Tesla Just Revealed Its Biggest Secret

Summary

Tesla has significantly reduced its vehicle production costs by 57% since 2017, primarily through manufacturing efficiency, positioning itself to potentially lower prices or increase profit margins with the introduction of the 4680 battery pack.

Abstract

Tesla's dominance in the EV market is reinforced by a recent revelation from its Vice President, Martin Viecha, that the company has slashed production costs by 57% since 2017. This reduction is attributed to improved factory efficiency rather than cheaper batteries or models. Unlike competitors who periodically overhaul models and incur substantial R&D and operational costs, Tesla's strategy of incremental improvements to existing models has allowed for a highly refined and cost-effective production process. With the average cost of producing a Tesla dropping from $84,000 in 2017 to$ 36,000 in 2022, and the potential for further cost reductions with new factories in Shanghai and Berlin, Tesla enjoys a significant competitive advantage. The company's profit margins are among the highest in the industry, with a $24,000+ profit per vehicle sold, while competitors like VW struggle to make their EVs profitable. The anticipated full utilization of Tesla's 4680 battery pack, which promises cost savings and performance improvements, could further reduce vehicle costs by up to 50%, potentially allowing Tesla to offer more affordable vehicles, such as a$ 25,000 model, while maintaining profitability.

Opinions

Tesla's approach to incremental model improvements and production efficiency is seen as superior to competitors' strategies of frequent model changes.
The efficiency gains in Tesla's factories are considered incredible and a testament to the vision of Elon Musk for near-total automation in production.
Tesla's competitors are viewed as lagging behind, with many failing to achieve profitability in their EV divisions.
The 4680 battery pack is believed to be a game-changer for Tesla, offering cost reductions and performance enhancements that competitors will struggle to match.
Tesla's current pricing strategy, despite similar costs to competitors, is seen as masking the company's true competitive edge and potential for market disruption.
The EV industry is perceived to be at a tipping point, with Tesla poised to either significantly undercut competitors or maintain high-profit margins due to its cost advantages.

The vice president just let slip a secret that should worry the rest of the EV world.

Tesla established and has continued to dominate the EV revolution. Thanks to this brainchild of Elon Musk, the world now has a viable alternative to gas-guzzling cars. But in recent years, it seems Tesla has started to lose its lead. Companies like VW, BMW, Mercedes, and Ford have begun offering EVs with similar driving ranges, charge speeds, performance, and pricing. Tesla has also had several significant setbacks, like the delay of their next generation 4680 battery pack, the Roadster, Cybertruck, and Semi. Not to mention how companies like CATL now offer arguably better batteries than the 4680. But in a recent press conference, Martin Viecha, Tesla’s Vice President, told Business Insider something that has shocked the EV world and will go on to cement Tesla as the ultimate king of the EV race.

Viecha happened to mention that the cost of producing a Tesla vehicle has gone down a massive 57% since 2017. But this isn’t down to cheaper batteries or even cheaper models, like the Model 3. No, this was entirely the result of increases in efficiency within their factories, which is incredible.

It just goes to show that Musk wasn’t bonkers to try and get a nearly 100% automated production line and that Tesla’s tactic of sticking with one model and incrementally improving it has paid off. You see, other manufacturers change models every few years. This means they need to pay for another full round of research and development, set up their factories all over again, and even update service and parts systems. All of this costs a tonne of money and means they don’t have the time to refine production enough to lower costs.

Meanwhile, Tesla improves its models incrementally without a complete refresh. A 2022 Model 3 might look similar to one from 2017, but everything from the backseats to the screen has actually been improved. All this without needing to change the production line, leaving Tesla able to get every little manufacturing process as refined, consistent, and cheap as they can make it.

Mr. Viecha also mentioned that new factories in Shanghai and Berlin will be much cheaper to operate once fully functional, meaning that this figure could fall even further!

But this has shown Tesla’s hand. You see, Tesla sells these $36,000 cars for about $60,000. This is only just cheaper than their competition. Take a Model Y long-range that costs just north of $60,000. It makes Tesla a massive $24,000+ per sale, giving it a 40% profit margin, which is one of the best in the entire car industry.

Meanwhile, its direct competitor, the VW I.D4, costs about the same but currently makes no profit at all. The same is true for many of Tesla’s rivals. Their EVs are either making a tiny or non-existent profit margin.

So even though Tesla might cost a similar amount as other EVs, they are actually in an entirely different league.

But don’t forget, this is without any drop in the price of the battery pack, which accounts for 40% of the cost of an EV. Yet, Tesla appears to be on track to fully utilise its 4680 battery pack in the near future.

If you don’t know what the 4680 is, I’d recommend checking out this article. But in short, the 4680 battery pack uses a much larger cell format and a unique internal structure. This means that fewer cells are needed for a car, making it cheaper to assemble, and each cell costs less to produce (per kWh). There are also some slight increases in energy density and charge speeds.

Unfortunately, manufacturing this revolutionary new cell has proven far more complicated than Tesla previously thought. It turns out that each time they try to scale up production, the quality significantly drops, and the number of rejected cells becomes far too high.

Right now, a Model Y’s 2170 battery pack (the old one) costs Tesla $11,000. But the same size pack using the current 4680 cells only costs $7,400 (33% less). Once manufacturing has reached scale, it could be as low as $5,500 (50% less). This means that all Teslas could soon cost 20% less to produce, all thanks to the 4680 battery pack.

With these cost savings in mind, Tesla might promptly find themselves in a position where they can sell Model Ys not for $60,000 but for something closer to $40,000 while still making a decent profit. They could even be able to offer that elusive $25,000 car.

Meanwhile, it seems like every other manufacturer will continue to struggle to make their current EVs profitable, even with new battery technology.

So don’t be fooled by the fact that Teslas cost about the same as their competitors. Behind the scenes, they are still years ahead of everyone else, and the 4680 battery pack and their new factories will only increase that lead. Musk is in an unprecedented situation. He could continue to sell Teslas at their current price and make billions while every other manufacturer struggles. Or, he could massively undercut everyone and crush the competition once and for all. Either way, Tesla and Elon win.