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Volt and Leaf will succeed, but Tesla S and Fisker Karma will not

It all comes down to simple math and tires give us a clue when it comes to comparing Chevy Volt and Nissan Leaf to Tesla Model S and Fisker Karma.
2013 Nissan Leaf

Delorean and Tucker. What two things do these automakers have in common? First, they were beloved by many of their customers and each inspired groundbreaking models that shook up the automotive world in terms of technology and styling. Second, they were economically unviable and they are history. Tesla and Fisker, will go this way, but that doesn’t necessarily mean it is all doom and gloom.

Given the money spent by Fisker and Tesla (and the US taxpayer) to create supercars for the 1 percenters, an investor might expect a return at some point. But why should they? In the category they compete in there are many choices, all good ones by the way, and very few buyers. No business school graduate on the planet Earth would ever suggest putting a new product into a crowded, mature, marketplace is likely to bring success.

The fact that the Fisker and the Tesla are electric just makes the path to success harder for them after the first early adopters have their cars. Clooney and Bieber have one. Who’s next in the showroom? With a completely straight face auto writers and media outlets are claiming the Tesla Model S is priced for the mainstream. The car STARTS near $60K.

With the package buyers actually want the car is in the Porsche Panamera price range. Which, by the way, makes a hybrid version for the buyer who can’t sleep at night due to environmental guilt. A green car enthusiast with a horsepower fetish can have a Chevy Camaro SS and a Chevy Volt for the same price the Tesla S will actually retail for.

When Fiskers burst into flames in driveways, garages, and in lots, and when Consumer Reports tests the car and it breaks, the media does not actually slant away from the company maliciously. “Consumer Reports Tests Supercar and All Goes Well” is not news. “Consumer Reports Tests New Supercar That Won’t Go” is news. Defending a burning car with “hey other cars burst into flames just like this one” does not work for small companies.

It can work for big companies. Follow the logic. GM competes with Fisker. Fisker burns. Head of the NHTSA, appointed by the leader of the main shareholder of GM says – “look into that.” A Volt burns and the same conversation is something like “Hey, take care of that.” Neither is a conspiracy. Both are perfectly normal, honest reactions. One gets investigated. One gets dealt with.

Let’s set aside the electric versus gas debate for a moment and talk rubber. Rubber is one of the few things on a car that the automakers themselves almost never make, and the cost of tires is significant. Look at the Fisker Karma and you will see 22 inch rims with low profile sport tires. No mainstream sports-luxury car has ever been fitted with 22 inch wheels.

Fisker doesn’t expect to ever make any money off the Karma, but let’s pretend they did. Why add thousands of dollars in cost to the car for no good reason? Style? Perhaps, but many cars rely on style for sales. Look at Toyota’s Scion FR-S. Is it stylish? Hard to argue that it isn’t. Successful? Hard to argue it isn’t. In October Toyota sold 1,107 Scion FR-S vehicles.

That is about the same number of Fisker Karmas that have been sold – ever. How much did Toyota pay for the tires on those Scions? I can tell you there is a chance that Toyota paid nothing for those tires. Zip. “How?”, you might ask. Here is how. Toyota uses that exact same rubber on another car. That model sells 250,000 units per year, thus an even 1 million unit tire order to the manufacturer lucky enough to get that purchase order. That could be $50 million in sales for one model number.

Do you have any idea what a company will do to land an order that big? The answer is simple – everything legal and then if nobody’s looking... Do you think a manufacturer might, say throw in 4,000 free tires? That would equate to a 1.6% discount. That is the least they can expect. The discount is likely something near 20%, (plus many, many cocktails, trips to fun places in the company of fun people, and more goodies than most readers could dream about.

I was in high tech business to business sales for 20 years, and I speak from experience). Toyota is paying nothing for tires and Fisker is picking out huge gumballs that have never, ever been used on any other automobile and paying the sticker price. Who has the edge here in profitability and who has the edge when they go looking for investor capital? This same analogy applies when Fiat builds a Viper.

Vipers don’t have to pay for radio knobs and door handles. They just take the ones dropped on the floor when the Chrysler 300s are being built. Most of the parts of mainstream automobiles are ridiculously inexpensive - if you buy literally 1 million of them. Buy 4,000 and you place your order on Amazon and pay your own freight. The examples used here are two fun cars, but the same logic applies to the electric Volt and the Leaf which are made by huge companies with revenues ginormous enough to swallow electric car losses, but which can minimize those losses through commonality of parts and other methods.

