Tesla's Growing Inventory-Problem or No?

Investment Analysis Clubs Macro Economic Trends and Risks
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It is the quality of the part. Take Telsa and their brakes. All models have four brakes (one on each wheel) so the part count (for the final part at least) is the same but Model S and X use much larger and thicker rotors than they do on the 3 due to the extra weight. The S/X also use palladium (very expensive) to make them vs some lower cost metal.

There are probably dozens of other items for which the part itself, either due to the quality or the need to use more material to make it, comes with a higher cost.

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I read years ago that the best aerodynamic shape is the puffer fish. Wide blunt nose tapering to a slim tail.
Later, the tear drop bicycle racing helmets became popular.

So, I asked the Bing GPT “what is the best aerodynamic shape for a car”:

Response:
However, the best aerodynamic shape for a car is a teardrop shape1. This shape is designed to reduce drag and improve fuel efficiency. It is wider at the front and tapers towards the rear. The teardrop shape is used in many vehicles such as airplanes and race cars1.

Received message. The most aerodynamic cars you can buy are the Mercedes-Benz A-Class, Mercedes-Benz CLA, Mercedes-Benz S-Class Saloon, Toyota Prius, Hyundai Ioniq, BMW 7 series L, Tesla Model X, Kia Optima Hybrid, Audi A6 and BMW i8 according to . However, the best aerodynamic shape for a car is a teardrop shape. This shape is designed to reduce drag and improve fuel efficiency. It is wider at the front and tapers towards the rear. The teardrop shape is used in many vehicles such as airplanes and race cars.
Learn more:

  1. caranddriver.com

:racing_car:
ralph

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Ah, you are starting to abandon the “it’s all the material” stance. In the case of what Farley wants to be Ford’s bottom end passenger vehicle, a three row Explorer, I will concede that, yes the third row seat and two additional windows increase the part count, slightly.

As for materials, I suggest you read this article, or take my word for it the actual materials, the metals, plastics, and fabrics, account for 10-11% of MSRP for the average vehicle.

OK The Explorer XLT, rear drive only, stickers for $38,570. The higher trims stick the customer for an extra $10-$15K, for a few extra gadgets.

The Explorer weighs 4345lbs. Material cost, at 10% of sticker would be $3,857.

A Fusion weighs 3472 lbs, or 80% of the weight of the Explorer, so the material cost for a Fusion would be 80% of the material cost of an Explorer, or $3,085.60.

The difference in material cost between a Fusion and an Explorer accounts for about $771 of the $15,000 difference in MSRP.

Part counts are roughly the same, except for the third row seat, and two extra windows.

The rest is extra GP

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My mistake. I was speaking generically about the van shape and should have been more specific. Minivans with the same external footprint as SUVs have substantially more interior space. That’s why I believe that most future EVs will look like minivans.

Let’s just say that I believe there will be a trend to a boxier look even as manufacturers still try to accommodate aerodynamics. I also believe that new battery technology will likely double the current range to 600 miles/charge in a few years. If that occurs it will be easier for customers to choose utility over efficiency. An even boxier look.

When gas was cheap, people didn’t care much about ICE efficiency. I suspect the same will be true for EVs if renewables drop the price of electricity and batteries continue to improve. Then the roads will be full of boxes on wheels.

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That type of analysis isn’t going to give you an accurate assessment of the increased production cost. Having a bigger vehicle doesn’t just increase costs because of higher amounts of raw materials. If your floor plate is that much bigger, it doesn’t just mean you have that much more carpeting to cover it (for example). It means you have more points of connection, requiring more time and more labor to put it in. Bigger frames and panels need more connections also - more welds or bolts or screws, which again adds that much more to your labor and time costs. If your parts are that much bigger, you need that much bigger and stronger robots and that much more energy to move them around. A heavier vehicle requires stronger and heavier parts in the suspension and braking systems - which are more expensive not just because they have slightly more steel in them.

And the different form factor creates different design and parts costs. We’ve talked about the extra row of seats and the extra windows. But you also have an extra pillar, and you have to route more controls and power systems to the further back. The bigger cabin requires rear climate control - so you’re running vents and ducts to the back, putting in a control panel in the rear console, and need larger and more powerful (ie. more expensive) fans and cooling systems. The rear lift gate is significantly more complicated (ie. more expensive) than an ordinary sedan trunk, with electronics and a different hinge/suspension and a windshield wiper. Etc.

