Clean Technica, April 2nd, 2018 by Maarten Vinkhuyzen
In a couple of previous articles, I compared the ramp of the Tesla Model 3 to the ramp of the Chevy Bolt. Tesla is clearly as good as or better than GM in bringing electric cars to production. In this article, I look at another aspect of Tesla electric cars. The competitive advantages they have over the products of the competition. Again, I am mainly comparing with the Chevy Bolt because it is the only one currently in production in this “long range + somewhat affordable price” category, but future products of would-be competitors will also get a mention.
The Tesla design team did not try to build the best electric car in its segment, but to make the best car in its segment — period. To do this, they had to design a very attractive car that was super easy to manufacture for a relatively low price. The most notable result of these design goals was a reduction in parts, resulting in the omission of the instrument cluster, amongst other things.
When you compare the BMW 3 Series, Mercedes-Benz C-Class, Audi A4, and Tesla Model 3 — all specified to your liking — and you think all 4 are equally attractive, the Tesla Model 3 should have the lowest price. When you look at your budget and configure the most attractive BMW 3 Series, Mercedes-Benz C-Class, Audi A4, or Tesla Model 3 for that money, the Tesla Model 3 should be the most attractive.
This will not work for everybody, but the designers’ goal was that the Model 3 scores the most wins in these competitions. To reach this goal, the design team focused on ease of manufacturing, low cost, aesthetics, performance, and luxury. The German carmakers that dissected a Model 3 were very impressed with the way Tesla solved these incompatible requirements.
The most important design directive GM gave the Bolt designers was to beat Tesla to market with a very attractive long-range EV. The intention was to use an existing platform, but when that was not feasible, and the deadline for production did not move, they had to make speed of design their prime target, sacrificing ease of construction and adaptability. A right-hand-drive version of the Bolt is apparently now too costly to make.
These different design goals did influence the cost of producing the cars. I estimate that the base model of the Chevy Bolt cost $10,000 more to make than the base model of the Tesla Model 3. This amount is the result of collecting what is known about the production costs of both models.
The losses GM suffers from the Bolt are estimated to be $9,000. This is acceptable to GM because the value of the ZEV credits they earn is higher. The MSRP of the Chevy Bolt is $37,500. The price GM receives from the dealers is far below that. A fair retail price is considered to be below $35,000. The salesman has his bonus, the dealer has its costs, the car has to be transported to the dealer, etc. The real revenue for GM is probably around $32,000. With a loss of $9,000, the cost of revenue for this car can be as high as $41,000.
Tesla expects an average retail price of $42,000 and a gross margin of 25%. That is a cost of revenue of $31,500 for the average car. The cost of the base model will be not much lower than that — Tesla has a number of software options with $0 marginal cost and a “Long Range” option with a margin above 75%. To account for all uncertainties, let us estimate the cost for the Model 3 at $30,000 and the Chevy Bolt at $40,000.
This is mind boggling. The Chevy Bolt is a compact car and the Tesla Model 3 is an entry-level luxury car. Normally, the compact car is cheaper to produce because of higher volumes, lower cost of parts, and higher automation. That the cost of this luxury sedan is so much lower than the compact car is partly because it is the world upside down. The luxury car has the higher volume, lower cost because of far fewer parts and higher automation.
Another part of the difference comes from different design goals as discussed above and the way the car was brought to production. The Tesla design team worked closely with the team that developed the manufacturing, and both teams optimized their design with input from the other group. The GM design team was stationed in South Korea, the manufacturing is in Orion, Michigan, in the USA. It seems there was not much (if any) input from manufacturing during the design phase. The result is that a mid-size luxury sport sedan costs $10,000 less to make than a compact hot-hatch.
And this is not only an advantage for the Tesla Model 3 compared to the Chevy Bolt. The Jaguar I-PACE was just presented to the public and will be at dealers shortly. It has a starting price of $69,500 in the USA and is the same size as the BMW X3. That places it squarely opposite the Tesla Model Y, expected next year. If Tesla keeps the same price difference between Model Y and Model 3 as between Model X and Model S, the starting price of the Model Y will be around $40,000.
The Mercedes EQC will face the same challenge. The Hyundai Kona can compete on price, but is in the lower CUV segment. And every other carmaker faces this challenge. Beside a brilliant design, you need volume to bring the cost down to compete with Tesla. And only Tesla has the volume in electric cars and battery production to get at these cost levels.
While already producing more Model 3 cars per quarter than GM is producing Bolts, Tesla is likely still losing money on the Model 3 because the production volumes are too low. The reason the Model 3 is very expensive to produce at low volumes is the high depreciation and amortization costs. When the costs of an installation built to produce 1,000 cars per day are allocated to only 100 cars per day, that is 10 times as much cost per car. A profitable production of the base model is only possible when the assembly line reaches a certain speed.
The current Long Range version might not be profitable, but it can bring in cash. Because, unlike wages and supplies, depreciation and amortization are costs that don’t leave the company. But the cash is a topic for my next article.