To Say That The Tesla Model 3 Won’t Have Strong Margins …

Tesla Model 3

OCT 1 2017 BY EVANNEX 34

Tesla Model 3

Tesla Model 3 (Instagram: shmobbert)

THREE REASONS TO EXPECT STRONG MARGINS FOR TESLA MODEL 3

The prevailing “wisdom” among those who continue to short Tesla is that Model 3’s lower price point will surely translate to anemic margins. However, that assumption looks unlikely. According to Trefis Team (via Forbes*), Elon Musk has already, “indicated that the [Model 3] sedan could garner gross margins of as much as 25% at some point next year. This is impressive, considering that margins on Tesla’s luxury Model S and X stand at similar levels, with most mainstream automakers such as GM and Ford commanding margins of under 15%.”

So how exactly is Elon Musk forecasting such thick, healthy margins on Tesla’s lower-priced Model 3? Trefis Team examines three unique factors at play for Tesla: low battery costs, high option uptake, and production efficiencies. Let’s take a look at these three determining factors that could impact gross margin for Tesla’s Model 3.

Low Battery Costs

When Tesla’s Model S launched in 2012, battery costs were around $400 per kWh. Those have descended well below today’s $145 per kWh confirmed by GM (via LG Chem) for its Chevy Bolt.  An improved supply chain along with “Tesla’s Gigafactory in Nevada, [is] enabling it to cut logistics costs compared to the cells on the Model X and S, which are imported from Japan.” To that end, “Tesla, along with Panasonic, has designed a new variety of battery cells called the ‘2170’ which will replace the smaller ‘18650’ cells which have been in use for decades. The new cells provide higher energy densities (meaning that they can store more energy for a given size) and will also be manufactured using an automated process that will help to cut costs.”

*This article comes to us courtesy of EVANNEX (which also makes aftermarket Tesla accessories). Authored by Matt Pressman.

Above: A look at Tesla Model 3’s 2170 battery cells in production at the Gigafactory (Youtube: Doug Robinson via Tesla)

High Option Uptake

Will everyone choose a barebones, standard level Model 3? Trefis Team expects many buyers to lean towards the pricier Model 3 with the “75kWh battery on the extended range model [which] would cost about $9,750, translating into incremental costs of about $3250. As the extended range model sells for an additional $9,000, it could command a healthier dollar gross profit of about $5750 (without accounting for any other incremental non-battery costs)… [and] Tesla is also offering several other add-ons such as the premium package (additional $5,000), enhanced autopilot ($5,000) and full self-driving capacity ($3,000) – which are all likely to be high-margin offerings that could boost average selling prices and profits on the Model 3.”

Tesla Model 3

It’s likely many will option-up their Model 3 with upgrades like these higher-priced 19″ sport wheels (Instagram: teslamotorsports)

Production Efficiencies

Looking ahead, Tesla “has set an aggressive target of producing as many as 10k cars per week next year… [and] there’s no denying that the mass-market nature of the Model 3 should provide the company with significant economies of scale compared to its more niche luxury models. Tesla has also simplified the design of the Model 3 to make production easier, learning from its mistakes with the Model S and X. The company intends to initially offer the car with just 100 permutations, compared to over 1,500 permutations for the Model S in a move that should make production and inventory management easier.”

Tesla

As production ramps, Model 3 efficiencies will likely be captured (Instagram: andyschuon)

As Tesla begins to ramp production of the Model 3, it’s reasonable to expect healthy margins with these three critical factors at play — even though the Model 3 represents Tesla’s least expensive model to date. Only time will tell. But, assuming Tesla hits its marks, it’s likely that Elon Musk will (once again) prove the superiority of electric vehicle tech versus aging internal combustion engine gas-mobiles.

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*Source: Forbes

*Editor’s Note: EVANNEX, which also sells aftermarket gear for Teslas, has kindly allowed us to share some of its content with our readers. Our thanks go out to EVANNEX, Check out the site here.

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34 Comments on "To Say That The Tesla Model 3 Won’t Have Strong Margins …"

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The claimed factors above are, for the most part, what already make the Model 3 theoretically possible at a low price point.

Otherwise, it would have costs similar to the Model S.

