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Model 3 Margins

Discussion in 'Model 3' started by Red Sage, Apr 27, 2016.

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  1. Red Sage

    Red Sage The Cybernetic Samurai

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    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.
     
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  2. StraightDave

    StraightDave Member

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    "Lexus apparently has survived over 25 years by having a 14% margin."

    I think the Toyota part is a contributing factor.
     
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  3. Big-T

    Big-T Member

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    I'm not arguing here but I'm curious where the percentages come from? It's sort of building the argument on a bed of sand without some factual numbers to go against. Where does the 5% minium profit needed come from? As to the 6% of advertising and dealer percent you mention it could be "up to 6%" which sounds like another number that you sort of came up with. Here's a number that isn't made up though, telsa spent $1,043 per vehicle on actual repairs and set aside $2,036 in warranty accruals to cover future repairs on the vehicles it sold in 2015

    That's between double and tripple the cost of traditional auto makers, and you can bet the first year of Model 3 production will have similar higher than average warranty costs than their competitors.

    To add to that, although Model S is profitable in terms of materials vs sales cost, but when you're factoring in all the R&D, staffing, and capital investment Tesla has yet to see a profit, regardless of the fact that sales are higher than ever. There are plenty of articles that break down the loss per car

    Yeah I hope Tesla makes a crap ton of profit, I want this car to be like the Model T was for Ford back in the day, revolutionary. But I'm prepared to hear that Tesla isn't actualy making much of a profit in order to keep the 35k price point, I expect it even.
     
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  4. wbrumfiel

    wbrumfiel Member

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    I'll be surprised if anything more than the pre-orders actually ship for close to $35k. They have shown it with the Roadster (raised the price during production), Model S (killed the 40kWh car and have raised the price of the base model a few times) and Model X (70kWh car became 75kWh and the price went up). Building brand new cars is expensive and I'm hopeful the base actually stays $35k but won't be surprised when it isn't.
     
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  5. Red Sage

    Red Sage The Cybernetic Samurai

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    If you mean that the ES 350 is basically a stretched wheelbase Camry, just as is the Avalon, then... Sure.
     
  6. Red Sage

    Red Sage The Cybernetic Samurai

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    They came from articles I read in the first half of 2014. Sorry, I don't have the exact references.

    Well, I've heard of that before. So what?

    Yeah, that's why I included the link to the article by Bob Lutz. It's good reading. Enjoy!

    OK. Well, whatever, and stuff.
     
  7. Red Sage

    Red Sage The Cybernetic Samurai

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    I expect that no matter what, the highest capacity battery pack will be the best seller, no matter what Tesla Motors does. I expect that the base versions of the Model ☰ will be ordered by fleet sales/leasing companies, rental agencies, livery/taxiand municipalities for the most part. But anyone who wants to get one will be able to do so. That is considerably different from the BMW 320i, which will almost certainly have $8,000-to-$12,000 of options with a 10,000% markup applied if you go to the lot for an 'independent franchised dealership' to buy one -- plus another markup for 'Dealer Prep' -- and another amount for 'Documentation Fees'. Aside from sales tax and licensing fees, all you'll have to pay Tesla Motors is the Destination Fee that is Federally mandated (I believe) to be a separate line item from the vehicle price.
     
  8. Red Sage

    Red Sage The Cybernetic Samurai

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    Hmmm... It seems that the title to this thread was edited at some point. I wonder why...
     
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  9. porc

    porc Member

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    Considering the fact that Tesla lost 888 million last year producing luxury cars, I dont see how they will be wildly profitable with the Model 3.
     
