Tesla: Manufacturing Process Advantage

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

To get started on manufacturing, I thought about a good starting question. What does the world not understand about Tesla's manufacturing capabilities?

Nowadays, it isn't very well understood that Tesla is doing it differently and more efficiently. The main principle from day one, that everybody talked about in Tesla, was the factory's density and flow speed. There is a very famous conversation with Elon about the speed of the factory. He talks about how, even with the speed that we had in three months, when you look at all the motion from the start of production to three months later, from stamping to body in whites, to paint, general assembly, and powertrain, all that motion results in the quantity of many cars coming out of the factory gate. Elon said that if we collect all those motions and see the output, one car is out every two or five minutes, and he compared it to a snail walk. He said all these movements show how efficient we are not. It's a straightforward superposition of this motion to have a very efficient output. He was always complaining about too many motions in the factory, from the areas where we had value-add work to areas where we had no value-add work, basically, nonvalue-add work activities.

What are value-add activities and nonvalue-add activities?

Value-add activities are those items where you add a process, add a part to a part. Nonvalue-adds are, for example, to transfer from this station to that station or transfer from this shop to that shop. The Germans are famous for having about two days of buffer between paint and general assembly. They want to ensure that none of those shops will starve or block each other. Because of that, they spend a lot of money on a huge beast of a warehouse called ASRS, automatic storage and retrieval system. It's a big investment, something like $50 million. They keep 500 to 1,000 cars that are works in progress waiting and doing nothing sitting in that buffer. That big chunk of investment is always wasted, and you have cash flow trapped in that buffer area. Our direction was to cut those nonvalue add areas and make the movement always efficient.

In car manufacturing, you see a lot of up and down; you see a lot of turning and movement that adds no value. It's just moving. Elon scrutinized the details of those movements and directed his trusted people for any new factory layouts to ensure that nonvalue-add works were minimized. This was one of the key factors. He always insisted at Tesla that the strategy was to have a dense factory with a reduced footprint because footprint is a direct factor to capex. If you can save one square foot, you will save on HVAC, lighting, and everything in the factory. One square foot means a lot.

Were you measuring cost per square foot, like capex per square foot? Was that a metric you thought about?

For building, yes, because the capex has two main factors. One was the equipment and tooling; the other was the facility and building cost. Those are the two main contributors to total capex.

Equipment, and building cost.

Yes. And the building is always following the process. There is the saying that process is always king, so the process and equipment people, the manufacturing engineers like my team and me, defined how many stations we needed and how many buffer stations we needed. Based on that, we would devise the layout, and the building was designed and set up based on that layout. Initially, we always talked about the footprint, but another factor was the height of the building, and we ended up providing a KPI called volume metric efficiency of the building.

How do you measure that?

What volume of building, X, Y, and Z is occupied by value-add activities.

What was considered good?

We had a relative baseline. For example, the Fremont factory was the first test baseline. Everything was flat, so we had something around 25 to 30 feet in building height, but in many of our shops, such as body in white, we were only using about 10 to 15 feet, so the second half of the whole building was always unutilized. So for the next factories in China or even Fremont, we considered a mezzanine platform to make sure the second half of the building was occupied, and we saved a lot because of that.

That’s awesome. How do the others do that?

The others, honestly, I think the other companies have a best practice based on their previous projects. None of those companies have been building one factory per year. Many of them have factories that have been established for years – Ford, GM, and even Toyota – and they keep doing the same thing. I'm pretty sure none of those factories, before Tesla, even thought about the volume efficiency of the space.

Everything is flat. It's 2D, and it’s just on the floor. If you ask them why your building is 30 feet high while you’re only using half of that, the answer would be it’s our standard. There's no explanation for that. Maybe in the future, we want to add a lifter, maybe we want to add equipment, and we need that height. So they invest in a million square feet of building because maybe 5% of the space needs that height, but the rest doesn't.

The original question was what was not understood by the broader world, so that's surely one aspect. How you plan capex is focused on density, speed of flow, and volumetric efficiency. Is there something else?

