Teslanomics Examines Model 3 Profitability On A Cost/kWh Basis

4 months ago by Steven Loveday 26

Will the Tesla Model 3 generate profit for Tesla, due to the massive amount of interest, or be a liability since it’s priced so competitively?

This is a really good question, and at this point, there is really no way to know for sure. If Tesla is able to make a fair amount of per-unit profit on the Model 3, then large scale production can only amount to a win. However, if the profit margin is too small, and sales don’t meet expectations, it could shape up to be a bit scary for the Silicon Valley electric automaker.

Ben Sullins’ spreadsheet with Tesla Model 3 profitability data by Cost/kWh.

Ben Sullins of Teslanomics applied his data-diving capabilities once again to try to get us a reasonable answer. It’s his belief that we can look at battery cost per kWh to come up with a reputable estimate.

Current profit margins at Tesla are up to a marginal 27 percent. This is actually pretty good for a startup in the electric car business, though it still lags behind the industry average, which suggests that the production cost should be about 40 percent of the car’s selling price.

Sullins used 50 percent as a more fair number for electric cars, since batteries comprise about half of the vehicle production cost. On the chart to the right, Sullins highlighted what cost/kWh it would take for Tesla to be nearly on par with the industry average.

Of course Sullins dives a lot deeper in the video, with plenty of comparison, charts, and graphs. There is now way Ben can assert that this is truly accurate, but he surely does his homework.

A year ago we reported that Model 3 battery pack costs were already under $190/kWh. Most of us can probably agree that a day will come soon enough that kWh pricing easily hits the $120 to $130 mark. Hopefully, it won’t be too much longer before prices plummet even further.  Tesla is also a special case due to the Gigafactory, along with plans for a Gigafactory 2, and likely several more.

Video Description via Teslanomics by Ben Sullins on YouTube:

Recently, we explored the cost of purchasing and owning a Tesla from the consumer side. This week, we’re looking at Tesla’s costs and how it effects their bottom line – specifically, as it relates to the Model 3.

In Q1, Tesla improved their profitability in the automotive sector by 27%. Question is, can they do the same with the Model 3? According to non-believers, like Colin Langan from UBS, no. Langan is constantly throwing shade Tesla, underestimating their stock price and overestimating their upgrade costs. However, out of his short-sighted and wrongful predictions, came the discussion of the profitability of the Model 3.

Using data from an anonymous source as well as my own calculations, I was able to estimate profitability potential based on what Tesla needs to get their battery costs per kwh down to.

Under conventional wisdom, to determine the profitability of a vehicle, you take the sales price of the car and compare that to the cost of production – which is about 40%. With electric vehicles, you also have to consider the cost of the battery – which is about 50% of overall production. Thus, we can reverse engineer these numbers to predict the Model 3’s profitability based on what the cost per kwh needs to be.

I’ve charted out and visualized various estimates of these numbers to determine the sweet spots of where Tesla needs to be in terms of cost per kwh. For the 55 kwh pack, it’s around $130. For the 77 kwh pack, it’s about $120. Again, these are estimates. However, as you can see from the data, Tesla should be in pretty good shape to profit from the Model 3, if they hit these cost per kwh benchmarks.

It’s important to note, and I will provide more detail via the link below, as the base sale goes down, the production cost remains relatively constant. It is the cost per kwh that effects the overall production cost percentage – and in-turn profitability.

Looking at the data in this way will help us better understand profitability potential as more information on kwh pricing becomes available. It will also help us understand what that means for the Model 3 and Tesla as a company.

While we know what they need to get the cost per kwh down to – approximately $130 – the question is, will they be able to do so?

They currently have their first gigafactory with some parts of it online. They also have a second factory in Buffalo, NY. Additionally, Tesla is going to announce 2 – 4 gigafactories this year. The reason I mention the gigafactories is scale. The more factories there are, the more Teslas they can build – thus, the more they can drop the price. And, once they get the price below $130 per kwh, they’re going to be making some serious cash.

Source: Teslanomics via Teslarati

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26 responses to "Teslanomics Examines Model 3 Profitability On A Cost/kWh Basis"

  1. Mike says:

    Another way to get some insight into the Model 3 price and cost is to look at the available market and Tesla’s sales assumptions. I think the BMW 3 and 5 series cars represent the comparable cars to the Model 3 and S70 (35,000 vs 50+). BMW sells about 3 times as many 3 series ICE cars as 5 series, with the 5 series selling 35-40,000 cars per year. This suggests that there simply aren’t enough people who are willing and able to pay 50,000 for a car to support the assumption of the Model 3 actually being a 50,000$ car.

