In order to make good investment decisions, it’s worthwhile taking a look at Tesla’s GM’s. The overall GM of 8.4% is made up of two parts: Automotive Sales and Development Services. The GM from Auto Sales was 5.6% (294.377/278.710 – 1). The GM from Dev Serv was 217% (11.955/3.765 – 1).
So how do we get to 15% in 1Q13? Unfortunately, we don’t know how much of the auto sales was from Rav4 and how much was from Model S. Which do you think is running higher GM? Anyway, we can expect S sales to double while Rav4 stays flat. So Model S GM will have to improve substantially to get to 15%. While 100% GM from Dev Serv is not unusual, I would have to think that 217% is a flash in the pan. But maybe there’s a big contract behind the scenes and that’s Elon’s ace in the hole to hit to 15%. He certainly seems confident.
It seems to me that improving gross margin (GM) is the highest priority at Tesla. To date, Tesla has shown that they can hit production rates of 400/wk but it comes at the cost of excessive overtime which erodes GM. GM on auto sales last quarter was 5.3% (1 - 278.710/294.377, corrected calculation this time). So how do they walk this up to 25%? There were two things that Musk talked about – labor cost and premium freight on purchased components.
The labor cost impact is fairly easy to quantify. Let’s say that their current labor costs last quarter were 2x the industry standard. An industry standard value would be about 30 hours at $50/hr, or $1500. So ultimately they can save $1500/vehicle. It may not happen all in the first quarter, but certainly by the end of the year. Assuming an ARP of $100k, that’s an opportunity to improve GM by 1.5%. That brings us to 6.8%.
Premium freight is a little harder to quantify, since we don’t have a good way to estimate what they’re spending right now. But here’s how it works. If the supplier messed up and is unable to deliver on time with normal shipping, then the supplier pays for premium freight. But if Tesla did not forecast and order properly, then Tesla pays it. The logistics of maintaining correct quantities of just-in-time inventories are very, very difficult. You’re dealing with over 100 suppliers, each with different lead times and standard shipment sizes and shipment methods. And each of these suppliers has suppliers, so the supply chain logistics are really complex. Anybody care to guess what they are paying for premium freight per car? $2000? If so, they could improve GM another 2% by the end of the year.
Are we at 25% yet? I’ll tell you, once the low-hanging fruit has been picked, it’s harder and harder to find one more percent. Can anybody suggest where the other 16.2% will come from?
"Let’s say that their current labor costs last quarter were 2x the industry standard. An industry standard value would be about 30 hours at $50/hr, or $1500. So ultimately they can save $1500/vehicle."
This equation seems to think there's only 30 manpower hours that goes into building 1 car?
You also missed lower cost of materials from bulk buys, and more efficent production processes, and a reduction from Temp workers to Full time workers..