Tesla Model 3 Battery Strategy To Lead To Strong Margins?

Red Tesla Model 3 at handover event


Tesla Model 3

Tesla Model 3

While mainstream automakers often settle for margins below 15 percent, Tesla pulls about 25 out of its Model S and X and stands to achieve the same with its Model 3 in the near future.

Pulling off 25 percent margins with the reasonably priced, mass-market Model 3 could take Tesla to a whole new level. Though the Silicon Valley automaker has turned a profit, the company isn’t really profitable as of yet. Tesla has borrowed an extraordinary amount of money to get where it is at this point and continues to do so. As many analysts have continually pointed out, Tesla must stop borrowing and begin making money sooner rather than later.

Tesla Model 3

Inside the Tesla Model 3

Most see the Tesla Model 3 as a way for the automaker to reach out to a wider audience, and not necessarily a way to make money. Musk has said all along that those buying a Model S or X are helping to fund the company’s future (AKA the Model 3). The wider audience part is a huge part of the plan, but so is making money along the way.

So, how can Tesla pull off such a wide margin on its vehicles, and more specifically, the Model 3?

Electric cars are simple compared to ICE vehicles. Most of the cost of the vehicle is associated with the battery. Battery prices are dropping at a consistent rate, so it only makes sense that as batteries get cheaper, electric cars will be much cheaper to manufacture. Added to this, Tesla has a huge advantage in the Gigafactory, since it’s currently the only automaker with its own colossal battery-producing entity.

Lithium-ion batteries were priced at about $400 per kWh in 2012. This means that cells alone for a car like the base Model 3 (50kWh battery pack) would have cost $20,000 at the time. This price doesn’t include the pack itself or anything else related to the production process … just the cells. Today a kWh costs around $150. Tesla hasn’t officially disclosed its per kWh battery cost, but GM pays LG Chem $145 per kWh for the Chevy Bolt’s battery.

One can guess that Tesla gets a better price for the Model 3, due to the Gigafactory’s highly automated and incredibly fast cell manufacturing technology, along with the elimination of a supplier, shipping, etc. Additionally, Tesla is constantly working on new battery cells with higher energy density. For instance, its newest cells (2170) will replace the prior 18650 cells, meaning fewer cells to provide the same or more energy.

Forbes estimates Tesla’s battery cost at $130 per kWh, in order to crunch some numbers. The standard Model 3 starts at $35,000 and has a 50 kWh pack. This works out to about $6,500 for the battery (as stated above, this may not factor some other costs related to battery production, nonetheless it still gives us some perspective). The Long-Range Model 3  comes with a 75 kWh pack and starts at $44,000. This amounts to $9,750 in battery costs for the more expensive model. So, it costs Tesla ~$3,250 more to make a long-range model, yet it sells for $9,000 more. You get the idea.

Now let’s keep in mind the fact that Tesla is only offering the long-range car at first, and it will likely prove to be the more popular vehicle. Factor in expensive options like the $5,000 Premium Package, $5,000 Enhanced Autopilot, and $3,000 Full Self-Driving Capability, all of which are surely huge profit margin offerings from Tesla. It can’t possibly cost anywhere near these figures to equip the vehicles with the above features.

Tesla Model 3

Production of 2170 Battery Cells at the Tesla Gigafactory

Tesla is set to build 400,000 of these vehicles just for early reservation holders, and then make tens of thousands more Model 3’s for those still placing orders. Though it will take a considerable amount of time for the automaker to achieve this feat, the profit potential could be enormous.

Meanwhile, as time moves forward, the Gigafactory continues to grow, Tesla moves to construct more Gigafactories, production costs drop for the batteries and the sedan itself, and battery energy density improvements are in the works. To say that the Model 3 could lead to very strong margins for Tesla, which will continue to improve exponentially over time, is perhaps a blatant understatement, considering the facts at hand. Now, Tesla just needs to start really cranking out some cars!

Source: Forbes

Categories: Tesla

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69 Comments on "Tesla Model 3 Battery Strategy To Lead To Strong Margins?"

