Tesla in China will have the lowest margins out of all the other markets, and factories. Hang on,
Tesla Economist, I think you might have gotten a little mixed up, and meant to say that the
other way around. Everything is cheaper in China,
everything is made in China, and thus easier and cheaper to source locally.
Labor is also a lower cost in China. I think you mean Tesla China will have the highest margins.
Well sure, Tesla are using the giga press in China, and they are not in Fremont.
But here's the thing. Tesla are selling a product in Asia, that is not good enough,
according to Elon, for other markets. In Asia it would appear though, that lower range EVs
are more accepted. So Tesla is able to get away with a standard range Model Y in this market.
As the standard model Y is much lower cost than the long range, there is instantly less margin
there. But I am actually talking in a few years time, so let's jump forwards to around 2025.
The Standard Range Model Y seems to be the sweet spot in China, there are fewer consumers who
can afford a Long Range in China than in the US. But a standard range is more affordable.
But the thing is, Tesla are only making these vehicles because CATL have a lot of batteries
available for Tesla. What Tesla do is work out how they can make the most dollar per kWh
for all of those batteries that CATL have available, but not only that likely also
how many batteries CATL say they can make. In other words it would appear likely,
at least when the chip shortage is sorted, that Tesla can ramp up production in China,
faster than CATL can ramp batteries. So perhaps Tesla have said to CATL, we will
buy as many batteries as you can possibly make. Now given that Tesla is usually in the order of
a one trillion dollar company, this is a very good purchase order to have. And we
are starting to see it already with this latest battery factory up the road from giga Shanghai.
Anyway these CATL batteries are LFP,
therefore they will only be suitable for standard range vehicles, and energy.
Obviously vehicles is vastly more profitable than energy at this stage. And the Model Y is vastly
more profitable than the 3. So Tesla have decided to try and ramp up supply of a standard Model Y,
their lowest range car, for a select local market around where it is made.
That market is large enough to serve a very high quantity of these cars.
But these batteries are from CATL, and although by this stage Tesla would surely be paying less
in around 5 years time per kWh, it still wont be as low a cost as
Tesla can get by making the batteries in-house. Therefore Tesla are stuck with CATL, thus Tesla
are stuck with LFP, and thus Tesla are stuck with a higher cost for batteries in China. But like I
said, Tesla are stuck with LFP, which means they are stuck with standard range, which means Tesla
are stuck with lower prices. Higher costs, lower prices.
But I think the Chinese business is pretty much complete for now. Just grow out the factories at
the same rate CATL can expand their battery production. I would say Tesla will continue
to use LG to supply the batteries for the long range and performance versions from China too.
Tesla don't need to place much focus on China. Especially now there isn't
going to be a $25,000 compact Tesla. I am not sure when China would ever allow
Tesla Robotaxis, that may be a long way off. Tesla will be entering markets where they have the best
chance of succeeding with Robotaxis. That is where there will be the most profit, and it will have
the most impact on the mission. We need to get our heads around that Tesla is a robotaxi company now.
The market Tesla are focusing on the most is the US. Now compare to Tesla China being
stuck with lower prices and higher costs, which I guess is the cost of doing business in China,
and owning 100% of the company there too. But remember, all these cars sold in China wouldn't
have been possible without CATL, so it's better than nothing, and it's still far from nothing.
It may also be the reason that margins were not up as high as I expected this
quarter. Perhaps the margins for the Model Y standard are below 30% in China. We wouldn't
have thought this likely. And the CATL battery prices will likely come down a lot, even soon.
Now compared to the US, where the batteries will be made on site,
at a lower cost, and significantly higher energy density. Using all the revolutionary
new manufacturing techniques, which Tesla may never upgrade in Shanghai,
perhaps of concerns of other companies trying to copy them. On the other hand, Elon is happy
enough to tell all auto manufacturing companies that they should build structural battery packs.
Anyway, a 4680 battery might be about 30% lower cost for Tesla than an LFP battery
from CATL per kWh. However, this is nickel vs iron prices. So Tesla's nickel battery
will still be lower cost for Tesla than CATL's iron battery. Yet Tesla can make cars with much
longer range, and better performance with their lower cost nickel battery.