    If this is the case, then the cost estimates floating around are all too high (actually we already know the build cost of a Model S is close to 30,000$)

    1. Mark.ca says:

      At $124/kWh they are making money on the bare bones M3 too.

  2. SparkEV says:

    Bolt cells are $145/kWh buying from third party, and the pack retails for $12K at 60 kWh. Tesla should do better than this, but $7K? Is that pack or cell? Way too speculative for my taste, and my speculations are subjective, based on strip club training!

  3. pjwood1 says:

    Another bellwether IEV hasn’t focused on, lately, is Supercharger growth. They’re claiming “double” this year, while Tesla has just 12 sites under construction in the continental U.S. (orange cone, supercharge.info ). Perhaps expansions at existing stations do not show up, but density will also be needed where cold. It’s not like a 55KWh Model 3 will take any less energy to heat its battery & cabin.

    I’m going to stay off topic 😉 and ask if anybody saw this LA Times story on urban road planning: http://www.latimes.com/local/lanow/la-me-ln-mobility-plan-20150811-story.html?utm_content=bufferda18d&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

    It’s a trend.

    Driver assistance features are great when you don’t want to do the driving. When cities allow for fewer cars as they grow, do we more often hang up the driving or do we hang up the car?

    1. randomhuman says:

      Expansions of existing stations do not show up. Yes that’s true and Tesla invests heavily in expansions of current Superchargers. But I don’t thing that they can double their Superchargers this year too. They always made very ambitious plans. We will see I guess.

  4. Chris O says:

    I wonder about that base assumption that production cost is typically only 40% of sales price. That’s basically a 60% gross margin right, which doesn’t jibe with some minor Googling efforts from my part suggesting the industry netting a 5% operating profit margin on average and 15% and 12% gross margins over at Ford and GM respectively.

    If the base assumptions are nonsense the analysis is nonsense.

    1. Spider-Dan says:

      I don’t think “production cost,” in this context, accounts for R&D, real estate overhead, etc. So it’s perfectly consistent to have a a 40% production cost but a 5% operating profit margin.

      1. Chris O says:

        The 55% between production cost and profit being R&D,sales cost and further overhead? GM and Ford should losing money hand over fist with only 12 and 15% gross margin to cover those costs.

        AFAIK Tesla’s 27% gross margin is among the best in the industry so production cost is typically (way) north of 70% of sales price for most OEMs.

        1. Spider-Dan says:

          You’re mixing and matching stats from different sources.

          The sources that are claiming that GM and Ford have a 12-15% gross margin are not the same sources claiming a 40% production cost, and vice versa. I’m pretty sure that the sources that are claiming 40% production cost cannot be claiming 12-15% gross margin, because that would mean that over 45% of the revenue (by their own stats) is simply unaccounted for.

          1. Chris O says:

            From investopedia:”On an income statement, profit calculated by deducting the cost of goods sold (COGS) from total net sales is called gross profit. The COGS includes both fixed costs and variable production costs”.

            So the unaccounted part is probably the fixed cost component if by production cost only the variable (marginal) component is meant. This way one can have 40% production cost and a 12% gross margin at the same time.

            looks like Tesla has much better gross margin than the likes of GM and Ford, yet loses money so it looks like it just doesn’t have sales numbers to match sales, general and administrative expenses (SG&A)and presumably R&D and some costs associated with new investments (not the investments themselves though)that are not generating any revue yet.

    2. Doggydogworld says:

      His 40% number is bogus and renders the entire exercise moot.

      Big 3 production cost is 55% of MSRP. 50% if you exclude depreciation. SG&A overhead is ~20%, dealer margin is ~10%, R&D is ~5%, warranty/transport/etc. is ~5%, legacy costs and profit a few percent each.

      Tesla production cost is 75% of MSRP. No one outside the company knows their battery costs and nobody knows what their “35% reduction” uses as a baseline. Could be 35% less than 2012 pricing.

    3. Pushmi-Pullyu says:

      Chris O said:

      “If the base assumptions are nonsense the analysis is nonsense.”

      That’s my assessment, too. The term in the computer programming industry is GIGO: Garbage In, Garbage Out.

  5. Pushmi-Pullyu says:

    “Current profit margins at Tesla are up to a marginal 27 percent. This is actually pretty good for a startup in the electric car business, though it still lags behind the industry average…”

    WOW! Even the most basic facts are wrong in this brain-dead “analysis”. Industry average gross profit margin for auto makers is considerably lower than this, altho admittedly the average is higher for companies that sell only in the “premium” price range, as Tesla does.

    For example, for 2nd quarter 2016, GM had a gross profit margin of 18.8%, up from 14.6% the previous year; and Ford’s was 12.4%, down from 16.2% the previous year (source below).

