I thought on the Q3 call, Zach said margins would go down in upcoming quarters due to ramp up costs of Model S/X refresh, and Austin/Berlin ramp ups. (even though long-term profitability is obviously on an upward trend)
TLDR: He didn’t quite say that. Overall he made a number of very bullish statements on forward margins, but without overcommitting.
Additionally, we have made good progress on the in-house battery manufacturing program. And we're excited to have expanded the full self-driving beta program to more customers. Financially, our auto gross margins reached 30.5% on a GAAP basis and just under 29%, excluding regulatory credits, which was our strongest yet. This benefit primarily comes from higher volumes, particularly out of the Shanghai factory, increased mix of the Model Y as we -- and we have made good progress increasing Model S volumes. [my comment: and now we have an extra 68k unit volume to spread factory costs across]
The Model S has now returned to positive gross margin and we expect this to increase with higher production and the ramp of Model X. As was the case in Q2, there were some net benefit from pricing actions. [my takeaway: S/X will be margin accretive in Q4]
The launch of Austin and Berlin will have ramp inefficiencies there for some period of time until we get those factories up and running. And so that's likely to put some downward pressure on our margins as those factories ramp. Our goals are to ramp those as quickly as possible. [my comment: won’t impact Q4]
We are seeing costs increase on the commodity side. We're getting feedback from our suppliers as we're seeing ourselves the impact of labor shortage. And then logistics and expedite costs just continue to be a part of our story here and it's uncertain how that will unfold. It's our hope that these things stabilize. Exactly when that happens is difficult to predict. And we have been adjusting pricing in line with those changes in cost. And so, we'll see how that unfolds over the course of the next year. So, it's difficult on gross margin to say where that will go for those reasons. [my takeaway: doing their best to neutralize input cost increases via pricing or alternative sourcing]
And we have to overcome cost increases that are outside of our control. So whether that's resourcing components or redesigning components or finding ways to be more efficient in manufacturing. We have no choice but to continue on that path and be even more aggressive in the light of the macroeconomics here. [my takeaway: again neutralizing increases or continuing to reduce input costs]
The benefits here, which is different in the ramp of these factories compared to other factories, is if you think about the percentage of our total cost structure in any given quarter that is associated with new ramps, we have the Fremont factory that's running -- generating stable and growing margins there. The same is also true in Shanghai. I expect we'll see some amount of headwind on margin from these ramps. It's just entirely dependent on how quickly we're able to ramp, and what uncertainties come up during the process. [my takeaway: even when Austin and Berlin start ramping, they won’t have anywhere near the downward pressure on margins that Shanghai ramp did]
And I think the net of all of this is hopefully that we continue to make progress on operating margin over the next 4 of 5 quarters. As we think forward, the business up until this point is kind of largely been a hardware automotive business with a little bit of software on top of that. As full self-driving matures, as take rates increase, if we are to raise pricing on that, there's considerable upside both on gross margins and operating margin as that comes to light, as the business starts to become more of a mix of a hardware-based Company and a software-based Company. [my comment: the end game, turning on more software margins per vehicle, not only increases gross margin per future vehicle sold, but increases net margins directly through existing fleet]
