Let’s Look At Tesla Model 3 Gross Margins: Long & Mid Range

OCT 21 2018 BY MARK KANE 58

Will Model 3 Mid Range affect profitability?

As Tesla is removing its Long Range rear-wheel drive Tesla Model 3 in favor of the all-new surprising Mid Range rear-wheel drive version, a question arises – is this wise from the business perspective?

One of the recent Teslike.com articles addresses gross margins. By assuming battery capacity of particular versions (as the only/main difference) and battery prices at $115/kWh, you can estimate how the gross margin of Mid Range or Standard Range versions will vary compared to the assumed gross margin of the Long Range version.

In attached examples (below is one for 25% gross margin for Long Range), it turns out that the decrease in price is bigger than the cost savings over the lower amount of batteries, which translates to several percent lower gross margins with every step to Mid Range and Standard Range.

Tesla Model 3 gross margins (Source: Teslike.com)

It sounds reasonable to us that the more affordable Model 3 will earn less for Tesla. This is why Tesla was pursuing the Long Range, and then all-wheel drive Performance versions, as well as why the general automotive industry was moving from cars to SUVs.

In the case of the cheaper Model 3, customers will probably opt for less optional equipment too.

At first glance, it seems that by introducing the Mid Range Model 3, Tesla will decrease profitability. However, there are other factors that could increase profitability:

  • some customers will go for the Long Range Dual Motor version (because Long Range rear-wheel drive is removed), others will take Mid Range with maybe some more options
  • some customers will go for the Mid Range version now instead of continuing to wait for Standard Range version
In other words, the overall financial impact for Tesla shouldn’t be bad.

Source: Teslike.com

Categories: Tesla

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58 Comments on "Let’s Look At Tesla Model 3 Gross Margins: Long & Mid Range"

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Model3 Owned- Niro EV TBD -Past-500e and Spark EV,

Another crucial reason — more cells available to feed into the starved Powerwall customers. Lots of installations awaiting and that’s money not earned there on solar installations that’s not servicing that huge Solar City debt.

Have to factor in the earnings on those installations since now able to feed batteries there without sacrificing production #s throughput since the battery pack assembly isn’t affected (just less cells). The SR will impact flow and they aren’t ready for that since they just got the new battery pack lines installed last month.

At 10-15k per installation of arrays, Tesla will make out nicely to restart those — factor that into the margins and probably comes out ahead by a lot more with the MR.

Pushmi-Pullyu

Analysts seem to be pretty much in agreement that Tesla doesn’t make much if any profit off selling PowerWalls or PowerPacks. It looks to me like every Gigafactory cell that goes into a PowerWall or PowerPack instead of into a Tesla car, represents a loss of profit for Tesla. That’s why Tesla hasn’t significantly increased the production of PowerWalls or PowerPacks.

Mint

From that point of view, it seems like Powerwall was mostly a backup plan to mitigate risk of the Gigafactory. It was announced a year before the Model 3 reveal, at which time every automaker thought 500k EVs per year by 2020 was ludicrous, so Panasonic was probably a bit nervous about investing billions.

Doggydogworld

You’re exactly right. Panasonic was dragging their feet. Musk announced Powerwall and Powerpack, said the phone was ringing off the hook and storage would quickly become a billion dollar business. That got Panasonic moving again.

Terawatt

I don’t disagree, but 500k Teslas in 2020 still looks unlikely. The ramp this year has gone just about as well as one might hope and gets them to an annualized rate of about 250k. I don’t think they can double that in Fremont, and their other assembly plant is a plot of land in China. Hope I’m wrong, but I will be surprised if they can reach 0.5 million cars in 2020.

Doggydogworld

They ran at a 320k/year rate in Q3 and are at 350k now. They claim they can get to 500k just by removing bottlenecks. We’ll see.

Musk claimed 1m in 2020 on the last call, because Shanghai. But he’d just said that plant would start 2021! They really do need to put him on 7 second delay.

antrik

He first said 1,000,000, but then corrected to 700,000 – 800,000. I think that’s realistic, even without Shanghai.