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2020 is when competition gets real and Tesla will need to be profitable. Before then they can premium price everything as there is no competition and all competitors in 2018-2019 will be low volume cars.

Competition in 2020? I doubt that will happen. While some company may one day make an EV as desirable as Tesla has done Tesla has two Ace’s up it’s sleeve. One is a huge and fast charging network and the other is all the data they collect every day. This data improves auto pilot and battery conditioning over time. They really appear to have a significant lead the is hard to beat.

I would argue that it could go on even longer than that …. just look at Amazon, how many years it has taken to turn profit.

Tesla is well funded and will continue to do so just because it has following due to its company policy and roadmap. I don’t think these investors will run anywhere anytime soon.

Before this was officially called a disruption, I always believed there was a room for one “Tesla” kind of company/darling who will dance through all the storms and tribulations, just because what they do and how they do it. Nothing to do with P&L sheets ….

Like Amazon’s cloud and hosting services, Tesla is going to need a low cost, high margin business to truly become profitable. My guess is that the Tesla network is this opportunity.

Once the stocks start losing money and speculation ends then it will be in big trouble

So far, you’re batting zero in the predictions arena.

So how much money have you, personally, lost on betting Tesla’s stock price will collapse? Tesla short-selling bashers have been predicting that, and betting on it, for… what, about four to 4-1/2 years now? How’s that going for y’all? Hmmmm?

Ah, the guilty pleasures of schadenfreude… 😀

mxs said: “Before this was officially called a disruption, I always believed there was a room for one ‘Tesla’ kind of company/darling who will dance through all the storms and tribulations, just because what they do and how they do it.” Perhaps, but Tesla will eventually have competition. Heck, even the Ford Motor Co. eventually had competition, even though at one time it had 90% of the car market, with the Model T. I just can’t see Tesla reproducing the monopoly of Ford, no matter how hard Elon tries. Not even if he succeeds in making a touchless “alien dreadnought” auto assembly line. The international auto market is so big, and making cars requires such an enormous investment of capital, that I just can’t see Tesla growing to capture 90% of the market before any other auto maker rises up to challenge it for PEV market share. Heck, arguably BYD is already challenging Tesla, at least in the number of cars produced! Of course, a lot of those are short-ranged PEVs with limited speed, but still. No, I think we’ll see other “young Turk” companies, startup PEV makers, who will rise to challenge Tesla’s lead. Maybe there’s already one startup… Read more »

This is the number 1 reason that battery technology EV’s will consume the market over any other alternative tech (like hydrogen fuel cells). Driving down the kWh cost is everything, and it’s happening now.

All mass produced products get cheaper over time.

So hydrogen fuel cells will always be expensive then?

Hydrogen fuel cells are strictly forbidden. They undermine the Great Story about the Great Leader and the One and the only One Ultimate Truth.

You don’t need to keep reminding us that you’re a science denying fool cell fanboy who rejects the Ultimate Truth of the Laws of Physics, thinks Thermodynamics is “just a theory”, and keeps promoting the “Hydrogen Economy” hoax.

You made that clear long, long ago.

Yep….. and certainly the “fuel” will be.

My electric vehicle is powered by the solar panels on my roof. How much will I be paying for that “fuel” down the road? My calculations are indicating… not much.

How is your home hydrogen producing system doing?

Tesla gets a higher margin than competitors also because they sell direct. No need to give a margin to resellers.

(Apple increases the same way its margins thanks to Apple stores (physical and even more with online stores)

Ya, this is what I was thinking. It’s odd to me that people hate “stealerships” yet have no problem giving that same $ to someone else that would have gone to them.

People don’t hate dealerships, or “stealerships” for those who prefer, for making an honest profit. They hate dealerships because they treat customers like con men treat their marks, manipulating figures in order to milk as much out of the customer as possible, and often pressuring buyers to buy expensive but worthless “upsells”, and in general giving people the impression they’re making a dishonest profit.

There are people who actually would rather haggle with a professional negotiator (such as a car salesmen) than buy from a “no haggle, no hassle” company like Tesla. Such people are of course entirely free to buy a non-Tesla car… and good luck to them! To each his own.