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  10. wbrumfiel

    wbrumfiel Member

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    It's obviously a conspiracy put forth by the ICE industry
     
  11. Drivin

    Drivin Member

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    By the way, a common reply to that is a variation of "that's okay because Tesla is investing in building out capabilities for the future". The issue with that is that almost every company that they compete with is also making investments for the future and yet overall making money. (Benz recently invested $500M in a second battery plant, $1.5B in a new factory in Germany, 500M in a new factory in the US, huge amount for the new E Class, Toyota is investing billions in fuel cell tech, etc)

    They will eventually have to figure out how to make money overall while still investing huge sums - it is the joy of being in a capital intensive business
     
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  12. ModelNforNerd

    ModelNforNerd Active Member

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    I think the meaning was that Lexus isn't its own brand, it's a marked-up-in-price badge under Toyota, just as Inifinit>Nissan, Genesis>Hyundai, Audi>VW, Lincoln (to a certain extent)>Ford, etc etc.

    Those "companies"(badges, really) can take that financial hit, because they're pumping put massive quantities of Camry's or Cruze's or Fusion's.
     
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  13. TslaIsFuture

    TslaIsFuture 2 Model 3 reservations 3/31/2016

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    I think people have to remember that the American auto industry is very very mature. They have had decades of mass market sales and thus have already gone through the initial capital intensive phase. Tesla right now is losing money yes but that is needed to build up the infrastructure to support the future. You really can't compare any of the major automakers to Tesla.....common people.
     
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  14. Drivin

    Drivin Member

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    Depends on what you mean by "mature".

    They have been around for a while but that doesn't mean it is stagnant with regard to continual investments.
    It is not as if the investments they made 40, 30, or even 20 years ago are relevant - they have to keep upgrading, or they die.

    For instance in 2013, GM announced plans to invest $16B in factories and facilities just in the US by this year.
    GM Plans About $16 Billion in Investments in U.S. by 2016
     
  15. TslaIsFuture

    TslaIsFuture 2 Model 3 reservations 3/31/2016

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    By mature, I mean the foundation of their business is complete and the investments being made are not necessarily in major infrastructure (although new facilities may be in order) but in "new efficiencies, new designs, new products, new technology". Also, $16B is a small fraction of what GM's revenue is (~10%) thus they can easily afford to do this.
     
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  16. ModelNforNerd

    ModelNforNerd Active Member

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    As we keep seeing headlines of Apple, Google, and Tesla "poaching" each other's talent....

    I predict we'll start seeing a new wave.

    Tesla is going to start going after people at "established" automakers, people who have valuable experience and deep understandings of mass production and outgoing product quality assurance.

    We've seen all the "soothsayers" talking about how Tesla can't pull this off....but we CAN agree with those articles on this:

    They need to do this on a massive scale, with low cost, and a high level of quality products leaving the factory (less recalls and warranty work dinging the bottom line).

    Tesla will soon be hiring these people.
     
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  17. 182RG

    182RG Free The Service Manuals From Tyranny

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    ^ This ^

    I predict a $35K Model 3 will be the proverbial mythical unicorn. In the dreams of many, but never to be seen......
     
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  18. Twiglett

    Twiglett Single pedal driver

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    I'm assuming margins will be much thinner on the base models - which is why they get built/shipped later than fuller optioned cars.
    Also also assume that the smallest battery will probably not last very long in the range.
    They will probably produce them, but in very low numbers, eventually.
    This thing was never intended to be "cheap", just less expensive than Model S
     
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  19. Fallenone

    Fallenone Active Member

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    You started off by assuming they will get 6% net profit margin and by operating without dealership, adding another 6%. You just can't make an argument of Model 3 having more than "razor thin margin" by assuming they will have 12% without providing any reasons.

    How much does the battery cost? The motors? The invertor? The glider? The labor? The tooling? The warranty? Will they be at a disadvantage with their suppliers in terms of buying parts because they are not buying the same parts several millions units a year and if so how big is the disadvantage?

    Also, yes they don't need to cut their profit for dealership, but they are spending money on renting the stores and paying those employee. At the end of the day, how much less are they spending to achieve the same goal of selling cars?
     
  20. BravoSarah

    BravoSarah Member

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    Their margins will be higher with every passing year. Battery costs will go down, but the price won't.
     
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