There are a lot of other factors. Another one is people density. If you look at other companies, they have one to two people working per station at every station. In China, maybe it is 2.5, the density of people per station.

In other factories?

in other factories, in other OEMs, yes.

Can you repeat the figures you gave?

It's the density of people per station. We defined the product's design and the process sequence to make every car be considered four distinct process areas and assembly areas that can have four people working simultaneously on that station. It was a kind of integrated work between designers, process engineers, and factory design people and we increased the density of people per station from 2.3 to 2.5, the industry norm, to four, and in some areas, five.

When more people work and add value to a car at the same footprint, you increase the performance. If you look at any car factory that's going to make 30 or 40 cars per hour, which is a very average standard, they end up with around 150 to 200 stations. Two hundred stations mean 200 times a six meter long by 12-meter-wide bit of station. Working with the people's density and utilizing the height of the building, we reduced the number of stations from 150-200 to 80-90 stations for the same capacity.

And then do you need the same length and the same height?

We also need to be sure we have more people on the cell, which is one station, as I mentioned, plus we work in the height and elevation. So instead of utilizing a lot of footprint for line side material, we had the production line on the second level and all the material flow on the first level to save footprint. So even the station, the unit of our multiplication, was about 50% smaller than a normal station of the others.

I know the story, but maybe you can add details. Fremont was the first one?

Yes.

And then you did giga Shanghai.

Yes.

Giga Berlin, and then Nevada. Or Austin?

Yes, Nevada was happening at the same time. Nevada started in 2016. While doing the same work in Fremont, we had a different crew in Nevada doing the gigafactory for battery and powertrain.

Fremont was churning out cars, and Nevada is batteries and powertrain?

Yes.

Why is that in a different place?

For scale manufacturing for about a million cars, Model 3 and Model Y, Fremont didn’t have the footprint to add too many factories because the space was constrained. We didn't want to move the car manufacturing to Nevada because of the logistics costs, and much of the talent initially didn't want to go to Nevada. The selection was to move something better in terms of logistics. Water was also a problem in Nevada. Paint and body in white need a lot of water, so we selected the battery and the powertrain that needs less water, and they're dense and kind of upstreaming the process. When you go downstream to the final assembly, you see more value added to the product. General assembly is the last factory and is the most value-add work because all the efforts end in general assembly.

But in the future, you wouldn't have the battery and the powertrain in the same space, so in Shanghai, that will be in the same place.

Exactly, also in Berlin and Austin.

Understood.

The reason was that here in Fremont, we had something around two to three million square feet of space. I'm unsure of the precise number, but that was the scale. We had the Model S and Model X there as well. The Model S and Model X are exclusively built in Fremont, and because of that, we didn't have the space to grow, but if you look at Austin, it's about 12 million square feet; it's about four times bigger than Fremont. I think Shanghai is seven to eight million square feet. These are the biggest factories in the world; they're so big in terms of space.

One good piece of information to know is that they are huge, 12 million square feet for a factory is huge, and the strategy Tesla has is to build multiple factories within them; for example, three factories. So when you look at that from the top view, it’s a big rectangle, and the corners are chamfered so from the top it looks like a diamond. It looks like one factory, but you have three to four factories inside that factory. Every quarter of that big square is a separate factory, and they build them in phases. It’s not only one general assembly or one body in white; in the future, they will expand and fill those factories with different products and platforms.

That's one main question I had, and this is very illuminating, which is typical; you would expect big capex and then the increase in earnings or revenues or outputs following. At Tesla, it looks like it’s growing together, with very high efficiency at all times, and without big impacts on gross profits or outputs. Is that the reason? Because basically, the capex is sequenced? A sequence based on, as you just said, starting with one area and expanding as you go.

I think it is different now. When I was there (Tesla), in 2016 to 2018, we designed a new generation factory that was denser and faster. By the factors that I described to you, the density of people per station, the size of the station itself, going to elevation, and making a volumetric efficiency, we end up utilizing about 25% to 30% of the footprint that the others do. That was the first thing; it was too much, and we realized it was too much density and too much automation.

