The auto in industry is going through a revolution. If you stand still you get left behind!
The Captain
And yet, in all these posts you have, IMO, failed to really address the issue of (your beloved?) VW whose CEO (at the time) said that they take 3x as much labor time to assemble a car than Tesla. How many years is it going to take for them to catch up?
I guess it is a lawyer trick to just avoid this topic 
Mike
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Recall the days when autos were hand rubbed between coats of paint. Does extra time and manpower mean extra care for quality fit and finish? Are labor issues involved? Or is it delayed adoption of better technology?
I see it is really difficult to argue/debate with cult members in all fields of endeavour! Pete and AI have given it the old college try.
JimA
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Oh, sorry. Didn’t mean to skip that, because that’s really easy to address. Because he didn’t say that VW takes “3x as much labor time to assemble a car than Tesla.”
His actual statement was to try to rile up his own workers by saying that Tesla might get down to 10 hours per electric vehicle in their new plant in Germany. Which at the time, hadn’t even opened yet. So Diess had no actual idea how long it would take Tesla to make their cars at the time he made the statement. Plus, per the article, VW expected that changes to their own factory operations would bring them down to 20 hours before the Tesla plant even opened:
Chief Executive Officer Herbert Diess urged German workers to prepare for a deeper overhaul to remain competitive when ramps up vehicle production at its first European factory outside Berlin next year.
Tesla is swiftly improving built quality and looks set to achieve a production time of just 10 hours per car at its Gruenheide plant, Diess said Thursday in a prepared speech at a staff meeting in Wolfsburg. VW’s main electric-car factory in Zwickau needs more than 30 hours per vehicle, which should be reduced to 20 hours next year.
So - maybe? No shock that Tesla might be quicker than VW in making electric cars in their newest plant compared to a single VW EV plant that hadn’t been overhauled. But Diess would have been just guessing. Given the context and timing of the quote, there’s no way that Diess could have known anything at all about what Tesla’s speed at the new plant would actually be. Because again, the plant wasn’t open - it wouldn’t make its first car until half a year later.
Heck, we don’t even know if that was what he really thought the speed might be (again, about half a year before the plant actually started operations). For all we know, he might have just been engaged in a little old-fashioned hyperbole about “the opposition” to light a fire under his own troops - you know, the way Musk will sometimes make claim about how close they are to actual self-driving or robotaxis or industry-leading solar in order to motivate Tesla workers and shareholders.
Somehow, though, that little nugget of inspirational speculation on Diess’ part has turned into…what’s would be the term for the opposite (but equally unjustified) of “FUD”? For misinformation designed to encourage people about a company or product, rather than discourage them? That. He made a single hyperbolic statement about what he thought Tesla might achieve for an as-yet-unopened factory compared to the speed of a single VW EV plant, in the context of trying to whip up energy among his own workers. Nowhere close to an actual assessment that it takes VW as a company 3x longer to assemble a car than Tesla does as a company. But that’s what it’s turned into through the internet game of telephone.
BTW - VW apparently did a really good job with the overhaul at Zwickau, getting a run rate in excess of their projected 100% EV capacity within the year mentioned in the article.
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Because labor time on its own is irrelevant. It’s just one part of the overall costs.
It’s technically possible to assemble a car entirely without labor. Robot arms with the right tools on them could accomplish the whole job.
But that line would likely be too expensive. The cost to design and program that line isn’t worth the labor savings.
What is needed is a balance between robots and labor. Use whichever is less expensive. Let people do the parts that are easy for people and the robots do the parts that are easy for robots.
—Peter
I tried to stay away. Really did. And would have if I thought albaby’s arguments were plausible rather than just clever. Just can’t do it.
This mention of timing supports the critical impact of the gigafactories. First off I agree, and it is obvious, that mean vehicle production costs can be reduced by making lots of lower priced models. No argument. BUT, it is equally obvious that this is not sustainable if those models are not profitable. That is the key.
Prior to Gigafactory production, the Model 3 was not consistently profitable, certainly not enough to pull Tesla into the black. Tesla could only generate a few sporadic profitable quarters from 2015-2018. Since the production methods in 2017 were not sufficient for reliable Model 3 profits, any reductions in the mean vehicle production cost resulting from the introduction of the cheaper Model 3 were not sustainable.
In short, if in 2015 Tesla thought they could make a profitable Model 3 using existing production methods, they were wrong.
That changed when Model 3 production shifted to using Gigafactory technology. Then the Model 3 became reliably profitable with high margins. We can empirically see that the lower average vehicle production cost observed today was made possible by the gigafactories coming online.