So you can’t say “economies of scale and new batteries, blah blah are why the Model 3 will cost only $35K” and *also* say “economies of scale and new batteries, blah blah are why the 3 will have great margins!”. Pick one, or the other. It strains credibility to assume these magic bullet points will give you both.

Finally, Tesla’s margin calculation excludes R&D costs, which other manufacturers include. Furthermore, because Tesla operates their own stores, they have additional cost of sales which traditional manufacturers don’t have: the dealerships spend that money, not the manufacturer. For these reasons it’s difficult to compare costs between Tesla and the rest of the industry.

🙄 🙄 🙄

I think even the other Tesla hating trolls have to be rolling their eyes and shaking their heads at your clueless comments, 4E. When posting Tesla hating FUD, you should at least make some attempt to make your assertions half-credible.

The reason the Model 3 is a lower priced car is because… it costs less to make. Duh!

Things like replacing much of the aluminum body with steel, eliminating many of the interior luxury touches, and making the car overall smaller and lighter — thus not needing as large a battery pack to power it — are a large part of why Tesla can sell it at a lower price.

As for the higher than expected margin — I think Elon originally estimated 15%, perhaps a couple of years ago, rather than the current estimate of ~25% — the article covers that pretty well. The cost for options are certainly higher than I expected, but not unreasonable if the car really is intended to compete with the BMW 3-Series and the Audi A4, as Tesla spokesmen have suggested.

Wow u know for a fact that Tesla excludes R&D costs, do u have a copy of the document saying so? (maybe u should read the investors newsletter sometime), or perhaps u just have a special magic crystal ball that u pulled out of ur ass.

Do you read the quarterly earning’s report before you make that accusation?

Well. first of all 4E’s an idiot as well as a serial anti-Tesla troll.

As Tesla goes into multi-hundreds of thousands mass production they will have increasing efficiencies on materials, suppliers, etc.

This alone will increase margins as they ruthlessly CONTINUE to bring down costs such as with their batteries which is one reason they built the Giga 1.

Its always cheaper to make a lot of something rather then less in modern production.

Also, they are further automating their assembly lines and plan on speeding them up tremendously as this will lead to further cost reductions since labor costs are almost always your number one cost.

Nope. Get Real, you’re an idiot as well as an serial Tesla concern troll. Every single post of yours is always nothing but an ad hominem personal attack on someone who has the gall to not shower Tesla with praise and adulation.

I for one am getting tired of your incessant and insolent ad hominem personal attacks. You should be banned.

And please learn how to reply to the comment that you’re concern trolling, instead of always starting a new thread. Or better yet, don’t comment at all.

Perhaps you should look up the meaning of “concern troll” before you try to mis-label someone else that way.

And Get Real is about as far away from any sort of troll there is, “concern” troll or otherwise… unless you mean the way he trolls the trolls themselves.

That makes him an anti-troll. InsideEVs needs a lot more anti-trolls, as a counter to the incredible amount of trolling in comments by EV haters, Tesla short-sellers, and shills for Big Oil!

You’re an even bigger concern troll than Get Real.

FYI, I looked up the meaning of “concern troll” and there was a picture of a Pushmi-Pullyu. The same pic was used to illustrate a “FUDster”.

Pushmi-Pullyu makes some of the best observations on this site. His comments are often as informative and insightful as the articles themselves.

+1

An aside: I wonder what sven is up to lately?

TVOR, anyone?

Banned in Boston, and on inside evs.

Yes Nix, my thoughts exactly.
This new losername TVOR has all the hallmarks of the former classless sven.

In any case, isn’t it remarkable how as Tesla becomes more and more successful at executing their master plan how more and more trolls come out from under their bridges to attack it here?

“Pushmi-Pullyu makes some of the best observations on this site”

You must be blind.

Or you probably don’t know how to do math just like Lensman, aka Pushmi-Pullu Poooh crap.

The option uptake is exactly how Tesla makes all the profit.

That is actually a good thing and shows how Tesla can make the product desirable enough to get people in the door and “milk them” up the option chain. That is no different from many other luxury brands which generates most of its profits thru options.

Don’t see either Get Real or Pushmi as concern trolls. If you’d bothered to look it up you shouldn’t either.

con·cern troll
nouninformalderogatory
a person who disingenuously expresses concern about an issue with the intention of undermining or derailing genuine discussion.