What does that mean? Why too much?

I think you heard about the production hell.

We were not able to ramp up easily because of those complex elevations. We had multiple lifters and multiple robots working in that dense environment. Installation was hard, and maintenance was hard. After all those challenges, we realized we achieved more dense space, but we were paying for it later in operation costs because we needed more maintenance and access was a problem.

Where did you land in the next generation? Not at 25% to 30%, but half?

In China, we increased the density. We relaxed it a bit more because Fremont was too dense at 25% to 30% of a normal factory. In China, we relaxed it and changed it to around 50%.

You almost doubled it.

Yes, to make it more opex friendly, operation cost-friendly, and we found the sweet spot there. But back to your question, when we started in China, Tesla was not in the position that it is today. We had a cash flow problem; it was hard to stay cash flow positive. In Shanghai, the Chinese helped us a lot. A big portion of the investment was their share. We provided our technology, investing with our technology, brand, everything, and they took care of a big portion of capex for building and investment there. That was one of the key points; we didn't spend that much from the existing cash flow at Tesla.

A quick sidebar, then we can return to the manufacturing. China, for me, is one of the biggest risks to Tesla today. Do you see that as well? How is that seen internally? I’m saying this for three reasons, one is production; a lot of production comes from there. The second is that a lot of volume, meaning sales demand, comes from there. The third, there is a geopolitical risk that products get forbidden, or IP gets stolen, that’s another risk. How do you see these risks?

Tesla is the only company 100% owned by Tesla itself, so there is no Chinese partner. Maybe you don't know about that. One of Elon’s conditions was not to have any partner sitting on his board from China's side; 100% of the company is for Tesla. Any other companies, when they want to have a branch, they partner with someone from the Chinese government on their board, but Tesla is not like that.

Why did the Chinese give money then?

It was incentive. They wanted Tesla to go there. They provided a lot of direct and indirect incentive.

Why? They have their local champions; they have BYD, Neo, and all the others.

I don't know about that, but my observation was that they were very helpful. They helped a lot in many ways. Permissions, building costs, providing the best vendors they have, and their vendors were not making any money working with us on that project. They wanted Tesla to be there, and they gave incentives for that. I'm pretty sure right now, BYD or Neo, or other Chinese companies are known, but in 2018 and 2019, it wasn't like that. By moving Tesla there, I think they knew there were many technology lessons to be learned, that many brains would go there, and they would learn. I think the authorities in China fully supported EVs because of air pollution and many other reasons.

Yes, that’s a good point.

And I think they are ahead. They are ahead in giving incentives, and in the next five or 10 years, they will be distinguished as the country that has progressed the most in EV and electrical data. But I agree about the geopolitical issues, that is a risk for all the companies, even more for Apple. I think Apple will die if anything happens. But Tesla is starting to distribute, and now they are having a big chunk of supply chain transferred. It's a strategy that we can see, there is a movement, and Tesla has rivals for all the supply chains in all parts of the world, especially in Mexico. They are investing a lot. The next-generation factory in Mexico is very smartly chosen because Mexico will be the next hub. They are investing a lot in Mexico.

Do you think the dependency on China will be lower over time?

Definitely, yes.

Where do you think those gigafactories will be? He said you'd need a dozen to do the 20 million cars. I don't know if you have knowledge or if it was discussed, but where would you think it makes sense to have them?

After Mexico, I would not be surprised for the next one to be in India. I know there were some discussions even recently, but it was not successful. India had some kind of regulatory issues that were not very good to work with, but in the long term, I think India would be the next spot. I also see Australia as an option because Australia has a lot of influence on the Tesla board, and Elon is a personal fan of Australia for many reasons. India and Australia.

Indonesia?

I don’t know about that.

That's helpful. Let's go back. The factories; understood. Fremont was the first. You had batteries separated from the cars; now, it's together, and you build them in stages. What has changed from Fremont to Shanghai, and from Shanghai to Berlin, and what will change going forward? How different is each generation?

