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The lesson I draw from Tesla is that it's possible (even straightforward) to produce an amazing car if you're willing to lose a ton of money on each one and you

by codex 14y ago

The lesson I draw from Tesla is that it's possible (even straightforward) to produce an amazing car if you're willing to lose a ton of money on each one and your competitors (mainstream auto makers) aren't. I say this because Tesla has, to date, been poor at controlling costs, enough so that the feds (Tesla's creditors) are concerned about their balance sheet, and Wall Street has hammered the stock. For example, Tesla used to lose $30M a month. Last quarter it brought in hundreds of millions more in revenue, but still lost ~$30M a month. At some point, they hope to stop losing money, but then they're about to create two new products which will also incur large R&D costs. To date, Tesla has lost about a billion dollars, or $50K per car sold, assuming they sell 20K cars next year. So to a consumer, Tesla's cars look amazing compared to what else is on the market (after all, they're losing money on each one, which their competitors are unwilling to do); to an accountant, the company looks worrysome, and to an investor, the company looks like either a tremendous deal or a fantastic lemon, depending on the investors views about the size of the market, competition, and ability to control costs. At current rates, they will have more liabilities than assets three months. Once Tesla can reign in their costs they can rewrite this story, and there's a good chance they can. Whether they can make electric cars more cheaply than mainstream automakers in the long term is, in my mind, an open question.

dman 14y ago
Entering a market with entrenched players is hard. Your competitors have economies of scale and you dont.
rogerbinns 14y ago
Note that Toyota also lost money for several years on the Prius as is GM on the Volt http://www.reuters.com/article/2012/09/10/us-generalmotors-autos-volt-idUSBRE88904J20120910 http://www.reuters.com/article/2012/09/10/us-generalmotors-a... - there is a learning curve to play in this space. Since everyone is keeping their technology private it won't be cheaper for later entrants. There will be an experience curve for the manufacturing which will lead to it becoming increasingly productive and cheaper http://en.wikipedia.org/wiki/Experience_curve_effects#The_experience_curve http://en.wikipedia.org/wiki/Experience_curve_effects#The_ex... As a comparison Boeing is reported to have an experienced a curve of 84% (costs decreasing 16% every time production units doubled) on the 777. Tesla doesn't have the legacy manufacturing infrastructure and can use far more automated methods, especially if they manufacture a large amount of the car themselves instead of outsourcing. It will be interesting to see what Tesla's numbers turn out to be.
- codex 14y ago
  Tesla's gross margins are currently 8% (whereas BMW is something like 19%) and they expect it to increase to 25% in one year alone. It's already up significantly from negative territory (I shudder to think what it was on the Roadster), but they still have to make the car another 18.5% cheaper. I wonder if they're aiming to squeeze that from the battery cost, in which case it's up to Panasonic, I suppose.
  - rogerbinns 14y ago
    I suspect they will find ways of assembling the car quicker. That alone will reduce the cost (share of fixed overheads per car would be down) as well as allowing negotiating bigger volume discounts on materials and components.
  - ANH 14y ago
    They're about to hit a volume discount from Panasonic, according to the earnings call. There are a number of other efficiencies they've identified. On the call Elon recounts some anecdotes about parts suppliers not being prepared in 2012 for the volume of orders, inefficient tire shipments, etc.
krschultz 14y ago
You are dividing fixed costs over a small number of units. Of course it's going to be bad. A lot of that money is R&D for current products. Another large chunk is investments in factory equipment that will be making cars for 10+ years. If I build a plastic mold for $2 parts, and the mold costs me $100,000, you don't say that I lost $10,000 per part for the first 10 parts.
- codex 14y ago
  Capital expenditures are actually up over last quarter, to $72M. I don't see that as sustainable with a gross margin of only eight percent at twenty thousand cars a year, as that leaves a gross profit of only $120M a year at a $75K average selling price. So something must be improved--either expenditures need to go down or gross margin needs to go up. Meanwhile, the average selling prices of Teslas will go down as early adopters run dry, even as R&D and capital expenditures on other models ramp up. At 25% gross margin, though, they can recoup their billion dollars in only three years. If they're indeed flying in tires from the Czech Republic it sounds like there's a lot of low hanging fruit in the cost department, but it's quite possible Tesla has just built a more expensive car than they thought they were making. I suspect it, in fact. I'm not sure they'll be able to avoid going back to the public markets for more money this year if they want to expand their product line. I think the interesting question is whether incumbent manufacturers will produce an equivalent auto lineup at less cost, or not. Many competitors, like Mercedes, BMW, or Ford, have existing labor, plants and tooling they could leverage for electric vehicle manufacture. Some have been in business for a hundred years. If the answer is no (market is too niche, existing plants are too old, incumbents lack the skillz) I think Tesla may be a viable entity. However, I think mainstream manufacturers have stayed away from aggressively creating new hotness in the vehicle market because they don't yet see any profits there. Their approach has been conservative, and I think the reason is that conditions are not yet ripe. Tesla was founded ten years ago; timing is everything.

