Elon Musk is very ambitious, but some speculate a loss of $13,000 per car sold

Not even a week ago, I brought you the news about a leaked EPA document that give us some figures for the long-range Tesla Model 3 – with the most important figures being the 3,937-pound curb weight and a meager 258 horsepower. These figures allowed us to determine that the long-range model likely had an 80-kWh battery. I later speculated that the standard model would use somewhere between a 50- or 60-kWh battery. Well, in a call with Goldman Sachs for the bondholders that bit onto Musk’s money-raising bait it was confirmed by the big (or little?) guy himself that the standard model gets a battery that is “just over 50 kWh” while the long-range version comes with a 75 kWh battery – turns out that my math and speculation was pretty spot on. Bully for me.

But, that’s not even the most important part – what’s important is that Elon Musk is expecting to see a 25-percent gross margin on each Model 3 Tesla sells. That’s a huge figure when we’re talking about a $35,000 car, but the pivotal deciding factor is the price of each battery that goes into this little EVs. During his call with Goldman Sachs, Musk refused to disclose the cost of each battery but claims that it is cheaper than the competition, and at one point it was said to be less than $190 per kWH. So, how does Musk plan to make so much money of the Model 3? Well, he seems to believe that battery cost could be below $100 per kWh by the end of the decade and even lower in the years to follow. What do these batteries really cost? We can’t say for sure yet, but we have an idea, so let’s do some math.

Potential Cost Assessment

2018 Tesla Model 3 Exterior High Resolution
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So, we know battery cost is below $190 per kWh as of now, so let’s go with say $160 per kWh at this given time. If Musk is expecting the cost to drop below $100 per kWh in just a couple of years, that seems like a good, round number, right? Well, at that cost, the standard battery (assuming it’s a 55 kWh battery) will cost Tesla a total of $8,800 while the long-range battery comes in at an even $12,000.

If we fast forward to the end of the decade, and Musk really does hit that ambitious goal with Gigafactory 1, the price of those batteries will fall to $5,500 and $7,500, respectively. Based on my initial estimates above, at $160 per kWh, the standard model would have to cost less than $26,200 to build without the battery while the long-range model would have to cost less than $32,000 to build. Clearly, there’s more money to be made from the long-range model than the base model, considering it is just as bare as the base model without options. Let’s think a little further ahead, though, and think about the price difference between the standard and long-range model.

Potential Profitability is in the Battery

2018 Tesla Model 3 Exterior High Resolution
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Tesla is going to push customers to the long-range models as much as possible – at least until there’s a shortage of battery cells over at Gigafactory 1.

You can pretty much assume that Tesla will make very little off of the standard model without any option boxes being checked at the time of ordering. So, Tesla is going to push customers to the long-range models as much as possible – at least until there’s a shortage of battery cells over at Gigafactory 1. That is something that Musk is already expressing concern about, saying that a shortage would create a bottle neck for Model 3 production.

Back to the topic at hand, profitability could be there for the standard model if the price per kWh drops below $100, but that’s likely to be some time in the future and far from reality today. Obviously, the man needs money to fund production, and that’s why he’s been throwing his fundraising parties in which he’s already pulled in at least $600 million just from junk bonds alone. Obviously, the cheddar isn’t rolling in quite yet, but Tesla does likely see some kind of profit from the long-range model, even without buyers going for any options. But, how?

The Battery on the Long-Range Model is Overpriced

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Let’s look back to my estimated figures from the previous sections. At $160 per kWh, the standard battery pack costs $8,800 while the long-range battery, at 75 kWh, comes in at $12,000. If this is, indeed, and good guestimate, the difference in battery cost is $3,200. Now, from the look of things, there’s no difference between the long-range and standard model, with the exception of that extra 90 miles of range, yet the cost difference between the two models comes in at $9,000.

The long-range battery is heavily overpriced, leading Tesla to make $5,800 of the battery of each long-range model alone – without any options selected.

If my estimates are correct, the long-range battery is heavily overpriced, leading Tesla to make $5,800 of the battery of each long-range model alone – without any options selected. And, considering Tesla won’t even begin delivering standard models until sometime in the fall of 2017, there’s some money to be made of the cars delivered between now and then. It may not amount to profit right away, but it will help move the bottom line to a lighter shade of red at the very least.

Let’s take this one step further and see how much can be made over the next couple of months. Let’s assume that Tesla won’t start delivering the standard model until the end of October. With information derived from Musk’s chart at the handover part, this month could see somewhere around 100 models produced, while September could see closer to 500 and October coming in around 1,500 if I’m being conservative. That comes to a total of 2100 vehicles, all of which will be long range models and will pull in at least $5,800 each from each car, just from the markup on the long-range battery, which only uses an extra 20 cells.

If 2100 long-range models, with zero options are sold, Tesla will pull in a total of $92,400,000. Of which, at least $12,180,000 will be pure profit from the battery alone. Now, that doesn’t mean each car sold will bring in profit, but that’s money made off the cost of the upgraded battery. That’s some pretty serious cheddar. Maybe not much for such a large operation running in the red, but it goes to show what kind of potential profitability there is, and why investors are so willing to pony up dough on demand to Mr. Musk and his ambitious operations.

And, here’s the thing. As battery cost drops and Tesla (hopefully) starts posting decent profits, the long-range Model 3 could drop in price a bit, but the cost won’t drop that much, and you can bet Tesla will still make somewhere around $6,000 per car from the battery alone. Is it a scheme? Not really, it’s about making a profit, and that’s part of the reason why Tesla is in business in the first place. But, it does leave some room for negotiation if you can convince Tesla to negotiate sticker price. It’s not likely, but worth mentioning.

Looking ahead

2018 Tesla Model 3 Exterior High Resolution
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Now, considering Tesla has at least 500,000 Model 3s that are spoken for, at the numbers I’ve discussed above – and assuming the cost of battery cells and the car itself stays the same – Tesla could manage to pull in as much as $2.9 billion in profit from those batteries alone by the time the initial reservations are produced and delivered. By the time this happens, the Model Y should be in production or at least close to it, and Tesla should be able to post profitable quarters on a steady basis.

Of course, I’m not a financial analyst by any means, but looking at the situation logically and in its basic form, those could be some pretty realistic numbers. That’s assuming the cost of production doesn’t go through the roof, of course, and Tesla can soldier on with the same overhead cost per car or better for the foreseeable future.

But, what do you think? Am I hitting the nail on the head here or am I speaking out of my ass? Let me know in the comments section below.

References

Tesla Model 3

2018 Tesla Model 3 Exterior High Resolution
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Read our full review on the Tesla Model 3.

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