How is Tesla making money on the Model 3?

[techmaven]

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

Tesla is likely already paying less than $150/kWh for the cells and the battery pack costs are likely around $185/kWh. So the 90 kWh battery pack probably costs them $16,500 but they charge $23,000 for it in a new car. They charge insurance companies far, far more for replacement parts.

The Gigafactory should bring costs down even further, getting them pack costs around $150/kWh. That probably puts the Model 3 base battery pack at $8,250 cost to Tesla. Drive unit costs should also come down. The use of more steel than aluminum will also help as well as just less material for a smaller car.

 

[proven]

The S and X reportedly have very big margins --25%.. they lose money overall because of all the investments they are making--expanding the factory lines, building a battery factory, R&D, etc. The Model 3 supposedly has been designed from the ground up to be easy and cheap to manufacture. Plus, the gigafactory is going to drive their costs down on the batteries. I think they'll make less money per car than the S and X, but still have a decent margin.

 

[Chuq]

They really need to make money on supercharging

They do. The supercharger network sells the cars. No other manufacturer can match this.

 

[SageBrush]

I've wondered about this too, and I am increasingly optimistic. I'll need help correcting my guesses of part costs, but here goes:

Costs:
Battery: Under $10,000
Motor: ?

Savings:
iCE: $2000 - $4000 ?
Dealership: $3000
Complex transmission: $2000
Exhaust/Emissions treatment: $500 - $1000
Fuel system: $500
Radiator: $500
Odds and Ends: $500
Reduction in complexity: no idea, but perhaps the most important in the list.

Here is a tangential question:
Can any of the other sports/luxury car manufacturers survive a Tesla success ?

 

[TaoJones]

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 ...

Gotta love that dry sense of humour.

 

[geoffreak]

Tesla is likely already paying less than $150/kWh for the cells and the battery pack costs are likely around $185/kWh. So the 90 kWh battery pack probably costs them $16,500 but they charge $23,000 for it in a new car. They charge insurance companies far, far more for replacement parts.

The Gigafactory should bring costs down even further, getting them pack costs around $150/kWh. That probably puts the Model 3 base battery pack at $8,250 cost to Tesla. Drive unit costs should also come down. The use of more steel than aluminum will also help as well as just less material for a smaller car.

Your thought process is halfway there but it's even crazier than you realized. At $185/kWh, you are correct that the pack would cost around $16,500, but they're actually charging much more than $23k for this pack. That's just the difference in consumer costs between the 70kWh and 90kWh packs. That $23k is for only 20kWh! If the battery actually cost this much per kWh, the 70kWh battery would cost around $80k, which is more than the price of the car! I think it's fair to say that's definitely an upsell at a premium price rather than even a remotely accurate estimate of costs.

Also, the Gigafactory is going to do better than $150/kWh.

When Tesla first announced the Gigafactory, it clearly stated in its plans that it expected that battery pack cost per kilowatt hour would be greater than 30% by Model 3 volume ramp in 2017.

Panasonic (arguably more knowledgeable and experienced regarding lithium-ion production than any company in the world) admitted that a 30% reduction by 2017 was, indeed, a conservative prediction.

A 30% reduction would put them at $130/kWh (assuming 185/kWh previous cost) and they actually expect a $100/kWh cost point by the time the factory is fully operational.

I want to add this in response to those wondering about the economies of scale. The reason why scaling up reduces costs has to do with a quite a number of things things, but I'll mention three. One, intending to make more items, they're willing to accept lower margins (obviously). Two, bigger needs for resources puts them in a really strong position when negotiating costs with suppliers (and cutting out middlemen). Finally, fixed upfront costs are able to be distributed over a larger number of items. These three things can make a significant impact on final price, especially when there wasn't much scale to begin with.

 

[Uncle Paul]

Tesla already has the factory space to build 50,000 cars a year, so no additional costs here.

They also have a test track next door that can test the Model 3 at no additional costs.

Their software for auto drive, displays, body control modules, marketing, promotions, etc are already developed and paid for.

They have already spent the money to produce a well working electric vehicle. Making a smaller one should be much easier.

