This is why I argue so feverishly with those who are certain that Tesla Motors margins on Model ☰ 'will be razor thin'. No. They won't.
Tesla Motors hires people who are at least smart enough to know that the majority of automobile companies that have a profit margin below 5% go out of business. They also know that the admitted (though possibly fictional) overall margin in the automobile industry is 6%. Using this as a baseline, they know that if the Model ☰ in base trim costs more than $32,900 to source, build, and deliver they will be in trouble.
Knowing that two issues will be out of the way: 1) 'independent franchised dealerships' as a distribution method; and 2) traditional paid advertising as a means of marketing -- means that those potential draws on profitability are gone as well. Those could, combined, add another 6% to the profit margin of the base car.
Once you are at a point where the base version of the car only costs you 88% of the Retail amount to get to the Customer, you are in great shape. Lexus apparently has survived over 25 years by having a 14% margin. That is good company to keep if you would like to stay in business.
So, no... A 12% margin is not as much as the 25% or more Tesla Motors has enjoyed with the Model S. But with the base Model ☰ costing exactly half as much as the base Model S, it is at least a proportional rate that can be targeted, and attained. Especially with a smaller vehicle that will be manufactured in higher volume.
To start, a $35,000 car would only cost $30,800 to build with a 12% margin. I sincerely doubt that most cars with a ~$35,000 price point cost that much to build. As such, the Model ☰ should not be a substandard, empty tin can, 'stripped' vehicle as so many have intimated. True enough, anyone who wants 'luxury' as defined by Cadillac or Lexus may be disappointed. But it will hold up well against the interior accouterments and feature sets of similarly priced vehicles. And don't forget that the Delivery Fee, perhaps $995 or so, will be on top of the base price. So, Tesla Motors will have plenty of room to work with for the sake of profitability.
Then, when you consider options packages... If the options chosen most frequently average a 2:1 ratio... Meaning $15,000 in optional features only cost $7,500 to build into the car... That means a car priced at $50,000 Retail may only cost $38,300 to build. Resulting in an excellent 23.4% margin. Which only improves further if there is a 3:1, 4:1 or 5:1 ratio on options.
This allows you to build affordable cars that are still profitable. And due to the profitability rate, there is no need to gouge unreasonably. Thus, an electric vehicle with extreme performance and superior accouterments might cost considerably less than a similarly marketed ICE vehicle. Making even the highest priced version of the Model ☰ a relative bargain when compared to BMW M3.
No doubt there will be $#0r+s, ANALysts, naysayers, pundits, experts, and various other talking heads that will decide to divide the cost of the Gigafactory by the first 15 cars sold and thereby determine they are 'not profitable' or whatever... But those guys smoke crack and like it. Even Bob Lutz things so.
Tesla Motors hires people who are at least smart enough to know that the majority of automobile companies that have a profit margin below 5% go out of business. They also know that the admitted (though possibly fictional) overall margin in the automobile industry is 6%. Using this as a baseline, they know that if the Model ☰ in base trim costs more than $32,900 to source, build, and deliver they will be in trouble.
Knowing that two issues will be out of the way: 1) 'independent franchised dealerships' as a distribution method; and 2) traditional paid advertising as a means of marketing -- means that those potential draws on profitability are gone as well. Those could, combined, add another 6% to the profit margin of the base car.
Once you are at a point where the base version of the car only costs you 88% of the Retail amount to get to the Customer, you are in great shape. Lexus apparently has survived over 25 years by having a 14% margin. That is good company to keep if you would like to stay in business.
So, no... A 12% margin is not as much as the 25% or more Tesla Motors has enjoyed with the Model S. But with the base Model ☰ costing exactly half as much as the base Model S, it is at least a proportional rate that can be targeted, and attained. Especially with a smaller vehicle that will be manufactured in higher volume.
To start, a $35,000 car would only cost $30,800 to build with a 12% margin. I sincerely doubt that most cars with a ~$35,000 price point cost that much to build. As such, the Model ☰ should not be a substandard, empty tin can, 'stripped' vehicle as so many have intimated. True enough, anyone who wants 'luxury' as defined by Cadillac or Lexus may be disappointed. But it will hold up well against the interior accouterments and feature sets of similarly priced vehicles. And don't forget that the Delivery Fee, perhaps $995 or so, will be on top of the base price. So, Tesla Motors will have plenty of room to work with for the sake of profitability.
Then, when you consider options packages... If the options chosen most frequently average a 2:1 ratio... Meaning $15,000 in optional features only cost $7,500 to build into the car... That means a car priced at $50,000 Retail may only cost $38,300 to build. Resulting in an excellent 23.4% margin. Which only improves further if there is a 3:1, 4:1 or 5:1 ratio on options.
This allows you to build affordable cars that are still profitable. And due to the profitability rate, there is no need to gouge unreasonably. Thus, an electric vehicle with extreme performance and superior accouterments might cost considerably less than a similarly marketed ICE vehicle. Making even the highest priced version of the Model ☰ a relative bargain when compared to BMW M3.
No doubt there will be $#0r+s, ANALysts, naysayers, pundits, experts, and various other talking heads that will decide to divide the cost of the Gigafactory by the first 15 cars sold and thereby determine they are 'not profitable' or whatever... But those guys smoke crack and like it. Even Bob Lutz things so.