Pushmi-Pullyu

I agree, it does seem unlikely that Tesla can reach 500k annual output as early as 2020. Perhaps not impossible, using the “production line in a tent” business model; but still unlikely.

Pushmi-Pullyu

“From that point of view, it seems like Powerwall was mostly a backup plan to mitigate risk of the Gigafactory.”

PowerWalls and PowerPacks both, I think. That’s been my working theory from the first time I read about the plan for production at the Gigafactory (now Gigafactory 1). The fact that there has been so little increase in production of PowerWalls and PowerPacks seems to confirm that.

There are some who say “Tesla isn’t an auto maker, it’s an energy company”. Well no, it’s an auto maker. Tesla gets at least 95% of its income from selling cars. It may not be that way forever, but it’s certainly that way at present.

yo

Tesla raised the price of the power wall 400 earlier this year and 800 a week and a half ago…
Hopefully that will help them turn a profit and continue volume increases…
When was the analysis performed??

https://www.greentechmedia.com/articles/read/tesla-hikes-powerwall-prices

Mr. Johnson

Except that GF1 cells don’t make it into those products. So they buy cells on open market for those products.

If anything PowerWall/Pack allow Tesla to keep tabs on the cell markets by being a “normal” large customer.

Doggydogworld

Tesla does buy energy storage cells from other companies, but they have also produced them at the GF. Specifically for Puerto Rico.

Model3 Owned- Niro EV TBD -Past-500e and Spark EV,

We know powerwall production has been on hold for the better part of the summer due to battery diversion to the Model 3. Only the PW2 and Model3 use the current battery size cells. With assembly lines in full production and even the Gigafactory batterypack lines delivered, the primary bottleneck appears to be the batteries themselves.

It’s interesting to see this MR announcement also comes nearly the same time as Tesla saying PW2 deliveries to resume in late 2018 — which does lend to the shaking loose of batteries from Model 3 to move over to PW2 production.

As to the PW2 cost, it was sounding like a loss leader to get traction initially 2 years ago… but the arrays themselves are quite profitable and the costs probably now are fine. Installations of these PV arrays I bet are going to get priority over simple PW installs. Luckily we got ours in March! 🙂

antrik

The SolarCity debt is being serviced by existing customers paying for the electricity generated. If they actually needed new installations to service the debt from previous ones, that would indeed be sort of a Ponzi Scheme, like some detractors are claiming…

You may be right though that “freeing” cells for solar+storage installations might actually be good for overall profitability.

Model3 Owned- Niro EV TBD -Past-500e and Spark EV,

You’re talking about individual service debt contracts probably. I’m referencing the $2.9B loan debt that Tesla assumed when it purchased SolarCity that’s hitting the books and finances of Tesla and causing all the financial consternation.

If people are waiting for their Powerwalls and Solar installations, SolarCity (hence Tesla) is not getting revenues — causing draw on profits. No sale = no profits regardless of margin.

Tesla’s moving cells over to Powerwall production to get sales = revenue while not sacrificing production numbers on the Model 3. A little margin sacrifice for more PV sales? Heck yeah…..good move.

jeffhre

By that definition, nearly all start-ups are Ponzi schemes, since some scale is required before they are self supporting.

Pushmi-Pullyu

You’re certainly correct to point out that the term “Ponzi scheme” is vastly over-used when it comes to startups and other businesses in a rapid growth phase. (Some Tesla bashers have even hurled that insult at Tesla; the same idiots who claim Tesla only makes its superb, highly desired, top-rated cars as window dressing for a stock fraud! 🙄 )

But at the same time, when Solar City’s business model turned negative, because States started repealing or cutting back on the “net metering” which Solar City depended on to generate a profit, it can be argued that the company did to some extent start operating like a Ponzi scheme.

Doggydogworld

“SolarCity debt is being serviced by existing customers paying for the electricity generated”

Not really. SCTY has two levels of debt, subsidiary and corporate. The subsidiaries own the panels, receive customer payments and pay their own bills and debt. Any cash left over flows up to corporate.

