Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

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Saturday, June 9, 2018

Tesla close to break-even on Model 3

Inside EVs reports that at 10,000 Model 3 assemblies per week, the cost per Model 3 will be just $28,000 -- $18,000 for material and $10,000 for labour.   The minimum price the base Model 3 will be sold for is $35,000.  But just add autopilot, which costs about $5000, and has no marginal cost of production, and you can see how profitable this could be for Tesla.  Provided it reaches 10,000 Model 3 units per week

We hear time and time again that automakers are losing money on EVs. Some people believe that an actual dollar amount is lost or absorbed every time an EV is sold. It’s not that simple. There are so many variables involved here when factoring in development costs, volume, etc. It’s a huge, tricky math problem that’s not so easy to comprehend.

With this being said, Tesla CEO Elon Musk’s recent Tweets about holding off on lower-priced models until volume is higher – so Tesla doesn’t die – makes perfect sense. For a myriad of reasons, as production increases, the automaker should be able to more easily turn a reasonable profit on less expensive trims. Now, a German firm that specializes in vehicle teardowns has put a number out there.

The German company recently spoke with WirtschaftsWoche. An engineer shared:

If Tesla manages to build the planned 10,000 pieces a week, the Model 3 will deliver a significant positive contribution to earnings.

In fact, it was revealed that the materials and logistics involved in building the Model 3 add up to about $18,000. Labor costs were determined to be about $10,000. This may not include some of the other factors that we spoke to above, but it’s pretty telling, nonetheless. It correlates well with Musk’s recent Tweet confirming that Model 3 production cost could definitely come down to ~$28,000 once production reaches 10,000 units per week.

[Read more here]

So the question is, will Tesla survive long enough to reach production of 10,000 cars per week?  The bears and short-sellers think not. The media are full of stories about how Tesla will have to come to the market for more money,

Clean Technica has an interesting article about how close Tesla is to break-even.  Obviously, once it reaches break-even, the chances are extremely high that it will survive.  The author of the article, Eric Kosak, calculates that at a weekly production rate of just 3,800 Model 3s per week to cover the operating expenses of its automotive division.  (Current Model 3 production is about 3000 per week)  That excludes interest expenses and if you include them then the required production level is 5,600 Model 3s per week.  I think it is very probable that Tesla will reach Model 3 production of 5000 cars per week either in the last week of June, or, if they want to postpone reaching 200,000 total production (and thus losing the Federal Tax Credit) until the 1st day of the new quarter, in the first week of July.  I think they'll reach 10,000 per week by end 2018.

What will the short sellers do then?  (Short selling is selling shares you don't own in the hope that you can buy them back later at a lower price.  If the price goes up you lose money because you have to buy them back at a higher price than you sold them for.)

Tesla will be very profitable.  While changing the world for the better.

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