Tesla’s Automotive Gross Margin Improves from 18.7% to 23.7%

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CleanTechnica

Tesla’s Automotive Gross Margin Improves from 18.7% to 23.7%

I’ve been lucky to have several chats with Tesla CEO Elon Musk over the past few years. Unsurprisingly, what he has said in private chats is mostly the same as what he regularly says in public (including on Twitter). In fact, some of his regular messages in private and in public are the same as they were several years ago. But we also have some concrete updates on some of these matters that put muscles and bones on the concepts.

I’ve been covering Tesla since 2012, and one thing I and many other close followers have seen is that Tesla has very closely followed the long-term plans Elon laid out years earlier — so there hasn’t been much need for the core messages to change. Frankly, I think that is one of the most astounding things about Tesla — it’s abnormal for a company to so closely follow a trajectory that was forecasted many years in advance, especially when you consider that so many of the milestones along the way were considered “impossible” by industry experts and armchair Tesla critics haters.

There is one line that Elon has been using for several years, since the early days of the first gigafactory at least, that I think is really starting to hit its real-world stride. That is his reference to “the machine that builds the machine.” From my experience, he’s been talking much more about this part of the business this past year. In fact, the title of one article I wrote after a bit of a chat with Elon was as follows: Elon Musk: “Tesla’s Long-Term Competitive Advantage Will Be Manufacturing.” On the most recent Tesla conference call, he also elaborated on this idea, saying:

“Tesla is absurdly vertically integrated compared to other auto companies, or basically almost any company. We have a massive amount of internal manufacturing technology that we built ourselves. … It’s like, okay, what are the things we want to make? Design a machine that will make that thing, then we make the machine. This makes it quite difficult to copy Tesla — because you can’t do catalog engineering. You can’t just say I’ll pick up the supplier catalog, I’ll get one of those. … We’re just making a crazy amount of machinery internally. If we’re trying to make progress and nobody’s got the machines that we need, we’ve got to make it. So we do.”

That’s all just a preface to what stimulated this article, though. It’s the context around two other major statements from that Q3 Tesla shareholder call.

The first statement that caught my attention is logical and nothing special to Tesla, but it adds important context around complicated large-scale manufacturing — and the challenges of ramping up production of a product like a car. Elon noted that a factory production ramp meant ramping up about 10,000 unique parts or processes, “each on its own S-curve.” That’s astounding to think about. In order for a car to be in mass production, 10,000 or so individual parts and processes need to be flowing out via smaller-scale mass production. You cannot be missing 10 parts, or even one part. When you keep that in mind, Tesla’s ability to ramp up production of the Model 3 in recent years and production of the Model Y this year is astounding and inspiring. It’s wild, to put it simply. Tesla basically had to learn how to do mass production in a few short years. And it has.

But the real biggie for me was this one: Tesla’s automotive gross margin improved from 18.7% to 23.7% in the third quarter (Q3). That’s a wild, astounding improvement in automotive gross margin — nothing to be shy about. Even 18.7% is a great gross margin in the automotive industry. This improvement is a testament to Tesla’s continual focus on getting more efficient, vertically integrating what can be done better in-house, driving down costs, and increasing the speed of production. It’s also a fundamentally impressive figure. 23.7% gross margin — and potentially improving still — still leaves Tesla a lot of room to bring down prices or keep making boatloads of cash to pump into faster growth.

In my chat with Elon a few months ago, he said, “Tesla’s long-term competitive advantage will be manufacturing.” He has said something like this a few times in the past year. Historically, if Elon has routinely said something about the long-term trajectory of the company, it has come to be the case. So, it’s difficult to bet against the idea that Tesla’s biggest long-term advantage is centered around the company’s manufacturing acumen. We’ll see what the surprise or surprises of the 4th quarter brings.

BY REMEREDZAI JOSEPH KUHUDZAI

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