There is almost no cash left over the first 10 years, then the subsidiaries finish paying off their debt and start sending most all cash flow to corporate. Unfortunately, the corporate level debt comes due much earlier. $82.5m was due to Musk/Rive in August and $230m is due to bondholders in two weeks. There’s another 560m due to bondholders in a year, and so on.

This timing mismatch is what made SCTY bankruptcy inevitable when they lost access to external funding.

Change

Test

Vexar

Well, if he can’t get the price of the standard right, the rest is bunk figures. Sandy Munro said that the Model III could be built for $28k and sold for $35k.

Model3 Owned- Niro EV TBD -Past-500e and Spark EV,

Think Author is using the forced PUP into the calculation, and then ‘options’ are Paint/Wheels/EAP

Vexar

I still think they will make margin on a $35k car at some volume of manufacturing and the base Model III was promised at $35k, so while I applaud the efforts, I still poke the author by saying it is off, numerically.

Mint

All cost figures are wild estimates, including Sandy Munro’s; moreover, the real figure will change with time as Tesla gets more experience in manufacturing, assembly, and component sourcing. Teslike (the source of this article’s figures) considered three gross margin scenarios for the LR: 25%, 15%, and 5%. They then calculated the MR gross margin for each.

The MR is definitely lower margin, but with most planned LR buyers advancing their order to 2018 for the full tax credit, there would be little demand in the first few months of 2019. It was a good move introducing the MR now to boost 2019 US sales.

Pushmi-Pullyu

Yeah, even Sandy’s estimates are still estimates. I don’t know how “wild” they are, but there is no reason to believe they’re especially accurate. Sandy can’t possibly know what volume Tesla will produce — even Tesla can’t predict that accurately in advance — and unit price (and therefore profit margin) is directly affected by volume of production.

Hopefully Sandy’s cost estimates are an educated guess, but at best they are still a guess.

Elemental

From what I know they did a complete tear down and itemization down to the individual bolts and nuts. So they should be able to get a pretty accurate cost of the parts with some projections about quantity discounts. The less accurate component of cost is probably labor and other costs not associated with the actual parts. There is some public information about that though and they may be drawing upon other averages in the industry (which are probably worse). I think that Sandy Munro’s numbers are likely fairly accurate.

Pushmi-Pullyu

The price of common fasteners such as nuts and bolts are certainly predictable, since they don’t change much even when ordered in quantity.

It’s the prices which auto parts suppliers charge for specialty parts and sub-assemblies made specifically for the Model 3, which will be most affected by volume of production. That and Tesla’s own costs for in-house production of parts and sub-assemblies.

REXisKing

As Tesla scales they should get lower unit costs on all components across the board.

Norm Dill

The other argument is that this is a mass market car. If the lower price kicks up volume total profit may rise and there is the halo effect of actually outselling established competitors by number of units not just profit. Also, understand Musk’s perspective, the more Tesla can sell, the more good it does for the environment (including the use of fewer raw materials which affects conservation, raw material shortages and disposal pollution).

The big institutional investors already want to stifle musk’s and Tesla’s Innovation by applying pure Financial models too something that is bigger than pure Financial models especially if you have the ability to look past the next quarter or the next annual. This is why replacing Musk with a traditional leader wood badly damaged Tesla as an innovator and as a contributor to the Future. Did anyone notice what happened to Apple when they got rid of Jobs and replaced them with a Pepsi executive?

Norm Dill

Is this inside EV’S or InsideWallStreet? I get that profit is essential to success, but you are applying the perspective of dreary quants to a revolution the Tesla and Musk are almost single handedly responsible for through technical innovation and risk taking (there is no chance the mainstream makers would be where they are without the impetus provided by Tesla. VW would still be pushing diesel as would all the Germans. GM world have backed away as they did with the first EV with Luddites like the “brilliant” Bob Lutz). Like I said, the financial is important and must be discussed realistically, just with a little less emphasis on the smothering blanket of conventional institutional Financial thinking which has its place but it ain’t here!

jeffhre

” VW would still be pushing diesel as would all the Germans.”