Look - no one’s denying that car companies make more gross profit on their bigger SUV’s than smaller sedans. That’s a bit part of why they’re shifting to them. There’s just more profit opportunities on upselling lots of features. But it’s simply not the case that these things cost virtually the same to manufacture as the much smaller sedans.

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I’m not sure why. I understand your point about the absence of an engine allowing the space currently in the front “box” of a car to eventually be absorbed into the passenger cabin. But that’s not where the difference between SUV’s and minivans is, for the most part. It’s in the back. If you compare Honda’s Odyssey (minivan) and Pilot (SUV), the front end of the car - everything from the A pillar forward - is basically the same, design-wise. The Odyssey is much longer and a little taller (which is where the extra space comes from).

https://www.hondaofjeffersoncity.com/research/pilot-vs-odyssey

Returning to the main point, while it’s certainly possible that the front “box” (in green) in the taxonomy of car designs might disappear, that doesn’t really support the proposition that the current degree of model variation is going to disappear. Again, all those models fit mostly within a few general design shapes anyway - the variations are mostly in size (which affects whether there’s a fourth pillar) and whether there’s a separate “box” for a trunk or not. Those variations exist to give consumers options in terms of size and budget. That’s not going to disappear with either EV’s or autonomy.

330px-Three_body_styles_with_pillars_and_boxes (1)

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I think for moving people around urban areas, they will be boxy with maximum interior space. You can already see this with all those experimental people-movers in various cities. I’ve ridden them in a few places on the west coast and a few times in Tampa, and there are some in Miami (that family members have ridden). But I still think that for higher speed travel between cities there will still sometimes need to be sleeker, lower, more aerodynamic solutions. It’ll be very similar to trucks today - trucks for transport within cities are usually blocky without much effort towards improving aerodynamic efficiency, but trucks that do long-haul transport have all sorts of things added to make them more aerodynamically efficient.

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So, your argument has shifted entirely from greater amount of material, to greater fabrication and assembly cost, which is where I have been saying the real cost is all along. Congratulations!

However, does the added amount of fab cost justify the $15,000, lets call it $13,500, after allowing for the additional material, third seat and a couple windows, spread between a Fusion and an Explorer?

The sticker price for a new Nissan Versa, assembled in Mexico, as the Fusion was, is $15,850. Does it sound reasonable that the bits of extra wire, carpet attachments and spot welds you list, is that close to the retail price of an entire new car?

If automakers were not gouging the daylights out of their large SUV customers, then why are they so determined to stop building any alternative, to force people to buy large SUVs?

And, if Farley was interested in a reality check, after culling all the passenger cars, because they had the lowest margin, then culling all the compact and mid-size SUVs, because their margins had eroded due to greater competition in that segment, so no-one makes anything but huge SUVs, the huge SUV market will then be “over-served”, and margins will erode. Where will Ford hide then? Of course, Farley will not care, because that will be the next CEO’s problem. Farley will be sitting in retirement, enjoying all the loot he pocketed by hollowing out Ford, in true Welchian fashion.

Steve

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Except it wasn’t “entirely” from greater amount of material. I noted some of these things in my first post on the subject. Bigger cars are more expensive to produce - material costs are part of it, the costs of bigger and higher-performance parts is part of it, and the assembly costs of putting those parts together is part of it as well.

Not all of it, no. Again, no one disagrees that the profit margin on an SUV is higher than that of a small or midsize passenger sedan. It has always been thus - the profit margins on larger vehicles, even within the sedan class, have tended to be higher than those of compact cars.

I mean, look - you can make this same argument comparing a Camry and a Corolla. The former is $5K more than the latter. Why? It’s not because of some grand conspiracy on behalf of Toyota. It’s because a midsize sedan is both: i) more expensive to build; and ii) appeals to a slightly wealthier customer base that can afford slightly more high-margin goodies.

They’re not. Again, looking to Toyota, they sells tons of affordable sedans in the Corolla and Camry, and they’ve given absolutely no indication that they want to get out of that business, yet they still charge $60K for the Sequoia.