So why did a successful genius like Elon, or a cool car-guy like Henrik decide to try the impossible? They didn’t. They wanted a project. They wanted to spend some of their money on something they were passionate about. If it succeeded economically, cool. But that wasn’t their main objective. They wanted to get the car built and prove a point. Successful guys like this are so good at so many parts of business, relationships, and technology, they can almost always achieve that goal – prove the point. Then the economics gets ugly when they try to sell more than the collector’s item volumes that the cars really justify.

There is also a second way to succeed financially, or at least recoup one’s losses. That is to mature your product to the 80% state and then sell it to a much larger competitor. Why do competitors buy companies? Many reasons including; Eliminating a product from a niche they choose to dominate, to secure part of the product’s technology portfolio, to satisfy regulators (“we need 5000 more electric cars fast, or we can no longer sell our trucks in California”), or in some cases they might just love the product and want to see it work. That hasn’t actually happened yet in the car industry, but there was a sniff of that in the Volt’s germination.

Real news would be “Elon Musk talking with GM’s Akerson at Starbucks.” Or “ Ford’s Alan Mulally seen dining with Henrik Fisker at Nobu. “ That is the story that will be written at some point and God I hope I break it. Dan Neil already has a Pulitzer. I just want one scoop!

Please see the update to this story at this link.


This article was inspired by our readers’ feedback. Thanks to Howard Marks and an anonymous reader who replied to David Herron’s recent Tesla stories writing “Now if GM and Ford would start doing the same would be a smart thing for them, and at the same time with the production capacity that GM or Ford have they would be able to bring the cost down to probably half and that would give enormous sales…”

John Goreham tweets at @JohnGoreham. Please, follow him and send tips.

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Comments

Anonymous (not verified)    November 7, 2012 - 10:46PM

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I have two parts to this reply:
part 1:
How else do you think that you will get money from them. They wont just give you the money. They buy stuff that us middle class people make.
part 2:
I don't know much about Fisker, but I do know that Tesla's plan is to first create a "supercar" to give its brand a name and get people to know about it (aka Tesla Roadster). Then it will create a premium sedan that will be more affordable and be sold more to the mass than the previous version (the Model S which apparently has 13000+ preorders). Finally they will create a car that will be around the $30,000 range (aka future car). Elon Musk talked about this plan himself and believes in it. The reason for Tesla to do this is mostly a startup mass production scheme; you cant just run into the market and hope to make money by building a super cheap car as your first car. You start with a high cost, low production car, then you move to a medium cost (or medium-high), medium production car. Finally you go to the low cost, high production car.

P.S: Though this may not matter to you, the Tesla Model S car has gotten outstanding reviews. You may find people who don't like the company, but you can't find someone who doesn't like the car. It was rated the Car of the year by Automobile Magazine and it's competition is BMW and audi cars. Yea... It is competing with gasoline cars, not just electric cars. They are even building stations that lets you charge your car at a extremely fast rate (150 miles in 30 min.) for free to anyone with a Model S. I respect what you think about Tesla (I repeat, I don't follow fisker) but I believe that it is a good company that is under a good C.E.O and founder Elon Musk. He is also the founder of SpaceX and Chairman of Solar City.

dsm363 (not verified)    November 7, 2012 - 10:53PM

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It's more of a 1-5%er or 10%er car even depending on how bad someone wanted the car and which version they got (top 5% earn over $150,000/yr). Not everyone who buys a $70k car makes over $350,000 (1%er) so a Model S is no different that a BMW 5 series in that respect. A dollar spent on a Model S is the same as on a BMW.

Dave (not verified)    March 2, 2013 - 11:47AM

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I am really tired of this 1 % talk. When I look at new cars most of the ones I would want are near that price. I nice pick up is in the high forties and a Suburban is high sixties. I don't know how people can afford them but there is a lot more than 1 % on the road. Not arguing the points you make just don't think this it is overpriced or only for 1 % of the population. Not practical but not out of reach.

Dan5 (not verified)    November 10, 2012 - 8:49AM

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I agree with your comment there, they were loans, more or less the same loans that Nissan and Ford received to build cars, The only difference is that Tesla and Fisker received much less. Tesla recieved 460 some million and Fisker 560 some million originally (Fisker decreased).

I do have an issue with calling them supercars also. Car and Driver magazine specifies a super car as anything that has a 0-60 under 5 seconds. Fisker is not a supercar and the only Tesla that is a supercar is the Performance version (not the regular car 85, 60 or 40). That's like saying Acura makes supercars because ONLY the NSX fits that criteria. Not exactly a kosher practice.