Those other automakers don’t have to pay for expensive mall space or employees. A dealership could have 1 employee or 100 and it doesn’t effect the manufactures bottom line.

Yeah, right! …because sales don’t matter.

I would like to have the money manufacturers lost when dealerships went bankrupt.

I agree, But $9000-USD for a 25kwh Bump is Ludicrous! I hope they do something about that..Like Cutting it down to at Least HALF thhat1

Margins are fine, but volumes matter, too. If base Tesla 3 with lower margin is significantly bigger seller than the long range option, that will bring in more profit (yes, profit!) In the end, total profit is what matters.

It’s hard to tell if base 3 will be much bigger seller, though. Competing against entry level luxury gasser, LR option might be bigger seller. Base might be fine for cheapskates, but there aren’t many likes of me around anymore.

With 455,000 paid reservations, I’d say it’s glaringly obvious the TM3 is going to sell better than the MS or the MX, assuming Tesla doesn’t drop the ball in some major way… and I mean far worse than they dropped the ball with the MX.

I am sticking my prediction that at the cell level, Tesla/Panasonic will achieve an internal direct manufacturing cost of just $55/kWh by December of 2018.

I predict Tesla will invent perpetual motion in November 2018, and by December won’t be using batteries at all. 😉

That would run in contradiction of the last 2 decades of battery price per kWh improvement. We’ve been steadily averaging about 14% improvement.

That means that AFTER they hit $100/kWh, it will still take approx another 4 MORE years to reach $55/kWh.

But I hope you are right…..

It’s like anything else…Base anything always has the lowest margins…S/X P100D with Ludi has the highest margins so we have to dive deeper than just the kWh’s price to determine whether a specific model is profitable…

Never forget what Tesla aims to do: nothing less than turning the mountain of millions of ICE cars produced and sold every years and big oil they consume to dust! That’s not David against Goliath. That’s an ant against an elephant. I think there’s nothing comparable in recent industrial history. It will take a long time to achieve that.

The ant got a mighty companion with the same goal, so the elephant will go down…

The whole article is speculative.

Tesla does not calculate gross margin per industry standard, so the 25% metric is nonsense.

Tesla does not make batteries. Panasonic does, and will sell them to anyone who wants one. Batteries are a commodity. The other major EV producers (Nissan, GM, various Chinese companies) are not buying from Panasonic, i.e. Panasonic does not have any secret sauce to better batteries.

Actually, since the Gigafactory is a joint venture, Tesla DOES make batteries. While they undoubtedly started with Panasonic technology, the new economies of scale and vertical integration means BOTH Tesla & Panasonic are highly motivated to develop the most energy- and cost-efficient batteries possible.

The Gigafactory is little more than a giant building for Panasonic to set up operations within.

😆 😆 😆

Why don’t you e-mail your comment to Gigafactory 1? No doubt the Tesla employees working on assembling Tesla battery packs, and those working on (or training for) the new Model 3 drivetrain assembly line, will post it on their bulletin board so they can point and laugh at it.

Which is exactly what they are doing.
Good point, Counterpoint.

Counterpoint – Panasonic leases space within the GF to manufacture cells using Panasonic machinery and Panasonic employees.

Tesla employees use the cells and Tesla machinery to make the packs.

Yeah. Tesla is in charge of getting raw materials to Gigafactory 1, and shipping finished battery packs out. Panasonic is only in charge of part of what goes on inside.

And the name on the building is “T ≡ S L A”… not Panasonic.

EV are simpler but not necessarily cheaper. Beside battery, the motor controller/inverters aren’t cheap either. Go around and see how much 200kW inverter would cost. It is more than your engine cost.

I haven’t heard of an updated price, but it was reported in 2014 that a Model S’s motor was $15K (not sure if that rounded up, includes labors or sales tax)…


You do know that seeking alpha is an anti-tesla troll site for shorters?

It is more likely that the real price is divided by ten than the crap they publish.