That doesn’t mean that they’re not able to get more margin out of a large SUV. They do. You can get more margin selling an expensive car to rich people than a budget car to middle-income people. You can load the car up with more high-margin extras - whether you call them frivolities or desired amenities - that wealthier people are willing to pay for. That’s hardly limited to the automotive sector. Many products and services yield modest margins on the core transaction, but have much larger margins on the upcharges and optional services. The gas station wants you to buy from the convenience store, the restaurant wants you to order dessert, the homebuilder wants you to sign up for kitchen upgrades.

You seem to be very critical of Ford specifically, but this is nearly universal among car companies. SUV’s are much more expensive than the corresponding sedan built on the same platform, across manufacturers and countries. Full-size sedans are much more expensive than compact sedans. Some of it is due to (again) a greater ability to hang upcharges and upsells into a more expensive product, but some of it is due to the expense of building a bigger car.

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This thread is a Wonderful Illustration of USA’s automobile obsession. I remember my shock as an eight year old that most of my classmates had knowledge and opinions on every model variant of every model of every automobile manufacturer in the USA.

Frankly, my dears, I Don’t Give a Damn…

david fb

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IMG_0431

End this thread or the dog gets it.

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I am talking about Ford specifically, because of the roadmap Farley has laid out over the last couple months. I could also rip VW, whose CFO said, a year ago, they want to take the brand “up-market”, jacking up prices, and margins, everywhere, and he doesn’t care if they lose volume. It’s all about ramping up ATP and GP per car.

Yes, you are correct, automakers in general tend to gouge their customers on higher priced cars. Not only is a low trim Explorer $15,000 more than a low trim Fusion, but higher trim Explorers add another $10-$15K on to the already high price of the XLT trim. The different strategy now, is eliminating consumer choice, with the intent of forcing everyone into the highest priced, highest margin, vehicles, whether that vehicle meets their need or not.

The most absurd thing Farley said was there would not be any headcount reductions and Ford sales volume would increase. He would need to be delusional to think that. How can a person who can barely manage the payments on a $25,000 car, possibly pay for the $50,000 monsters that will be Ford’s only product in the future? At least the VW CFO realized they will lose a lot of customers.

There is a wider issue here: the continued Welchian dogma of “creating shareholder value”. As noted far above, some bright lad will offer a decent product, in a segment the big three have abandoned, in their search for ever higher ATP and GP, and eat their lunch. Before that happens, consumer choice will be eliminated, and people will be taken for a lot more money than they need to spend to obtain a serviceable product.

The irony is, I did not read any of the Tesla threads, until I made a snarky comment on this one about nearing the 300 comment point.

How about shooting a nose?

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It could be history repeating itself. Back in the 70s, US (and European to some extent) automakers couldn’t find a way to compete on efficiency. They were so used to making “land boats” and other assorted inefficient vehicles that they just didn’t see any other way to operate. So, as we all, know, the Japanese automakers found ways to make money by selling more efficient vehicles. And the Japanese automakers ended up taking substantial market share from the US automakers. And they took a lot of the profit share as well. Maybe something similar will happen, maybe all those established automakers (Ford, VW, etc) that can’t find ways to make [enough] money on medium sized vehicles, will suddenly find themselves facing a strong competitor that can find a way to make money on medium sized vehicles. And they will lose market share, and worse they will lose profit share yet again.

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Not every company has to sell every type of car in every country. Ford exiting the low-end small sedan market doesn’t force customers into cars that don’t meet their needs. It just means that Ford won’t be making those types of cars. But other companies will be.

TBH, it might not be a bad decision. Companies have to make strategic decisions about what segments of the market they’re going to serve. From a macroeconomic perspective, it looks like the automotive world is about to experience an onslaught of Chinese car exports. Chinese industrial policy is likely going to be aimed at maximizing the role of their own, domestic firms in that export boom - which will make it very hard for firms like Ford to compete at the low end in markets that are open to those cars. American industrial policy says that the future of automobiles has to be electric and largely domestically made - which makes it very likely that the near-term future of cars is expensive, and possibly only available as near-luxury goods. Again, that makes phasing out your low-end sedans a pretty smart move - especially if you don’t have a huge market that demands smaller cars to push a lot of your product into, like the Japanese manufacturers have.

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But perhaps you should, and not for nostalgia’s sake. There is probably no other industry currently being disrupted as much as the automotive and there are few industries as foundational to western economies.

