:
    Oregon
  11. garsh

    garsh Re Member

    Joined:
    Apr 2, 2016
    Messages:
    330
    Location:
    Pittsburgh
    No. GM would much rather keep creating their profitable combustion vehicles. They're building EVs because they *have* to (government regulation). And so far, they appear to be only selling the Bolt into CARB states, where the ZEV credits will help offset the losses on the car itself.

    The problem is that they don't have the in-house capability to build a complete EV. So they're paying LG to build most of the EV parts for them.
    You need to look beyond the "economies of scale" argument, and also look at the "middle men". The more people (and companies) involved in producing a car, the less profit you end up having because you have to pay them.
    • Tesla designs & builds almost the entire car. GM is getting all of the EV parts for the Bolt from LG. You can be sure that LG isn't losing any money on that contract.
    • Tesla sells its own cars. GM has to share any profit on car sales with car dealerships. That hurts GM's gross margins. Car dealerships won't lose money on most sales, or they'd quickly go out of business.
    • Tesla is aiming for a highly-automated assembly line for the Model 3. GM probably has a lot more manual labor on their assembly line. Union workers aren't cheap, and robots have the potential to be much faster. But it remains to be seen how these compare.
     
    • Like x 4
  12. melindav

    melindav ☰ reserved

    Joined:
    Apr 10, 2016
    Messages:
    653
    Location:
    Vancouver, WA
    The Tesla Show podcast (if you don't listen to their show, you really should!) recently broke down this exact case - why traditional auto manufacturers are not more profitable and the parts suppliers are very profitable.
    The approach Tesla has taken with in-house parts (for the most part) AND not selling vehicles wholesale to dealerships that then sell them for retail, is a sure way to bring more of that sale price back to the manufacture as profit.
     
    • Like x 4
    • Helpful x 1
  13. shrspeedblade

    shrspeedblade Member

    Joined:
    Sep 29, 2015
    Messages:
    439
    Location:
    CA, United States
    Does anybody have a link to this alleged information that the Bolt is a big money loser? I'm quite skeptical, as while the 1st gen Volt was not profitable the 2nd gen is at least revenue neutral if not small-margin profitable (very much like most GM small cars for decades). The Bolt uses much of the same tech without the expense of the ICE drivetrain at a higher price point, so logic would dictate it would be at least very close to the Volt in profitability.
     
    • Like x 3
    • Disagree x 1
  14. R.S

    R.S Member

    Joined:
    Mar 8, 2015
    Messages:
    469
    Location:
    Munich, Bavaria, Germany
    But wouldn't it make even more sense to just see profitable EVs alongside profitable ICEs? I see no reason why GM would benefit from paying for the Bolt, instead of getting payed. They could limit availability as well, if they want to. But assuming that they want to sell them at a loss is pretty far fetched...

    And GM owns the design to the chemistry as well as to the motor/inverter. LG builds their motors, that is the only difference I can see. Teslas cells are still produced by Panasonic, as far as I know, even if Tesla might have more favorable terms.

    I also don't buy the GM has more workers argument. They sell pretty cheap cars, if you look at the rest of their vehicles. I doubt they forgot how to automatize a production line, when it came to the Bolt. Especially since the Model 3 doesn't seem to be the dreadnought we thought, but rather produced like any other vehicle.
     
    • Disagree x 2
  15. MP3Mike

    MP3Mike Active Member

    Joined:
    Feb 1, 2016
    Messages:
    3,355
    Location:
    Oregon
    Technically they aren't selling it as a loss because they are getting ZEV credits that are worth ~$10k for each Bolt sold in a CARB state to offset the actual loss of selling the vehicle. (Which allows them to keep selling their very profitable large trucks/SUVs.)

    How many Bolts do you think they would sell if it was priced at $47,500, which would be about the break-even point. (From what we have seen reported.)
     
    • Like x 1
  16. R.S

    R.S Member

    Joined:
    Mar 8, 2015
    Messages:
    469
    Location:
    Munich, Bavaria, Germany
    But they also plan to sell it in Canada, Korea and Europe. But essentially my point is that there is an incentive to build it as cheap as possible. There is no reason in making it artificially expensive, since the only ones paying that tap is GM.

    main_variation_Default_view_1_425x425..jpeg
    Here are 4 Moscow Mules, in a nice lime and copper finish, to justify my post.
     
    • Like x 1
  17. electracity

    electracity Active Member

    Joined:
    Jun 8, 2015
    Messages:
    2,595
    Location:
    60606
    Tesla is selling cars at below cost too. Everyone making EVs today is executing a long term strategy which excludes positive margins.
     
    • Disagree x 12
    • Like x 2
  18. sandpiper

    sandpiper Active Member

    Joined:
    Sep 25, 2014
    Messages:
    2,012
    Location:
    Ontario, Canada
    How do you know that? Tesla reports positive margins on vehicles, but negative profits due to high levels of capital investment. It's possible that Tesla is playing games with the numbers, shunting OPEX to CAPEX, but I'm not sure how anybody outside of Tesla could know that?
     
    • Like x 5
  19. nikeykid

    nikeykid Member

    Joined:
    Apr 9, 2016
    Messages:
    248
    Location:
    Fremont, CA
    they have an independent big four accounting firm signing off on their financials :)
     
    • Like x 2
  20. electracity

    electracity Active Member

    Joined:
    Jun 8, 2015
    Messages:
    2,595
    Location:
    60606
    Knowledge of accounting. It is not complicated to understand why Tesla's reported margins are not comparable to other auto makers.
     
    • Disagree x 1

Share This Page