The mature environment is also questionable. The last car company worldwide that was sucessful and survived actually did just that in the 1960's and is one the the premier names in that specific sector.

I'm not particularly keen on the statement about a a green car enthusiast who wants horsepower buying a Corvette and a Volt instead, That's a ridiculous statement unless maybe you make your own gasoline and have a teleporter to teleport your corvetter when you need the horsepower.

For any cars, there are random fires all the time, some accidents, some bad engineering. I will remind you that no Tesla Roadster has caught fire and that more regular cars as a percentage caught fire than Teslas and Volts. With Fisker, the fire in NJ, the cars were immersed in salt water and the "garage" incident looks like it was related to the internal combustion engine, not the batteries. Yes, the batterie did fail in the consumer report car, but it was the fault of the battery manufacturer, not Fisker (who btw makes the batteries for Chevy also).

To cite tires and compare a mass produced car to a Fisker is not really valid. The Fisker karma was never intended to be a mainstream sports car, more like a "beta" model or a vehicle to test the market. There are tires out there for 22 inch rims that are not "one" offs, while expensive they are out there. Tesla on the other hand is using more or less stock rims. Just out of curiosity, I looked up a 2002 Ford car for tire prices and the Tesla ones. The Tesla 21's and 19's are LESS expensive to replace than the tires on that specific car and that had 17 inch rims.

Arguing bulk purchases and that they can just "pick up left over pieces" and getting bulk discounts doesn't fly, All cars have a fixed cost, while you may be able to negotiate slightly better in one case or the other, it's not going to make a significant difference with regards to your competitors. If Tesla sells 20,000 cars per year and Porsche sells 30,0000 (made up numbers) the advantage of bulk purchasing disappears. If you are trying to say that the Volt is a direct competitor to the Tesla and Fisker and that GM can take advantage of the bulk purchasing of the Malibu than that's a different story, but at that point you may as well say a BMW 5 series is a direct competitor to a Civic/Corolla/Focus. Not exactly a kosher statement.

The statement about "getting a car built to prove a point" is also wrong. In the case of Tesla the Roadster has already been built and proven itself. If the ideal of a project and proving a point was his intention, he would not have initiated the Model S, Model X, and Gen III project or just stopped at the Model S. You are incorrect in the maturing to 80% statement also. Tesla can not sell it to any company, there's too many spoons in the pot to decline. Chrysler can override/decline any sale, so can Toyota. So unless Toyota has a wink wink deal with Chrysler, they can't sell it. Also the "break even" point appears to be around 8,000 cars per year, so above 8,000 they are profitable. Right now they are have roughly enough reservation holders to cover themselves and NOT loss money for roughly 2 years and the cars are rarely seen on the road and there's not advertisements How many will be sold after people start seeing them, probably more...

Anonymous (not verified)    November 7, 2012 - 11:37PM

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Tesla is not Fisker. Tesla has a revolutionary product. Fisker is Delorean - a cool car for those who want a status symbol. Tesla is a game changer. More of a Model T than a Tucker. The Model S is very expensive, indeed. But it is also an amazing machine, and costs less than the cars it competes with, like the Porsche Panamera, the Maserati Quattroporte and the BMW M5. Ok, those are all 1% cars. But if Maserati can stay in business selling only expensive cars, then so can Tesla. But Tesla will be able to expand and drop prices as their superior technology catches on, in the same way that Apple is finally being accepted as the superior operation system. The Tesla is just a better vehicle than comparable cars. It is faster, requires less maintenance and costs less to operate. It also doesn't require constant trips to a gas station to fill it up with stinky gasoline. In the end, the technology will win, even if Tesla does not.

Anonymous (not verified)    November 8, 2012 - 3:17AM

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THIS. The whole article is basically "here are all the reasons the Fisker Karma sucks, and therefore Tesla will fail".

The author never makes a cogent argument about why Tesla will fail. I agree that Fisker's survival is looking extremely unlikely though.

Btw, while the Model S may be priced to compete with the Panamera, actual drivers, and reviewers are saying it compares to one as far as the driving experience goes. And that is before considering that it will be cheaper due to the tax credit and drastically lower fuel costs. And also completely ignores the fact that the Model S, has a ton of luggage space and room. It has more luggage space in the trunk compared to any other car in its class, and additionally has a "frunk".