While I probably shouldn’t have cited seeking alpha, the $15K replacement cost at the time was accurate per Edmunds…

“…the $15K replacement cost at the time was accurate per Edmunds…” WOW! How many errors of logic and reasoning is that? Well, before I list them, let me just say that I’ve seen a 3rd party supplier price (not cost, but price, including their profit) for a high-performance EV motor that was $2000, and that includes the inverter. So Mikael’s assertion that your $15k “cost” is inflated about 10x, is probably about on target. 1. Tesla doesn’t replace just the motor itself, it replaces the entire “drive unit”, which includes the inverter and the fixed reduction gear. That’s not the price for just the motor. 2. You’re citing the price (not cost… price) for a service shop to replace the drive unit out of warranty. So that would include both labor cost and Tesla’s profit margin. Again… not cost, but price. Furthermore, if it’s an out-of-warranty replacement, that may well be retail price… not just wholesale price. 3. You’re citing the price for a Model S drive unit, not a Model 3 drive unit. Made in significantly larger quantities, we expect Tesla’s unit cost for Model 3 motors would be somewhat lower than Model S motors. 4. A Model S… Read more »

No it’s not. It’s an open forum for investors, both long and short investors can post stories there.

Seeking Liars is notorious for regularly excreting hordes of zombie shorter trolls to come onto EV sites and spam their unimaginatively repetitive and easily discredited anti-Tesla FUD.

Desperately Seeking Liars… er, sorry, “Seeking Alpha”, may not have been created as a forum specifically for those creating, promoting, and disseminating FUD about Tesla, but Tesla short-sellers certainly are using it for that purpose! We were told a few days ago that someone on Desperately Seeking Liars had posted a link to an InsideEVs article… which is why we suddenly got a flood of new anti-Tesla trolls posting comments to that InsideEVs discussion thread. I spent a few months reading Tesla-related SA blog posts, and comments to those, so I could recognize the FUD and fallacious arguments directed against Tesla when I saw them. It is absolutely astounding that so many people will post literally dozens of comments there every day repeating the same Tesla bashing FUD, and some of them keep this up for months or years. I really don’t understand why they think it’s worth their time. Surely no individual investor can possibly be affecting Tesla’s stock price by as much as even 1¢? Maybe they think their group effort is worth all the time they spend doing that. Or perhaps their greed has driven all judgement and sense from their heads. One thing is quite certain:… Read more »

Someone said Sinking Alpha is: “an open forum for investors, both long and short investors can post stories there.”

This is either a naive oversimplification, or a disingenuous intentional misrepresentation of what Sinking Alpha is about. Do you post stories on Sinking Alpha?

The reality is that Sinking Alpha is a site for profitizing content through clicks. This means there is no even coverage on TSLA like you pretend. The act of profitizing content (AKA click-bait) has lead to a massive distortion field on that site with a horribly bad record of failure when it comes to predicting anything about Tesla.

If you are trying to pretend that somehow the coverage of Tesla there is neutral or evenhanded, you either are the sucker they desperately desire, or you are part of the problem of spreading the FUD. I’m guessing the latter.

“t was reported in 2014 that a Model S’s motor was $15K”

That may be a retail price. But I highly doubt that is the “cost” of the motor.

The induction motor used in the Tesla is fairly cheap. Based on the raw material alone and technology, it should cost more than $2K to make at most.

However, the 500kW motor drive system, the high powered IGBTs and MOSFETS will cost at least $3K to $4K if not more. That is where “simple” doesn’t mean cheaper.

So far, people are only talking about E-motor being cheaper than engine (which is true) but hardly mentioning anything about electric drive controller and inverters that are in the 200kW to 500kW range which is way more expensive than most thinks.

Right, the PEM (Power Electronics Module) and the cutting-edge inverter are almost certainly going to cost Tesla more than the motor itself.

Electric motors are basically just a bunch of wires and metal plates. At least the one in the Model S that does not use permanent magnets. It probably costs less then 500 USD to produce!

