Economic Trade-Offs to Building Model 3

[eisbock]

According to the conference call (and previous ones) the first Model 3 line is like version .5 of the alien dreadnought. In the most recent conference call he said that the Model 3 line will eventually be comparable to the best current line in the world.

The Model Y line will be the true alien dreadnought which is an order of magnitude better and faster than other companies according to the call.

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.

 

[cdub]

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?

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.

 

[Dynastar]

I know Model 3 is only a sedan (even thought it looks more like Model X), but so is Model S. Plus, I thought Tesla was supposed to be different. Practical. Cars of the future and all that. The trunk opening and storage capability for this car are not practical or futuristic. It really seems like an oversight.

Too much thought has gone into designing Model 3 as a taxi or people-mover. That's the reason for the tiny trunk right? Those guys in the back seat need that extra inch of head room! We're supposed to see an affordable sedan and affordable CUV, but we're getting something in between that tries to take the good and bad from each, but that's impossible so you just get a car full of compromises.

This car is trying to wear too many hats and ultimately won't satisfy the crowd that wants a sporty 3-series competitor or the crowd that wants a practical CUV. I don't really want a CUV but it sounds like Model Y is going to be one sweet-ass car.

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.

 

[R.S]

So far you have quite a track record with respect to your expectations vs. consensus here. Who would have thought this was going to be so complicated?

But, hey, in case you didn't want to read through transcripts of previous investment calls or even the voluminous Secret Master Plans the basic idea was that the Model 3 is going to be a $35k base vehicle to compete with the BMW 3 series / Audi A4/ Mercedes C class. Not a $35k vehicle to compete with a $20k Civic.

This, given, the history of EVs could only be achieved by massive cost reductions and scale production volumes. So if Tesla achieves this by hitting the target, then, in fact, they have also achieved these goals as well.

But then again you also believe that if GM can't succeed with this goal then no way can Tesla. Hate to break it to you, the only people who think GM is an industry leader are folks at GM.

I'll go ahead and also predict that GM sells less than 1000 of the CT6 plug in (base price $75k vs $55k non plug in) and Supercruise is going to be extremely limited when it finally rolls out in the 2018 models.

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.

 

[RobStark]

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.

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.

 

[Dan Detweiler]

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

 

[Laban]

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.

It's more than the battery pack:

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

LG is producing the electric drive motor, power inverter module, battery pack, battery heater, onboard charger, high-power distribution module, accessory power module, and power line communication module. The South Korean company is also making the electric climate control system compressor, the instrument cluster, and the infotainment system.

 

[R.S]

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

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".

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.

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.

 

[dsvick]

Such a small opening that only lets you throw away tiny stuff until it's full. But what if I wanted to throw away something big like the remains of that chair my fat ass smashed to pieces the other day? Won't fit in that hole, but it would fit in the can. Now if you take off the cover, everything fits nice and easily. You can take off the cover of a Model S, but not Model 3.

I know Model 3 is only a sedan (even thought it looks more like Model X), but so is Model S. Plus, I thought Tesla was supposed to be different. Practical. Cars of the future and all that. The trunk opening and storage capability for this car are not practical or futuristic. It really seems like an oversight.

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.

 

[MP3Mike]

It's more than the battery pack:

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

Yep, and what do you think LG's profit margin is on the parts they are providing GM?

 

[garsh]

So you think they'd rather burn money than build a profitable car?

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.

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.

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.

 

[melindav]

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.

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.

 

[shrspeedblade]

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.

 

[R.S]

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.

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.

 

[MP3Mike]

But assuming that they want to sell them at a loss is pretty far fetched...

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.)

 

[R.S]

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.)

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.

Here are 4 Moscow Mules, in a nice lime and copper finish, to justify my post.

 

[electracity]

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.)

Tesla is selling cars at below cost too. Everyone making EVs today is executing a long term strategy which excludes positive margins.

 

[sandpiper]

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?

 

[nikeykid]

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?

they have an independent big four accounting firm signing off on their financials

 

[electracity]

How do you know that?

Knowledge of accounting. It is not complicated to understand why Tesla's reported margins are not comparable to other auto makers.