John Goreham    November 8, 2012 - 4:42PM

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Thank you for making my point. Mazer could not, and never has stayed in business making only expenzive cars. Mazer (one of my favorite cars) is not a stand alone company. It has always been a subsidiary of another company, notably Ferrari (Owned itself by Fiat). An exact analogy is the Viper, branded an SRT, under the Chrysler Group, which is owned (meaning controlled by) by Fiat. My article contends that IS a possible path to success for such cars. My money is on Toyota / Lexus picking up Tesla.

Anonymous (not verified)    November 8, 2012 - 9:37PM

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Ok, I can't say I disagree that a long term play might be for another, larger manufacturer to buy Tesla. Toyota is a likely buyer since they already have entered deals with Tesla to manufacture parts for the electronic RAV. But, I you started the article by comparing Tesla and Fisker to Delorean and Tucker. The latter were just failures. I agree that Fisker will fail. But Tesla has been focusing on making a viable product, and if you live in Silicon Valley or Los Angeles, it seems that it already is. I live in NYC and I'm dying to get a Tesla, but I have to figure out how I can swing it since I lack the most important feature -- a garage with a 240v outlet. So, there is a major limitation for me. But anyone who lives in a house with a garage will not have that problem. If Tesla is successful in building strategically placed supercharging stations along the Eastern Seaboard, the company will succeed. Maybe they will even buy Toyota some day.

petero (not verified)    November 10, 2012 - 11:09AM

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Anonymous. I agree with you about Tesla. I just want to add that I sincerely doubt some of the boutique car manufacturers would survive without large corporate 'donors'. Cases in point: Ferrari--Maserati-Alfa Romeo (Fiat), Lamborghini-Bugatti, Bentley (VW), Rolls Royce (BMW). None of these prestige name plates could survive with out 'deep pockets.'

Anonymous (not verified)    November 8, 2012 - 12:15AM

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Let's not forget one important thing that I have not heard yet, you don't have to buy any gas so I personally would save 400.00 per month on gasoline.
Also, the Model S starts at 50,000.00 and goes up, you don't get the same mileage but 130 miles is the best on of the electric or hybrids at this point and 60,000 gets you 230 miles.

If you have a good loan on a 50k Tesla and pay a reasonable interest rate for 72 months you can pay 800 to 850. If you pay 300 for gas, that puts your payment around 500.00 per month, doesn't sound like !% territory?

A lease would be even better. Don't forget there is virtually no upkeep on these cars, oil, transmission, etc.

Mercedes has 8 cars over 70,000 and you see them everywhere. Many people have expensive cars and live in an apartment, many people like expensive cars and they are not 1% people.

You can make less than 150k and own most of the Mercedes and any of the Tesla's if you choose too. Plus they are working on a medium level car that will be 30 to 40k, minus the gas, it will be very reasonable.

Aren't you tired of gasoline pollution, the monopoly that the gasoline companies have, the fact that most people have no choice other than gas??

Aren't you tired of going to war to secure gas prices in the middle east, don't you hate having to pay money to import gas from all over the world?

Really, we need a change and I believe Tesla is part of that. My wife and I will buy too of them no matter what it takes, to support Tesla's Electric Revolution!!

Anonymous (not verified)    November 8, 2012 - 8:14AM

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I disagree with alot of what the author of this article states.

First off, he states that the Tesla Model S is for 1 percenters. While it is an expensive car, you also have to factor in the gas savings. I quick calculation has an average driver spending $40 on electricity for a Tesla and around $225 on gas for an average car. So like for like a person could have the same monthly payment as a lincoln, infiniti, or a lexus (plus gas). Not really the 1%

The author is also incorrect in terms of economic entry. Many products start off at the top, most expensive price range and work their way down to the masses. There are many sucessful businesses that started off at the top and worked their way to the masses. Alienware (prior to buyout) comes to mind, Lamborghini, also comes to mind in the automotive area, and there's plenty of specility parts manufacturers also.

The point of trying to say that a Camaro SS and a Volt = a Tesla and not well thought out. When in a Volt, i.e. daily drive, you would not get the acceleration present in the Tesla, and while in the Camaro you would not get the fuel efficiency of the Tesla. Also neither the Camaro or the Volt are luxury sedans- the same statement could be made about any car, why get a Corvette when I can get a Honda and slap in a supercharger (after all I can get it cheaper and get better mileage) and get a beater car. Not to mention 2 cars cost more to insure than 1 car and you need to do maintenance on the Camaro, less on the Volt, and even less on the Tesla

