Well we were at 28% in Q3 I think. You just need to do some quick math to know it'll be much lower than that.
I think i mentioned in some previous posts. Berlin and Austin opened up last year, over the last 3 quarters with their ramping, commodity prices, a few price rises, an increase of 40% volume production, we only saw auto gross margin fluctuate by single % points. I'm talking like 3-5%. Do we seriously believe we will see it go up 15% due to economies of scale? I mean lets be real here guys.
It’s not just economies of scale.
Q3 was a tough quarter. Margins were affected by:
- New factories ramping
- Shanghai shutdowns
- Strong US$ movements
- Peaking COGS, according to Tesla
- Lower than average ZEV credits
Tesla said automotive margin for Shanghai and Fremont alone with Berlin and Texas excluded was 30%. This means the new factories materially dragged on margins. In 2023 the opposite should be true: these new factories should
increase average margins. They’ll have very strong production efficiency thanks to improvements such as front gigacastings, 4680s, new battery pack design, and the structural pack with its tremendous efficiency benefits for buildup of cabin assemblies on top of it.
Tesla has also guided for serious commodity cost deflation to take effect around right now. This had apparently pushed costs up by several thousand dollars per car. If this is reversing now, then that offsets a serious chunk of the price cuts.
Logistics costs also will be massively lower.
- Ending the wave and doing smooth deliveries
- More EU-sold Ys avoiding 10% import tariff
- Lower freight prices in general
- Shorter average transport distance thanks to having four factories instead of two
- Reduced expedite costs from stabilized supply chains
The new prices are still generally a bit higher than in early 2021 and gross margins were a solid 22% then (not including ZEV credits). This was also with no S&X, much less Chinese production, much lower FSD prices, and much less Y in the mix. See snip from Tesla Daily’s US price table below. Also note that the variants that decreased in price since then are the performance and plaid, which will tend to drive more customers to upgrade and thus might actually benefit overall average margins.
- Base M3 +$6k
- M3P -$1k
- MYLR +$3k
- MYP -$3k
- MSLR +$15k
- MSP -$5k
- MXLR +$20k
- MXP No change
It’s unclear how much of the higher prices ever even hit the deliveries. There was a backlog for a very long time and ASP I’m Q3 was only $53.5k, up only $4.7k from Q3 ‘21. Some of this was because of the forex wildness I’m Q3, but the price hikes had been much higher than $4.7k and also mix had shifted away from M3 and Tesla was recognizing much more FSD and insurance revenue per car compared to Q3 ‘21.
Operating leverage is also kicking in. OpEx has not really been increasing significantly, but in the first three quarters of 2022 it ate up 40% of Tesla’s gross profit. Gross profit growth will drag up net margins.
The IRA battery subsidies will add about $3k per car eligible and about 1/3 of Tesla’s global sales will be eligible, so that’s an average boost of $1k per car.
Energy is also likely to earn billions in ‘23 if Lathrop can ramp as hoped and the margins are 30%+ as many people have estimated recently,
There remains the strong possibility that profit per car will actually increase in ‘23, depending on how all these factors stack up. We have direct visibility into list prices, but little to no visibility into factors like cost projections, mix, and FSD take rate. It’s easy to give excessive weight to known information and discount unknown parameters but they all matter. It appears that every major factor other than reduced prices favors increased profit per car this year, but with these humongous price cuts it’s difficult to say how it all nets out. I recommend that we avoid jumping to conclusions about margin and free cash flow collapse. I think all we can say with certainty is that margin expectations for ‘23 should now be lower than they were before this happened and that Tesla’s ability to grow sales volume 50-100% YoY is no longer in any reasonable doubt.