Tesla S Charged With Generating ProfitBy Scott Doggett March 23, 2011
In a meeting with reporters last week, Tesla executives said the Model S must be profitable, and for the first time they said why they believe the battery-electric sedan will be. The Palo Alto, Calif., company which has experienced a 52-week high of $36.42 a share since it went public in summer 2010 but has been trading around $22 recently intends to launch its second model in mid-2012. Production of the new model is planned at 20,000 vehicles a year. Production of Tesla's first model, the Roadster, is slated to end in 2011.
The Model S will be priced at $57,400 with the least expensive of the three battery packs that will be offered with the vehicle a pack good for a claimed 160 miles between charges. Packs with 200- and 230-mile ranges will also be available. Tesla has repeatedly said it expects the Model S to compete with the BMW M5, which sells for about $80,000 and the Audi A8, priced about $85,000.
But the BMW and Audi aren't rich with aluminum, a commodity not only expensive to buy but also tricky to use in automotive production. They dont come with a very pricey lithium-ion battery pack, nor were they designed from the ground up. And they dont contain nearly the same number of unique parts the Model S will. Tesla executives were asked how they expect to make any money on the Model S given that its competition costs so much more.
Standing in a 20,000-square-foot assembly room at Tesla headquarters, where 20 test units of the Model S were recently made, Tesla Vice President and Chief Technology Officer J.B. Straubel said: "Well, it takes a lot of hard work. We're putting attention on every single system to make sure we have costs that can support that."
Line Item Focus
Presumably BMW and Audi also pay close attention to costs. So why cant Audi and BMW build an M5 or an A8 and sell it for $57,400? "Well I'm not sure they've ever tried," Straubel said. "I don't know that it's a direct comparison to say that we know something that they don't. I think we're taking on the challenge and certainly aluminum cars can be built, and just because it's aluminum doesn't inherently mean that it has to be expensive."
"We're tracking every line item mercilessly, Straubel said. I mean it's something we're focusing on incredibly closely today, because we can't sell this car at a loss. That's not something Tesla can support. We have to be profitable and we have to be profitable with the vehicles that we field."
Straubel (below, left) said much attention has gone into how Tesla can manufacture the Model S components itself and do so in the most economical manner, and a lot of attention has been given to production locations, the supply chain and Tesla's suppliers. All of these, he said, have improved since the production of the first Roadster, a two-seater that arrives at Tesla as a roller from Lotus, acquires parts from Tesla and suppliers, and is sold directly by Tesla to consumers for $107,000.
Tesla Vice President and Chief Engineer Peter Rawlinson said: "I also think there's a cultural approach to efficiency. My body structure's design team is about seven or eight people. You'd expect it to be 40 or 50 people at a traditional OEM. Those guys are not afraid of hard work, I can tell you. There's been midnights and not just on weeknights but Saturdays and Sundays. That's what it's taken to get here."
Prior to joining Tesla, Rawlinson (below, right) led vehicle engineering at Corus Automotive, an engineering consultancy specializing in advanced engineering solutions for the global auto industry. Traditional-vehicle programs he worked on at Corus included the X-type, XJ and F-type Jaguars, Land Rover Freelander and Discovery, Ford Fiesta, Honda Accord, BMW 5 Series and Bentley Continental.
Referring to the Model S, Rawlinson said, "If you look at the number of parts for this car versus those for the competition, we've got a very low parts count and that's reducing costs. There is a culture of total dedication within the engineering teams. We're all here to produce something that's excellent.
We see this as an adventure, and that culture is instilled from the very top from [CEO] Elon [Musk] on. I structure my team and I know J.B. does, and that is the culture for hard work and striving in engineering excellence. And that pays dividends in terms of cost effectiveness, because that means the parts are more elegant, requiring less brackets and less content, and that saves weight and saves costs."
Straubel said that efficiency also carries through on how Tesla sells and services the cars. Unlike most automakers, Tesla doesn't rely upon independent dealers. Rather, Tesla has its own stores, which allows the company to maintain a lean sales and distribution system. "There's a number of elements of efficiency that go all the way through from design to final sales, he said. We know it can work. We're a company that can work." He said about 4,000 prospective customers so far have reserved a Model S.
Tesla is partly owned by Toyota and Daimler and has made components for both companies in what had matured into a healthy partnership between the California startup and the world's largest and the world's oldest automakers, respectively. In keeping its costs down for the Model S, Straubel said those strategic partnerships have helped the company tremendously "in access to suppliers, and in introductions and communications with some of the supply base . We can also leverage some of their buying power in some of their existing relationships with suppliers."
And, he said, Tesla has discovered suppliers "are much more willing to stretch and work hard with Tesla because it gives them sort of a shoe-in to the electric-vehicle market, which is more valuable than just the volumes that the Model S program might represent, because it helps them learn about the market, about the customer needs, about the new technologies."
Although clearly reluctant to give examples automakers as a rule don't like to publicize who supplies their parts Straubel disclosed that Toyota will supply the air-conditioning system for the Model S. He said the Japanese automaker's experience with hybrids has given it a great deal of knowledge about electric air-conditioning systems. He said Tesla is benefiting from that, as well as introduction to some of Toyota's core suppliers.
Doubt On Profits
Tesla has impressed industry observers and insiders including the top executives at Toyota and Daimler but there are skeptics, particularly as regards the Model S, which will be Tesla's first mass-produced vehicle. The Roadster, by contrast, is a very low-volume car, with total deliveries after three years' production at fewer than 1,500 units. Among those who doubt Tesla's ability to turn a profit on the Model S is David Cole, chair emeritus at the Center for Automotive Research in Ann Arbor, Mich., and a highly regarded industry expert.
In an interview with Auto Observer on Friday, Cole said if Tesla's executives were to say they were able to produce a lithium-ion battery for $250 per kilowatt-hour, "I'd think that maybe they've got something going here. But nobody's close to that price yet. You're looking at a $15,000-plus battery just to get the kind of range they are talking about, and then when you layer on top of that low volume and an aluminum-intensive vehicle, I think it's going to be a very difficult thing to do."
Tesla executives are not willing to discuss the cost of their Model S battery packs, but Straubel disclosed last week the base battery pack in the Model S would have greater capacity than the 56-kwh pack in the Roadster. At $250 a kilowatt-hour, a 60-kwh battery would cost $15,000. At a more-likely $350 a kilowatt-hour, the pack price climbs to $21,000.
"I was comfortable with Tesla when they were doing $110,000 sports cars," Cole said, because you have a unique enough market; you can do a lot by hand. But now as you go to production equipment, production technology, unless you're using somebody else's stuff a platform, a body once you get into volume you get into dies and stamping presses and window regulators at that low volume with this level of sophistication in an electric vehicle I think it's going to be really hard to make money.
He said people in the car-making industry tend to be a little more optimistic about what they're doing than realistic. This might be one of those cases, he said. "If they've got something special, like they've done a major breakthrough on a battery or have something spectacular on how to use aluminum, fine. But they would be in line for some Nobel Prizes if they are."
Cole estimated the cost of the Model S battery at $20,000 and estimated its powertrain and electronic controls at another $20,000. Throw in the cost of the rest of the luxury car and a warranty and what you're left with is a very small or nonexistent profit margin on every Model S sold.
In less than 18 months, Tesla will show us whether it is able to produce a profitable second model. We will post a detailed look at where Tesla stands with regard to development of that model later this week.