Economies of Scale

Economies of Scale

With the Tesla stock at around $180/s, the negative articles are increasingly coming from Seeking Alpha, Fools, Forbes, Bloomberg. Yes, the stock is pricey and volatility is likely. However, most analysts are making projections on sales, production economies on a linear basis. Advances in technology and markets are seldom linear.

Tesla may have been producing at the rate of may be 600 MS/wk. However, the incremental investments that the company is making in design to improve manufacturing plus automation and supply chain optimization will lead to production capacity that may indeed reach 1,000/wk (50k/year) within a few months. All this with a marginal increase in capital investment of may be $200M and additional shifts. In the annual conference and other announcements indicate this possibility and I think Elon is lowballing. Also, MS uses mostly commodity components and these falling big with volume and long term contracts. Gross margins may indeed exceed 25% and be closer to 30%.

Model X manufacturing facilities will need incremental investment. It will share many of the facilities that MS uses and common components. Any estimates? I think I heard Elon mention $200M additional capex. I think it will be closer to $300-400M considering the existing plant, equipment cost around $725M.

I am looking how the cost of electromechanical equipment like washing machines, hard drives, etc fell over the years with the use of automation and of course labor outsourcing. Tesla component of labor is falling with volume and automation. It certainly looks like the Gen3 with the advances in battery tech that Tesla is implementing with Panasonic would enable the company to sell the car in the $35-50 range (for souped up version!).

Along with cheap charging at home and supercharger network... the ICE industry could get seriously hurt. Analysts certainly have doubt have heavily bet against Tesla. So far they have been wrong.

Brian H | September 24, 2013

Elon's rule of thumb estimate is that 10X the volume cuts unit costs in half.

Andrzej1 | September 24, 2013

That's an interesting prediction by Elon. I think he is a bit overoptimistic. His prediction is nearly equivalent to the solar industries' Swanson Law which states that each doubling of cumulative volume of modules shipped results in a 20% reduction in prices. This is equivalent to the solar industry having an experience curve of 80% vs Elon's 81% prediction for the EV business. Experience curves for batteries have been in the 85% to 91% range. The Model T had a super-aggressive experience curve of 77%!

So what does that mean for future EV car prices if Elon is right that the Tesla Model S will have a learning curve more akin to the Model T instead of battery technology?

Last year global automobile production was 84,141,209 units or 1,618,100 units per week. If Tesla was able to totally obliterate all its ICE competition and was able to increase its current 600 vehicles per week to produce 1,618,100 Model S units per week, it would be able to sell a $100k Model S for a paltry $9,273.60 using Elon's 81% experience curve. Now that would be a game changer!

Brian H | September 24, 2013

Probably a log curve, with a lesser impact as volume rises. 10X, 100X, 1000X per halving of costs?

negarholger | September 24, 2013

@Andrzej1 - interesting observation. Besides economy of scale but there is also cost of scale. What TM can to for $500M - Ford or GM need $5B to do exactly the same.

PapaSmurf | September 24, 2013

"What TM can to for $500M - Ford or GM need $5B to do exactly the same."

That would be true up to a point. But as Tesla grows larger, it will also start to become more bureaucratic with multiple layers of mis-management and the other BS that comes with large companies.

Tesla will still be flexible for a few more years. But by the time they are doing 500,000 cars per year, they will be more like any other massive company.

negarholger | September 25, 2013

@JamesM - absolutely yes... it will be interesting how TM deals whith the issue. Most start ups fail at that point.

lolachampcar | September 25, 2013

Most start ups that move to that point have different management. It takes one set of skills to get a ball rolling and a very different set to roll it a 1Kx/10kx the size.

soma | September 25, 2013

I do not believe the scale effect will be so dramatic. Much of the cost is battery, commodity sourced. If that cannot come down dramatically, you don't have much to squeeze.

Andrzej1 | September 25, 2013

@Brian H

Yes, in this context the experience curve is plotted on a log*log graph.

As for its longevity, Arthur D. Little found the experience curve effect lasted typically for about the first 20 years of a technology's life cycle.

Andrzej1 | September 25, 2013


I agree that the Elon is overoptimistic. However, while typical battery technology has had an experience curve of about 90-91%, laptop computer batteries on which the Tesla battery pack is based, have had an experience curve of 85% which is much closer to Elon's number of 81%.

