Model 3 Margins

[Trev Page]

Please remember that all of the big car companies have had DECADES more time to pay off capital cost expenditures. Tesla has barely 10 years. They're spending their profits trying to grow as fast as they can. They're "loosing" money because they're spending more than they take in from Model S/X sales.

But once the expenditures taper off off they will be profitable but not until Model 3 is out for 3-4 years.

This is a massively capital-intensive business and only the strongest survive which is why so many others went out of business. Tesla is trying really hard to get on the same level as the "big boys" as fast as they can, and they must if to meet the Model 3 backlog and ongoing sales. The 400K preorders are just the start. Once the car hits the roads the fence sitters will want a part of the action.

 

[ummgood]

I am guessing the margins went up after the mass demand came out for the car. I am in the automotive parts business (Car Audio) and as you buy more parts costs go down dramatically. For example let's say they had planned to buy 200k FM tuners at 2 dollars each. Now that they know they have double the demand they can go back and negotiate .50 to $1 discount on the same parts because of needing double the amount.

If they do that across the board with parts/robots (used to build)/etc... I bet because of the economies of scale their cost is dropping on the model 3 as far as parts go. Who knows how much...

They will have to hire more people and build more infrastructure for the demand but the cost from suppliers on the initial cars should be less...

 

[Steepler2k]

I am guessing the margins went up after the mass demand came out for the car. I am in the automotive parts business (Car Audio) and as you buy more parts costs go down dramatically. For example let's say they had planned to buy 200k FM tuners at 2 dollars each. Now that they know they have double the demand they can go back and negotiate .50 to $1 discount on the same parts because of needing double the amount.

If they do that across the board with parts/robots (used to build)/etc... I bet because of the economies of scale their cost is dropping on the model 3 as far as parts go. Who knows how much...

They will have to hire more people and build more infrastructure for the demand but the cost from suppliers on the initial cars should be less...

Is it possible that someone could look at this demand, knowing how important it is for Tesla to be on-time and ramp up quickly, try to squeeze them for more money instead?

 

[ummgood]

Is it possible that someone could look at this demand, knowing how important it is for Tesla to be on-time and ramp up quickly, try to squeeze them for more money instead?

That is a possibility if there is only one vender that can make the part. In the auto business you better believe there is competition or will be competition. It would be risky to try to gouge based on this info when you might lose an important customer.

 

[SageBrush]

$35,000 is aspirational pricing set years ahead of production by one of the smartest companies in the world.

I'm just happy that I only had to pay a refundable deposit to have a front row seat.

 

[Red Sage]

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.

As has already been noted by others, that 80-to-120 year head start probably helped considerably.

(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)

And which of those 'investments' by Mercedes-Benz, Toyota, or any other traditional automobile manufacturer represents a 50% increase year-over-year in their total capacity? Here, I'll take a wild guess... NONE OF THEM.

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

There is no 'eventually' to it. They already figured it out. They must reach a worldwide capacity in the neighborhood of 3,000,000 to 4,000,000 units within the next ten years if they are to survive beyond that point. Anything less, and the whole thing will collapse under the weight of the traditional automobile industry.

The alternative is to give up on The MISSION: To accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.

Thereby becoming the niche manufacturer of 'Toys... for the RICH!' that Naysayers such as you have always proclaimed them to be. Without the expansion... Without the increase in infrastructure... Without the development of new technologies... Without the push to mass market... Tesla Motors is ALREADY profitable. That is the point you refuse to admit as truth.

All of their so-called 'losses' are necessary to achieve The MISSION. There is no way around that, because if they were to sell out to someone else, the company would simply be dismantled and all its technologies mothballed. So they will not be taken over, they will not taken on 'partners' in the automotive industry, and they will NOT stop growing until they achieve the stated goal. It isn't about profitability, it is about philosophy.

Depends on what you mean by "mature".

You know exactly what we mean. Replacing existing capacity in a piecemeal fashion is not the same as building it from scratch.

 

[Red Sage]

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.