I don't see much improvement from factory design anymore. I think Tesla has found its model. It started in Fremont and was practiced successfully in China. Now it's being repeated in other locations. The same building height, the same building column span, the same type of tooling. Even one of the key items for a factory design and installation is which vendors you work with. There aren't that many equipment integrators in this business. There are some key players in Europe, especially in Germany, like Dürr, and Eisenman; one is very good and works with BMW.

Other than that, working in China, we understood that there are a lot of great integrators there. They are very good integrators. They chose a Chinese general contractor to build the next factory in Berlin. My German friends were embarrassed that the Chinese were building the Berlin factory in the heart of Europe. It was embarrassing for them, but the Chinese were doing a better job in terms of project management; they were doing it faster and much more cost-effectively. The quality might be 10% or 20% less, but when you see they can do the project in half the time the others do, that 20% is going to be compensated. It’s not a big deal.

I’m scrolling through the annual report and do not find square feet data. Do you know that? Is it public information?

Which website are you looking at?

Not a website, the Tesla annual report. Do you know if they released the square footage data?

I can check. It's not on the top of my mind, but I think in the earning calls, they don't report the footprint of the buildings, but they talk about it. I think it's part of the financial report.

I will check that.

The best you can do is go to Google Earth; from Google Earth, you should be able to see the size of the factories.

Good idea.

In Fremont, it's very precise because we were doing a lot of designs based on Google Earth, just capturing a video or a picture and starting to layout with Google Earth.

Interesting. For me to understand, you were always on the car side. Not the batteries, not others.

That's right. When I started at Tesla, for about the first six months, I worked on the battery enclosure. Not the battery technology; the enclosure is the structure all the batteries sit in. I was responsible for the automation cell to make that enclosure. The sealing was critical, and the manufacturing was hard, but I didn’t work specifically on the battery technology.

There is a discussion around Optimus. I guess that was after you left, or were you still there when that started?

It was after I left, yes.

How leverageable is the manufacturing footprint for other products? Was that thought about when you designed those factories, or would that be separate lines?

For Optimus, you mean?

Optimus or any other types of products. Elon always says that manufacturing strength is Tesla's biggest competitive advantage. I'm trying to understand if that was thought about already or if it's a completely new business they would scale.

I agree, to some extent, that manufacturing is the strength of Tesla because of its efficiency and because the Model 3 and Model Y are designed for manufacturing. Manufacturing is strong because of the line and supply chain; everything helps manufacturing to be stronger than the others. I explained earlier in this call some manufacturing factors: the reduced number of stations; we added density. One key point was that we tried to make the line as straight as possible. It was a key factor that seemed simple, but nobody talks about it that much. If you go to any factory or other OEMs, the car goes in a snake-shaped factory, it goes up or down, and you can easily lose track of the car. But in Tesla, one direction was we only wanted to go straight. No turns, no up, no down, just straight. So all the Tesla factories are very long. You have one single long line with access from all sides, so the logistics are easier. Everything is a stretch from inbound logistic doors and docks to the line side, and you don't need to pass multiple logistics aisles. It's just one aisle, one straight line. There are many factors why Tesla's manufacturing is stronger.

Another point is that Tesla is expanding at a speed that nobody else is, and they have trained many good engineers in the last 10 years and have built five or six factories. They are very skilled; there are a lot of integrators that Tesla has identified as partners, especially Chinese ones, who are helping a lot.

They are fast and cost-effective, and Tesla has found the type of equipment they want to scale, so every time they go, it's like a catalog. They just say I want this factory, and they order it. There's no need for a year or two of negotiation to design the layout. The layout is now a kind of template.

I think whatever they did in Berlin and Austin is a template taken from what they did in Fremont and later matured in China.

I have a basic question, but I'd like to hear it from someone with first-hand experience. When volume scales, you’re able to reduce your cost per car. Why is that? I suppose the materials are part of it. If you can source larger volumes of materials, you can get lower prices per unit.