The author is also ignorant in the fact that some of the Tesla parts are also made for Mercedes. Yes larger car companies get bulk discounts, but in the field Tesla is playing in the expected sales for comparable cars is 20,000-50,000 so the bulk price advantage disappears. They are not competing in the world of Honda Civics, Corollas and Prii, Tesla is competing with Audi, BMW, Mercedes and Porsche. It should be noted that the Tesla tires are relatively standard, 19 inches and 21 inches. Actually Mercedes offers the same exact rims Tesla is using

In terms of being profitable Tesla only needs to sell 8,000/yr to cover costs. Right now they have around 14,000 reservations (without any TV/radio/magazine marketing) and are expected to make 20,000/yr

finally the most compelling reason why Tesla will succeed in the EV industry is because of range. While true there are other EVs that are less than 40 K, people want cars that have the perceived range comparable to their regular vehicle. The only EV out there that meets that requirement is the Tesla and people are willing to pay more of a premium for that feature, not to mention Tesla can take advantage of commodity cell pricing while the Leaf, Focus and Volt have custom made batteries.

Matthew (not verified)    November 8, 2012 - 2:33PM

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John:
It's clear that you've miffed a lot of Tesla fans who love the car, but might not often balance their checkbooks. There are two different arguments: one, whether the car "per se" is viable (I am looking forward to a few burst-into-flames moments myself) and the other is whether the companies can remain viable.

An analogous industry parallel for this might be the private jet industry. There we've seen smaller, lighter, cheaper, better models constantly built, but their price tags so expensive compared to reliable, proven older models that might be less efficient; and we've watched the 1%'ers stick to the gas guzzlers rather than take a chance that either the plane or the manufacturer will burst into flames. Same holds for the super-car model; I frankly think the high end BMWs, Porsches and other supercars don't even have a news clipping about the Tesla hanging on their wall, unless it's to throw P&L darts at it (BMW up 8.99% YTD during a global recession).

These cars are all "projects." Even the Volt is a project to make Uncle Sam happy and keep the free taxpayer dollars flowing. As Richard Branson says: If you want to become a millionaire, start out as a billionaire and open an airline. That's all we're seeing here: Car enthusiasts who would rather burn thru their own money making something fun and cool; rather than see it whittled away by inflation and taxes...

Great article!

Anonymous (not verified)    November 12, 2012 - 10:25AM

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That's the best you can come up with about why Tesla and Fisker will NOT succeed because they are not buying in bulk to get the discounts as the "big guys"- someone needs to stop going to Sam's club. Really grasping at straws there.

How much could you possibly save? A few hundred, maybe a thousand- suppliers have to make a profit too. Fisker's a private company so I don't have the data for them, but last I heard the projected Tesla Model S is in the mid-20 % profit for each car. How much do dealerships add onto the cost of a car? Tesla does not have a middleman making profit.

There's so many more arguments against EVs, Tesla, Fisker, etc, but not getting rebates due to bulk sales takes the cake as the weakest argument.

Here's some others that were much stronger than the "bulk rebates" that were disproven

1. Lithium shortage- $30 in the biggest Tesla ($40 K battery), if lithium triples it becomes economically viable to "mine" out of seawater

2. Cobalt/Nickel shortage - Google Nick Butcher seeking alpha- he did an excellent analysis rebuking this claim

3. Copper shortage -Economics takes over, low value copper items get replaced first. let's see $100 worth of copper in a $5,000 motor OR in $150 worth of building material (Use PVC, steel, or aluminum instead- the world did exactly that in the 60's and 70's)

4. Rare earths- no rare earths in Tesla, easy fix to use a copper motor instead of fixed magnet in others

5. Battery manufacturing pollution- Most LCAs cite somewhere between 20-50% of initial car manufacturing is battery, there are some one offs but they have some shady or non-traditional cut-off points and used "phony" data

6. EVs powered by coal and more polluting- Less than half the US grid average is coal, and then if you have people who have solar and work "odd hours", bartenders, nurses, Doctors, certain store owners, etc

7. No market without the rebate? Let's see 7500 on a 40 K, that's 19% of the car price OR 7.5 K on a 100 K car, or 7.5%. If the subsidy goes away, Leaf and Volt sales will be hurt more. They can't make it up on battery cost decreases alone, Tesla can.

8. Grid can't handle it- most EVs charged at night- Grid peak is mid-day in the summer while people are at work, charging typically occurs at night when demand is much lower, plenty of extra capacity for the grid. $5 timer allows EV owners to take advantage of off peak charging (like 2 AM to 5 AM).