Indeed. It took the better part of twenty years before Hyundai finally became a 'winner' in sales. Their reputation due to the Excel had them flagged by Consumer Reports for several years even after their cars such as the Sonata had vastly improved. Luckily, they were supported by the Korean government and Hyundai Heavy Equipment through all the lean years. Tesla Motors doesn't have a Bank of Mom & Dad or a Big Brother to help bail them out. They also don't have time to waste building low end crap cars that make them no money, but ruin their reputation. Better to do as they have by building compelling cars from the very start and through their whole run.

 

[Red Sage]

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.

...

Tesla will soon be hiring these people.

Oh, they already have. Guys from Jaguar and Aston-Martin, Mazda and General Motors... All over the place, have been going to Tesla Motors for years now. Most recently it was announced that someone from Porsche is joining them as well. They have the correct people in the right places and will indeed be getting more of them as time goes by. This, despite how Naysayers love to claim that, "They don't know what they're doing in Silicon Valley..." those guys are proven wrong at every turn, time and again. The problem is those guys don't know what Tesla Motors is doing and cannot wrap their minds around the concept.

 

[Red Sage]

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.

It seems to me you are assuming I'm wrong without any evidence to the contrary. Please, do prove me wrong. That's OK. But do so with something other than trite statements such as 'Time will tell.' or whatever.

As I noted before... Companies that have a 5% margin or less go out of business. I'm pretty sure that Tesla Motors does not want to go out of business. So suggesting they will offer the base version of Model ☰ either at COST or a RAZOR THIN margin is utterly ridiculous. That would be DUMB, and the people who work there are NOT DUMB. Thus, the absolute WORST margin they would aim for is 6% on the base car -- the same margin that apparently works for the rest of the entire automotive industry even to support their 'loss leaders' -- when selling at wholesale to 'independent franchised dealerships'.

You overlooked that I also mentioned expenses for traditional advertising -- which Tesla Motors does not engage in at all. They have a web page, YouTube and Vimeo channels, a Facebook and Google+ page, and Twitter accounts. Those, along with word of mouth and news coverage of a highly opinionated SuperGENIUS CEO have been enough to keep the public aware of the company -- and the kick-ass cars they build. That is all quite a bit less expensive than '$1,500 FACTORY CASH BACK!' deals and Superbowl ads along with the supposedly prerequisite late night movie commercials on television, local newspaper ads, and incessant radio spots on every frequency on the AM and FM dial.

A long time ago, and several times since, Elon Musk has stated he does not believe the Model ☰ will enjoy the margins that the Model S has, those being in the range of 25%-to-28% or so. He said they would likely be lower, between 10% and 15%, then corrected that to say about 12% might be sufficient. That makes sense, because if the base version of the Model S is $70,000 then the proportional margin on a car that cost half as much at $35,000 would be about 12% instead of 25%. So, no... I didn't pull that number out of my [BUM]. It was a stated target by the CEO of the company -- around THREE YEARS AGO.

This being a Tesla Enthusiast forum, I sometimes presume that others have rabidly consumed any and all sources of video, audio, and written coverage of Elon Musk and Tesla Motors as I have. As such, I expect they are already aware of such statements. Please, try to find a way to forgive me if you are unaware of them, and stuff. But really, I kindasorta know what the [FLOCK] I am talking about here.

How much does the battery cost?

Less than anyone else in the world for the given capacity thanks to the Gigafactory. I would guess somewhere between $6,600 and $8,750 as internal cost, dependent upon capacity.

The motors?

Designed and built in-house from naught much more than copper wire from less material overall than goes in a Honda 600cc motorcycle engine.

The invertor?

Designed in-house and assembled at Fremont from components ordered from various high volume electronics suppliers. Having connections to the Silicon Valley industry has its benefits.

The glider?

Not really built that way... But if we must... A traditional 'glider' would be the entire car less engine and transmission. The analog for Tesla Motors would probably be the entire car less the battery pack -- because really, the motor(s) and inverter are kind of cheap. Considering the intended profit margin, I calculate this will come to about $22,000 -- or right in line with a BMW 3-Series Glider.

The labor?