Working with a steel frame is much easier and cheap to manufacture than all aluminum.

They most likely will make all their interiors/seating in house.

They have developed their own infotainment systems in house.

So many hard costs are already in place. Easy to transfer to a smaller car.

 

[S'toon]

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.

...So, what you're saying are those of us who can't afford a Model S or X are inherently dishonest, or untrustworthy, or something? We'd scam the system just because we're driving a more affordable car?

 

[WaitingForTes]

I think an interesting new aspect to the auto industry will be soft features as future income post sales. Even hardware upgrades that really don't exist for current ICE cars. I feel a lot of people will opt for soft features later ala autopilot, supercharger access, who knows what they'll come up with next. It will be interesting to see if and how they capitalize on that in the future.

 

[deonb]

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

One of the best proves of that:
https://www.youtube.com/watch?v=MShv_74FNWU

 

[azred]

I think a companion question to the how are they making money on model S question is how are they going to avoid making the model 3 another niche car? When I see people here talking about 65 or 70 thousand dollar, heavily optioned model 3s, I see failure ahead for Elon''s dream of sustainable transportation for the masses. Instead, he may be building Boxster competitors to join his current 911 competitors. But perhaps a small company like Tesla will never be able to market sustainable transportation for the masses, yet may be the inspiration for other companies to get to that goal.

 

[tomas]

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.

How about a shred of fact based argument? I normally ignore stuff like this, but this one is astounding doubleheader: broad assertion with no explanation/basis, then senseless innuendo.

 

[ItsNotAboutTheMoney]

LiFeP04 cells are more expensive per kWh than the cells Tesla uses. They are not a guide to Tesla's costs, any more than PbA or NiMH are.

Take $35k.
Deduct 10% ($3.5k) for margin: $31.5k
Say $150/kWh a 60kWh battery, cost $9k. $22.5k.
Do you think that they can build the rest of the car for $22.5k?
Add a couple of hundred for their excessive delivery charge.
If they can make, prep and cover warranty service for $22.5k +, they'll be all right.
Also of note:
- due to manufacturing in CA they get Social Cost of Carbon credits, which they'll continue to get even as ZEV credits drop in price.
- Tesla has nearly 400,000 reservations with minimal customer acquisition costs.

A lot hinges on battery pricing.

 

[ItsNotAboutTheMoney]

I think a companion question to the how are they making money on model S question is how are they going to avoid making the model 3 another niche car? When I see people here talking about 65 or 70 thousand dollar, heavily optioned model 3s, I see failure ahead for Elon''s dream of sustainable transportation for the masses. Instead, he may be building Boxster competitors to join his current 911 competitors. But perhaps a small company like Tesla will never be able to market sustainable transportation for the masses, yet may be the inspiration for other companies to get to that goal.

Why on earth are you thinking about $65k or $70k? Elon Musk has said that he expects an ASP of $42k, which sounds reasonable to me if you consider the basic spec they've mentioned and current option prices.
$35k + $2.5k (AP) + $2k (Supercharging) + $1k (Subzero) = $40.5k.

Throw in the enthusiasts like me who'll be ready to buy up because it's a BEV, and to me it's clear that the Model 3 would be less niche than the BMW 3 Series.

 

[Garlan Garner]

Tesla already has the factory space to build 50,000 cars a year, so no additional costs here.

.

Oh No!!! only 50K cars a year? Did you see how many pre-orders there were? It would take me 5 years to get my car.

 

[Garlan Garner]

How about a shred of fact based argument? I normally ignore stuff like this, but this one is astounding doubleheader: broad assertion with no explanation/basis, then senseless innuendo.

LOL Non-factual speculation is the name of the game. That's what makes it fun. With a company like ST - (Secret Tesla). The only thing you can do is speculate.

All I was asking for is speculation. I'm interested in seeing what "other people think" - not what other people know.

What else are we going to do for the next 18 months? Wait on facts from TESLA? LOL. This is fun.

 

[ItsNotAboutTheMoney]

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.

The gamble was made almost 10 years ago o earlier, because Tesla has long been planning to do this.
People have been anticipating the Model 3 and that's why there are so many reservations. Without Model 3, nobody would care.

