1) A key question for Tesla’s margin as it grows sales volume going forward is what operating leverage can it achieve?
How much SG&A and R&D need to be added from 3Q19s annualised level of $3,720m to sustain double vehicle sales volume for example?
$TSLA
How much SG&A and R&D need to be added from 3Q19s annualised level of $3,720m to sustain double vehicle sales volume for example?
$TSLA
2) In 3Q19 vs 3Q17 SG&A was down 9% & R&D was flat despite 272% increase in deliveries & Model 3 launch in many new markets.
This shows there is very little true variable cost in SG&A & R&D aside from customer referral fees & sales bonuses (& both have been cut significantly).
This shows there is very little true variable cost in SG&A & R&D aside from customer referral fees & sales bonuses (& both have been cut significantly).
3) Delivery network costs are mostly in Autos COGs, Service Centre costs are mostly in Service & Other COGs and Warranty Reserve (in Auto COGs). Tesla does not advertise, so there is little marketing costs to scale with scales.
4) I think most SG&A is likely regional and global HQ staff and functions, legal & consulting costs, management bonuses, rents, software teams, store network costs, website costs etc.
5) Very little of this cost base has to be scaled as Tesla launches new product lines & new factories. Tesla’s sales model is primarily free word of mouth & Twitter marketing & its sales channel is primarily online - so little marginal cost to expand sales.
6) The stores and website Tesla does have can easily be leveraged to sell additional models within the same cost structure.
7) Tesla R&D is mostly future product design rather than maintaining/rebranding existing products (the norm R&D for most Auto OEMs) - so little R&D has to scale with new factories & products. Particularly as many components are designed in a modular way & shared between vehicles.
8) I think Tesla could potentially double sales with just a 20-30% increase in SG&A and R&D. The key uncertainty is whether Tesla has to start advertising or increase its referral bonuses to drive the higher demand.
9) On my estimates Tesla Model 3 delivered a $8.4k gross profit and $1.3 adjusted EBIT per car in 3Q19. If Tesla can double sales with just 25% increase in opex, this adjusted EBIT per Model 3 can increase to $4.0k.
10) I estimate GM cars made $0.7k gross profit (ex R&D) & -$2.8k adjusted EBIT in 2018. (GM disclosed 2018 variable profit/car for Trucks was 180% of the average, Crossover/SUVs, 50% & Cars 20%). GM make profit on Trucks & Crossovers but Cars help leverage fixed costs. 
11) This also compares to 3Q19 adj. EBIT/car of $2.4k at Daimler ($8.3k gross profit) & $3.2k at BMW ($9.5k gross profit) which both benefit from SUV/Crossover mix. On a like for like product mix basis, Tesla is likely already significantly more profitable per car.
12) But operating leverage isn’t the only lever for Tesla to increase profit per car. Model Y profit should be ~$3k higher than Model 3 given higher ASP but flat COGs on new design improvements.
13) And Tesla will also continue to reduce like for like production costs/COGs. In 3Q19 I estimate Model 3s like for like mix adjusted COGs were reduced $5.2k year on year.
14) Because so many components in Teslas are designed from scratch (not sharing existing high volume components with ICE cars), many of these components (particularly batteries) will continue to benefit from > economies of scale & rapid early stage technology experience curves.
15) How much of Tesla’s further progress on COGs reduction will flow through to higher gross profit vs lower pricing depends on how it manages to ramp demand relative to production.
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