Analysts Who Spent Over 6,000 Hours Deconstructing Tesla Model 3: Musk Is Driving Costs
Sandy Munro is the founder of Munro & Associates, a firm that breaks down new vehicles to get a better understanding of production methods, their associated efficiency rate, and a project cost and resulting margin that a company might make. Its extremely useful data for investors and at the least entertaining for auto enthusiasts. Today we got to digest a lengthy report that the firm issued on the Tesla Model 3.
After spending around 6,600 hours with the Model 3, the results are a bit of a mixed bag though overall positive in terms of the future outlook.
On one hand the firm praises the structural build quality of the Model 3, while specifically calling out instances where the frame or body is over-engineered, done to the point of needless cost overruns.
Munro estimates that a Tesla (NASDAQ:TSLA) Model 3 costs roughly $2,000 more to produce than a similar priced BMW i3 EV. They take into account both materials cost as well as the all-important production method to apply those materials to the build.
Musk may have allowed an overly expensive design to get the green light, but that's OK
The firm did make a fairly bold claim: Elon Musk is needlessly allowing his company to over-complicate design choices which are driving time to build, which of course drives overall cost.
If that car was made anywhere else, and Elon wasn’t part of the manufacturing process, they would make a lot of money. They’re just learning all the old mistakes everyone else made years ago.
-Sandy Munro of Munro & Associates
Sandy details, in his public report that he sent to Tesla free of charge(!), over 200 issues pertaining to the Model 3 production scheme from start to finish. For instance, the steel and aluminum frame uses too much alloy. The battery that sits low could add stiffness but apparently the Model 3 blueprint doesn't take any advantage of this.
The aluminum trunk well is made from several pieces fixed with bolts and welds, instead of an oft-used contemporary design - the singular fiberglass trunk well used by many others. They even detail the rear wheel well. Take Chevrolet's approach for example; the Chevy Bolt uses one stamped piece of steel that saves time and complexity on the assembly line, but the Model 3 uses nine pieces of metal riveted or welded together. Very inefficient, Munro claims.
The findings of this report are critical as the Model 3 is the saving grace for Tesla when it comes to long-term sustainable profitability. They need to make a healthy margin on a car that is expected to be selling in huge volumes down the road.
The Model 3 that got the tear-down treatment was a premium $50,000 version with an upgraded battery pack. Munro calculates (a well educated guess) the total cost to build was $34,700. Adding in logistics costs and labor, Munro estimates that gross profit margins would exceed 30 percent which is very good.
Now keep in mind that Munro has yet to step foot on the Tesla factory floor, but he has had several calls with Musk and other Tesla leadership to voice his findings. Musk claims that Munro used a very outdated Model 3 design from the earlier wave of units shipped, and that cost's estimates could be higher as efficiencies have been made since then.
Musk even claims the engineer that is responsible for the over-wrought body construction was "fired". Remember also that Doug Field departed Tesla as the head of vehicle engineering just this past June. The move could have been related to ballooning Model 3 costs.
Its worth noting the firm showered extremely positive praise on the technical achievements of the Model 3. Its basically faster, more durable, and more efficient in terms of range than any other EV on the market. Most of that, according to the firm, is because of the advanced electric motor that costs Tesla only $800 to make and utilizes advanced magnetics to drive efficiencies.
Let's poke a bit at the Tesla profit numbers
Assume Tesla can make (and sell) 5,000 Model 3's a week. Tesla has already sustainted this output level for several months so this is a safe bet.
Let's also assume we are discussing the $50,000 model which is basically all the firm is selling at this point. A 30 percent margin, given this volume, would lend itself to $300,000,000 operating profit per month. That's $900M per quarter. Our most recent earnings piece on Tesla, detailed a loss of $717.5 million for the quarter for Q2 2018. Don't forget we are talking about a cool billion dollars a month in revenue at these rates.
So given a conservative estimate on the cost, that could in all likelihood have come down since, and a fair assumption of volume and sales price, Tesla could see itself profiting several hundred million dollars per quarter sooner rather than later. Stay tuned for our coverage of Tesla's Q3 earnings where a net profit could be very likely.