Some people say Tesla has unlimited demand.
And other people say that those people are delusional fanboys.
Obviously the word unlimited is open for interpretation in this perspective, so how about we define
it and explore whether or not Tesla really does have unlimited demand.
UNLIMITED I think when we say unlimited demand, what
we really mean is that Tesla can find a buyer for all the cars they can make, and still
make a good profit margin.
Right now this is very much the case, Tesla can keep making more Model Ys, and sell them
all, and keep getting great margins.
Ok, some of the demand is potentially dropping in China, but this has since been compensated
by lowering prices, and this was an economic effect, not a Tesla related demand drop.
Tesla lowering their prices now means that Tesla are passing on this demand drop to other
competitors, as the consumers who were going to buy from the competition can now afford
to buy a Tesla.
This will always be the case, whenever Tesla lower their prices, or offer lower model variants,
it will take away from demand of other autos.
The thing is Tesla have an insane buffer of margin, to lower prices a lot more.
But they don't have the supply to cover this demand.
Potentially interpreted that Tesla has unlimited demand because they have limited supply.
INCREASE SUPPLY But what if Tesla doubled their supply, or
tripled it, or made 3 or 4 million Model Ys a year.
Is there really enough demand for that?
Well Tesla could likely still sell 3 or 4 million Model Ys a year.
Right, now I sound like the delusional fanboy some of you might think, but before you stop
watching hearing me out.
Now if Tesla stepped up to that level of production then there would be some serious economies
of scale.
The OPEX per vehicle would drop from $7,000 per vehicle to about $2,000 per vehicle.
Do you see, there is already $5,000 more operating profit per vehicle due to the economies of
scale.
Not only that there would be more local manufacturing.
For example right now the majority of Model Ys sold in Europe come from China, they are
shipped at great cost, and even more cost is the import tariffs they face.
Again this would probably reduce the cost of the car by a further $7,000 or so.
Wow, just through economies of scale we have managed to reduce costs of European Model
Ys by about $12,000.
And as we are going through the unlimited demand scenario, then we get to use these
economies of scale.
REDUCED COSTS Alright so with economies of scale Tesla could
cut costs in Europe by $12,000 just from local production.
Alright it might cost less to manufacturer in China, but equally Shanghai is using old
manufacturing techniques compared to how Tesla can make vehicles now.
China is also not using vertical integration when it comes to the most expensive component
that goes into a vehicle, the battery, Tesla are buying their batteries from a 3rd party
supplier who make profit from these sales, and are not as good or as efficient at manufacturing
batteries as Tesla.
And on top of that, we are also not factoring in actual economies of scale of the fact Tesla
would have tripled or quadrupled their production of Model Ys, and thus be able to get their
supplies at lower costs.
Their plants would be producing more vehicles per sq foot of the factory, and all other
associated cost savings, that more than compensate for higher costs in Europe over China.
When you factor in actual battery savings too, and all the above, then we have likely
saved about $15,000 cost in Europe, compared to importing from China, due to the economies
of scale.
MARGINS In other words, in this scenario, Tesla could
drop the price of their Model Y but $15,000 and still make the same gross profit.
But not only that, due to the price dropping perhaps 30%, and still making the same gross
profit, it would mean that Tesla's margins would increase.
As it's the same amount of profit relative to a lower price vehicle.
Now just imagine how much more demand Tesla would have for a Model Y in Europe at $15,000
less?
And then we are now dealing with something like 40 or 45% margins, especially if we factor
in some FSD, so Tesla could drop their prices another 10% or so if they wanted to, or even
20%, and still make a good operating profit.
In my opinion this is what I would call unlimited demand.
Tesla has this insane operating leverage, that keeps getting better again with their
latest manufacturing techniques, and that's the ones we have today, there are still more
to come with this new platform we heard about.
MODEL 3 And this is the Model Y we are talking about,
Tesla could do this for the Model 3 too, and perhaps make a Model 3 for about $3,000 lower
cost than the Y, due to it be less of a car.