The fact that Tesla's 4680 battery will offer improved range and performance,
means that the car can be sold for a higher price, as a Long Range Model Y too. Therefore
Tesla has reduced the cost significantly with the lower cost, more energy dense battery,
along with the other more advanced manufacturing techniques that will also save cost in producing
these cars in the US, over Shanghai, that may not adapt to the front diecast mold, at least no time
soon. And I believe that the LFP battery packs are already structural in the standard range vehicles,
it was part of how Tesla did such a good job getting the weight down for them.
In other words the opposite of Shanghai, and we have higher prices with lower costs.
Therefore Tesla's margins will be significantly higher than when compared to the majority of
the vehicles sold from China. Remember also in Europe, currently Tesla pay a tariff for all the
cars entering Europe from Shanghai, I have heard its somewhere between 10 and 20%. Of course on top
of that are all the additional transport costs. So imagine how much lower cost Tesla will be able
to deliver Model Ys in to Germany, and the rest of Europe. Minimal transport costs. No tariffs.
More advanced manufacturing processes. Eventually lower cost batteries in Germany soon too,
i.e. 4680 batteries produced on site, hopefully sometime this year.
Just think how much more this can add to Tesla's margin, or how much more demand this can create
for Tesla, by allowing Tesla more room to reduce the price, if they need to improve demand,
and yet still maintain a great profit. Think about it like this, whenever Tesla
get the cost of production down, then that means they can increase demand further,
if they so chose. The most costs Tesla reduce, the lower Tesla can put the prices, and thus
the higher demand can increase, due to lower prices. It's almost like a higher profit margin,
is stored up demand. The more demand a product has the more the prices can increase, and the higher
profit margins become. Thus you want to make as many of these products as you can, but then demand
starts to drop, as you can supply so many more. But you can drop prices again to meet demand.
So profit margin is deferred demand, if you lower the margin, you can increase demand. Of course as
long as you have the supply to meet that demand. Now if you are also able to reduce costs further,
it means you have more margin, and thus can lower prices further and increase demand again.
I think if Tesla do continue to sell to the public, they will need to drop their prices
eventually, so the vehicles do become more affordable. For example Apple, Apple doesn't
need to drop their prices, just about anyone can afford an Apple, if they really wanted it,
they could make sacrifices if they had to, and eventually be able to afford an iPhone.
But a $50,000 vehicle, some people can want it more than anything in the world,
but still have no means of being able to afford it. My point is though, if Tesla perhaps got the
Model 3 price down to $35,000, or maybe even $30,000, then that generate a lot of demand.
The question is, how low can Tesla get the costs, to still clear a decent margin.
A $35,000 Tesla, now that is affordable for the masses.
Because bear in mind, when you remove fuel, servicing, and heavy depreciation,
it's closer to the cost of ownership of a $15,000 ICE vehicle. Now there are a lot
more people who can make sacrifices to afford a $15,000 ICE equivalent.
Anyway, I am not sure Tesla need to be concerned about dropping prices to increase demand any time
soon. And I wonder, what would be better for Tesla, to drop the price of each vehicle by
$1,000, or to spend an average of $1,000 per vehicle on advertising? Just because Tesla
hasn't spent anything on advertising, don't rule it out. There simply is no point though,
if you can't come close to meeting demand. Imagine how much the demand for Tesla's
would increase if the prices dropped by $1,000, well probably not too noticeable.
However, imagine if Tesla spent $2 billion on advertising. And remember
Tesla's massive economies of scale? This would be advertising likely just for the 3 & Y,
probably in the same ad. Now that has the possibility of jumping demand maybe 50% or
something. The ads just need to explain how it all works, and how much better it is than ICE.
My theory is Tesla will do everything they can to make as many Model 3s and Ys as possible, and
then do everything they can to generate as much demand for these models as possible, rather than
focusing these efforts into making new models. All efforts will be focused on reducing cost
of 3 and Y, and building more further demand for more ramping.
Anyway, China will continue to ramp up at the rate of CATL, and is more or less
a complete business for now. I think it might be sometime until Robotaxis will enter that market.
I think Canada is the next obvious market for Robotaxis, but after that, I am not sure.
Tesla serves as a way for CATL to find an application for all the batteries they can
produce. Tesla is the only manufacturer remotely close that can handle that level of batteries in
manufacturing vehicles, and eventually energy. I mean it's a great partnership, as you would expect
from the worlds largest battery manufacturer and the worlds largest EV manufacturer.