Luckily, due to the strict 'NO [ICEHOLES]' hiring policy in management, there is no union to muck things up, and employees get to keep those 'dues' to themselves -- happily. So, Tesla Motors gets to pay a fair wage to everyone on the line. Perhaps a bit more than they would pay someone in Texas or Mississippi, due to the location in California, but certainly no worse than anyone else that manufactures here.

The tooling?

It costs what it costs -- and is a one-time expense. Simplifying the design for easy manufacture will reduce the amount of tooling needed to build the cars. Every vehicle you build over the course of eight years allows its initial cost to be absorbed that much more readily. Not a problem at all.

The warranty?

It's the cost of doing business. Building a better car to begin with will limit exposure. And Consumers should not pay for a manufacturer's mistakes. This is different from traditional automobile manufacturers, who would be happy if the service departments at 'independent franchised dealerships' charged people up the ying-yang for spare parts until something becomes an official recall or class action lawsuit issue.

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?

Not any more. As long as a supplier isn't informed in a back room, under-the-table, back-door, threatening fashion that they will lose major contracts for Corolla, Cruze, or Civic by working with Tesla Motors? It is of no concern. Tesla Motors has made a name for themselves now. It is now a point of prestige that they choose your components to build their cars. And hundreds of thousands of Reservations 18-to-24 months ahead of Delivery make it really easy to say, "Yes. We've got you covered," when Elon Musk calls.

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?

The point is how much less the Consumers pay for the same car. No need to haggle. No need to navigate a minefield of up-charges. No need to pay 8% or more above MSRP for the privilege of having an 'independent franchised dealership' hold your hand during the process. If a car is popular and desirable, those guys will claim a bonus with a markup to 'What the Market Can Bear' in a heartbeat or less. Stick a Cadillac, Lexus, AUDI, Porsche, Mercedes-Benz, or BMW emblem on the Model S or Model X today and their prices go up by $100,000 overnight regardless of trim level for sales through 'independent franchised dealerships' while their sales drop to 25% of their current totals. The very same would happen to the Model ☰. That doesn't help The MISSION one bit.

 

[Fallenone]

It seems to me you are assuming I'm wrong without any evidence to the contrary. Please, do prove me wrong. That's OK. But do so with something other than trite statements such as 'Time will tell.' or whatever.

As I noted before... Companies that have a 5% margin or less go out of business. I'm pretty sure that Tesla Motors does not want to go out of business. So suggesting they will offer the base version of Model ☰ either at COST or a RAZOR THIN margin is utterly ridiculous. That would be DUMB, and the people who work there are NOT DUMB. Thus, the absolute WORST margin they would aim for is 6% on the base car -- the same margin that apparently works for the rest of the entire automotive industry even to support their 'loss leaders' -- when selling at wholesale to 'independent franchised dealerships'.

You overlooked that I also mentioned expenses for traditional advertising -- which Tesla Motors does not engage in at all. They have a web page, YouTube and Vimeo channels, a Facebook and Google+ page, and Twitter accounts. Those, along with word of mouth and news coverage of a highly opinionated SuperGENIUS CEO have been enough to keep the public aware of the company -- and the kick-ass cars they build. That is all quite a bit less expensive than '$1,500 FACTORY CASH BACK!' deals and Superbowl ads along with the supposedly prerequisite late night movie commercials on television, local newspaper ads, and incessant radio spots on every frequency on the AM and FM dial.

A long time ago, and several times since, Elon Musk has stated he does not believe the Model ☰ will enjoy the margins that the Model S has, those being in the range of 25%-to-28% or so. He said they would likely be lower, between 10% and 15%, then corrected that to say about 12% might be sufficient. That makes sense, because if the base version of the Model S is $70,000 then the proportional margin on a car that cost half as much at $35,000 would be about 12% instead of 25%. So, no... I didn't pull that number out of my [BUM]. It was a stated target by the CEO of the company -- around THREE YEARS AGO.

This being a Tesla Enthusiast forum, I sometimes presume that others have rabidly consumed any and all sources of video, audio, and written coverage of Elon Musk and Tesla Motors as I have. As such, I expect they are already aware of such statements. Please, try to find a way to forgive me if you are unaware of them, and stuff. But really, I kindasorta know what the [FLOCK] I am talking about here.