Which is supply chain, right? Supply chain advantage. Another advantage from a manufacturing standpoint is that a higher manufacturing volume means you have a shorter cycle time per station. So every operator or worker in line will have a shorter or smaller scope of work. When you are just supposed to have this pen, grab it, put it on the paper every 30 seconds, and it's what you do, the risk of performance loss and failure or quality is less. Because you make more cars, the granularity of the work is smaller, so every operator is doing more specific work and repeats that more, so collectively, you see a better efficiency in terms of the production line.

Those are the two reasons?

I think the supply chain is the key factor, and in the cost of the car, the BOM – bill of materials – of the car is maybe 80% of the cost.

That was the next question. What was 80% of the cost?

Bill of materials. The part and the supply chain cost to provide the part to the factory is 80% or even more, and the capex – the building and the equipment – is a tiny fraction.

To give a feeling for a car being built, let's say you invested in a factory. You build a factory, and you make five million cars in 20 years in that factory. If you divide the cost of the capex, which is the building and the equipment, the scale is something like this. If the car costs $30,000, the capex, the process equipment and the building, costs between $20 and $30 per car. If the factory has built five million cars in that factory in 20 years, the normalized cost per car, the capex, is about $30 per car.

It’s trending lower as volumes go up.

Yes, so it's about 0.01%. The capex is not a key factor for the COGS initially, but it’s important because it’s extra capex you have to burn from your existing money. But over time, it isn't a key factor in the cost of the final good.

The main savings in COGS will have to come from the supply chain.

Exactly. Definitely. And operation costs.

Yes.

The BOM and operation costs are the two key factors. The cost of the factory helps the operation costs to be saved, if it's a good factory.

Supply chain: more volume, better logistics, fewer materials, lower cost materials, those are the four keys?

And less inventory.

One of the key improvements that we learned in Fremont was to kill and eliminate the inventories and buffer. From 90% of the parts being in our inventories for sometimes 30 days, we changed it to something around 40% of the parts being on the wheel. It means they were never double handled from a trailer to an inventory and then to the production line. They were on the wheel; a warehouse on the wheel; and they sat in the factory until they were completely utilized, and the trailer was back. So inventory cost was a key player in optimization.

And operations costs? That’s opex, right? How do you deal with that going forward?

I think the operation cost consists of the number of headcounts, the logistics, the maintenance, and consumption materials; spare parts. Many factors are related to that. Tesla is doing it efficiently because every person is working hard. When you go to other factories, you see that people are relaxed and have a clear scope of work, but at Tesla, every person works on the line like two people. They are fully loaded. The density is high, and the inventories are cut to a minimum, and they are doing it just in time, just in time in many cases.

If we look at the car, you said 80% of the cost is the bill of materials, the BOM, and as you said, the capex is trending down. If we focus on that 80%, what are each car's main parts and cost items? I'm trying to understand what it consists of and what the cost savings that Tesla has achieved and could achieve in the future.

Every car has three main pieces. The first piece of the car is the body, which is one-third of the weight of the car. The second is the powertrain, which is the batteries and the powertrain system, and the third part is all the interiors and exteriors. If you want to say how I can save the BOM cost, I think all three are the key players. Especially the battery, powertrain, and body in white, which are vertically integrated in the factory. The others, like dashboards, wheels, or seats, are something you can find a lot of competition for in the market. You might be able to vertically integrate some of them. For example, the seats are something that Tesla owns, and they always want to have it next to their factory, but the rest is just wires, wheels, and windscreen; nobody cares about that. You should just make a good supply chain team to go and find the best vendors all around the world and justify the costs of logistics, etc.

But the key reason for being successful is the cost of body and powertrain. Tesla was very successful in reducing the cost. For body, I have a good understanding of why they were able to reduce the costs. First, they use a lot of aluminum, which is lighter and easier to build, and they use casting on a bigger scale. By doing the casting, they are saving a lot of money. For example, one piece of casting for the front and rear underbody of the car saves 60 to 70 pieces of stamped material that others use. So they reduced the cost of body in white in a very good way. Also, I think the battery is the key to the powertrain. The scale and the total number that Tesla is making are not comparable to other competitors for battery manufacturing. They are successful in making it much cheaper.