TVOR said:

“You’re an even bigger concern troll than Get Real.”

Coming from you, that’s a compliment. So thank you.

“Judge a man by the reputation of his enemies.” — Arabian Proverb

Of all Musk predictions, his weakest have always been financial predictions. He just doesn’t care if Tesla makes money. They don’t, and they won’t.

Bankruptcy is part of the business plan. It’s a great strategy — except for the shareholders — to cancel those pesky SolarCity debts and loans that Tesla has needed.

Tesla has no financial or technical moat. Just brand cache.

Bankruptcy is a great strategy for St. Elon and all his Tesla shares? Your assessment makes it sound like a good business plan for everyone, except those unfortunate Tesla shareholders.

Interesting take on Tesla financial predictions!

My ears hurt from the desperate scream of the shorts that have lost all credibility. Since 2005 it’s a tired old song, as Tesla Continues to GROW GEOMETRICALLY.

The Model S has been out since 2005 and Still No Competition from Anyone till 2020.

Yeah, it has all been smoke and mirrors as people drive around emission free in a car of the future made today, and it’s merely a coincident that they stomp the living daylights out of so called super-cars that cost 2-4x as much.

“Bankruptcy is part of the business plan.”

I see the anti-Tesla FUDsters have a new conspiracy theory. At least this one has the “virtue” of simplicity.

Well, the Tesla haters certainly need a new conspiracy theory, now that Model 3 production is ramping up so well, and they can’t use that one any more!

Go Tesla!

While you’re right that Tesla doesn’t have a fall-back plan if they fail, it’s worth noting that they’ve been rather successful to date. Operating a business as a loss leader has the potential to generate significant profits in the long term. And although Tesla often over-promises and under-estimates development time, they do have successful products. I wouldn’t count them out.

and think of the money they are saving by putting the windshield wiper controls on the tablet! Brilliant!

Zoom in on stalk.

With the model 3’s supercomputer and voice actuated controls, there is no need to touch the tablet for any controls.

If this turns out to be true (and reliable), I would no longer be afraid to drive this car. The idea of needing to access a touchscreen for most adjustments while driving would keep me from ever considering the Model 3. Deal dead.

The next few months will be very informative when reviews start to come out.

Early on, Elon was predicting a 15% gross margin for the Model 3. That worried me. I am much happier with the current goals.

That is not accurate.
Musk said that the BASE model will have a 15% margin. And I suspect that it remains closer to that, then 25%.

What he is counting on, is that most buyers will not get the base, but will get more options, such as Premium, which will bring the margins up to 25%.

Basically, if you buy the base, well, it is just like buying a base BMW 3 series. It really does not give you that much.

This is really good news even beyond just Tesla. Because if Tesla can build a 200+ mile EV and sell it for an affordable price, and make money. Then the truth is, so can GM, Ford, and everyone else. However, it does require a commitment of a lot of money and investment. It also means no science-project cars and instead real cars that people want to drive. Those companies have simply had no incentive to do it up to this point, for a multitude of reasons. But one reason probably had to do with risk. In order to get proper economies of scale, they’d need to invest in a vehicle that they planned to sell hundreds of thousands every year. Well, now that Tesla is about to be doing just that, the other car companies can see that the market will support that, if they just build desirable vehicles. I think Nissan is about to be testing that water. GM has come close, but the Bolt EV is just a bit too pricey for what it is. I think if they offered a cheaper model with a 150 mile range and maybe $4,000 cheaper, it would be a better offering.… Read more »

I think the Bolt’s main problem is it’s not linked in to a decent supercharging network. As a result, it’s a problematic car for long trips (unlike, say, a Tesla) even with the big battery.

That and the fact that it looks so dorky.
The seats are no so great either.

I believe that Tesla’s extreme markups on the model 3’s options may actually turn around and bite them.

I was willing to pay $10,000 for the larger battery and full self driving. Tesla would have made a profit over marginal costs of $6000 on that.

But, inasmuch as they are asking $17,000 for those options, I won’t be purchasing them and Tesla will lose that $6000.

What’s the price difference between the 100D vs the P100D? Around $30K…Most of that is pure profit…

I don’t even know what the difference between the two are. But neither of them are mass-market–anticipated to sell up to 1 million cars per year.