Gen III Gross Profit Margin (%)

20
15
10
5
0
2011 1 2

13

14

15

16

17

18

19

20

21

22

Tesla will begin sales of the Gen III in 2017. Although management targets a long term gross margin of 25% for the
company as a whole, we believe that overall margins will gradually decline to around 23% as production of the Gen III is
ramped up.
We believe that the company will initially achieve a gross margin of around 17% on the vehicle, gradually increasing to
23.5% by 2020 and will stay at around that level until the end of our forecast period.
Forecast Rationale
Supporting:
Mitigating:
1. HIGH END VARIANTS OF THE GEN III WILL HAVE HIGHER MARGINS – The Gen III will be available in a price range
from $35,000-$60,000. The high end variants offer larger battery packs and premium features, such as better interiors,
improved suspension, and carbon fiber spoilers. This will help command higher margins.
2. DECLINING BATTERY COSTS – The costs of electric vehicle batteries are expected to decline substantially over the
course of this decade due to improving technology and battery makers achieving economies of scale. Batteries make
up a substantial portion of the total manufacturing costs of EVs, and a decline in these costs can considerably boost
margins.
3. According to a 2012 McKinsey study, the price of a lithium-ion battery pack could drop from $500-$600 per kiloWatt
hour(kWh) to about $200 per kWh in 2020 and $160 by 2025.
4. ECONOMIES OF SCALE – Once Tesla ramps up production of the Gen III, costs will be substantially reduced due to
economies of scale, thereby leading to higher margins.
5. COMPETITION CAN FORCE TESLA TO REDUCE PRICES – The EV market is expected to grow at an exponential rate over
the next several years. A large number of competitors are bound to emerge, and considering the fact that Tesla is a
relatively new brand, customers may prefer to purchase EV's manufactured by trusted brands. This could force Tesla
to decrease prices in order to maintain its market share, thereby reducing margins.
Sources for historical data and explanations can be found on the Trefis.com website (link)

TREFIS ANALYSIS for TESLA MOTORS

CONTENT@TREFIS.COM

+ 1 617 394 8763

•16