But it is also the case that half of VW production also comes from low labor cost countries like China, Mexico, and India. Same is probably true for most major car manufacturers these days. China is not much of an advantage for Tesla relative to the rest of the industry, which means that China does not explain why Tesla’s margins are so much higher than its competitors.
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Perhaps. I was merely taking issue with your comment about how “an assumption of the production efficiencies to be generated by the Giga factories allowed the Model 3” to have specs that would be competitive with ICE cars. Tesla might indeed have ended up needing lower production costs than available in Fremont. But they certainly weren’t taking that into account when making the specs for the Model 3. They weren’t using any assumptions about automotive Gigafactories in designing it. I think this is just retconning automotive assembly Gigafactories into being a material factor in Tesla’s origin story, when they really weren’t.
As for timing…well, we have a difficult problem in assigning causation, don’t we? Tesla only has one Gigafactory that produces large numbers of autos - and it’s in China. So looking at it from the outside, even if we conclude that a big part of their turn to profitability resulted from getting large proportion of their production out of Shanghai instead of Fremont…is that because their Gigafactory is more innovative? Or because they were producing in China?
I don’t know. Thinking about investor day, it’s also hard for me to reconcile the idea that Tesla’s got “best in world” auto manufacturing chops with their failure to bring the Cybertruck to actual production in any timely manner. I wonder if their success with the Model 3 and Model Y was due to not spending too much time and engineering resources trying to massage every 0.01% of efficiency out of the process.
If you’ve got a link to that, I’d be curious to see it. Certainly all the majors have factories abroad. But do any of them come close to half? You can look at VW’s plants at the link below. Most of their plants are in Europe, as well as their largest. Their two large German plants are each more than twice the size of their largest Chinese plant - they’ve got easily a half dozen European plants bigger than their biggest Mexican plant, and their Indian plant is actually quite small. I don’t think any of the US Big 3 produce anywhere close to half their product abroad in low-cost markets, either.
Plus, again, my point is still that Tesla relies on their Chinese plant to get a non-trivial chunk of their gross margins. You still need that lower-cost facility as part of the composition of their overall profitability for the Model 3. Maybe not software (I suspect the take rate for that entry level vehicle is low), but certainly China.
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This is what Elon wrote in 2016:
" What really matters to accelerate a sustainable future is being able to scale up production volume as quickly as possible. That is why Tesla engineering has transitioned to focus heavily on designing the machine that makes the machine – turning the factory itself into a product. A first principles physics analysis of automotive production suggests that somewhere between a 5 to 10 fold improvement is achievable by version 3 on a roughly 2 year iteration cycle. The first Model 3 factory machine should be thought of as version 0.5, with version 1.0 probably in 2018." Master Plan, Part Deux | Tesla
Musk designed the Model 3 with the assumption that there would be significant improvements in production efficiency by 2018 and accelerating from there. The Gigafactory concept for auto manufacturing was always an essential part of the plan for the long-term success of the Model 3.
We may never know but can make an educated guess based on how other car companies were impacted by moving their manufacturing to places with low labor costs. Certainly a benefit but I don’t see too many sporting 25% gross margins with their China/Mexico made vehicles. For example, the Ford Mach-E is assembled only in Mexico and China yet still has profit margins so low they disappeared with rising commodity prices. In contrast, the price rise didn’t seem to make much of a dent in Model 3 profitability.
Over the past few years the VW group has sold between 8M-11M vehicles/year. The most recent year (2022) VW group deliveries was around 8.3M. Here is the production from recent years for China, Mexico, and India.
China: 4+M Volkswagen Group China | Volkswagen Newsroom
Mexico: 0.4 M Volkswagen de México - Wikipedia
India: Only have data for 1.5M cumulative. VW has been in India for about 18 years so figure about a 100,000 annual production over the most recent few years. https://www.business-standard.com/article/companies/volkswagen-group-crosses-cumulative-production-of-15-lakh-units-in-india-122033100965_1.html
Roughly 4.5M cars from low labor cost countries. Pretty close to 50% on average.
Sure, I can accept “non-trivial chunk”, but I suspect it is less than you think.
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I hope it works better than when VW management riled up the diesel software team!
And they do need to do something because just a few months after he made that statement it was reported that they were now going to make EVs as profitable as fossil cars sooner! Sooner than 2 or 3 years.
BERLIN, May 12 (Reuters) - Volkswagen expects its electric vehicle business to be as profitable as its fossil fuel-burning cars sooner than planned, its chief executive Herbert Diess said on Thursday.
