Game of EV Factories

The battle for global EV dominance is now a game of electric car-truck factories and also a game of self-driving. The starting point is having a desirable EV design and the next step is a profitable good range EV. The financial reality and logistics of scaling many profitable EV factories is why Tesla has a lead that is insurmountable.

The Tesla Roadster was desirable but was not profitable. The Tesla Model S and X are desirable and profitable on a single-car basis. Tesla Model 3 took the whole company to profitability at scale.

Making 100k-200k EVs/year and losing $1-4billion per year is one thing but what will it take to be a major-let alone dominant player in 2025. 2030?

The Volkswagen ID3 and I expect the ID4 will be desirable cars. There is more than one desirable combustion engine car in each category and there are multiple categories. Toyota can have its Camry and Honda can have its Accord. There is more than one good selling car.

But what about Norway? Tesla had 30% market share in 2019 and then other EVs took over Norway. Norway is a tiny market and Tesla only has two global factories. There are now 50k-60k Tesla’s in Norway and Norway sells about 100k-140k cars per year. The price of the used Model 3 is higher than a new Model 3. Tesla sales to many European markets is lumpy because they have to send batches of 10-15k cars on one big container ship from Fremont or Shanghai. Tesla is selling all of the EVs they can make and Tesla is doing that without any advertising. Other big carmakers are spending $5+B per year on ads. Tesla has maintained over 80% market share of the US EV sales market.

Volkswagen is losing $4500 for every ID3 they sell. The eGolf was a relative failure. Volkswagen not expecting to make money selling EVs until 2025. If they are losing $4500 per car then selling 1.1 million per year would cost them $5 billion. GM is selling its Bolts at 12k below MSRP and the Bolts had a starting price that was not profitable for GM. If Volkswagen is selling 1.1 million EVs per year in 2025 then Tesla would still be getting its market share out of the total of 15 million to 25 million EVs that would likely be sold in 2025. Ford sold 5.4 million cars and trucks in 2019 but had $1.7 billion GAAP net income losses in 2019. It is possible to move units unprofitably for a time and to make some back on financing games. No one says Ford selling vehicles as an unprofitable company is a threat to put Mercedes, Toyota or VW out of business.

EV are not simpler to make really good. Tesla leads on the efficiency rating of batteries and drivetrain. kwh/miles/weight.

It cost billions in R&D to make a competitive electric drivetrain and control systems. It takes R&D and software coders to enable over-the-air updates of EVs. There is a lot of spending needed to be competitive with self-driving. Companies also have to be desirable to attract the best engineers, factory managers and AI and software coders. It takes money and top technical talent. The top technical talent is all going to Tesla.

Does GM-Volkswagen have over-the-air update of the software in their cars?
Do they have their own AI chip. Tesla is heading to 2nd and 3rd gen on the custom AI chip?

Volkswagen cannot really scale (convert many gas car factories to EV factories) until they are making profitable EVs. They can endure pain to be in the game at 200k-500k/year but they dare not convert 10 factories to get 5 million cars per year in 2023-2025 while they are still losing a lot on each EV. If they cut losses to $3000 per EV and go to 3 million EV per year that is $9B in losses per year plus $6-10b for the cost of the factories.

The top-selling car model in 2019 was the Toyota Corolla at 1.2 million. 900,000 Ford F-150 were sold. Most EVs sell far less than 30,000 units/year. When other carmakers create a new truck do they create a Corolla-killer or a Ford F150 killer. Do they plot to put any other carmaker out of business? They just want moderate or large success for their new model.

Getting a Big Share of the Growing World EV Pie

World 3 million EV/year in 2020 (Growing 30% per year but signs of accelerating to 50-70% per year as EV get more desirable than combustion cars). Maybe 5 million in 2021. 8-9 million in 2022. 15-25 million in 2025.

There is room for 2 to 4 companies making 5 million cars per year in 2025 and then 2 to 4 companies making 10 million cars per year in 2030. It will cost $20-40 billion to build the factories by 2025. $10+ for the R&D. Does each also have to eat $10-20B in losses as they scale?

It will take another $20-40 billion to make/convert factories to get to 2030 scale.

If it is so simple to scale EV, then why does Volkswagen target 1.5 million cars per year in 2025 and GM 1 million? Tesla will have 1 million to 1.5 million cars per year in 2021. GM and Volkswagen have to spend $30-50B and 4 years to get to where Tesla is 2020-2021. Tesla continues to innovate. Some of the China EV makers will have the government backstopping them with billions for factories.

If Tesla maintains 20% global market share and has 90% of the profits from EV, then they are like Apple versus the Androids. Apple has almost all of the smartphone profits. Tesla is growing global market share.

Tesla makes 26+% auto margin and growing. So they make $13000 on every $50000 car they sell. After $1 billion in quarterly operating expenses that is mostly profit.

They are raising another $5 billion today for 0.8% dilution. That is enough for them to start two more Gigafactories for another 1 million cars per year in 2023. Tesla will have over $20+ billion in cash at the end of this year. They will be making over $4 billion in free cash flow every quarter. This is after spending about $8 billion every year on building more factories and research and development.

By 2023, Tesla will have rolled out most of the Battery day innovations. Halved the cost of the batteries. Batteries part of structure of cars and trucks. 70% lower cost to build out factories.

Tesla can race ahead on factories and new models and massive amounts of batteries because they have 500,000 EV/year profitably made and sold.

Tesla is past the tipping point for its self-sustaining avalanche of new EVs. Volkswagen and GM want to get to the point where their EVs are each profitable and then their division is profitable at 500k to 1.5M cars per/year. Then they can start massive factory conversion. Volkswagen and GM have to do this while Tesla cuts the price of EV’s by $1000-3000 each year. Tesla uses some of their growing profit margin to make it tougher for others to become profitable.

The business moat is getting to the scale and capability for 500k/year at good profitability with two gigafactories to get the right to try to spend $40-60 billion to scale 5 million cars per year in profitability with ten gigafactories and then another $40-60 billion to get to $10 million cars per year. The cost to do this drops 70% if Tesla has battery day innovations. This would mean $15 billion to scale to 5 million cars per year and another $10 billion to scale 10 million cars and another $15 billion to scale to 20 million cars per year.

The Game of Tanks in WW2 Was Actually a Game of Tank Factories

German Panzers were individually better than the US Sherman tank and the Russian T34. There were 12000 Panzers made in WW2 versus 50,000 Sherman tanks and 55,000 T-34s.

SOURCES -Tesla, CarAdvice
Written by Brian Wang, Nextbigfuture (Brian owns shares of Tesla)