How will Tesla be profitable selling an electric 7-series for $57k?

[Fr23shjive]

That’s a question that I've been hearing a lot lately and I’m not sure how Tesla is going to pull it off. The Model S' competitors are high end luxury cars which normally sell for $70k+ but Tesla says they can produce and sell the Model S for $13k less and still be profitable.

I’m not sure if this has been discussed here but where exactly is Tesla cutting costs in order to be able to produce a luxury vehicle for much less than the competition? I find this pretty difficult especially considering that they are a small start up with less access to the supply chains that the larger automakers have and they have much less resources than the large automakers.

The only explanations that I have been able to come up with are that:

1. They don’t have a lot of the overhead that the large automakers have. ie; Union Pensions, healthcare...etc.

2. Tesla is small company so they're able to be more efficient than a lumbering giant like GM or Nissan.

3. They're only focusing on one vehicle so they're able to cut costs in that respect too.

4. They own their own dealerships so they’re making more money off of each vehicle by cutting out the middle man.

Are there any cost advantages to making a EV as opposed to an ICE vehicle? Does an electric engine costs less to produce than an ICE?

Just trying to understand how they're able to produce a vehicle for such a low price and still make a profit when their competition is charging significantly more.

 

[Iz]

The use of small format batteries is one manner in which they keep costs down.

qwk posted a link to a very imformative article.

http://www.wired.com/autopia/2011/01/tesla-wants-some-engineering-cred/

 

[Fr23shjive]

The use of small format batteries is one manner in which they keep costs down.

qwk posted a link to a very imformative article.

I saw that article. Thats actually what sparked the question.

I know that Tesla saves money on their batteries. They're industry leaders in this area but what is the cost of an Internal combustion engine compared to an electric engine and battery? Is Tesla saving money on using an electric engine instead of an ICE?

 

[qwk]

I think that since the ICE has so many more components, it raises R&D and cost considerably.
Just think, Tesla doesn't have to worry about emission system, exhaust, fuel system, controls for everything the ice requires.

I do know that the dash pics that have been posted of the roadster have about a 10th of the wires compared to under the dash of a modern ICE car.

 

[mpt]

Tesla have often pointed to the elaborate costs of emissions regulations; this was one reason that they've chosen to pass on a hybrid.

Wrt the supply chain; they sorted that through their partners; Lotus, Daimler and now Toyota and do take advantage of the existing parts in the bin. It's diverse, they'll use anyones stuff if it works, the indicator stalks & window switches are from GM circa 1985, the garage door opener is Audi and the boot latches are Ford, just to name a few.

wrt to the drive train; I don't know how much they've added in RND for the S over the Roadster but, Ford will spend $155M on an engine and consider that a bargain. I don't think Tesla have spent that yet on the whole drive train.

All that plus cutting out the fat & streamlining the path from buyers pocket to Tesla bank account as you said is how they'll do it but, I expect the S to weigh in at $70k for a really nice one putting it right into the Jag's back yard, that, I think is its competitor, not the 7 series.

 

[Cobos]

Yes I actually think ideas like the 2 big screens and no actual analog instruments reduces costs. Most digital stuff is cheaper than analog counterparts and if the software is very good can be better. At least 1 screen replacing a complete or almost complete instrument cluster.
Similar with the special chassis. All the vibrations and clunkyness of an ICE creates a big need for a lot of sounddamping and anti-vibrations and vibrationsafe connections everywhere etc. The basic drive of the model S is a LOT simpler and you don't need any of that knowhow. After all BMW for their 7-series are paying a lot for the R&D and materials and fit of the parts to make a 7-series drive as comfortable as an EV does naturally.
I'm guessing in these kind of gotcha moments lies many of the differences between the series 5 and Model S. Though I've also heard Tesla say they are competing with the series 5 and NOT the series 7, and they are priced a lot closer to the Model S.
What is the differences in quality between the 7 and 5 really?

Cobos

 

[TEG]

It does seem there is a lot of overhead in maintaining all the sales and service centers and all the work on compliance and such.
I ask myself too how they can be profitable overall. Auto manufacturing and sales is a well established business with somewhat low margins that has driven other car companies out of business.

Maybe they can lose money for a while until they cost reduce further? They have tapped into various sources of cash to keep going even if some vehicles are sold at a loss.

But back to the technical questions... I imagine that the "long pole in the tent" is still the battery pack. The motor and control electronics are probably in the same ballpark with an ICE, but a pack full of battery cells costs a lot more than an empty gasoline tank.

 

[TEG]

The lethargic economy right now is providing opportunities.

Some other reasons to consider why Tesla has an advantage:

#1: They got a fantastic deal on the production space at NUMMI.
#2: There are suppliers who are probably hungry to sell components at bargain prices since sales to the established auto giants has probably slowed dramatically in recent years.
#3: Tesla seems to do well by word-of-mouth and other free advertising fronts. They have the benefit of being an interesting "underdog", and "GreenTech" is a huge area of interest right now.

 

[bolosky]

I suspect that the real answer is that they won't make money at $57K. Nor will they sell many cars at that price. People will shell out for the bigger batteries, for interior options, for premium paint colors or fancy wheels, or whatever. I bet that very few people paid $109K for Roadsters, either. I was pretty modest with the options and still came out closer to $120K. Same thing will happen with the S.