What about Cybertruck? They were going to use stainless steel there. Would that change the equation a lot?

I don't have much visibility inside that product, but to the extent that I know, it's not an easy product to build, and Tesla is struggling to make it a financially effective product. I know they resized the whole product from the initial car that they showed in 2018 or 2019. They are making it a bit smaller and trying to develop the new processes like thermal spray or very special processes that that product needs. They are struggling. That's why they're delaying it, but I think next year we should see it. Cybertruck has the potential to be a very successful product. It is polarized. Many people love it, and many people hate it.

I agree.

But I think it will be a game-changer. It will be a very different product. If they're successful in the process development and the product is as successful as the Model T and Model Y in terms of quality and performance, I think it can be next level because it's a different beast. It's just a unique product.

I agree with you, and if they succeed there, they will hurt General Motors and Ford a lot because that's the profit pool with which they are trying to fund their transition to EVs.

Rivian is also a player. I think we need to consider Rivian as a competitor in that sector.

Yes.

I think Rivian has good potential. Lucid and Rivian are the two with potential.

This is a good segue into competition. Let's stay with the manufacturing and competition. Who could catch up with Tesla in manufacturing?

I think we discussed that last time. In the scale of business, the Chinese are ahead. Nobody can beat them, but the Chinese are limited to their market in China. I don't think they will be successful in exporting like Americans. I think in Europe, Volkswagen is also doing a great job. They are also aligned and have a good relationship with Tesla. I don't know what the Japanese are doing. I never underestimate Toyota. Toyota has some secrets with Apple that they might show their cars later. Just my personal feeling.

Why is that?

I have seen evidence that they are working together, Apple and Toyota, and I think they are a good match because of the culture, quality, and consistency. Who has the same culture and mindset as Apple in car manufacturing? Toyota. They're consistent, care about quality, and are a good strategic partner for Apple. Apple is not disclosing anything to anyone about what they are doing, but I'm pretty sure that in the next two years, there will be a surprise about the Apple car. It's just my personal feeling that their partner for scale manufacturing would be a Japanese company.

Interesting. Culturally I can see that. I have heard rumors that they were working with BMW.

I think Apple cannot work with European companies, and I can see large cultural differences when you’ve worked with the Chinese, with that culture, for many years. I think Apple will continue to work with Asia, but it is an Achilles’ heel if something happens geopolitically. They may consider working not with China but with Japan because it's a more reliable partner.

We touched upon that. What parts of the car does Tesla source itself? You said before, windows, these things are outsourced, wires and screens. But they do the other parts themselves, including the batteries? Or for batteries, is it both?

I think they get the battery cells from Panasonic. They have a partnership with them, but I'm pretty sure Tesla is working directly to find the resources, and, in the future, I think they will do it themselves. But besides the battery and powertrain, the only part Tesla takes care of is the seats. They own the seats and build them here in Fremont. In the car interior-exterior, besides the seats, I don't think Tesla will do anything else on the rest. The electronic parts, yes. The car computer.

Were you involved with the car computer? With the software? The operating system of the car?

My involvement was in general assembly, where we integrated the software and the hardware in the car. When I was there, we had many problems programming it. It took about 30 minutes to program and integrate the hardware-software into the car. I was trying to find a tight space to give this much station for programming on the line side, but I think they fixed that problem. Besides that, I do not have that visibility on the car's electronics.

When you talk to people, many will tell you that the main advantage to Tesla is the driver's experience. Would you agree with that?

Totally, yes.

What makes that so differentiated?

Because of the knowledge and resource pool in the Bay Area, I think Tesla was able to hire the best leaders. For example, Jim Keller was one of the legends in chip design and was hired, and other big names, and each one of them brought a lot of great experience and the latest and greatest data to the architecture of the car's electronics. Being in the Bay Area has that advantage so that you can have great leaders. For many years, I think they’ve had a very strong team of the best of the best. They have access to hire Apple, Google, and Facebook brains, and Tesla hunts for them and uses them.