9. Toys for the rich- looks like the average household income of Model S buyers from the Tesla forums, looks like the same combined salary as 2 teachers in the northeast, not "rich" in any respects

Aaron Turpen    November 12, 2012 - 12:11PM

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Actually, it's your poo-pooing of this bulk discounting that's weak, Anonymous comment man. It shows you have zero concept of economies of scale and wholesale business practices.

Here's a small example that might help you get an idea of how huge this kind of discounting really is. I won't even have to resort to telling you to go to Sam's Club or Walmart and find out why they are trouncing the competition.

Years ago, I worked as an inside salesman at a hardware wholesaler. That company both imported and sold domestic nuts, bolts, washers, etc. Let's look at one theoretical, but accurate illustration of the impact wholesale discounting has:

Two customers are buying the same product, 1/2" flat washers, which are sold in 50 pound increments. The small customer wants 400 pounds while the larger customer wants 3,000 pounds (a pallet). The base price for the washers is the same either way at fifty cents a pound. From that base price, subtractions for discounts of quantity are made.

For the 400 pound order, no discount is given because it's a small quantity, so fifty cents per pound is the price. The markup for that customer to his retail customer will put them on his shelf at $1 per pound.

For the pallet-quantity order, the base price is fifty cents per pound, but because this customer buys a pallet at a time and does so regularly, that's discounted to 35 cents per pound. His shelf price will be either $1 per pound to match his smaller competition, but at a much higher profit margin OR it will be $0.85 per pound, thus allowing him to sell more at the same markup. Either way, the larger buyer is making more profit either as straight dollars or through sales volumes. Most likely he will do both and sell for $0.95 per pound and both undercut his competitor and make more profit.

Now do that for 10,000 vehicles which each have four tires on them, four wheels on them, two headlights, one rearview mirror... get the idea? You could be talking about $1,000, $2,000, $5,000 per car, depending on the vehicle and the discounts. You don't think $10,000 makes a difference to a company like Fisker or Tesla's bottom line? Keep multiplying that every time a car is built. Pay attention to that trickle-down too, since it means dealerships (even franchises like Tesla's have a markup), sales commissions, repair shops, automotive shippers, assembly line workers... all of those people lose a little bit of money because the car cost more to make and/or is expensive at sale and thus sells fewer units.

Ultimately, the retail customer will look at a car and make a decision whether or not to buy. If I'm looking at a car that costs $20,000 and another that costs $25,000, the difference to me is going to be roughly 20% in monthly payment difference for the more expensive car. If it can't justify that extra expenditure every month, I will not buy it. My biggest beef, for example, with the Volt is that it's being sold at around $45,000 (fully appointed) when it's not really a $40k car in its fittings, nor is it a mid-sized sedan, nor is it practical for any but the single person or commuter. Therefore, I would never buy it and definitely would not spend that kind of money on it. For some, it's a good choice, but I would contend that for most, it's not. Which explains its relatively low sales figures in comparison to it's non-electric competition.

Ask any automaker what a difference just $2,000 on the showroom floor can have towards a model's sales volume. It's HUGE.

petero (not verified)    November 12, 2012 - 12:54PM

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Aaron. I agree with you in principle, but TM will not be able to take advantage of the best/highest economies of scale. They will be a small, boutique, auto manufacturer for at least a decade. The S and X will never produce huge volume sales, the Gen III will greatly expand TM's market but this will still be small potatoes in the auto world.

One last point. I do not see TM ever being a low cost provider of EVs. If anything, they will provide EVs to the upper end of the spectrum in their price category. For example, if Gen III has a base base price of $30-35K you may find a Toyota-Nissan-Ford for less! TM has an uncanny ability of encouraging reservation holders to pony up for the options. In reality the $30K GIII is more likely a $40-45K car. TM simply provides the BEST EV and a percentage of buyers will pay more for the best. Your point about economies of scale will fully apply to the low cost providers like Toyota, Nissan, GM (?), Ford because they convert ICE cars to EV-Hybrids and have the volume scale of both models(ICE and Hybrids) to take advantage of their volume.

Anonymous (not verified)    November 12, 2012 - 1:29PM

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Aaron,

Any parts manufacturer can not sell a product to any company for below cost.

You are not talking about thousands of dollars here, you are talking about a few hundred to maybe even, at most a thousand dollars, 1% difference doesn't amount to much in a 50 (lowest Tesla)-120 K car (highest Fisker).

We can figure out the "cost" of the Tesla based on the battery and expected profit margin of the car
The cost of the Tesla including labor and materials in the mid 20's.

Tesla is making between 14 K to 25 K per car (dependent on options and battery size).

