Model X Gross Profit Margin (%)

30
25
20
15
10
5
0
2011 1 2

13

14

15

16

17

18

19

20

21

22

Tesla will begin sales of the Model X in the second half of 2015. The company's management targets a long term gross
margin of 25% for the company as a whole, with margins of the more expensive models being higher.
We believe that the company will initially achieve a gross margin of around 17% on the vehicle, increasing to 22% by
2016 and rising gradually from there on. The margin expansion will be helped by the inception of the gigafactory, which
should lower the overall battery costs.
Forecast Rationale
Supporting:
Mitigating:
1. TESLA CAN COMMAND HIGHER MARGINS ON THE MODEL X DUE TO THE UNIQUE NATURE OF THE VEHICLE – The
Model X will be the first ever pure-electric luxury crossover. It will also offer a number of other unique features, such
as "falcon wing" doors and Tesla's touchscreen control panel.
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 Model X, costs will be substantially reduced due to
economies of scale, 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 EVs 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

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