Do you think Tesla will outsource that operating system to third parties one day or open it up as they have done with, let's say, the charging network now?

They would not easily disclose that; that is the key point, and I think not. As it evolves every year, they will change it and keep improving it. Of course, the computing strength for integrating with AI and autonomous driving is evolving, and every year, they make a lot of progress. That's a secret point they are very confidential about.

Why do you think they opened up the charging network?

I'm sure that was a deal between Tesla, the government, and other state authorities. Maybe Tesla got some other incentives to do that. Plus, it makes revenue for them. When others come and use the network, it is revenue, especially now that energy is expensive. They're making good money on that.

Do you know how they’re making money on that?

I have no information or details about it, but of course, for every kilowatt how they charge you, at peak times in the Bay Area, it's something around 0.6 dollars for every kilowatt hour, which is big money. Nobody cares here; people are rich, and they charge it, and I'm pretty sure it's at a good margin.

Point six dollars per kilowatt hour?

Yes.

Wow. Is that just the Tesla margin, or is there a cost included?

I think that is what they charge the customer, but what is the margin, how much they are making on that, I don't know. The company called PG&E here, Pacific Gas and Electric, its normal cost is $0.24 or $0.25, and in peak times maybe $0.3, but Tesla charges in rush hours and daytime $0.6, double the cost of PG&E.

That’s a big margin. I guess we’re out of time. We covered a lot, but could you talk more about the safety of the cars? Why is Tesla leading in all performance metrics? Could you talk about these topics as well?

About the safety? Recently there was a two-minute video by Lars Moravy, who is the SVP of manufacturing engineering. He's explaining how the car is safe. I think that was great. I loved it. I know Lars; I worked with him directly. He's one of the best. He's the mastermind in Tesla for new products. Those two or three minutes, I think, explains why the Tesla car is so safe.

It's safe because of the powertrain, because the weight is at the bottom, and the car is unlikely to burn. But are there other things?

Yes, I can send you the video. It's on YouTube. You can search "Tesla Safety, presented by Lars" and easily find it on YouTube. In that video, he's not talking about the powertrain but the body.

I saw the video, how when it collapses that the interior does not get crushed in the same way.

Exactly. It was because of the extrusion part of the casting in the front of the car. It shows that stage by stage, it’s absorbing the energy until it completely collapses. It's not transferring the impact to the cabin. That was a good description of why the Tesla body and car are so safe.

Is it true that it’s also because of the vision? Meaning when the car sees an impact, it will tighten the belt faster?

I guess yes, plus Tesla has a lot of other alerts. When you are close to hitting someone or a car stops in front of you, the car gives you a notification, or there's an alarm, and you realize, I'm going to hit someone, and you stop. Or sometimes, if you are in autonomous driving mode, the car will stop for you, shift the wheels for you, or just shift the steering wheel to save you. Those are real, and they help.

Do you use FSD Beta?

I don’t, but I have seen it.

Why is Tesla leading on all counts regarding efficiency? Largest range, lowest consumption, if you will.

I think Lucid has better factors if you compare; Lucid has a longer range and better efficiency, and Lucid Air is a better car in that sense. I worked for Lucid for two years. I'm not biased, but the Lucid car is better in range, about 500 miles, and Tesla is not over 400 miles. Plus, the horsepower is very similar to the Model S Plaid; they're around 1,100 to 1,200, but they're neck and neck. The Lucid Air is a bit better than the Model S Plaid in terms of efficiency in electrical consumption and the range; the range is 100 miles more.

The range is a function of what?

The range is a function of the battery's size relative to the car's weight. So they made the car smaller, and the way they put the batteries together is denser, and the way they cool the battery is different. Instead of having coils between the batteries, they have two plates, one on the top and one on the bottom, and they cool the battery differently.

The Lucid powertrain is also something that warrants discussion, they have a great powertrain, and all the packaging and design of the car at Lucid is something that, to some extent, is better than Tesla.

But how differentiated is this? Will Tesla not be able to copy that?

