The line upgrades at Shanghai late last summer almost immediately spiked production rates by about 20%. As far as I’m aware they did this with no major increase in labor hours per week and no additional production lines, so this improvement in rate implies major productivity gains.
You can bet that this kind of improvement goes hand in hand with lower costs. For example:
- If nothing else, you’re getting more economies of scale by cranking out more cars with the same facility and the same fixed costs like depreciation and amortization.
- If total labor hours per week are the same and output is 20% higher, then labor cost per car is reduced by about 1 - 1/1.2 = 17%.
- Productivity may have improved via improved first-time quality, resulting in higher yield, less wasted time, fewer injuries, and so on
Personally I didn’t expect a 5-10% price drop in the Asia-Pacific regional market Shanghai serves, but I would not be surprised to learn that margins from Shanghai moving forward are about the same as last year’s margins. If this is so, Q4 margins may have been temporarily high because of the benefits of the efficiency gains coming before most of the price drops. We will learn more on the Q4 earnings report and call. For what it’s worth, we do have the statements coming from Tesla saying that the price drops reflect major cost improvements.
When you combine this with the inputs getting cheaper as Tesla said last quarter and deflation kicking in, I would hesitate to jump to any conclusions about margins suffering severely until at least the Q4 financial data is out.
The fact that Tesla China can sell a 3 SR for USD$33k equivalent is an extremely bullish sign in my opinion. I’m confident they’re not selling this at 0% margin. If it’s at least 10% profit margin for this base version then that implies a cost of production under $30k, and that’s still for a car that’s currently missing many of the cost optimizations that the Y enjoys.