What's GM's profit margin on say a Malibu?
I'll give you a hint- at most it's 10% based on their quarterly finances

If you tack on the extra features present in the Tesla such as the touchscreen (expensive), more appealing rims, different type tires, more expensive materials (not due to bulk purchasing mind you because the Tesla is aluminum, not steel) it's very well in the ballpark of what it costs to build a Volt.

Best estimate if you slapped on Volt type tires and rims and made the car out of steel, touch screen, you would save 6-8 K- which puts it within pennies if the Volt cost to manufacturing. It's different materials, NOT bulk purchasing that makes the difference, you may want to sit down and write down the similarities and differences and price everything out

That's why the bulk purchasing argument is weak.

If you have something to prove me wrong, please list out most if not all of the materials and price them out both bulk and wholesale and see the differences WITHOUT guessing and relating a nuts and bolts story- You'll see those Tesla numbers make sense and the cost of manufacturing is currently on par with the Volt if you substitute Volt materials at retail cost

Aaron Turpen    November 12, 2012 - 2:42PM

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For Tesla, those kind of profit margins, if they're true, are unsustainable. I seriously doubt that those are the actual costs involved for building a Model S and if they are, Tesla is cutting its own throat by not offering the car at a far more affordable price point. Even knocking $10k off the price of a Model S would have a huge impact on sales.

Anonymous (not verified)    November 12, 2012 - 3:55PM

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Google tesla profit margin, as an article November 5th states a gross profit of 25%.

Not really cutting their own throat, but charging what the market will bear, basic economics, look at other industries, iPhone and droid, essentially the "same" , apple's gross margin is 55%. Heck Porche's gross margin is close to 40%, and that's their competitor..BMW years back used to have a 25% gross profit margin. Hyundai as per feb 2012 had a GPM of 25.8%, same article Kia was at 25.4%. Before you make a statement about GPM and that 25% is unsustainable, there's 3 right now that have that or over 25%.

Ford, GM, and Mopar are not teslas competitor. Ideally, it's the 75 k to 100 k car range. Sure you can get a Porsche in the 50 k range, but like Tesla the lion's share of sales is going to fall in the 75 to 100 k range.

Keep in mind try comparing it to Porche in terms of quality and volume.

Aaron Turpen    November 12, 2012 - 4:12PM

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25% of gross margin is NOT the same as 25% profit margin on the car. The COMPANY plans to have a 25% gross profit margin, not that kind of profit on each Model S sold. That's according to Reuters, not some blog or political commentator.

There's a HUGE difference, as I keep telling people, between a $60k+ car and a $500 phone. Most car makers make money not just from cars, but from selling OEM parts and distribution rights for them. That's why replacement parts for a new car are often extremely expensive. Tesla makes money from power train sales, battery re-sells, etc. Not just the Model S.

Anonymous (not verified)    November 12, 2012 - 5:45PM

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Ok smart guy, answer me this question, how much profit is made on any two versions of the model S? We know they are make $125 per kwhr, so using the 85 kwhr pack and their pack selling price, the selling price of the car sans the battery is 35 k.

Run a list of retail materials
Paint- 2k
Rims-1 k
Seats 3 k
Aluminum for frame and car- 1 k
Brembo brakes- 2 k
Shocks- 2 k
Tires - 1 k
Stereo - 1 k
Touch screen - 1 k
Pem- 3 k
Motor- 5 k
Instrumentation and steering wheel- 2 k
Door panels and dash- 2 k
Computer - 3 k
Misc stuff-2 k

Looks like 31 Retail prices, and judging by salaries at full scale production add in another 2.5 K for workers

Worst case is 33.5, and that's with Joe Schmo going to pep boys or ordering the parts from summit. Tesla has some leverage than 1 individual person, hence the upper -mid 28s estimate for the car sans the battery.

You have any better estimates Aaron. Btw, I've restored 3 cars from frame only and am quite familiar with the costs. The PEM, motor, and touchscreens are estimates, probably less

Aaron Turpen    November 12, 2012 - 6:20PM

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Wow, doesn't that all sound nice. I'm glad you've restored cars, but your numbers from Pep Boys are pretty far off. First, the S doesn't use a standard frame, it uses a custom-made, aluminum frame. $1,000 for that is pretty damn cheap, pal. Not sure where you think you're getting that alloy frame from, but you sure aren't getting one for $1k. For production-grade aluminum, you'll currently pay about $2,000, just the materials alone for the 2-ton total weight of the car, which uses aluminum heavily throughout, is going to be more than that. Second, $2k for interior treatments is pretty damn cheap for a luxury level car.