They can, but when you have a bigger battery, it means you'll make the car more expensive. Yes, you're getting 100 miles more, but does it add value? Elon talked about that. He said 400 miles is a good range. If you drive 400 miles, you need to stop for about half an hour to go to the bathroom and relax before continuing, and that 20 to 30 minutes is enough to recharge your battery, so why should it have 500? What is that extra for? Having more range is a factor where Lucid is ahead.

This was great. I wonder if we need another call for the supply chain and gigafactory pieces. Are you familiar with the financials and budgeting of those gigafactories and COGS relating to that, all that stuff?

I can help with the capex side because I was always on the capex side as the manufacturing engineer manager. My role was to create a layout that was efficient, dense, straight, and saved footprint for us. That impacted the building cost, the second big capex factor.

Yes.

To discuss COGS, I sat with other operation managers, like logistics and production managers. I know their factors and how they worked to make it more efficient. That was a discussion we had in order to approve a new factory. We always presented the capex, the opex, and the payback period for that factory. So if they invest in this factory, in two or three years, we will make these many cars, this much money, and this is the payback period.

What was the period you were targeting?

Anything under one year was a strong goal. The one-to-two-year payback period was a condition to see if there was a better option. Over two or three years, a no-go; it was red. So under one year was green, over three years was red, and one to two or three years, you needed to look for other options or compare and go into more detail.

Were you looking at returns on capital? Meaning in the capex you were thinking about what the earnings would be?

Yes.

Those were cashflow calculations?

Yes, for example, in this factory, if we can make 5,000 cars per week; by this margin that we have, we can make this much money.

What was the margin you were considering?

Tesla hasn't revealed that because, while I was there, it wasn't very clear. The supply chain was struggling, and the costs were not efficient. But nowadays, we know that the Tesla margin is 30%.

Is that reasonable to assume going forward?

I think Tesla is cutting the margin to about 10% now to own the market in our current financial circumstances. We are in a hard situation today; the customers have financial problems. Especially in North America. It's not like it was a year ago, when there was a long line to get a car. Tesla started to cut the price to ensure they still had enough customers in line. They reduced $20,000 on the Model Y and $13,000 to $14,000 on the Model 3, and they have a 10% margin.

A $20,000 reduction on the Model Y and a $13,000 reduction on the Model 3. You think the margin on those sales will be at a gross margin of 10%? Did I get you right?

Yes.

But that would be very low.

There are reports of how other companies are still making money with 10%; and Tesla is at the top of the list.

But by historical standards, it's low. Over 25% has been the norm for the last four or five years. I thought it was, on average, that if you look at all the products sold, the reduction would be roughly 10% or 15% of the car. The reduction is different in each market. In some markets, it’s single digits; in others, it's 15% or 20%, and the cost per car is going down by 10% per year. I hoped that if the average selling price goes down by 10% and the cost per car goes down by 10%, it shouldn't have a big impact on the gross margin. You're saying the gross margin will be impacted big time. Why is that?

That assumption that every year the car cost will go down 10% is not always true. In the last two or three years, we have seen the raw material issues because of Covid, and a lot of things have been different.

But it was only this year; the cost per car went up only in 2022.

Yes.

Before, it probably came down because of mix shift because they had more Models Y and 3 versus Models X and S.

But in general, I think this trend will continue in the next years because of the overall inflation rate globally. The manufacturing cost will go up, at least for a year or two, until we stabilize. The Fed is currently trying to control inflation, and the cost of money is 6%, 7% now. So you have to make 15% just to satisfy that, to get to a break-even point, by a 6% to 7% cost of money. I'm not an expert on the financial side, so my understanding is not deep on that side of the business, and this is just my understanding.

I'm looking forward to that first quarterly report because it will show what impact those price cuts will have on the margin.

I think Tesla is just putting their foot on the other rivals' necks. They want to make sure, even if the margin is 0% or negative. I think the strategy is to kill other rivals.

Really?

Yes; they’re trying to make sure.

This was great. I learned a ton, and I enjoyed it.