by codex 14y ago

dman 14y ago

Entering a market with entrenched players is hard. Your competitors have economies of scale and you dont.

rogerbinns 14y ago

Note that Toyota also lost money for several years on the Prius as is GM on the Volt http://www.reuters.com/article/2012/09/10/us-generalmotors-autos-volt-idUSBRE88904J20120910 http://www.reuters.com/article/2012/09/10/us-generalmotors-a... - there is a learning curve to play in this space. Since everyone is keeping their technology private it won't be cheaper for later entrants. There will be an experience curve for the manufacturing which will lead to it becoming increasingly productive and cheaper http://en.wikipedia.org/wiki/Experience_curve_effects#The_experience_curve http://en.wikipedia.org/wiki/Experience_curve_effects#The_ex... As a comparison Boeing is reported to have an experienced a curve of 84% (costs decreasing 16% every time production units doubled) on the 777. Tesla doesn't have the legacy manufacturing infrastructure and can use far more automated methods, especially if they manufacture a large amount of the car themselves instead of outsourcing. It will be interesting to see what Tesla's numbers turn out to be.

codex 14y ago
Tesla's gross margins are currently 8% (whereas BMW is something like 19%) and they expect it to increase to 25% in one year alone. It's already up significantly from negative territory (I shudder to think what it was on the Roadster), but they still have to make the car another 18.5% cheaper. I wonder if they're aiming to squeeze that from the battery cost, in which case it's up to Panasonic, I suppose.
- rogerbinns 14y ago
  I suspect they will find ways of assembling the car quicker. That alone will reduce the cost (share of fixed overheads per car would be down) as well as allowing negotiating bigger volume discounts on materials and components.
- ANH 14y ago
  They're about to hit a volume discount from Panasonic, according to the earnings call. There are a number of other efficiencies they've identified. On the call Elon recounts some anecdotes about parts suppliers not being prepared in 2012 for the volume of orders, inefficient tire shipments, etc.

krschultz 14y ago

You are dividing fixed costs over a small number of units. Of course it's going to be bad. A lot of that money is R&D for current products. Another large chunk is investments in factory equipment that will be making cars for 10+ years. If I build a plastic mold for $2 parts, and the mold costs me $100,000, you don't say that I lost $10,000 per part for the first 10 parts.

codex 14y ago
Capital expenditures are actually up over last quarter, to $72M. I don't see that as sustainable with a gross margin of only eight percent at twenty thousand cars a year, as that leaves a gross profit of only $120M a year at a $75K average selling price. So something must be improved--either expenditures need to go down or gross margin needs to go up. Meanwhile, the average selling prices of Teslas will go down as early adopters run dry, even as R&D and capital expenditures on other models ramp up. At 25% gross margin, though, they can recoup their billion dollars in only three years. If they're indeed flying in tires from the Czech Republic it sounds like there's a lot of low hanging fruit in the cost department, but it's quite possible Tesla has just built a more expensive car than they thought they were making. I suspect it, in fact. I'm not sure they'll be able to avoid going back to the public markets for more money this year if they want to expand their product line. I think the interesting question is whether incumbent manufacturers will produce an equivalent auto lineup at less cost, or not. Many competitors, like Mercedes, BMW, or Ford, have existing labor, plants and tooling they could leverage for electric vehicle manufacture. Some have been in business for a hundred years. If the answer is no (market is too niche, existing plants are too old, incumbents lack the skillz) I think Tesla may be a viable entity. However, I think mainstream manufacturers have stayed away from aggressively creating new hotness in the vehicle market because they don't yet see any profits there. Their approach has been conservative, and I think the reason is that conditions are not yet ripe. Tesla was founded ten years ago; timing is everything.