Item — HN Reader

> My issue is mostly with the financial situation of the company. Its clear that the $35k M3 has been relegated as a "loss leader", and there's no work on actually making the car profitable at that price.

Doesn't it seem obvious that both processes and supply costs tend to improve over time? (this isn't Tesla specific actually)

A couple of simple examples:

- battery costs (they have been on a downwards trend for a while, and expected to keep falling)

- production/assembly line costs: initial hiccups are expected and costly, and as you fix them and learn to optimize your production, your costs also decrease. The rejection rate starts dropping, and rework costs also start dropping.

This is true of pretty much any production: you get better at it as you go, and generally your supply costs also decrease. As you get out of the ramp-up "hell" you start producing a lot more, which starts giving you economies of scale.

Lastly, innovation also offers improvements that can give you another knob. For example, the motors in the M3 are now being ported to Model S to improve the range. This gives an option to either offer a higher range, or keep the range the same but put in a smaller battery (where the savings are going to be). I expect incremental improvements in M3 to have a similar type of effect.

I consider all that "work". I imagine it will lower the production cost, given the same spec. That translates to profit, if the price point is kept the same.

2 comments

The Model 3 has positive gross margins. Its an issue of volume, not an issue of margins.

There's a lot of things they did wrong to get to this point: changing the design of the M3 too much and too often, making it difficult to stock parts for repairs and all that... but ultimately, the vehicle is actually positive margin.

That doesn't make the company profitable. They spend $700 Million / quarter on their Supercharger network, their sales channels, salaries for employees, and other such "static costs". They need to get to the 5000 cars / week (or higher) point to become profitable.

That's all it come down to. They've got a positive gross margin car, its an issue of selling more of them. If there's a ton of customers waiting for a cheaper vehicle, well that was an error in Musk's marketing. Too many people are holding out waiting for a cheaper car. IMO anyway.

At ~$40,000, they make $8k per vehicle or so. If they raised average prices to $50,000 or so (assuming a base price of ~$45k), they'd only need to sell 1/2 as many vehicles to make a profit.

I've read about battery cost improvements around 18% per year. If you consider that the battery is somewhere between 30% and 50% of the cost of the car, they should be able to reduce the price of the car by thousands of dollar a year.

Edit: This 2017 PDF illustrates this well. While the 18% looks accurate for 2010 thought 2016 they are projecting that rate slowing down. Page 8 has a good chart illustrating how EV cars will soon be cheaper then ICE cars.

https://data.bloomberglp.com/bnef/sites/14/2017/07/BNEF-Lith...