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The most worrying is the slowing production of models S and X, coupled with what I'd call a collapse in the gross margins of those products. Why is the margin d

The most worrying is the slowing production of models S and X, coupled with what I'd call a collapse in the gross margins of those products. Why is the margin declining so drastically?

opportune 9y ago
The gross margin changing is fine and natural, I think. The Model 3 is a lower-priced good, so by being able to sell more of it, they can deal with somewhat lower margins. By that I mean, 100 cars * $12,000 gross margin each is definitely worse than 5000 cars * $4,000 gross margin (for Tesla at least, I suppose branding could come into play with other brands), even though the gross margins drastically collapse. It's just a different business model, and it's what Tesla wants to happen so they can get into the more regular-consumer market.
- 11thEarlOfMar 9y ago
  But the ratio of Model 3 to S+X units sold in Q3 does not support a 10% drop in Gross Margin for Q3, unless the cost of manufacturing the 3s they did ship was way higher than the associated revenue (significantly negative gross margins on the 3s). Maybe there are costs associated with the gigafactory that are getting assigned as cost of goods for the model 3s and throwing the margins out of kilter until the volume gets up? Or perhaps depreciation on the stamping equipment and fixtures that are largely idle? I'm fine with the gross margin trending towards, say, 20% over the next few quarters since GM for example is at 12% (I'd expect Tesla's gross margin to be higher than GMs because Tesla keeps the revenue that GM has to give to its dealers).
  - sliken 9y ago
    Man hours aren't free. Nor is a huge amount of your production facility running idle because one of your parts is constrained. The parts that aren't automated are being done by hand for now. So sure they might well be making a loss at the current rate of sales of the model 3, but will be quite profitable once the production rate increases.
saas_co_de 9y ago
They definitely seem to have hit a plateau in terms of demand which was declining before they started to slash prices in order to move inventory. The S/X and are old now and the car market requires new models to keep sales going. That combined with the approaching launches of other high end luxury electric cars does not bode well for future S/X sales. The negative press on autopilot and failure to deliver on autopilot 2.0 could certainly be a factor as well.
- dmix 9y ago
  > The negative press on autopilot and failure to deliver on autopilot 2.0 Was there more than that accident with the old version? I havent heard much about this...
  - opencl 9y ago
    HW2 has been out for over a year and has yet to reach feature parity with HW1. I would call that a "failure to deliver". Earlier this year Musk said “November or December of this year, we should be able to go from a parking lot in California to a parking lot in New York, no controls touched at any point during the entire journey.” It's November and they don't even have automatic windshield wipers working. See: https://docs.google.com/spreadsheets/d/1FGexNNm8rOXB24qQ1bdIWtVhdPVhPign6F28ZrI1pqM/edit#gid=1631729099 https://docs.google.com/spreadsheets/d/1FGexNNm8rOXB24qQ1bdI...
  - chc 9y ago
    The negative press was basically just 15000 different ways of saying "A car once crashed while on Autopilot, and I have a theory about how it means the whole product is a sham." There's really not much more to it besides me-tooing. But the failure to deliver is real. The entire Autopilot project is way behind schedule. AP2 was supposed to reach feature parity last year, but it didn't until quite recently, and it's still widely considered not to be as good as experience as the original Autopilot yet.
  - saas_co_de 9y ago