Kaboom | September 25, 2013

If supply and manufacturing costs of the MS come down significantly over the next few years, do you really think that they will drop the price in line with that?

On the one hand, that would make to remain competitive......on the other hand, that would totally go against all the early adopters who forked over big cash for the current MS, who would see their cars depreciate rapidly..... i would think TM would try to protect the MS pricepoint...

Andrzej1 | September 25, 2013


“do you really think that they will drop the price in line with that?”

No they won't. TM will protect the price point by significantly improving the performance so one can expect major improvements in price/performance over the coming years. For instance, silicon anodes are coming to LIBs which will give the Model S a 500 mile range and 20C charging. If you think TM should not adopt these advances and freeze the price/performance to protect early adopters against technological obsolescence, it would be TM's death knell.

Early adopters have always paid a very high price in terms of price/performance. They were typically enthusiasts who relished being ahead of the crowd, and welcomed further improvements in the product that made it only better.

Ultimately, for EV technology to conquer the world requires scale and that will only be achieved with a significantly lower price point.

Benz | September 26, 2013


"Ultimately, for EV technology to conquer the world requires scale and that will only be achieved with a significantly lower price point".

Very true.

Benz | September 27, 2013

Today's IPCC report is a good signal for zero emission vehicles (and a bad signal for ICE vehicles). That helps as well. Governments should adapt their policies and they should favour zero emission vehicles.

Benz | September 27, 2013

It will be interesting to see how many governments actually will seriously adapt their policies according to the IPCC report.

Kaboom | September 27, 2013

I never implied that TS should not make improvements upon the car. Obviously they should build upon it and make it better and better looking to the future. I just meant i wouldnt want to see the MS base price drop 30k because battery or manufacturing prices drop. That would be a kick in the butt for todays MS owners.

Brian H | September 27, 2013

This IPCC report is very heavy on opinion and light on data. The Last Hurrah; it's backed off on even offering a crucial figure this time: the Climate Sensitivity number. The models are all over the place, so they gave up. Useless.

Benz | September 30, 2013

Wow, that's pretty negative Brian. On the news it actually was presented as kind of a wake up call. They are 95% sure that the people on this planet are responsible for climate change. But in the end the main question is indeed how the governments are going to value this IPCC report?

J.T. | September 30, 2013

@JamesM That would be true up to a point. But as Tesla grows larger, it will also start to become more bureaucratic with multiple layers of mis-management and the other BS that comes with large companies.

Considering the numerous posts here of recent deliveries that have been royally inadequate they might have a head start on this.

Bubba2000 | September 30, 2013

In manufacturing economies of scale follow a parabolic curve. The initial gains with volume are significant and then taper. Tesla with 500+ cars/wk is still in the initial phase and gains with volume should be significant. Since it is an electric car with few moving parts it will benefit from automation and scale. Excluding the battery, the car should cost about what a mid-size Toyota costs, especially without ICE.

I do not know much about battery manufacturing, but Panasonic must have the process optimized. Lower cost will have to come from improvements in the chemistry, electrodes... something that Elon indicated in the last annual meeting. Packaging will certainly benefit from automation, scale and volume.

The stock get bashed everyday due to valuation metrics. However, we have to consider what the IPRs, patents, manufacturing process, business model, etc are worth. Will it disrupt the ICE market like Netflix did to DVD rentals and cable TV? Or MP3 did to CD record stores? Does Elon have the technical management skills, resources and courage?

Going long (or short!) Tesla has not been for the weak hearted. Including myself, a few people I know had to be discreet about going long, lest they be considered insane.

Benz | September 30, 2013


"Will it disrupt the ICE market...."

On the long term it will definitely do that. But how many years is that going to take?

Andrzej1 | September 30, 2013


I think Tesla may already be exerting some pressure on the luxury brands. Look at Mercedes Benz and the new S550. MB has cut its price over $2k all the while increasing its value proposition some 3% by adding a number of features to the standard equipment list. In Canada the price drop is even more dramatic coming in at over $13k or less 10%.

Brian H | October 1, 2013

The "95% sure" is pure hot air. It's internal consensus, no math or data to justify it, and plenty of contrary evidence. Senior scientist Judith Curry calls the number "incomprehensible". Others are much less polite.

lolachampcar | October 1, 2013

Please do not feed the BH with climate bait. Doing it is like kicking the thread off to horizontal.