I vaguely recall somewhere a quote from someone at Tesla saying that they expected the average selling price to be more like $70K once the options are added in, but I'm not sure where that quote was.

 

[TEG]

Some more thoughts from their IPO Roadshow slides...
http://www.businessinsider.com/tesl...n-model-is-smarter-than-a-traditional-model-8

 

[vfx]

...
Some other reasons to consider why Tesla has an advantage:

#1: They got a fantastic deal on the production space at NUMMI.
#2: There are suppliers who are probably hungry to sell components at bargain prices since sales to the established auto giants has probably slowed dramatically in recent years.
#3: Tesla seems to do well by word-of-mouth and other free advertising fronts. They have the benefit of being an interesting "underdog", and "GreenTech" is a huge area of interest right now.

#3A: They hire like a startup not a wheezing Detroit geezer. That is, a newfangled Silicon Valley bootstrapping with young people working long hours (for pizza?) in it for the excitement of being part of something big (a la the EV1). You can see it in their posted job descriptions. Employees are expected to do more than their share as it's the company MO.

Cheap talent and not a lot of top end fat cats helps too.

 

[mpt]

"Hire kids; they're cheap and they know everything"

 

[Jaff]

#3 & #3A might be the biggest savings.

Along with a lumbering approach (and associated costs) of a traditional automaker bringing a new model to market comes the totally unsubtle "flood the airwaves" with (expensive) TV & radio, and high-end print media advertising.

Just as TM's product is unique from the traditional gassers, I'd expect a far more surgical, targeted approach with their marketing...no big budget, "hammer them over the head" campaigns, but rather a niche marketing specifically and thoughtfully aimed at the Model S target.

I'd also expect clever use of PR, taking advantage of every opportunity to get their word out.

Remember, they're looking to move 20,000 units in 2013...that is not that many when compared with the competition.

#3A: They hire like a startup not and wheezing Detroit geezer. That is, a newfangled Silicon Valley bootstrapping with young people working long hours (for pizza?) in it for the excitement of being part of something big (a la the EV1). You can see it in their posted job descriptions. Employees are expected to do more than their share as it's the company MO.

Cheap talent and not a lot of top end fat cats helps too.

 

[richkae]

I totally disagree with the thinking that the Model S drivetrain is comparable in price with a luxury ICE drivetrain.
According to my very minimal research, a BMW 7 series engine is probably at least a $10000 part, and a 7 speed automatic transmission is probably a $4000 to $5000 part.
The incredible number of moving parts and complexity in those things make them expensive - an AC motor with its 1 moving part is trivial in comparison.
I bet ( again with little evidence ) that the entire Model S drivetrain could be produced for less than the automatic transmission, when produced at similar scale.

 

[qwk]

I totally disagree with the thinking that the Model S drivetrain is comparable in price with a luxury ICE drivetrain.
According to my very minimal research, a BMW 7 series engine is probably at least a $10000 part, and a 7 speed automatic transmission is probably a $4000 to $5000 part.
The incredible number of moving parts and complexity in those things make them expensive - an AC motor with its 1 moving part is trivial in comparison.
I bet ( again with little evidence ) that the entire Model S drivetrain could be produced for less than the automatic transmission, when produced at similar scale.

I read somewhere a while ago that the roadster drivetrain cost tesla between $13-15k. This was about 2 years ago.

I bet you are right. If produced in mass they could be significantly less than a premium ICE engine.

 

[PopSmith]

According to my very minimal research, a BMW 7 series engine is probably at least a $10000 part, and a 7 speed automatic transmission is probably a $4000 to $5000 part.

A (probably significant) portion of that cost is R&D on the engine/transmission. New engines have to meet new emissions standards, usually produce more power than the previous generation and use less fuel while doing so. I'd bet figuring all that out takes a significant amount of money and, obviously, the consumer pays for this research.

With an EV it's going to cost far less to build a new, better, more efficient motor for multiple reasons including not having to worry about emissions.

The biggest thing EV buyers have to pay for is the batteries; but the economics of scale are going to be far kinder to batteries than they are to an engine.

 

[Doug_G]

With an EV it's going to cost far less to build a new, better, more efficient motor for multiple reasons including not having to worry about emissions.

Electric motor technology is very mature, and I doubt you're going to see more than minor improvements over time. ICE engines are also mature but they're so far from ideal that there's still room to improve them, although a great effort effort is required for modest gains.

As you say, the big developments will be in battery technology. Even there I'd expect to see a gradual evolution in technology and manufacturing, rather than revolutionary changes.

 

[TEG]

...the big developments will be in battery technology. Even there I'd expect to see a gradual evolution in technology and manufacturing, rather than revolutionary changes...

I keep expecting some major improvements any day now actually.
We had all these nano-tech lab announcements a few years ago, and someone is likely trying to turn them into a viable product.
Plus all the noise over ultra-caps.

AC motors seem to me fairly optimized already, but current batteries are probably crude compared to what we will have in 20 years.

 

[Doug_G]

I keep expecting some major improvements any day now actually.

That would be great, but I'm not holding my breath. Something tells me this chemistry stuff is harder to transition into production than other sorts of technology.

 

[Iz]

Improvements in battery would be great. One caveat is how soon will these new batteries be incorporated into existing or soon-to-be-produced packs such as those in Model S? Having learned quite a lot about batteries from this forum and supported links, it appears even TM will be hesitant to use a new battery chemistry in their configuration. May be a hard nut to crack.