Less than anyone else in the world for the given capacity thanks to the Gigafactory. I would guess somewhere between $6,600 and $8,750 as internal cost, dependent upon capacity.


Designed and built in-house from naught much more than copper wire from less material overall than goes in a Honda 600cc motorcycle engine.


Designed in-house and assembled at Fremont from components ordered from various high volume electronics suppliers. Having connections to the Silicon Valley industry has its benefits.


Not really built that way... But if we must... A traditional 'glider' would be the entire car less engine and transmission. The analog for Tesla Motors would probably be the entire car less the battery pack -- because really, the motor(s) and inverter are kind of cheap. Considering the intended profit margin, I calculate this will come to about $22,000 -- or right in line with a BMW 3-Series Glider.


Luckily, due to the strict 'NO [ICEHOLES]' hiring policy in management, there is no union to muck things up, and employees get to keep those 'dues' to themselves -- happily. So, Tesla Motors gets to pay a fair wage to everyone on the line. Perhaps a bit more than they would pay someone in Texas or Mississippi, due to the location in California, but certainly no worse than anyone else that manufactures here.


It costs what it costs -- and is a one-time expense. Simplifying the design for easy manufacture will reduce the amount of tooling needed to build the cars. Every vehicle you build over the course of eight years allows its initial cost to be absorbed that much more readily. Not a problem at all.


It's the cost of doing business. Building a better car to begin with will limit exposure. And Consumers should not pay for a manufacturer's mistakes. This is different from traditional automobile manufacturers, who would be happy if the service departments at 'independent franchised dealerships' charged people up the ying-yang for spare parts until something becomes an official recall or class action lawsuit issue.


Not any more. As long as a supplier isn't informed in a back room, under-the-table, back-door, threatening fashion that they will lose major contracts for Corolla, Cruze, or Civic by working with Tesla Motors? It is of no concern. Tesla Motors has made a name for themselves now. It is now a point of prestige that they choose your components to build their cars. And hundreds of thousands of Reservations 18-to-24 months ahead of Delivery make it really easy to say, "Yes. We've got you covered," when Elon Musk calls.


The point is how much less the Consumers pay for the same car. No need to haggle. No need to navigate a minefield of up-charges. No need to pay 8% or more above MSRP for the privilege of having an 'independent franchised dealership' hold your hand during the process. If a car is popular and desirable, those guys will claim a bonus with a markup to 'What the Market Can Bear' in a heartbeat or less. Stick a Cadillac, Lexus, AUDI, Porsche, Mercedes-Benz, or BMW emblem on the Model S or Model X today and their prices go up by $100,000 overnight regardless of trim level for sales through 'independent franchised dealerships' while their sales drop to 25% of their current totals. The very same would happen to the Model ☰. That doesn't help The MISSION one bit.

Again, you are assuming they won't go under and therefore giving them 12% net profit margin outright. This is absolutely the wrong way to investigate the cost and profit margin of the Model 3. No company wants to go bankrupt, but many did. Although I don't see Tesla being one of them (I am heavily invested in TSLA), when speculating the margins of their products, you just can't assume they won't bankrupt and therefore assume they will make a certain level of profit margin.

As for the various components, except for the battery cost and glider, I don't see any number, let alone any reasons to back them up. Let me just pick them one by one

On the battery front, I agree with your estimates. ~$130/kWh seems like the right number after GF starts producing cells (before end of this year) and having almost one year to improve on efficiency. It might be even cheaper if they can get better prices on raw materials due to demand of Tesla Energy products.

On the motor, less material doesn't mean less cost. I'm not familiar with the Honda 600cc motorcycle engine but a quick Google search returned numbers about $500. Personally I think the motors used by Model 3 may be more expensive but maybe not too much. So, let's go with the $500 here.

On the inverter, first of, are there any high volume electronic suppliers in the Silicon Valley? Second, if there are, what does this have to do with the price Tesla gets? They may produce an appropriate inverter at low cost because they are high volume producer, but that doesn't mean Tesla can get a low price if they are not ordering in bulks. Look at the Powerpack. Tesla definitely has the cheapest production cost for the same level of products. But if you're ordering no more than 50+ of them, you get a quote of $470/kWh instead of the possibility $250/kWh for utilities level buyers. How much it costs? I don't know either, but let's say the same as the motor, $500.