As someone who’s built a few home-brew EV’s, it’s apples and oranges to compare the cost of a component for mass production versus a specialized aftermarket part (e.g. a 200kW inverter off the shelf designed to work with a variety of motors). That’s a bit like saying that the cost for a manufacturer to go to a turbocharged engine will be similar to the cost of an aftermarket turbo kit. It’s just not the case.

My ~10kW peak charger was built in a commercial garage and cost about $2,500 but can charge just about any type of battery on the planet and has all kinds of user controls, communications, etc. The 10kW charger under the hood of a Tesla only do one specific thing and easily cost less than 1/10 of that to build in a factory by the thousands. Scale and use-case matter A LOT.

Yes, that is just the onboard charger which should be cheaper on mass scale.

Now, what about your Motor Drive system? How much does that cost you? Also, for induction motor that is 200kW, how much would it cost?

Those strong margins are pretty important if you are still trying to grow the Supercharger network that every Tesla driver wants.

At some point, the pricing may ease off a bit, but I don’t expect that to happen anytime soon.

I believe the price will drop as soon as the US tax credit runs out (end of 2018).

The full credit expires, then they’re allowed to close out that quarter and the next quarter at full, then it progressively goes down…Essentially once the 200Kth vehicle is delivered it’ll be roughly a year for it to fully disappear…

Glad Roy_H finally touched the real driver. Tesla reaches 200k cars around start 2018, so its FTC starts to decrease mid 2018… Tesla has to lower its cost now [build many] so that it has the option to lower the price as its FTC fades down to zero. Other auto makers can continue to ride the FTC gravy train until they too must earn their price.

According to that calculation the margin on the battery extension it is 177% instead of 25% for the car overall. A bit strange to increase the margin on what is already the most expensive part of an ev. It seems counter productive to ev promotion.

I don’t think there’s much in this article which should be taken seriously. A few years ago, a Tesla spokesman said that Tesla’s cost for the battery pack was about 25% of the cost for the entire Model S.

With the drop in battery price since then, it may be that the fraction of the battery pack cost for the Model 3 is not much more than 25%, even though the average price for the TM3 is much lower. At any rate, the profit margin on the rest of the car will certainly be more important than the margin on the battery pack alone. One of the few things this article almost certainly gets right, is to indicate that the profit margin on at least some (perhaps most) of the options for the TM3 will be much higher than the overall average profit margin on the cars.

Average auto makers don’t make a 25% gross profit margin on their cars, but makers of exclusive high-end cars do. And since Tesla has been making only “premium” cars, perhaps it shouldn’t be surprising that its gross profit margin has been ~25%. But let’s not forget that to achieve that, Tesla had to go for the direct sales model. So Tesla gets both the wholesale and the retail profit, while not having to deal with independent dealerships and how they suck off so much of an auto maker’s profit. Of course, Tesla does have to pay for Tesla stores to be built, and does have to pay the employees who work there, so there is somewhat of a tradeoff. Back in the day, when Tesla was first talking about the Model 3 (or the “Model E” as it was known then”), it was said that Tesla was aiming for a 15% gross profit margin on the Model E/3. That makes sense; any businessman should understand that you can trade off profit margin for more volume, and come out ahead if the volume is sufficiently high. So why has Tesla (or Elon) lately taken to claiming Tesla will work up to… Read more »

Here is the crazy thing. In the last conference call, Elon stated that they would approach 25% margin within 3-4 months after reaching 20K cars/month. His financial folks hedged for more time just to be conservative.

But if they hit 20K/mo before the end of 2017 like Elon has stated is the goal, and they don’t even plan on going to alien dreadnought 0.5 until mid-2018, it doesn’t sound like they are even taking further automation into consideration when they talk about their goal of 25% margin.

Or maybe Elon’s goal of hitting a 25% gross profit margin that soon is… what’s the polite way to put it?… more aspirational than practical.

Elon has a habit of setting impossible or nigh-impossible goals, apparently in the hope that his employees will try hard to achieve that goal, and so achieve more than they would if a more realistic goal was set. Maybe that’s a successful business strategy for Elon, but it must be rather exasperating for his employees and his investors!