VW cheated!. How did getting caught affect them – financially! “…technical innovation and risk taking” are ineffective if they have no financial effects.

Pushmi-Pullyu

“At first glance, it seems that by introducing the Mid Range Model 3, Tesla will decrease profitability.”

Sure, from the extremely narrow viewpoint of a one-dimensional analysis. But throw in a second dimension, volume of sales, and things might look different. It’s a no-brainer to suggest that Tesla might be trading off lower unit profit margin for higher volume of sales; that’s a well-known business practice. In fact, I’d say that’s not merely possible, but probable.

Dennis Moore

“How do we do it? VOLUME!!!”

REXisKing

Yes, the more units you order the better the pricing, the lower unit costs go. This will also help lower Tesla insurance rates as repair parts too should get a price decrease, or at least no need for a price increase.

Matthew Kennel

There’s a decent chance that at the moment the capacity for cell production may be more limited than factory assembly capacity. Panasonic is opening new cell production lines but perhaps personnel are being diverted to setting them up.

trololo

40 k$ for the standard range Model 3 ? This will make Telsa dectractors happy …

Hauer

40k$ includes the currently non-deselectable Premium package.

trololo

OK, thanks. The Column title “price before options” is a bit misleading.

CarGuy

Good article. They wiil make up for the reduced margin by increasing and possibly doubling the volume. Most base model buyers will still pick a couple of options.

Alex

I don’t think the MR has less profit than the previous $49k LR version. They’re increasing the price per kWh with the MR. It’s true that they’re selling less batteries at a very high profit, but there are more batteries left to build more cars.
I’ve few doubts that the MR version main reason is to improve profits.
At 25% gross profits, Tesla is going to have a healthy profit in Q3… but it’s not going to happen in my opinion, I suspect it’s going to be very small – below $100 millions.

antrik

Their guidance was 15% gross margin on Model 3 in Q3.

REXisKing

Bringing out the Mid-Range first is genius.
You get more cars on the market with less batteries,
and you allow low-range buyers to rethink and possibly upgrade to a MR purchase.

This should substantially increase demand.
And I note that currently you can order a $45,000 Black/Black car with no other options. So, that is your final price.

The next thing I’d like to see is for Tesla to unlock Lease sales, for the Model 3.
But, if you can’t meet current demand…

Milfan

Can you please give the source for “$115/kWh”. It seems to be very low, but possible given the scale of production in Gigafactory.
Any why is the Standard Range listed as $40,000. Is it not $35,000.

antrik

Actually, $115 per kWh at cell level is rather high, considering that Elon claimed they will likely get below $100 before the end of the year…

(Don’t know whether it’s coincidence, but IIRC $115 per kWh is what Audi claimed a while back they will be paying for cells.)

Pushmi-Pullyu

I agree, Tesla’s current cell-level price for batteries is very likely less than $115/kWh; probably only slightly above $100/kWh, or perhaps even right at $100/kWh by now. That is, assuming what Elon said is the reality, and not him being overly optimistic again, which is a bad habit of his.

The “LR” will reappear in the future at a diferent price point. 1$ bet that in 3-6 month it will be at around 50k with no 5k optional that can not be excluded like in the present, so std version + long rance pack = 50k

antrik

Are you suggesting they will be raising the price for that configuration by $6,000?…

Chris

Margins aren’t a static amount. The more cars produced the bigger the margins and if cells are holding up production then it means more cars are being produced, so whilst it might mean slightly lower margin cars, but more cars might also mean higher margins on all variants. But as to whether this is a good move depends on the overall affect on gross margins. Higher total gp will mean more money to cover overheads and make for potential profitability.

QCO

I’m certainly becoming jaded with all the pricing and option variations. For example the white interior dropped significantly in price and is now available on every variation except the original LR RWD on which it was blocked for no real reason (it wasn’t volume related since it is independent of drive configuration). Arbitrarily dropping the maximum range variation, even if lower volume, seems short sighted when EV range is such a visible and differentiating specification. Besides, the Model 3 option mix variation is already very low, and the options are all highly independent from a build perspective (which actually demonstrates really good model structure planning).