    https://www.fastcompany.com/4043602/a-driver-claimed-teslas-autopilot-crashed-his-car-and-now-teslas-stock-has-dropped https://www.fastcompany.com/4043602/a-driver-claimed-teslas-... http://www.dailymail.co.uk/news/article-4276810/Dashboard-camera-footage-captures-crash-Tesla-autopilot.html http://www.dailymail.co.uk/news/article-4276810/Dashboard-ca... https://qz.com/783009/the-scary-similarities-between-teslas-tsla-deadly-autopilot-crashes/ https://qz.com/783009/the-scary-similarities-between-teslas-... https://jalopnik.com/autopilot-blamed-for-tesla-crashing-and-rolling-into-a-1796963962 https://jalopnik.com/autopilot-blamed-for-tesla-crashing-and... https://electrek.co/2017/03/27/tesla-model-x-autopilot-crash-semi/ https://electrek.co/2017/03/27/tesla-model-x-autopilot-crash... http://autoweek.com/article/autonomous-cars/tesla-autopilot-dangerously-defective-lawsuit-claims http://autoweek.com/article/autonomous-cars/tesla-autopilot-... http://fortune.com/2016/05/26/tesla-autopilot-crash/ http://fortune.com/2016/05/26/tesla-autopilot-crash/ https://www.theguardian.com/technology/2017/apr/03/the-customer-is-always-wrong-tesla-lets-out-self-driving-car-data-when-it-suits https://www.theguardian.com/technology/2017/apr/03/the-custo... https://www.usatoday.com/story/tech/nation-now/2017/03/28/tesla-autopilot-car-hits-police-motorcycle/99719978/ https://www.usatoday.com/story/tech/nation-now/2017/03/28/te... https://www.teslarati.com/rare-tesla-model-x-founder-series-crashes-driver-unsure-autopilot-blames/ https://www.teslarati.com/rare-tesla-model-x-founder-series-... https://www.teslarati.com/lawsuit-alleges-tesla-death-not-happened-another-car/ https://www.teslarati.com/lawsuit-alleges-tesla-death-not-ha... http://www.dutchnews.nl/news/archives/2017/04/self-driving-tesla-crashes-into-truck-on-dutch-motorway/ http://www.dutchnews.nl/news/archives/2017/04/self-driving-t... This is a sample of the first 100 articles from Google News on "Tesla Autopilot Crash" - in total you have about 10 unique incidents with 100s of stories in different outlets written about it. Lots of sensational headlines and a lot of the incidents are pretty dubious about what the actual cause is but to casual readers its adds up to a cloud of doubt about Tesla repeated across many big name media sources. Most of these same media sources also run plenty of enthusiastic coverage on Tesla so it really depends on your pre-judgements what you take away from it. Tech enthusiasts will tend to minimize the negative stories whereas people not interested in tech who are more safety concerned will give them much more weight.
11thEarlOfMar 9y ago
Found the official answer from the shareholder letter, page 3: - Non-GAAP automotive gross margin temporarily declined to 18.7%, which was in line with our expectations. The gross margin declined primarily because of a significant increase in Model 3 manufacturing costs to support the limited initial level of production. - Model S and Model X gross margin declined from Q2 primarily due to one-time price adjustments for discontinued trims and unfavorable trim mix. Numerous actions to improve Model S and Model X gross margin are underway. Consequently, we expect Model S and Model X gross margin to improve in upcoming quarters.
jVinc 9y ago
Might have something to do with countries cutting the subsidies for electric cars. I know in Denmark the price of a Tesla is set to more than double in the next years as they normalice registration taxes which were previously omitted on electric cars.
- jjeaff 9y ago
  Are you saying that registration taxes in Denmark amount to tens of thousands of dollars?
  - rtuulik 9y ago
    Yeah, they do. Luxury cars are taxed heavily in Denmark. Import tax on new cars can be up to 180%. After removing the subsidy on EVs, Tesla prices became comparable to other cars and sales dropped sharply.
  - jdietrich 9y ago
    Yes. A new car is subject to a registration tax of 105%, or 150% over ~$16,000. New cars in Denmark are very, very expensive. http://www.skm.dk/skattetal/satser/satser-og-beloebsgraenser/registreringsafgiftsloven http://www.skm.dk/skattetal/satser/satser-og-beloebsgraenser...
  - T-A 9y ago
    > electric car dealers were for a long time spared the jaw-dropping import tax of 180 percent that Denmark applies on vehicles fueled by a traditional combustion engine https://www.bloomberg.com/news/articles/2017-06-02/denmark-is-killing-tesla-and-other-electric-cars https://www.bloomberg.com/news/articles/2017-06-02/denmark-i...

