UBS Sees Telsa's (TSLA) Model 3 As Unprofitable

UBS analyst, Colin Langan, thinks that due to slow progress on li-ion chemistry, Tesla's (NASDAQ: TSLA) Model 3 is not profitable at $35k and the company would need to charge nearly $50,000 to break even.

The analyst, hosted a call with Jon Bereisa, President & CEO of Auto Lectrification. Jon spent 35 years at GM and was the chief engineer responsible for the Chevy Volt. He highlighted slow progress in li-ion chemistry since 2014; limited cost/density improvements have come from scaling up the cell size (less cells = less thermal components, interconnects, and weight), not breakthroughs in cell chemistry. He continues to see $133-$155/kWh as best case for pack costs by 2025.

In a detailed breakdown of factory variable cost (FVC), Jon sees the Model 3's FVC $1,510 above base price of $35k vs. the Bolt's FVC $4,980 below base price of $37.5k. Compared to the Bolt, the Model 3 adds incremental variable cost from its aluminum content, lack of scale, extra sensors, a faster propulsion system, and higher pack costs. Jon estimates TSLA's pack costs at $260/kWh and GM's at $215/kWh (due to GM sourcing the cell at-cost from LG).

Tesla disagrees with Bereisa on battery and Model 3 costs. Jeff Evanson, head of TSLA's IR, dialled into the call during Q&A to contradict some of Jon's statements. There were two main points of contention:

1) Jeff stated that the Model 3 will only be partially aluminum, not all-aluminum

2) Jeff stated that the Model S's all-in pack cost today is already <$190/kWh and that the Model 3 will have a battery size below Jon's estimate of 60kWh.

Jon is skeptical about the <$190/kWh cost, as the raw material floor on current chemistries is ~$160 assuming 40% supplier margins. He also sees 55 kWh min. necessary to get to just 200 mile range.

The analyst is also skeptical of TSLA's <$190/kWh pack cost estimate given discussions with other experts (Cairn & MIT). Moreover, factory variable costs only include parts, material, and assembly labor per car. All other operating costs such as depreciation, engineering & R&D, overhead, SG&A, etc. are not included. Therefore, even though TSLA's assumptions would imply Model 3 MSRP could exceed FVCs by ~$4.5k, this still leaves little room for operating profit after covering all other costs. Typically, OEMs require a 45-55% markup from FVC just to breakeven. This would imply, even at $190/kWh, an ASP of ~$45k-48k simply for TSLA to breakeven on the Model 3.

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