The AltmanZ score is a long-time metric use to identify manufacturing companies headed to bankruptcy. Scores approaching zero are bad with 1.8 the danger threshold. The correlation between AltmanZ and actual bankruptcy is about 80-90%. Altman Z-Score: What It Is, Formula, How to Interpret Results

Here are the Altman Z scores in mid-2021 for auto companies:

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It isn’t pretty for OEMs at the moment. A further concern is that the manufacturing plants for ICEs are considered assets on the OEMs’ spreadsheets. That’s accurate as long as they are making ICEs. But once the transition to EVs occur, unless those assembly lines can be easily converted to EV production they will suddenly become stranded.

This is a critical and historic moment in time for the global auto industry. Virtually all the western OEMs are carrying huge amounts of debt while indicating that they will also be spending billions to transition to electric. That seems a bad combination. The question is whether there exists any narrative where they can still be major players (or even exist) in 10 years.

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Is that score applicable to auto companies?

I looked up historical figures for most of the majors that were on that chart. As far as I can tell, only one publicly traded auto company has ever had an AltmanZ score over 1.8. Toyota. But even then, the Toyota score never got above 2.5 - and it’s been below 1.8 for the last fifteen years. The data for Ford goes back to 1990 - and for the last three and a half decades, Ford has always had a score that is below 1.8 - typically around 1.2.

So clearly their low scores on those metrics have nothing to do with EV’s. It’s probably just not applicable to auto manufacturers. After all, Toyota hasn’t been on the bring of bankruptcy since 2008, and Ford hasn’t been on the edge of bankruptcy continuously since 1990.

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Since this thread got away from all Tesla, all the time, it has gotten a lot more interesting. :slight_smile:

On picking segments where you want to compete, and segments you exit, you win another Radio Shack story, to illustrate the danger of narrowing your market excessively.

As we old phartz know, RS used to carry a wide variety of product, in several different market segments of consumer electronics. As some of us also know, RS’ business model was very inefficient, requiring about a 40% GP to break even.

As big box stores, that could operate profitably at much lower margins, came to dominate the market, RS became increasingly uncompetitive. Did RS change is business model to become more efficient? Nope. It started culling the lower margin product categories.

The 55-60% margins the company had enjoyed on the TRS-80 evaporated as MS-DOS machines became a commodity. RS sold it’s computer factories in Fort Worth to AST Research, carried AST computers for a couple years, then exited that market.

By the time RS went toes up, beside computers, they had exited stereo equipment, video equipment, PA equipment, burglar alarms, and more that slips my mind at the moment, while landline phones and CB radios died of their own accord.

I went through the RS near my home as it was winding down. They still had small parts, though in less variety than in the 80s. They had some radio controlled toy cars and drones. The bulk of their product was cell phones and cell phone accessories. Management had bet the company they could flourish reselling other company’s phone service, and the hardware that went with it. Only one problem. RS didn’t add anything that benefited the cell companies they contracted with. I noticed how RS rotated through different cell companies, from Sprint, to Verizon, to, iirc, T-Mobile. Meanwhile, the big dogs, including T and VZ, apparently started asking themselves why they were subsidizing RS, instead of opening their own stores, and keeping all the loot for themselves.

Unlike other cell phone resellers, like Best Buy and Target, RS was not diversified enough, nor cost efficient enough, to sustain itself without fat kickbacks from the cell carriers.

Farley is setting Ford up the same way RS set itself up: narrowing it’s market focus, and, thus setting the company up to crash and burn when there is a market shift.

Here is a brief article about RS’ collapse. Note item #3, “product concentration”.

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No dog in this fight (not even one with a gun at its head).

In more recent years, however, a Z-Score closer to 0 indicates a company may be in financial trouble. In a lecture given in 2019 titled “50 Years of the Altman Score,” Professor Altman himself noted that recent data has shown that 0—not 1.8—is the figure at which investors should worry about a company’s financial strength.4 The two-hour lecture is available to view for free on YouTube.

From:

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As with all metrics it depends on who is doing the calculating. In any case, here is another site that appears to use 1.5 as the threshold and shows Ford only entered the “danger zone” in about 2016.

If you type in Toyota it has always been in the grey zone. GM looks like Ford.

The important thing I think is the trend, which for Ford and GM is not good. Toyota is interesting. I suspect their better results is because of a lack of investment in EVs. That may cost them long term.

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I guess? The website you linked shows Tesla as being in the Red Zone across all time periods also. Which is the opposite of the point you were making?

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