The most worrying is the slowing production of models S and X, coupled with what I'd call a collapse in the gross margins of those products. Why is the margin declining so drastically?

opportune 9y ago

The gross margin changing is fine and natural, I think. The Model 3 is a lower-priced good, so by being able to sell more of it, they can deal with somewhat lower margins. By that I mean, 100 cars * $12,000 gross margin each is definitely worse than 5000 cars * $4,000 gross margin (for Tesla at least, I suppose branding could come into play with other brands), even though the gross margins drastically collapse. It's just a different business model, and it's what Tesla wants to happen so they can get into the more regular-consumer market.

11thEarlOfMar 9y ago
But the ratio of Model 3 to S+X units sold in Q3 does not support a 10% drop in Gross Margin for Q3, unless the cost of manufacturing the 3s they did ship was way higher than the associated revenue (significantly negative gross margins on the 3s). Maybe there are costs associated with the gigafactory that are getting assigned as cost of goods for the model 3s and throwing the margins out of kilter until the volume gets up? Or perhaps depreciation on the stamping equipment and fixtures that are largely idle? I'm fine with the gross margin trending towards, say, 20% over the next few quarters since GM for example is at 12% (I'd expect Tesla's gross margin to be higher than GMs because Tesla keeps the revenue that GM has to give to its dealers).
- sliken 9y ago
  Man hours aren't free. Nor is a huge amount of your production facility running idle because one of your parts is constrained. The parts that aren't automated are being done by hand for now. So sure they might well be making a loss at the current rate of sales of the model 3, but will be quite profitable once the production rate increases.

saas_co_de 9y ago

They definitely seem to have hit a plateau in terms of demand which was declining before they started to slash prices in order to move inventory. The S/X and are old now and the car market requires new models to keep sales going. That combined with the approaching launches of other high end luxury electric cars does not bode well for future S/X sales. The negative press on autopilot and failure to deliver on autopilot 2.0 could certainly be a factor as well.

