How is Tesla making money on the Model 3?

[Garlan Garner]

I understand that this question is of no concern to the masses here, however I still wonder how TESLA is going to make money on the M3?

I believe the mass amount of reservation came in light of the fact that most people look at the M3 and say "This is a good deal for ME". Which is just fine, however I wonder how its a good deal for TESLA.

I purchase LifeP04 batteries for many of my projects and I wonder how TESLA is going to be able to build/purchase the battery for $35K let alone provide a car that surrounds the battery. Oh well, I suppose they have found a way somehow.

Fiat Chrysler CEO says he will copy Tesla’s Model 3 if Musk can make a profit off it

 

[MitchMitch]

Take a small loss on each car, but make it up with large volume!

 

[GSP]

Tesla execs have stated that they plan to reduce the cost of almost all components by half, by a combination of economies of scale (like the gigafactory) and improved engineering (all new design with newer, more cost effective technology). This should allow the price to be cut in half and still provide a profit. They also have said that they will accept less profit margin than the S.

So, they have a plan. I hope they don't have too many bumps in the road getting there.

GSP

 

[Josh the German]

Take a small loss on each car, but make it up with large volume!

Mathematics at its best: A small loss on each car sold with large volume will create a big loss - minus multiplicated with plus is minus ...

 

[HanSolo]

Mathematics at its best: A small loss on each car sold with large volume will create a big loss - minus multiplicated with plus is minus ...

I am sure he was joking, but you will have to forgive us Americans. We don't do so good in math.

I am actually concerned as well because Tesla will need to find a way to be profitable sooner than later. I know that green credits, CO2 exchanges, and green subsidies are heavily factored into their business strategy, but I still have no clue how they intend to deliver this car for $35k even if it is a hot and sexy stripper.

 

[McRat]

Mathematics at its best: A small loss on each car sold with large volume will create a big loss - minus multiplicated with plus is minus ...

Sadly, a lot folk believe the economies of scale will solve all problems.

I'm not sure Tesla is actually making money on 2wd Model S70 strippers at $72,700 USD. So cutting component costs in 1/2 and labor in 1/2 probably isn't going to do it. There is something called fixed overhead that screws that scheme up.

It will be interesting. Right now, Tesla is spending about $10k labor per car best I can figure. They cannot do that for the Model 3. It's going to have to be under $4k.

 

[Thomas Edison]

The best way to do that clearly is with more automation. To be able to push out the number of cars they want to annually they're going to have to increase automation because manpower is just plain slow in comparison.

Sadly, a lot folk believe the economies of scale will solve all problems.

I'm not sure Tesla is actually making money on 2wd Model S70 strippers at $72,700 USD. So cutting component costs in 1/2 and labor in 1/2 probably isn't going to do it. There is something called fixed overhead that screws that scheme up.

It will be interesting. Right now, Tesla is spending about $10k labor per car best I can figure. They cannot do that for the Model 3. It's going to have to be under $4k.

 

[Josh the German]

I am convinced that we as a community won't fail animore. Now there is not only the company and manufacturer Tesla, but a steadily growing number of people who believe that this step is the right one. In case of potential failure we shall finance the vision via crowdfunding. There won't be a step back.

Best regards from Germany

Josh

 

[CHG-ON]

Take a small loss on each car, but make it up with large volume!

Haha. Love it. Most definitely a sales person's POV! Seen it a million times and seen those companies go kaput.

Tesla is counting on the good old economies of scale. I think they will most definitely see them. Especially in the batteries. Just wait. Battery prices will fall like a rock once volume hits the big numbers. It has happened in every single item that has hit the mass market. Econ 101. Raw material will skyrocket early on, as we are now seeing. They will then plummet over the long haul, once supply becomes saturated.

Investing 101. Get in early in raw material. Get out quick and move to those who add value.

 

[Dutchie]

I think Elon gave a small hint. Make money on the options! He expects that the a arame M3 will sell for $42,000. So $7,000 on options. A lot of options are software driven like auto pilot, ludricous etc. There are huge margins on these software related options.

 

[Ubbe]

Well, as I understand it: except for the battery and motor(s) you've got the same components as a ICE car, so there we're even.
Compared to an ICE engine the AC induction motor should be less costly --and in overall complexity there's no contest.

The battery pack, on the other hand is one thing extra compared to the ICE car. But the battery is not composed of anything especially exotic or expensive, but the process of mixing and cooking the secret sauce is the expensive part.

If you can scale up production (i.e. produce a LOT of cells) the cost of the process become a smaller part of the cost of the cell. -And the cost approaches that of the raw materials (relatively cheap). Incidentally Teslas plan is to start with base raw materials in one end of the Giga Factory and output finished battery modules/packs in the other end. So they're cutting out some middlemen at the same time.

So yes, in that way they make it up by large volumes

If (AC induction motor + it's support systems) cost less or equal to (ICE engine + ICE support systems) = no worry.

If it costs more... well for starters you've got a better performing car in the BEV model, so how much is that worth for you? -And the energy ("fuel") costs are also lower for the BEV.

 

[S'toon]

I think people are making an assumption that Tesla is losing money on each car sold now. They're not. They're making reportedly about $20K per car. It's just that their expenditures right now, building up the company's infrastructure from scratch is outpacing the money coming in. Once that infrastructure is in place, the Gigafactory, the factories, the service centres, etc. then any money coming in afterwards balance the books and the costs will come down.