 

[Vitold]

Here's an example:

Honda HRV which is produced in (relatively) small quantities and maybe of roughly similar size, costs 19k at the dealer. 19k already includes dealer and manufacturer's costs and profits.

(Assuming that Model 3 will have 60kWh battery)

@ $200/kWh x 60 = 12000 which puts Model 3 final price= 19000+12000 = $31000
@ $160/lWh x 60 = 9600 makes M3 cost: 19000+9600 = $28600

First estimate leaves $4000 for interior and exterior upgrades (after all Model 3 will be better than HRV...) second $6400.

Above totals do not consider cost of drive-train where I think it's safe to assume that electric drivetrain is cheaper.

 

[porc]

I believe it will be very! difficult to make a GAAP profit with the Model 3. Last year they lost 800 million with the Model S. They will have to go from making massive losses with a high margin luxury car to making profits with a low margin mass market car.

I believe Tesla will have to increase the price, i.e. catapulting the Model 3 out of the mass market price range, if they want to avoid making losses.

I understand that economies of scale will help some. But I am not sure massive reductions in battery prices, i.e. 50 percent, are likely. If anything cost reductions in batteries will be what the industry has achieved on average over the last 5 years.

Looking at the income statement

Tesla Motors Inc.

Revenue, currently 4.05 billion, minus costs of goods sold, 3.12 billion, will show a much smaller margin. Yes this figure might still be larger than todays one despite the smaller margin, if they sell enough cars. Cutting the purchasing price by half or more per car will make GAAP profits difficult to say the least, even if fixed costs as a percentage of revenue go much lower.

Depreciation and amortization expense, will likely increase with higher investments needed for production expansion. Currently standing 422 million.

R and D, will not increase much with increased production. Currently standing at 776 million

Other SG and E expense will increase with more superchargers and service centers needed.

At the end of the day a lot of things need to fall into place if you want to go from making a 800 million loss to profits while producing cars with a smaller margin.

One thing is for certain though. They need another significant financing round, via the selling of equity, to finance their expansion plans and the development of model 3.

 

[JamesL]

Here's an example:

Honda HRV which is produced in (relatively) small quantities and maybe of roughly similar size, costs 19k at the dealer. 19k already includes dealer and manufacturer's costs and profits.

(Assuming that Model 3 will have 60kWh battery)

@ $200/kWh x 60 = 12000 which puts Model 3 final price= 19000+12000 = $31000
@ $160/lWh x 60 = 9600 makes M3 cost: 19000+9600 = $28600

First estimate leaves $4000 for interior and exterior upgrades (after all Model 3 will be better than HRV...) second $6400.

Above totals do not consider cost of drive-train where I think it's safe to assume that electric drivetrain is cheaper.

First off, I'd expect the base Model 3 to have a smaller battery. Remember that the Model 3 is smaller, so it should have better mileage per kWh. The original Model S had a 208 mile range with a 60kWh battery. I imagine a vehicle 30% smaller would get a bit more than 215 miles with the same size battery. As such, I'm expecting the base Model 3 to have a 40-50 kWh battery

Chevy is getting batteries at $130/kWh for the Bolt. I believe the Gigafactory's hopes are that it can reduce the cost of batteries for Tesla to $100/kWh. This would reduce the battery cost by a few thousand in your calculations, and combined with my belief of a smaller battery, would be cheaper than your best case scenario by less than half ($4000 for a 40kWh battery.)

Then of course, Honda, Chevy, etc. are stuck with a middle man which has to take a cut as well. Tesla gets to save this cost and roll it in to their margins.

Traditional dealers have to stock their lots with vehicles. Every day the vehicle sits on the lot is money lost, whether it is interest paid on a loan or opportunity cost. Now, I realize this cost is incurred by the Dealer and not the Manufacturer, but regardless it is an additional cost that Tesla gets to avoid compared to traditional vehicle sales because (at least for the foreseeable future) Tesla vehicles are sold before they even make it to the production line.

All these combined, I feel I can confidently say that they will make money on the Model 3, even the base one.