dmix 9y ago
> The negative press on autopilot and failure to deliver on autopilot 2.0 Was there more than that accident with the old version? I havent heard much about this...
- opencl 9y ago
  HW2 has been out for over a year and has yet to reach feature parity with HW1. I would call that a "failure to deliver". Earlier this year Musk said “November or December of this year, we should be able to go from a parking lot in California to a parking lot in New York, no controls touched at any point during the entire journey.” It's November and they don't even have automatic windshield wipers working. See: https://docs.google.com/spreadsheets/d/1FGexNNm8rOXB24qQ1bdIWtVhdPVhPign6F28ZrI1pqM/edit#gid=1631729099 https://docs.google.com/spreadsheets/d/1FGexNNm8rOXB24qQ1bdI...
- chc 9y ago
  The negative press was basically just 15000 different ways of saying "A car once crashed while on Autopilot, and I have a theory about how it means the whole product is a sham." There's really not much more to it besides me-tooing. But the failure to deliver is real. The entire Autopilot project is way behind schedule. AP2 was supposed to reach feature parity last year, but it didn't until quite recently, and it's still widely considered not to be as good as experience as the original Autopilot yet.
- saas_co_de 9y ago
  https://www.fastcompany.com/4043602/a-driver-claimed-teslas-autopilot-crashed-his-car-and-now-teslas-stock-has-dropped https://www.fastcompany.com/4043602/a-driver-claimed-teslas-... http://www.dailymail.co.uk/news/article-4276810/Dashboard-camera-footage-captures-crash-Tesla-autopilot.html http://www.dailymail.co.uk/news/article-4276810/Dashboard-ca... https://qz.com/783009/the-scary-similarities-between-teslas-tsla-deadly-autopilot-crashes/ https://qz.com/783009/the-scary-similarities-between-teslas-... https://jalopnik.com/autopilot-blamed-for-tesla-crashing-and-rolling-into-a-1796963962 https://jalopnik.com/autopilot-blamed-for-tesla-crashing-and... https://electrek.co/2017/03/27/tesla-model-x-autopilot-crash-semi/ https://electrek.co/2017/03/27/tesla-model-x-autopilot-crash... http://autoweek.com/article/autonomous-cars/tesla-autopilot-dangerously-defective-lawsuit-claims http://autoweek.com/article/autonomous-cars/tesla-autopilot-... http://fortune.com/2016/05/26/tesla-autopilot-crash/ http://fortune.com/2016/05/26/tesla-autopilot-crash/ https://www.theguardian.com/technology/2017/apr/03/the-customer-is-always-wrong-tesla-lets-out-self-driving-car-data-when-it-suits https://www.theguardian.com/technology/2017/apr/03/the-custo... https://www.usatoday.com/story/tech/nation-now/2017/03/28/tesla-autopilot-car-hits-police-motorcycle/99719978/ https://www.usatoday.com/story/tech/nation-now/2017/03/28/te... https://www.teslarati.com/rare-tesla-model-x-founder-series-crashes-driver-unsure-autopilot-blames/ https://www.teslarati.com/rare-tesla-model-x-founder-series-... https://www.teslarati.com/lawsuit-alleges-tesla-death-not-happened-another-car/ https://www.teslarati.com/lawsuit-alleges-tesla-death-not-ha... http://www.dutchnews.nl/news/archives/2017/04/self-driving-tesla-crashes-into-truck-on-dutch-motorway/ http://www.dutchnews.nl/news/archives/2017/04/self-driving-t... This is a sample of the first 100 articles from Google News on "Tesla Autopilot Crash" - in total you have about 10 unique incidents with 100s of stories in different outlets written about it. Lots of sensational headlines and a lot of the incidents are pretty dubious about what the actual cause is but to casual readers its adds up to a cloud of doubt about Tesla repeated across many big name media sources. Most of these same media sources also run plenty of enthusiastic coverage on Tesla so it really depends on your pre-judgements what you take away from it. Tech enthusiasts will tend to minimize the negative stories whereas people not interested in tech who are more safety concerned will give them much more weight.

11thEarlOfMar 9y ago

Found the official answer from the shareholder letter, page 3: - Non-GAAP automotive gross margin temporarily declined to 18.7%, which was in line with our expectations. The gross margin declined primarily because of a significant increase in Model 3 manufacturing costs to support the limited initial level of production. - Model S and Model X gross margin declined from Q2 primarily due to one-time price adjustments for discontinued trims and unfavorable trim mix. Numerous actions to improve Model S and Model X gross margin are underway. Consequently, we expect Model S and Model X gross margin to improve in upcoming quarters.

jVinc 9y ago

Might have something to do with countries cutting the subsidies for electric cars. I know in Denmark the price of a Tesla is set to more than double in the next years as they normalice registration taxes which were previously omitted on electric cars.

jjeaff 9y ago
Are you saying that registration taxes in Denmark amount to tens of thousands of dollars?
- rtuulik 9y ago
  Yeah, they do. Luxury cars are taxed heavily in Denmark. Import tax on new cars can be up to 180%. After removing the subsidy on EVs, Tesla prices became comparable to other cars and sales dropped sharply.
- jdietrich 9y ago
  Yes. A new car is subject to a registration tax of 105%, or 150% over ~$16,000. New cars in Denmark are very, very expensive. http://www.skm.dk/skattetal/satser/satser-og-beloebsgraenser/registreringsafgiftsloven http://www.skm.dk/skattetal/satser/satser-og-beloebsgraenser...
- T-A 9y ago
  > electric car dealers were for a long time spared the jaw-dropping import tax of 180 percent that Denmark applies on vehicles fueled by a traditional combustion engine https://www.bloomberg.com/news/articles/2017-06-02/denmark-is-killing-tesla-and-other-electric-cars https://www.bloomberg.com/news/articles/2017-06-02/denmark-i...