 

[cpa]

I think that by the time Tesla starts to manufacture Model 3s, the "economies of scale," will not have kicked in sufficiently to provide much of a profit margin on the stripped-down basic $35,000 price. That car might only have two grand or so in profit margin. Like others have said, most of the profit will be from us purchasing options, many of which will be just turning on a switch in the software that is already part of the car. I would also submit that the profit margin on a larger battery will be much larger than the baked-in price of the standard battery.

It may take 18 months or so before Tesla realizes true economies of scale--the Gigafactory is running near capacity and all kinks in the assembly line have been fixed. Then, I would hope that the profit margin on even the basic model would approach $8-10K/unit.

 

[shokunin]

You don't get economies of scale while trying to scale, you get them at scale. Which is why Tesla prioritizes higher cost vehicles for delivery first, there is still a profit margin (hopefully) on each vehicle while they work out the ramping and supply chain. I'm guessing Tesla is predicting to be cash strapped so prioritizing west coast deliveries first reduces the lead time in payment due to transit.

IMO, they need to get that pack cost down, and to do that they need the gigafactory to be pumping out battery cells and not importing them from Japan.

 

[svp6]

Options are going to be the name of the game - evn now, not that many stripped down versions of Model S are being sold. I bet that most of the initial Model 3 delivered will be significantly more than 42k, closer to 55-60k which I expect to be the top of the range (probably AWD, larger battery package, ludicrous / plaid mode, etc.). Since they will prioritize the higher margin cars first, they will deliver those the first 6-12 months of production, so they have more time to further decrease costs for the lower optioned cars.
In terms of current margin, I heard they have something like 25%. My understanding is that other manufacturers at the mid-range have closer to 10% margin - which is acceptable if you sell in large numbers.

 

[Trips]

I believe that they currently sell their efficiency credits to the ICE companies so they can continue making inefficient trucks. They are getting $4k per car for that.

Unlike most cars the price could actually go down in the future.

 

[Lobstahz]

There are some fundamental efficiencies that Tesla has over traditional manufactures, as well some some additional expenditures. Overall I think it works out quite favorably for Tesla (and other EVs for that matter).

Larger Margins -
No 3rd party dealer network, they don't have to give a cut to a middleman
People pay MSRP, not invoice. No one (to my knowledge, please correct me if I'm wrong) can negotiate down on price as there is a wait list on all models, so Tesla can decline and sell to the next person at full price.

Lower acquisition costs -
No advertising cost. Watch TV for any rate of time and there is generally a car ad in every if not every other commercial break (personal observation)

Operational efficiencies -
EVs are simpler at a mechanical level. No complicated engines (pistons, spark plugs, gaskets, valves, cam shafts, alternators, timing belt, serpentine belt, turbo, intercooler, exhaust, muffler, catalytic converter, MAFs, intake, fuel injectors, fuel tank, fuel filter, etc) or transmission/power distribution (manual/automatic transmission, servos, clutch/dual clutch, torque converter, drive shaft, transfer case, torsen differential, etc).
The intellectual property and R&D necessary to develop all of those associated systems and parts. All of that need to be recouped, which effectively eats into margin.
Purchasing their Fremont factory for 42M when valued at ~1B (How Elon Musk Turned Tesla Into the Car Company of the Future)

On the other side
They're developing/refining AC motors, batteries, autopilot, etc
Building the 2nd biggest building on the planet to be get economies of scale for battery production
Building out the charging infrastructure to support the brand

There is likely more, but that's what I have off the top of my head

 

[StraightDave]

Big gamble for Tesla. Musk still doesn't have the money to build the M3 and if he can't deliver as promised then Tesla will disappear faster than Obama's college transcripts.

 

[Jbailey]

They really need to make money on supercharging or they may lose their shirt. Most who can afford a model s or x would just as soon charge at home for convenience. The cost in electricity is a very small part of most who can afford a 100K car. Those who buy a 30-35K car are more likely to take advantage of the supercharger for daily routine use, especially if the superchargers are plentiful. I own a Model S and have 3 model 3's reserved for family. I do not expect free supercharging with the economy models. I think the free supercharging is a bonus for early adopters and will be phased out much like "unlimited cellular" was, or it may be continued on +90K cars to increase their appeal relative to the less expensive models.

Tesla basically holds the patent on what the gas station will become. By charging customers 1/2 or so of gas equivalent they could stand to make a lot of money to invest in tesla and build even more superchargers. The superchargers could evolve into retail outlets...food and other things people can do while their cars charge. they are also could expand their home batteries and maybe develop a package deal, car supercharging, home battery storage, solar energy, replace home emergency batteries/ generators....ie using the car battery as an emergency battery for electricity outages, and market this.

We will see.

 

[CHG-ON]

Very good comments here.

Tesla's key to success is the energy part of the business. Not so much the cars. The cars are awesome and are the driver (no pun intended) of their energy products. But the cars are not the key to the future. I think they see that.

They are essentially creating their own market for electricity storage through their cars. If they can scale the gigafactory concept as they intend, they will take off like a SpaceX rocket. If they can pull off producing the number of batteries, both for automotive and for energy storage, that they are planning, they could own the market. Nobody else is even close to where they are, even at this early stage. Everybody else seems to be asleep. It will come down to outstanding logistics and manufacturing. They still have a way to go. I think that if they can pivot from a marketing and spin company (that has a totally cool product) to a solid industrial company that delivers efficiently and consistently they can be wildly successful. Right now, they are stumbling in quality and efficient delivery. They need to get those under control.

I think they will. Apple is a very good example of that pivot.