On the glider, $22k for the glider is my estimate as well, also coming from back calculating the BMW 3. But this is assuming Tesla is using cheaper parts to compensate they can't get the parts as cheap as BMW because their order size is much smaller. Whether this assumption is correct or not, I don't know, but let's go with it.

On the labor, yes there's no union in Tesla. But they are paid about $17/hour on the job. One shift per worker equals to $170. Tesla has over 13k employee and a big chunk of them are factory line workers. They produced roughly 50k cars in 2015. Assuming about 300 days working and 1.5 shifts per day on average. And assuming 8000 workers completing all the work so effectively 5333 workers worked 4500 hours each for the year. That translates to about $8k per Model S for labor. Let's say Tesla increased efficiency for the Model 3 and cut this cost by half. Then $4k per car.

On the tooling, I suggest you read their filings to SEC. The tooling cost is not a big upfront one-time expense. It is spread across 250k cars they make. And they are constantly adding/adjusting tooling to the production line so it will always be there and the total amount will go up with their total production (not necessarily on per car basis though). On their balance sheet, tooling was valued at $296M in 2014 and $551M in 2015. Distributing this to the 50k cars we get about $5k tooling cost per Model S. Again, cut it by half for Model 3. $2.5k.

On warranty, Model S is costing them about $3k per car. Let's cut it by half again, $1.5k. Consumers being screwed by dealers or not, it costs Tesla and eats into their profit margin, simple as that.

Also there's delivery logistics. Model S is charging $1.2k so let's say it costs them $600. This shouldn't really be lower for Model 3 because shipping a car is shipping a car.

So, add all these up, you get $38k of cost per basic Model 3 for Tesla. And this is before all the RND and SG&A which further cost them on the net margin front.

Regarding to what Elon said about profits on Model 3. I believe him. But think that's their long term goal, which is 2020 and beyond. For late 2017 and 2018, I don't believe they can get over 10% on the basic Model 3. And IMO that's why he said they will first deliver highly optioned Model 3. Because the margin on those options are 100% or more based on my observations for Model S.

Again, I'm not saying this will be their cost. I certainly have made many mistakes in the above calculations. I also present this as their early Model 3 production scenario when less than 100k are made per year. Battery, motor, inverter, glider, labor, tooling would all likely to get lower with more production because they can get better prices from suppliers and can increase their efficiency in manufacturing. And I very very much welcome you to correct me. But when doing so, please provide something tangible besides of believing in them can lower their cost just because they need to survive.

 

[Big-T]

Again, you are assuming they won't go under and therefore giving them 12% net profit margin outright. This is absolutely the wrong way to investigate the cost and profit margin of the Model 3. No company wants to go bankrupt, but many did. Although I don't see Tesla being one of them (I am heavily invested in TSLA), when speculating the margins of their products, you just can't assume they won't bankrupt and therefore assume they will make a certain level of profit margin.

This is the smartest statement on this thread to date.

 

[SageBrush]

This is the smartest statement on this thread to date.

Except that it misses Red Sage's point. He is saying that Tesla would not have picked a $35k price point based on a ~ 5% profit margin. That does not make them right in their calculations, it just means that Fallenone and Tesla have come up with different numbers. It also means that RS is actually putting Tesla in a more difficult situation, in the sense that he think they have to end up with a ~ $31.5k cost to them car rather than say $33k

This argument has devolved down to arguments over +/- 5% of component, labor and R&D costs. Surely that is in the range of uncertainty for both sides but favors Tesla given their massive information advantage.

How massive ? Let me it put it this way: what is the minimum $/kWh cost Fallenone would has said with confidence GM is paying for LG batteries for the Bolt prior to the GM leak ?