The inconsistency looks like marketing experimentation, which to a cautious consumer suggests it is better to wait until variation and pricing settles down later next year before committing. That is obviously not the outcome Tesla wants, but they are potentially heading that way.

antrik

Actually, spreading out demand instead of everyone ordering at once, is a good thing…

I’m pretty sure the white interior was initially volume-constrained, which is why they offered it only for the lower-volume variants. Maybe they could have lifted that limitation a bit sooner, though…

filip bjurling

It’s so weird that Americans say “transition from cars to SUVs”. To me an SUV is a car. Saying “transition from cars to SUVs” is like saying “transition from vehicles to cars”

ABLE LAWRENCE

By simply making more cars, reduces operating losses by spreading the fixed costs to more vehicles. Its a net positive.

Garth Woodworth

Tesla is optimizing the US/Canadian market to prep for the world market.
Model 3 is indeed a ‘mass market car’, but not in the sense that the term is currently understood. At present, the mass market car is:
a) good quality
b) cheap enough for a broad range of buyers
Model 3 is different
a) good quality
b) offers wide buyer range – eventually cheap enough for most buyers, but, (with options) attractive to high end buyers
c) fundamentally more practical than even the present most practical mass market cars (because EV vs ICE)
d) endurance: a million mile vehicle – no practical need to flip model year
e) software up-gradable: no practical need to flip model year
f) design allows for progressively lower cost of mfg/progressively greater margins (or progressively lower cost to buyer)
g) fun (clincher for those who don’t care about any of the above)

Basically, the introductory phase is coming to an end. From here on in, Model 3 will displace mass market competitors at each of their levels, low budget through performance

Terawatt
Sorry, but this analysis is lacking. Profit margin and profits isn’t the same thing. You write as though it is, moving straight from a table showing lower margin for the new version to the conclusion that it seems Teslas profits will suffer. A lower margin only shows a lower margin, it doesn’t in itself translate directly to profits. That’s why manufacturers of everything from houses to food to clothes to chocolate make both the high-margin stuff AND the low-margin stuff. If you have satisfied the demand for the highest margin version of a product, you move on to the next highest margin version. You make less profit, and less per dollar spent (therefore risked) to generate it, but can usually sell more units. Generally, as long as you can make a decent return (significantly more than risk-free interest — how much more depends on how risky the investment is, and that is a judgement call), you want to continue going to lower margins and greater volumes, because you’re still making more money and enough more that it’s worth it. It may be that Tesla doesn’t have enough demand for a $49k Model 3, as long they aren’t ready to deliver… Read more »
Doggydogworld

A perfect analysis would use contribution margin and include incremental SG&A. That data is not available, so change in gross margin is a reasonable approximation.

I agree about US demand. That’s clearly why Tesla invented the MR. It may be less profitable, but you have to build what you can sell.

Lawrence

That 68.25kwh figure sounds high, which greatly affect the total GP. Given that LR RWD’s range was derailed by 7.2%, which Tesla will not do for the mid range.

Lawrence

Ugh auto spell correction strikes again. Anyhow.

Difference in kWh based on range: 260/310=50, 50/310=16.1%, 16.1%*80.5=13kwh

Uncompensated kwh of MR: 80.5-13= 67.5kwh

Compensate for wh/mile inflation of LR: 67.5*7.2%=4.9kwh

Actual battery size of MR (total capacity) = 62.6kwh

That comes out to a 23% gpp based off of your table.

Doggydogworld

“which Tesla will not do for the mid range”.

According to you. Troy used weight difference, not just the change in range. MR is a quick hack using the LR pack. There may be a limit to the number of cells they can easily remove. If that limit is ~15% they would have lots of motivation to downrate EPA range the same percentage as LR+RWD.

antrik

Going by the the LR having ~50% bigger battery and ~50% more range, it seems the (smallish) weight difference doesn’t affect range significantly…

I don’t see why they would want to derate the range if they can’t reduce the cell number more? Why lower the sales value more than the actual pack size would call for?…