LFP This is also without Tesla making their own
LFP cells, or whatever low cost, less energy dense cell Tesla decide to make, with the
4680 to keep it structural.
Again due to this level of economies of scale Tesla can justify far more investment in more
cell factories, lithium refineries, etc.
The vertical integration kicks in further, which means lower cost, more supply, a virtuous
circle.
FSD And FSD could change all of this again, for
starters if Tesla was making so much more money in FSD, then they may want to lower
the initial capital cost of the vehicle to get bums in seats to clip the ticket for FSD.
More vehicles sold, more FSD revenue, which is highly profitable.
But not only that, we have really only seen Tesla's demand they have in the EV industry,
they will be the first vehicle manufacturer to offer AVs to private passengers too.
This is going to be an absolutely massive industry, and Tesla will not just lead it,
they will own it and it to themselves for at least this decade.
Well that will only further add to the unlimited demand.
20M But the saying isn't that the Model Y has
unlimited demand, it's that Tesla has unlimited demand.
Well limited to 80 million a year or so, as that's about how many new cars are sold a
year.
And not everyone will want a Tesla, so they may only get about 25% market share if things
go really well, which is what we keep hearing, 20 million cars year.
So perhaps that is about where Tesla's unlimited demand limits itself, which lets face it,
is still pretty huge.
So Tesla will keep selling every car they make, at massive profits, and then once they
hit 20 million a year, they'll stop.
They'll be an earnings call and Elon will say something like "We finally hit our target
of 20 million deliveries this year, we are very happy with that, it feels funny being
a multi-trillionaire now, and we are happy with the contribution that we have made in
transitioning the world, but the rest is up to the competition to turn the world electric,
but we don't want to make any more of these incredibly profitable cars".
Right?
No, I don't think so, why would Tesla want to stop making cars to transition the world.
20 million is a target for 2030, not the end of Tesla.
Tesla will keep going if they are going to accelerate the transition of renewable energy.
AFFORDABLE Again this is where you think I am a delusional
fanboy, no way more than 20 million people can afford a Tesla.
Well Elon said they can build the next Tesla at half the cost of a Model 3.
We are talking in the vicinity of $15,000, now.
In 2030 it could be $10,000, adjusted for inflation.
Factor in all the other battery efficiencies and all sorts of break-throughs we might expect
by 2030, then it's very possible.
Even if Tesla had a price of $20,000, with 50% margin and FSD on top of that, then I
think we see some real demand.
But not everyone wants a compact car, not all 80 million new car buyers, some want large
SUVs, trucks, sports cars, etc.
Yes, but you may still be thinking zero sum, or 80 million sum to be more accurate.
Tesla's are not competing in the new car market, they will be competing with the used car market.
A very high percentage of the global population can afford $20,000 for a vehicle that would
cost possibly something under $100 a month to run, remember we are talking about 2030,
with more efficiencies in battery, this would be a smaller lighter car, with a smaller battery
too, and not cost as much.
And of course Tesla will have insurance too.
Solar and battery storage might have also reduced energy costs by the as well.
Or solar is simply lower cost and more people can afford it in their homes, along with battery
storage too.
Still $20,000 is a lot of money for some people.
Well what if Tesla offered financing over 10 years, and with a small deposit, then you
payments are $200 a month.
And then you are saving $200 a month not having to run your previous ICE vehicle on gas, insurance,
servicing, engine maintenance.
Then the number of people who could potentially afford this vehicle in the world, might be
classified as unlimited demand.
But if you want me to put a number on it, then I would say possibly 100 million a year.
So many people in the world could make the sacrifice to save where ever they needed to,
or work that little bit harder, to afford this amazing, safe car, with all the Tesla
features we expect.
And we didn't even need to get into the demand for Robotaxis, or local subsidies.
But personally, I am happy enough to call that unlimited demand, and saying otherwise
is just splitting hairs.