 

[SageBrush]

On the labor, yes there's no union in Tesla. But they are paid about $17/hour on the job. One shift per worker equals to $170. Tesla has over 13k employee and a big chunk of them are factory line workers. They produced roughly 50k cars in 2015. Assuming about 300 days working and 1.5 shifts per day on average. And assuming 8000 workers completing all the work so effectively 5333 workers worked 4500 hours each for the year. That translates to about $8k per Model S for labor. Let's say Tesla increased efficiency for the Model 3 and cut this cost by half. Then $4k per car.

Estimate your uncertainty for each variable and tell us your final range.

 

[Big-T]

Except that it misses Red Sage's point. He is saying that Tesla would not have picked a $35k price point based on a ~ 5% profit margin. That does not make them right in their calculations, it just means that Fallenone and Tesla have come up with different numbers.

This argument has devolved down to arguments over +/- 5% of component costs. Surely that is in the range of uncertainty for both sides but favors Tesla given their massive information advantage.

Well, I think some of the costs are higher than speculated (since we're speculating here) Let's say I'd agree on the motor, inverter and glider, the following seem a bit low to me:

$130 KW/H - I know Tesla said that they're under $190 but that's a 30% improvement over the $190 number. Seems like Tesla would have said we're under $150 or something similar if they were really at $130. Will they get there eventually, sure but I'd be surprised if they got to that rate in the first year or two.

$17 per hour labor - It's going to be higher when you factor in the worker benefits like health insurance, vacation, holiday pay, 401k, etc not to mention the likely overtime they're going to have to cough up to get 400k cars out the door

Warranty costs - I'm sure eventually the warranty cost will go down but there seems to be general agreement that the first year or more of new car production has higher than typical warranty costs and Tesla's are already more than double the traditional ICE manufacturers.

I'm saying this not to squabble over the various percents but to point out that I think Elon is hoping to get to that 12-15% profit margin EVENTUALLY once the model 3 is in full production, not right out of the gate on the first few thousand models.

And to get back to SageBrush's point - history is littered with plenty of smart, talented, companies out there that were within "spitting distance of profitability" (if I may quote from the CEO of the now defunct startup that I joined after college). Who had a vision, a great product, and even a path to profits, but were not able to generate said profits fast enough before investor confidence fell and the money dried up.

I sure hope that isn't Tesla's fate, I don't expect it to be Tesla's fate, but you can't base it on the assumption that the OP is stating

 

[SageBrush]

$130 KW/H - I know Tesla said that they're under $190 but that's a 30% improvement over the $190 number. Seems like Tesla would have said we're under $150 or something similar if they were really at $130. Will they get there eventually, sure but I'd be surprised if they got to that rate in the first year or two.

Isn't that their current pack pricing without benefit of the GF ?

Warranty costs - I'm sure eventually the warranty cost will go down but there seems to be general agreement that the first year or more of new car production has higher than typical warranty costs and Tesla's are already more than double the traditional ICE manufacturers.

Even if correct (and the data is fairly garbage,) don't you want to weight that start-up cost over the entire production run ? And I would keep in mind that Tesla has every intent to slash warranty costs compared to say, the MX. No Falcon doors for the M3.

 

[Fallenone]

Except that it misses Red Sage's point. He is saying that Tesla would not have picked a $35k price point based on a ~ 5% profit margin. That does not make them right in their calculations, it just means that Fallenone and Tesla have come up with different numbers. It also means that RS is actually putting Tesla in a more difficult situation, in the sense that he think they have to end up with a ~ $31.5k cost to them car rather than say $33k

This argument has devolved down to arguments over +/- 5% of component, labor and R&D costs. Surely that is in the range of uncertainty for both sides but favors Tesla given their massive information advantage.

How massive ? Let me it put it this way: what is the minimum $/kWh cost Fallenone would has said with confidence GM is paying for LG batteries for the Bolt prior to the GM leak ?

First, let me be clear. I don't doubt Model 3 base version would be profitable with a 10%+ net profit eventually. Because as they mature to a company making millions of cars, they have the same power as other big auto manufacturers when they sit down with suppliers. There's also improvement in manufacturing efficiency over time as they produce more. I am strictly talking about the early Model 3, namely the late 2017 and 2018, maybe 2019 ones.

