Elon Musk explained why Giga Shanghai is more cost-efficient during the latest Tesla Earnings call. Musk and CFO Zachary Kirkhorn spoke briefly about Tesla China’s factory in Shanghai during the call, and the information they shared was enough to glean how much Tesla’s factory layout has changed and how it affects the EV automaker’s bottom line.
Tesla's Fremont Factory was formerly the NUMMI plant, a joint venture between General Motors and Toyota. Retrofitting an old factory building that's several decades old is definitely not as good as a brand new factory that is designed from the ground up to be an electric car production facility.
Tesla's experiment with the GA4 tent for early Model 3 production helped the company refined its production line. Gigafactory 3 in Shanghai is built with the knowledge Tesla gained inside GA4. This is why Tesla Shanghai Gigafactory is the most efficient and highest auto plant investment per unit of fixed assets.
Tesla’s Solid Gigafactory Template
As a previous Tesmanian article noted, Giga Berlin’s blueprints reveal a developing pattern in Tesla’s factories. Phase 1 of Tesla’s Berlin Factory and its the Shanghai facility will be similar in design, based on blueprints from gathered from the town hall in Brandenburg. Phase 1 of Giga Shanghai houses the assembly line for the MIC Model 3. Similarly, the Made-in-Germany Model Y’s production line may take place in Phase 1 of Giga Berlin.
During Tesla’s Q4 2019 earnings call, an institutional investor asked about Giga Shanghai. The participant wondered if Tesla could share what it had learned with their new factory and how it affected the EV maker’s long-term gross margin.
“You have spoken previously about Shanghai Giga begins 65 percent lower CAPEX per unit of capacity. Have you learned to do anything better or differently from an OPEX perspective, and if yes, what kind of impact might we expect on the long-term gross margin?” the investor asked.
Tesla CFO Zachary Kirkhorn took the helm in answering the question. “Yeah, the Shanghai Factory has been a quite remarkable cost experience across all line items of COGS for the Model 3 there. We have talked a lot about the CAPEX premium of capacity being lower, but you can basically run down [an] entire list of COGS between labor cost[s], a material cost[s] due to localization…
“So it’s opening up suppliers that would not have made economic sense from States localizing the supply chain flows into inbound logistics and outbound logistics costs as well. So we’re not shipping cars from California over to China. And then that has corresponding savings on our lower import-related costs,” Kirkhorn explained.
He also clarified how the evident layout differences between Fremont and Giga Shanghai have helped reduce costs. Kirkhorn referenced a picture in Tesla’s Shareholder Letter for Q4 2019, which showed the stark differences between the production line in the Fremont Factory and the Shanghai Facility (see article’s Feature Image above).
“The simplification in terms of the flow is pretty evident from that layout, and that cascades itself into all sorts of savings to the operations of the facility. And so you know if you add all of this up our internal estimates are a pretty significant reduction in the cost of the Model 3 in China, relative to Fremont. I think it’s also important to keep in mind that the Standard Plus that we’re selling out of Shanghai is also lower than that of the similar car coming out of Fremont upfront from a price perspective. I’ve said this on previous earnings calls. I think it’s fair to expect the margin coming out of the Shanghai facility to match the same margin for the vehicle in Fremont,” he said.
Elon Musk stepped in after Kirkhorn’s explanation to stress how significant Giga Shanghai’s efficiency, output, and placement in China was to Tesla as a whole. Musk explained how cost-efficient it was for Tesla to have a factory making its vehicles, specifically the affordable Model 3 and Model Y, within the country where the cars will be sold.
Musk clarified that having a China-based factory to make cars for the country eliminated certain costs for Tesla, like tariffs and transport payments. Since the MIC Model 3 wouldn’t have to be transported from the US, they could be delivered faster to customers, too.
He also noted that Giga Shanghai helped reduce the complexity of the assembly lines in the Fremont Factory. Tesla’s California-based factory has to continually shift from one country’s specific car design to another to make sure all the final products meet regulatory requirements and needs in each territory.
For instance, the steering wheel in cars for Japan would be on the right side, while the ones meant for the US are on the left. Fremont would have to keep each of these little details in mind when making cars for each country. In contrast, Giga Shanghai only makes cars for one country, so it doesn’t have to shift from one design to another, which saves time in the long run.
Image Credit: @Krisoyo/Twitter
Tesla Gigafactories in Elon Musk’s Master Plan
Based on Elon Musk and Kirhorn’s answers, the EV maker has found a solid template for its factories that increases the efficiency of its production line. However, Tesla continues to constantly tweak little details to optimize its vehicles' assembly process even more.
For example, Elon Musk shared at the MIC Model 3 delivery event that Tesla had found a way to improve production for the Model Y through advanced manufacturing technology. Musk’s small announcement about the Model Y production line was largely overlooked in the light of the MIC Model 3 delivery event. However, it could be a major indication of where Tesla and Elon Musk are in relation to his Master Plan, Part Deux.
In Part Deux of his Master Plan, Musk briefly mentioned his ideas for Tesla’s future factories.
“What really matters to accelerate a sustainable future is being able to scale up production volume as quickly as possible. That is why Tesla engineering has transitioned to focus heavily on designing the machine that makes the machine -- turning the factory itself into a product. A first principles physics analysis of automotive production suggests that somewhere between a 5 to 10 fold improvement is achievable by version 3 on a roughly 2 year iteration cycle. The first Model 3 factory machine should be thought of as version 0.5, with version 1.0 probably in 2018,” Musk wrote.
With Model Y production nearing, Tesla may already be working on ticking that part of Elon Musk’s Master Plan off the list.
Tesla’s solid Gigafactory template leads to an optimized vehicle production process because it is efficient both in time and cost. Further optimization in its Gigafactories could lead to even more cost-efficiency, and the time to concentrate on making Tesla’s facilities into products for the company. If all goes according to Elon Musk’s Master Plan, Tesla's future will definitely be bright.
Featured Image Credit: Tesla Shareholder's Letter
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