    I could point to other errors… but really, why bother? The point is that the “anlysis” is based on false premises, and reading this article is a complete waste of time.

    I don’t consider myself a “financial guy”, yet in many cases concerning the finances of auto makers, I seem to know more about this subject than people who pretend to be. Sad.

    Source:

    http://marketrealist.com/2016/08/automakers-2q16-margins-is-gms-strategy-to-cut-fleet-sales-paying-off/

  6. Nix says:

    It sounds like he is confusing “marginal cost” with “profit margin”. While they sound similar, they are very different.

    The marginal cost of a Tesla Model S is around $30K, which is much lower than the profit margin on current production, because they don’t measure the same thing.

    “Elon: How much do you think it cost to make a Model S?

    Tom: I don’t know. About $50,000?

    Elon: No. About $30,000 is the marginal cost to produce that car.”

    https://electrek.co/2017/05/15/tesla-kill-auto-industry-elon-musk-manufacturing-spacex-cto/

    1. Chris O says:

      Interesting quote. So how does a car that only costs $30K to produce only show a 20-25% gross margin on an average sales price that has got to be close to $100K?

      Because the definition of gross margin appears to be the difference between what the producer gets for his product and all the cost associated with creating that unit so basically sales price-marginal cost, yet Tesla’s gross margin isn’t anywhere near 70%.

      1. Nix says:

        Marginal cost is how much it would cost Tesla to build 1 more Model S on top of what they already build.

        The list of costs that the Marginal Cost does NOT include is extensive and lengthy. Thus the wide gap between marginal cost and profit margin.

        1. Chris O says:

          Turns out I got the definition of gross margin wrong. That includes both marginal cost and fixed cost so it is possible to have marginal cost of only $30K and a gross margin of only 20-25% on a $100K car if that car is burdened with very high fixed cost.

  7. Ron M says:

    Am I the only one that read the article in International Business Times saying that version 3 of the Supercharger will be a 350kw charger that can charge the EV’s in 10 minutes rather than the current one hour. Also the charging stations won’t be connected to the grid but get power from solar panels and battery storage.

    1. Pushmi-Pullyu says:

      I don’t know where you read it, but it’s complete nonsense.

      1. The average charging time at a Supercharger for a Model S isn’t 1 hour, it’s about 30 minutes; maximum 45 minutes.

      2. Batteries in current EVs can’t be fully (or mostly) charged in 10 minutes, period. The limitation isn’t the Supercharger, it’s the battery pack. Charging that fast needs better battery tech than what is currently being used.

      3. Tesla has been claiming from the start that the Supercharger network will be solar powered. The reality is that it’s utterly impractical and far too expensive to do that. It would require large solar farms adjacent to the Supercharger stations, and when I say “large” I mean like 1-2 football fields of area per stall. In many or most cases that much land at the site wouldn’t be available to buy, even if Tesla could afford such massive expense.

      The solar canopies at a few Supercharger stations supply, if my napkin math is correct, maybe 1-2% of the power. The rest comes from the grid.

      1. Asak says:

        It could be that Tesla intends to build solar farms to offset their super charger power use. They might be able to make agreements with utilities to do that, so the production doesn’t need to be directly adjacent to the chargers. Solar panel production efficiency is clearly too low for a few panels on a canopy to offset more than a negligible amount of the chargers’ use.

      2. TomArt says:

        No, Tesla means that they will be powered by solar panels in a net-metered kind of way, not in absolute capacity.

  8. przemo_li says:

    This is ridiculous.

    Traditional OEMs need below 40% to still have money for dilerships, costly advertisement in national media networks, etc. etc. etc.

    Tesla need not those. Wont need those in initial stages of Model 3 production.

    (Tesla may exhaust demand for EVs so much they will start to benefit from advertisements, who knows…)

    1. theflew says:

      Traditional OEM’s don’t have real-estate in malls or have to pay salesman and super charger infrastructure.

  9. Don Zenga says:

    What makes us think that base Model-3 comes with a 55 KWh version. For a vehicle the size of Model-3, it should be at least 60 KWh. Still the profit line is great.

    Is the giga factory producing at 25%, 50% … capacity. Only based on this, we can decide the battery cost as long as Tesla does not reveal.

    1. Pushmi-Pullyu says:

      “What makes us think that base Model-3 comes with a 55 KWh version.”

      Elon once Tweeted that the Model 3’s battery pack (presumably the smaller size) will be <60 kWh; that's what makes us think that. But that info may be outdated; current rumor is that the smaller pack size is 60 kWh.

      But then, it could be 59.9 kWh, and Elon's tweet would still be technically correct. It has been determined that Tesla rounds off the amount of kWh its packs have, and that the actual precise kWh is generally slightly more or less than the rounded-off number they give for the car.

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