“With the huge roar of the machines, we can even hear the sound of burning money,” Musk said in a recent interview, adding, “The Berlin and Austin factories are losing billions of dollars right now.”
In common sense, Musk’s words seem to have thrown a blockbuster into the market. You know, Tesla’s gross profit margin for cars has exceeded 30% for three consecutive quarters, and it is definitely one of the best companies in the industry.
Combined with the fact that analysts cut their second-quarter production forecast to 250,000 vehicles, it seems that Tesla’s high profitability levels are unsustainable. In addition, Tesla’s investment in Bitcoin may have a floating loss of more than $400 million, which has caused many analysts to cut Tesla’s price target.
Although Musk’s description is vivid, the problems of Tesla’s Berlin and Texas Gigafactories have not caused a huge reaction from the market.
Building a new plant will always affect margins, as the rate of growth in early-stage revenue certainly doesn’t match the huge up-front investment.
Industry experience is that when a manufacturing plant can use 80% of its installed capacity on a two-shift basis, it tends to operate at substantial profitability. Only when that percentage drops to 60% does a factory lose money.
However, when a factory is just starting up production, there is always a long list of initial issues that need to be resolved.
For example, the supply chain needs to work flawlessly; the production machines need to be constantly adjusted to ensure that the exterior body panels fit together seamlessly; and the workstations must meet time targets so that the assembly line doesn’t slow down.
If these issues are not fully addressed from the start, errors will pile up as more and more cars are produced each day, and ultimately manufacturers will spend more to fix the line.
So while capacity utilization rates at the Berlin and Texas Gigafactories are currently low, Musk has previously said that it will take about 12 months for these new plants to be at their peak operational efficiency.
In fact, Tesla’s rival Volkswagen is struggling to match the expected production rate at the Berlin Gigafactory, where a Model Y electric SUV takes just 10 hours to roll off the assembly line. That’s twice as fast as most car manufacturing plants, thanks to new production techniques such as one-piece die-cast bodywork front and rear.
In addition, Tesla’s higher productivity than the industry average is partly due to the very low complexity of vehicle production. Almost all of the capacity comes from the Model 3 and Model Y electric cars, which have little room for choice in exterior colors, rims and interior trim.
For now, Tesla’s Berlin Gigafactory only reached the production level of 1,000 electric vehicles per week earlier this month, which is equivalent to only about 10% of the designed capacity of 500,000 vehicles, which is already in operation. Almost three months.
Musk said: “The expenses are high, but there is little output.” The key depends on what Musk said next: “This will all be solved quickly, but it will take a lot of energy.”
Tesla expects deliveries to continue to grow by more than 50% at its Shanghai, Berlin, and Texas Gigafactories this year, and earnings per share could approach $12 in 2022. Tesla stock trades at about 60 times forward earnings, which is high for most publicly traded companies, but bulls see this as reasonable given that few companies in the industry can grow at such a rate.
In fact, Tesla bearish investors may want to keep in mind that the second-quarter numbers will almost certainly be Tesla’s lows for the year. Investors may only need to worry if these early problems at the Berlin and Texas Gigafactories continue into the fourth quarter.
In terms of market performance, investors also took Musk’s warnings in stride. (Chen Chen)