All that aside, your numbers completely ignore the marketing, production facility costs, cost of the showrooms (Tesla is fronting those themselves, after all), corporate salaries... In other words, while they might be able to build just the car at that price point, they can't sell any without adding a lot more to the cost. Again, this is why economies of scale are important. It might work for you in your home garage to break down ONE car like this for costs, but try doing the same and selling 100, 1000, or 1000000 of them and see what other costs start popping up.

Aaron Turpen    November 12, 2012 - 6:26PM

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Anonymous guy, you might want to take the time to visit an automotive manufacturing facility and see all of the money associated with building a car. The car itself is nothing. The factory, tooling, employees (what's worse, Tesla is building in California, one of the most expensive places in the nation to build anything tangible), management, sales forces, etc., etc. that go into it. IF the profit margin on the car can be 20%, the company is doing way better than any other large automaker out there in per unit profit. Only small, limited, very high-end makers hope for those kinds of numbers. If Tesla plans to stay small (which they emphatically say they don't), then this approach is fine.

Look, I'm not against electrics, the Model S, or Tesla. I like them. But people need to be realistic about what these cars are. For now and the foreseeable future, they are novelties, not game changers.

Anonymous (not verified)    November 12, 2012 - 7:08PM

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Actually I have been quite a number of tours, GM facilities and watched my car being made. I've been to the years ago Fremont facility, and am fully aware of the machinery involved and the deal Tesla got on it and their equipment. Unfortunately what you fail to consider is that Tesla is NOT weighed down by huge finicial obligations to workers as GM, FORD and many other manufacturers and it has huge tax breaks. Have you gone through any of their public Q10 statements?

where are you numbers Aaron? How much do you THINK the car will cost TESLA to make WITHOUT the battery. Can't be more than 37 K

I've provided based on restoration experience. Where are you numbers. It's weak to criticize because YOU say it's wrong without providing any evidence to support your claim.

I provided 3 that have a gross profit above 25%. I provided an estimate for costs. Interiors are cheap if premade and ordered from Summit, interior is mostly labor, at most an extra few hundred for leather for material. Now you want to include R&D and marketing, that's not in the manufacturing process, we are talking about Car minus battery cost ONLY, don't try to switch topics. 2.5k per car attributed to salaries in manufacturing is very reasonable. That's based on 100 k salaries/benifits and number of current tesla employees.

I challenge you to provide YOUR costs

Btw- I would note consider over 10 k preorders. Would not consider it a novelty. If you feel it's a novelty short the stock, fair warning; lots of people who felt the same way as you have lost their shirts doing that..

Have you driven one? Seen one in person?

Aaron Turpen    November 12, 2012 - 9:46PM

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You can keep demanding numbers, Mr. Anonymous, but I'm not going to follow your straw man. It doesn't matter how much they cost WITHOUT THE BATTERIES since they don't sell the damn things without them. Assuming your numbers are correct, add in the batteries and.. the car suddenly doesn't have that wide profit margin you claim. Let's assume a base model at $57.4k sales price (battery is 40kWh). Their price per kilowatt hour is about $500 (difference in price between the 40 and 60kWh packs is $10k difference, or $500/kWh). That's $20,000 added to the $37k you said the car without batteries would cost. Getting awful close to that $57k selling price there, Anonymous. Let's say that Tesla has a big markup, so those batteries and accompanying equipment cost only $10k for them to put them in the car. That's still $47k on a $57k car. A good profit for sure, but nowhere near your expectations (about 17%, not your 25%).

Again IF the company can build these cars really cheap and reap those kinds of profit for it, then they're self-limiting their market potential and that's bad business. Toyota sold the Prius at a loss and break even for the first few years of production for a reason: the market for a $60k hybrid in 1999 was next to nothing, but the market for a $25k one was ripe for growth.

If, however, the S costs a lot more than your guesses, and they're dealing with standard auto manufacturing markups, then it's the cost of the cars that will hold them back. Either way, they won't sell them.

In fact, all of this b.s. has convinced me that I should do a writeup explaining why Tesla is not going to go mainstream with the Model S and how they're probably not even going to make their production goals for next year unless they plan to build a lot of cars and then have them parked waiting for customers.

Watch for that.

Anonymous (not verified)    December 25, 2012 - 10:39PM

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Tesla have a very bright future ahead of them after making the highly successful Model S. All the naysayers will look dumb in a few years when Tesla is the next Apple.