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High Gross Margin vs Affordable EV

Discussion in 'Tesla Motors' started by constraint, Jun 7, 2013.

  1. constraint

    constraint Member

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    Everyone knows the short term goal is 25% gross margin on the Model S production. Musk recently also said that gross margin should achieve Porsche's margin which at one point was close to 50 percent. So i want to know how Musk can be telling his investors we are going to overcharge for his car while maintaining a goal of affordable cars for the masses? I am not saying Tesla needs to maintain 10% Gross like the GM's and Ford's in the world, but how much is too much? Am I missing something or is musk just raising the hype again?
     
  2. DaveT

    DaveT Searcher of green pastures

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    At the shareholder meeting, someone asked about this and the question was if Tesla could match Porche's gross margin of 18%. Elon Musk said that they could approach that number over time (post-Gen III).

    My interpretation is that they can get 25% gross margin on Model S, but with Gen III their gross margin will be significantly lower (maybe 10-15%) and they will try to approach 15% gross margin with Gen III and together Model S at 25% gross margin would be near the 18% of Porsche. This would be several years after the intro of Gen III.
     
  3. pilotSteve

    pilotSteve Member

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    I heard Elon say (in a kind of mumble) "I'd rather sell Gen IIIs at lower margin and achieve high sales volume. We will have cost saving with high volume".
     
  4. deonb

    deonb Active Member

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    I for one am thrilled that Tesla made $25'000 profit from me (well, future averaged) which they'll use to invest into R&D to create our EV & Energy future. It makes me feel like I was able to contributed to something bigger than if I were to just buy a BMW M5.

    The fact that I felt that their profits goes to a cause which I am in great support of was actually very much a part of my purchase decision.

    (And I felt that way before TSLA soared and I made more than that back anyway :) ).
     
  5. ggies07

    ggies07 Active Member

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    Which is exactly why he started the company and I'm glad he actually said this. I'm invested in the company as well, but I'd rather see EVs take off for the masses than better earnings. This is exactly why he's not going to have an IPO for SpaceX.
     
  6. CapitalistOppressor

    CapitalistOppressor Active Member

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    The gross margins on the Model S are justified for a couple of reasons.

    First, the Model S is a bargain compared to it's competitors, even priced as it is. It's a better car, with a competitive price, and once you factor in TCO it is dramatically cheaper to own over the life of the vehicle.

    Second, Tesla must have a really high margins, because the volumes on the Model S will never be high enough to generate the kinds of profits necessary to finance Gen III. The only other route to self financing future development is a capital raise. And nobody is going to give Tesla a lot of money to develop a speculative product unless they can demonstrate high levels of profitability with the current one.

    Either way, Tesla needs high margins on the Model S, and once you get them you might as well finance Gen III without diluting the value of the company by raising capital.

    And as mentioned already, Elon expects to sell Gen III a much lower margins in order to stimulate high volumes. I have no problem with that strategy whatsoever.
     
  7. constraint

    constraint Member

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    TCO of a MS only works if you compare against a 7-series and you ignore the depreciation of the battery pack (I know Musk says he guarantee's resale value, but I think of that battery pack more like a computer when new and improved models come out). The MS is expensive and out of the reach for many people. Many of the people that are buying this car are stretching their budgets and have been rolling Honda civics until now. I completely agree for the short term high Gross is warranted considering it took 7 years for Tesla to get a profit. Longer term when Gen 3 comes out 15-18% is reasonable also considering Tesla doesn't have some of the legacy costs that GM and Ford have.

    Shortly after the investors meeting i read an article that was stating Porsche's 50% Gross figure and got concerned. One thing i have noticed following Tesla is how inaccurate "news" is lately.

    Past few Porsche luxury sports sedan’s gross profit margin has remained above 50%, compared to the first quarter of the Tesla electric car today gross margin was 17%.
    http://www.thestockmarketwatch.co/tesla-ceo-says-future-gross-margins-or-over-porsche.html
     
  8. callmesam

    callmesam Member

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    You write "I think of that battery pack more like a computer when new and improved models come out".

    The better analogy is that the car is like the iPhone that gets the new OS every year. This car in 8 years will likely have so much more functionality than when we bought them.

    Compare that to everything else from Ford, GM, Toyota, Daimler etc. Those cars age, and badly.

    Your concern about the battery is out of proportion to the risk.

    Everyone agrees that batteries are getting lighter, more energy dense and cheaper. In 8 years, a "rebuild" of your Tesla will make it almost like new.
     
  9. constraint

    constraint Member

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    The battery on the MS is half the cost of the car. In 5 years, I think it is safe to assume that battery pack cost could be half of what it is today. Used MS's value will decrease faster because it will be the only case where the new car is very possibly cheaper then what was paid in the past for the same functionality. Picture 5 years down the road with a MS with 265 mile range for 50 grand (when everyone paid 70 at the start), used cars will take a hit. You see examples of this with the Leaf when they dropped the prices this year where used leaf's with 10,000 miles are selling for 13,000 bucks.

    Yes software updates might be cool, but you are still dependent on the physical devices present on the car during the time of purchase. You will never get an update for self driving as the sensors to make that happen will not be installed on your car. You may get better navigation, system sleep functionality and so forth which will incrementally increase the value of used cars but there will always be certain features in the newer model that cant be supported in the old models. For instance Telsa is planning on implementing 4G (at least that's what i heard), but the hardware to make that happen doesnt exist in the early cars.
     