Yes, it is likely an aspiration. But the point is that it is an aspiration BEFORE factoring in even version 0.5 of the alien dreadnought, much less the full V1.0 or V2.0.

Yes, I got your point. I am highly skeptical that Tesla can achieve that high a profit level that fast, but then I was also highly skeptical that Tesla could actually start Model 3 production on time, on an aggressively accelerated schedule… yet they managed to pull that off!

Thanks again, Nix, for all your insightful and very well-informed comments.

…and Go Tesla!

I believe 5k/week maxes out one line, and the expansion to 10k involves adding a second Model 3 line. Margin for the second line, once ramped up and running at capacity, will be roughly the same as the first one.

Source? All of the plans they have talked about alien dreadnought have been upgrading their current line. I’ve posted links to that previously (ibid).

Starting the gigafactory with the upfront cost of building it in the first place is certainly increasing the price of the first cells a lot. If a key on door plant is say 1 billion dollars, the first cell instant cost is 1 billion dollars and the arrival of the next cell put the price at 500 millions, that trend continue until the per unit cost equals the recurring operation cost of the factory divided by the monthly output. Perhaps the present instant cell cost is 360 $/KWh, so they place the 25 KWh pack extension at 9000$ to reflect their true present instant cell cost. The other cells of the base car being considered as part of a lump value set at conception at 35000$ no matter what.
More precisely if they set a 25% overall margin the present cell cost would be 288 $/KWh.
Just speculations of course but perhaps somewhat connected to the gigafactory reality.

In the Bolt EV’s wiki it cites Opel responded to the “$9K/vehicle loss” article by saying they’re paying $130/kWh for the Ampera-e…Opel is no longer owned by GM…

I think it was Jay Cole who reported that LG Chem and Samsung were in “a bit of a price war”, so perhaps it shouldn’t be surprising if someone is already paying LG Chem less than $145/kWh for batteries in quantity.

But what does that have to do with Tesla’s cost for batteries from Gigafactory 1? Nothing. It’s not like Tesla can switch battery suppliers for the Model 3! At least not in the short term, and not until other battery makers are making batteries in much greater quantities than they are now.

“saying they’re paying $130/kWh for the Ampera-e…Opel is no longer owned by GM…”

After GM came out with $145/kWh by the end of 2016 (when Bolt launches) and $100/kWh by 2020. Nissan commented that “GM is probably paying lower than that”…

So, I am not surprised that $130/kWh is the actual figure. But that is all cell level cost which would cost more at pack level.

Now, after GM released the $145/kWh figure, Tesla mentioned in the earning’s call that they “still got the lowest price in the industry”. So, that implies that they are lower than the $145/kWh figure that GM was quoting. How much lower, we don’t know.

Either way, it sounds like $100/kWh figure is reachable by 2020 or earlier for sure.

That potentially means that we can make a 200 miles range pack for less than $10K.

It will be better if all automakers launch 1 or 2 trims built on aluminium frame in every model. It will cost around $1,000 – $2,000 more than the trims with steel frame, but with aluminium which is 15% lighter, the mileage will also increase by 15%. These vehicles should carry a badge like Al or Alum just like Hybrid and Plugin vehicles carry a separate badge.

And those who drive more than average will be willing to pay this premium because they can get the return on investment sooner or later.
Prospective buyers will be
* Cabbies
* Fleet and business users
* Individuals who have long commutes.

Also those who park their vehicle outside exposing it to the sun, rain, wind would like to buy such a vehicle because Aluminium does not rust and it maintains the shine.

And the most important thing is that the automakers should advertise the fact that these vehicles are 15% more fuel efficient and also they don’t rust.

Nowhere near 15% lighter, only frame, and body panels if all aluminum. And no that doesn’t translate to 15% more efficient.

Weight is only a variable in 2 factors of energy efficiency, as air resistance is the largest by far and inertial losses while 100% if an ice, is only about 15% in and electric.

However, aluminum is far more difficult and expensve to work and repair.

High strength steel is about the sweet spot for cost effective (tco wise) materials.