Car program economics

Volume manufacturing of cars is a game of big numbers. Rumored development spending on the Nissan Leaf was about 6B$. Further Tesla apparently spent a whopping $90k manufacturing the first few Tesla Model 3 cars. Given all this, how do carmakers actually make money? The answer lies in a few “good-models” that can be sold at a profit, which usually happens near the end of the model’s useful lives. Lets dive in and explore car-economics from the standpoint of the carmaker.

The car industry is not for the faint of heart. Lots and lots and lots of money needs to be spent long before a car model hits the market, starts selling, and eventually, starts making a profit. Lets start with the development costs. This would cover anything from basic research into battery electric drive-trains, setup of manufacturing plants, tooling etc. Basically anything you need to start producing your first production car. Nissan reportedly spent at least 5.6 B$ to bring the first generation Leaf to market, compared to 1-2 B$ for something more traditional (source). Tesla spent perhaps 2-3B$ developing the model 3 (source).

Once developed, manufacturing needs to be perfected. This some say, is a bigger hurdle, Tesla for example reportedly spent about 84k$ producing the first few Tesla model 3 cars (source), which has since dropped to 36k$ (source). This translates into a sizable financial problem, fresh from spending billions on development, car manufacturers now need to spend more billions subsidizing their cars until they turn profitable. As we shall see, this requires massive cash.

Lets illustrate with a simplified example. Suppose we spend 2B$ in developing an EV. We expect to sell 100 000 cars per year (not too far off from the Tesla Model 3 source). We assume an “exponential fall” in per-unit manufacturing costs starting at 90k$ per unit, dropping to 30k$ per unit in 4 years (source). Our market research indicates we can sell our EV for 45k$. This leads to the following program balance.

As you can see, we start with a $-2B loss, for our development efforts. Interestingly, more hurtful is actually the fact that we spend 90k to build the first few cars. Recall, our sale price is 45k. Adding this up in our “program balance sheet”, we see that we need not 2B in the bank to develop our EV, but 6.5B to cover the manufacturing losses early on in the program. Its not until year 7 we actually see a program profit, even though we got to per-unit profitability in year 2. Indeed, the numbers are quite something. Feel free to play with my spreadsheet, its available below. Drop me a comment with your thoughts.

Hence, the carmaker’s “economic lifeline” is likely found in older established models that have been around for a few years, models that have long ago paid off their development costs, and the manufacturing crew has had a few years to figure out how to make it efficiently. For Tesla, this is almost certainly the Model 3, and Nissan has had plenty of time to iron out the kinks in the Leaf’s production.