Often we hear about the threshold for survival in the automotive industry being the number of cars sold each year, whether it is 50,000, 100,000, 200,000 or more.
Today, let’s examine why scale is so important in the automotive industry using Tesla’s data as an example.
As Tesla’s Q4 2022 capital expenditures have not been announced, it is estimated to be $1.2 billion. Therefore, the total capital expenditures for Tesla in 2021 and 2022 are approximately $13 billion. Most of these capital expenditures, about 80% or $10.4 billion, is allocated to the construction of the Berlin and Texas Gigafactories.
Let’s take a look at the average monthly production data in Q3 2022 for both Gigafactories, which is around 2,000 vehicles per month per factory. Assuming the depreciation period for the equipment in the Gigafactories is 10 years, the depreciation expense for each vehicle produced in 2022 Q3 is $21,666, which is calculated by dividing $10.4 billion by 10 years, 12 months, 2 factories, and 2,000 vehicles per month. At this rate, the production capacity of both Gigafactories is 48,000 vehicles per year.
If the monthly production climbs to 5,000 vehicles per month per factory, the depreciation expense per vehicle is $8,666, resulting in a production capacity of 120,000 vehicles per year.
If the monthly production reaches 10,000 vehicles per month per factory, the depreciation expense per vehicle drops to $4,333, and the production capacity of both Gigafactories becomes 240,000 vehicles per year.
Let’s quickly calculate the depreciation expense per vehicle for the Shanghai Gigafactory, which can be used as a benchmark for efficiency. Tesla’s total capital investment in 2019 and 2020 was $4.6 billion, and with the possible line upgrades in 2021 and 2022 estimated to be 20% of the $13 billion capital expenditure, which is about $2.6 billion, the total investment for four years is approximately $7.2 billion.
The production capacity of the Shanghai Gigafactory at the end of 2022 is around 1.2 million vehicles per year, resulting in a depreciation expense of $600 per vehicle.The above only considers the depreciation and amortization of fixed assets, and the amortization curve of labor costs is actually very similar to the above process.
Taking the Berlin Super Factory as an example again, the latest progress is about 8,500 employees. Assuming an average monthly salary of $6,000 for employees (currently the euro is almost equal to the dollar), when the production is 2,000 units/month, 5,000 units/month and 10,000 units/month, the labor cost is allocated to the cost per unit respectively as $25,000/unit, $10,200/unit and $5,100/unit.
Looking at the Shanghai Super Factory, the global benchmark for manufacturing, there are approximately 16,000 employees and an average monthly salary estimated at RMB 20,000, resulting in a labor cost allocated per unit of $460.
Therefore, it can be seen that the total cost of annual production of 24,000 units, 60,000 units, 120,000 units and 1,200,000 units at the combined cost of depreciation and amortization and labor costs are $46,666 per unit, $18,866 per unit, $9,433 per unit and $1,060 per unit, respectively.
This is only considering the depreciation and amortization of fixed assets and labor costs, without taking into account the cost of raw materials and other costs. However, it can already be seen that the cost difference brought by scale is huge. Therefore, the larger the production capacity of a car company, the more discounts it can give to consumers, and the higher the cost-effectiveness of its products.
This is also why car companies must strive to achieve economies of scale in sales. Basically, products produced by companies with an annual production volume of less than 100,000 units/year are unlikely to be competitive in price, and in practice, they may face many unexpected situations. This number may need to reach 200,000 units/year to be more secure.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.