With 500k/year at 2020, they would be roughly the size of BMW. It is only at that time we can safely assume the cost of parts for the glider can be on par with BMW's without making sacrifices on the level of luxury or quality. Just look at the interior of Model S. Yes we can say we don't care, we can say it's "futuristic" and "minimalist", we can ignore the higher than average quality issues like gaps and alignment. But at the end of the day, we all know they lack in the luxury department compared to MB S class, BMW 7, and other cars in the same price range. Why? Because their orders for parts are not big enough to get the same price. Same goes with the early Model 3. This of course will improve over time as their production grows over time. But, during the early years of Model 3, this would be a major constraint on their profitability, if not the biggest. We just can't simply look over this and say since some other established big auto can make it with this price, Tesla can make it too.

As for Elon and company's statements on costs, margins, and other stuff, which is I think Red Sage's starting point. He is well known to be optimistic, sometimes overoptimistic even. And from time to time, the actual performance falls below statements he made a year or two before. I don't think I need to elaborate on this if we are enthusiasts and know the history of Tesla. And as far as I know, he never said the basic Model 3 of $35k will have a profit margin of 12%. In fact, he anticipated the average selling price (ASP) of Model 3 would be ~$41k. Has he ever said 12% for the $35k or $41k? No. And the ASP for Model S with a 25-28% gross margin is close to $100k, not $70k. If we really want to use the slash half approach to get the gross margin, then the ASP of Model 3 would be $50k in order to achieve the 12% margin.

Also I'm not arguing the cost of batteries. Tesla has it under control, massively. And if no other players are doing the stuff Tesla is doing (GF), their comparative advantage in cost for batteries will only get larger and larger. My point, again, is for the early basic Model 3 it would be very hard for them to achieve decent gross margin and Elon's statement does not by default would turn out to be true and he's talking about Model 3 in general, not the basic $35k ones.

 

[Fallenone]

Estimate your uncertainty for each variable and tell us your final range.

It's quite on the lower end already for the early Model 3. I'm doing a lot of slashing in halves compared to Model S if you noticed. Based on the same approach I got a gross margin for the Model S 90D at 28%, which is quite close to their reported gross margin but still would be a bit higher since the S90D sells for $10k lower than their ASP on Model S. And if we assume the $41k ASP and 12% gross margin from Elon himself to be correct, the average cost would be $36.6k. We can shave down one or two k for their cost of adding the options but really not much room left here.

 

[SageBrush]

And if we assume the $41k ASP and 12% gross margin from Elon himself to be correct, the average cost would be $36.6k.

Fair point

 

[Drivin]

Without the expansion... Without the increase in infrastructure... Without the development of new technologies... Without the push to mass market... Tesla Motors is ALREADY profitable. That is the point you refuse to admit as truth.

Duh.
Of course it is true that if a company doesn't have to expand, invest in infrastructure, invest in new tech, expand into new markets the bar for profitability is a lot lower.

Unfortunately, that is all irrelevant since just about every company in the world, especially those in highly competitive capital industries, compete in a market that requires consistent investment in infrastructure, tech, growth into new markets, etc.

That is the real word, not a fantasy finance world of "just pay attention to the fact that we can sell a car for more than it costs us to make - oh look "Tesla motors is already profitable". That positioning is fool's game since that without those investments, that profit picture will just decline over time, possibly rapidly if well capitalized competitors and buyers see you as stagnant and their investments increase and crush you. LOL.

 

[Fallenone]

$130 KW/H - I know Tesla said that they're under $190 but that's a 30% improvement over the $190 number. Seems like Tesla would have said we're under $150 or something similar if they were really at $130. Will they get there eventually, sure but I'd be surprised if they got to that rate in the first year or two.

30% price improvement is expected by them to be achieved with the GF. There's also battery tech improvement of 5-8% each year. So $130/kWh is not too optimistic for 2018.

$17 per hour labor - It's going to be higher when you factor in the worker benefits like health insurance, vacation, holiday pay, 401k, etc not to mention the likely overtime they're going to have to cough up to get 400k cars out the door

Those, if I'm not wrong, would go into SG&A, not COGS. We're mainly talking about gross margin here. But yes, those would impact their net profit margins.