Volkswagen previously expected to match its profit margins from combustion engine vehicles with electric vehicle sales in two to three years, but the carmaker was in a robust financial position to do so sooner, Diess said, despite a challenging economic environment.
Volkswagen's EV profit margins to match combustion engines sooner than planned - CEO | Reuters
Let’s look at what this goal means.
(From the link)
Tesla margins = 17%
VW margins = 8.6%
So they are going to reach half the margins of Tesla earlier than 2 to 3 years (from last May)
Mike
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It could be that in 2-3 years, VW’s margins will rise to that number, and Tesla’s margins will drop to that number. As EVs become more standard with less differentiation, normally you would expect this.
I’m afraid we’ll never know. Again, since Tesla’s only Gigafactory producing cars at volume is the one they built in China, there’s no way to know whether it’s impact on their turn to profitability around 2020 was more due to the innovativeness of the factory or the place that it was built.
Still, an interesting discussion - I appreciate it!
That’s certainly what that quote suggests they’re projecting.
Well, half the margins of where Tesla is today. To MarkR’s point, if VW does actually successfully execute their business plan and becomes a larger producer of EV’s than Tesla and BYD by 2025, it’s unlikely that Tesla’s margins would remain where they are.
Estimates of Tesla margins at its various plants are little more than guesses. Low labor costs makes it likely China is the low cost site. It is probably best suited to market vehicles in China. Shipping costs are probably a factor in where vehicles are shipped. And they can adjust models to markets as needed. Models sold in USA probably have more cup holders, etc.
The Berlin factory probably allows most vehicles for Europe to be made there. And the new plant in Mexico adds capacity and lower labor costs.
The signs are that Tesla is well managed and probably has many details that are not public.
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Of course. I’ve noted a lot of the things that I think contributed heavily to Tesla’s great margins, and there are good management decisions behind them.
They may indeed be very good at manufacturing. But it’s hard to reconcile them being best in world" manufacturing boffins with their most prominent failures/disappointments being issues with getting cars made: the Semi, the Cybertruck, and the updated Roadster.
Maybe excuse the Semi: those big commercial vehicles are more of a fundamentally different vehicle class. But the pickup and roadster are woefully behind schedule. In 2019, the pickup started taking reservations and delivery was anticipated by late 2021. That’s been pushed back to late 2023. And the roadster, originally unveiled in 2017 with expected release in 2020 isn’t even on their radar any more (wasn’t even mentioned at Investor Day, nor did it appear in their future vehicle slides). Despite having more than a quarter billion dollars in reservations deposited.
That’s…not great? They had tremendous success with their two models based on the Model 3 platform (the 3 and the Y). But they’re having trouble being nimble manufacturing any subsequent platforms. The pickup has been extremely delayed, and they didn’t talk about it much at investor day - despite it being their next launch and their next blockbuster product, given the size of that market in the U.S. And they might have abandoned the Roadster altogether.
So again - Tesla might indeed be pretty good at manufacturing, but you wouldn’t expect those types of misses from a company that was really leading the world in general manufacturing prowess.
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Sure, mathematically that could happen.
Do you have a link the the public presentation(s) made by the VW engineers that itemizes all the improvements they are making to get to that goal?
Mike
Most companies don’t provide that kind of detail, they consider it a trade secret. But what does that have to do with my comment… repeated below -
“As EVs become more standard with less differentiation, normally you would expect this [convergence of margins].”
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Sure. Normally you would expect convergence of margins. But Tesla appears to be attaining large scale without some baggage the others can’t seem to get rid of. For example, dealers and advertising to name a couple. So this won’t suddenly change in just a couple of years, IMO. And by their car designs, they are more vertically integrated. For example, designing their own chips, including the software that goes into them.
Mike
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Yes, I agree, if the legacy automakers can’t get rid of the things that reduce their margin, then their margin won’t be as high as other automakers (like Tesla) that don’t suffer from those things.
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I would say that this statement is true in theory but not in practice. Further, that it is true about margins but wrong about the time frame.
It’s not as if Tesla is standing still waiting for others to catch up. From Investor Day it should be clear that innovation is built into the fabric of the company. They are a continuous improvement machine. I’m reminded about what my business partner said about our business, “The only constant around here is change.”
About the timeline, the innovations announced at Investor Day will be achieved in a factory that has not even broken ground. I’m afraid
More important from an investor’s point of view is whether there are other growth technologies in the pipeline to follow the EV “S” curve. By the time the competition catches up with EV margins, what other drivers does Tesla have to make it an interesting investment?
The Captain