  10. callmesam

    callmesam Member

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    Adding the driving sensors is ALREADY happening in the EU deliveries. Check the teslamotors.com website.
     
  11. PopSmith

    PopSmith Saving for a Model 3

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    IMO, this is the reason for Model X before Gen III. The capital to bring Model X to market should be lower than a whole new vehicle (i.e. Gen III) since it could largely use the same components as Model S. By utilizing a lot of the same components the cost-per-unit is lower and the margins are higher (in theory). Not to mention that Model X targets (i.e. Audi Q7, Porsche Cayenne, Infiniti QX, Acura MDX or Lexus RX) are the usually in the top-three best-sellers for their respective manufacturers.

    On the Gen III note, it sounds like it will essentially be a smaller Model S. I could see Tesla also announcing a smaller Model X for 2018-2020 which could quickly outsell any competing vehicle. That would be huge for Tesla since "crossovers"/"small SUVs" are often the best-selling vehicle for most manufactures (at least in the U.S.).
     
  12. callmesam

    callmesam Member

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    This has already been announced.

    The Gen III is 3 cars:

    1. 4 door sedan (BMW 3 equivalent) (Late 2016)
    2. Smaller SUV (2017)
    3. Roadster V2 (2017/18)
     
  13. DaveT

    DaveT Searcher of green pastures

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    I would imagine Gen III SUV gets pushed back to 2018 (and Roadster V2 to 2019-2020) as Gen III sedan demand will probably exceed everyone's expectations and Tesla will have a difficult time enough just trying to produce enough Gen III sedans.

    It's similar to what happened to the push-backed date of the Model X. Originally it was slated for late 2013 because they thought they needed it to get to 35k units overall in 2014. But when Model S demand was better than expected, they pushed back Model X because they could meet their 35k+ unit goal for 2014 with just the Model S.
     
  14. Soflason

    Soflason Member

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    He's also mentioned a truck a few times (see below) - has he ever put any rough date on release though?
    Teslas Elon Musk Tweets Out More Details on Mysterious Electric Truck
     
  15. PopSmith

    PopSmith Saving for a Model 3

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    Ah, good catch. For some reason I'd forgotten that Tesla announced a smaller SUV and was just thinking Gen III sedan and Roadster 3.0. :redface:
     
  16. sleepyhead

    sleepyhead Active Member

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    Actually the guy who asked the question referenced Porsche's OPERATING MARGINS of 18% and not gross margins, which is a big difference. The question was very poorly worded, and caused some confusion. I still don't understand if Musk meant that we will exceed Porsche's margins, because he had 25% in mind vs. the 18% that the guy referenced (which was operating margin). I assume Musk knows what Porsche's gross margins are ~40%, so maybe he expects 40% - 50% margins. IDK, I am still confused on that question.
     
  17. callmesam

    callmesam Member

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    @Sleepyhead

    That's a good catch. I actually think Elon knows Porsche's margins down to the 0.1%.

    Elon always discusses Tesla in terms of "gross margins" and the MINIMUM being 25%. Some of the goalposts of his share vesting require consecutive quarters above 30% gross margins for 4 quarters consecutively. Tesla Motors - Quarterly Report


    So in light of the facts of Elon's contract, and goals discussed up to this point. And discounting the imprecision of the question, I think that Elon is saying that the Model S will achieve Porsche-like margins. The Gen III will be less than THAT margin. Not less than 18%. Musk didn't acknowledge the question's premise, only the REALITY of Porsche's gross margins.

    In addition, Musk mentions "our CAPEX will be significantly higher" than Porsche's.
     
  18. constraint

    constraint Member

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    I would assume capex would be higher as it is a newer company that is planning on owning a significant distribution and charging network. I do not know how on earth Tesla could possibly manage an 18 percent overall profit given their enormous R&D budget and assume Elon was more referencing his plan for 25 percent Gross on model S. With that said and with the gaps that have been filled for me in this post, I have to agree that Elon's comments were more of a reference of creating high profits at first instead of hitting the exact values that Porsche hits with its Gross Margin's.


    It makes perfect sense to have the S be relatively high at 25% until they are able to supply the current demand for this car, but long term it doesn't solve the affordability question at all. Lowering the gross over time as a result of spreading fixed costs over a much higher production number makes perfect sense to me and seems the correct strategy.

    A lot of the gaps are getting filled in for me so thank you.
     
  19. neroden

    neroden Happy Model S Owner

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    What you're missing is the long-term business model.
    (1) Make high margins on the early, high-end cars -- use this to pay the R&D costs, the factory purchase costs, the costs of building the network of stores and service centers, etc.
    (2) After all of those "startup costs" have been spent and all that stuff is built out, produce later, "mass market" cars in high volumes with lower margins. Now you don't need to pay for all of those startup costs -- it's already been done. So the lower margins are OK.
     
  20. ItsNotAboutTheMoney

    ItsNotAboutTheMoney Active Member

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    First of all, nobody actually knows what the battery costs, because Tesla isn't telling anyone.

    Secondly, batteries becoming cheaper does not directly decrease the value of the car. It can only lower value in two ways:
    a) The new information provides a better valuation
    b) Lower prices increases volume and lowers unit costs.

    If other people have the same assumption as you about battery prices and improved amenities that's already included in the used value.
     

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