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Tesla Giga Berlin is producing the luxury Model Y, an analyst at New Street Research concluded after a factory visit. The firm affirmed its Buy rating with a price target of $530 per TSLA (NASDAQ: TSLA) share.
Several investment firm analysts visited Tesla Giga Berlin this week, where they met with the head of Tesla's investor relations, Martin Viecha. New Street Research analyst, Pierre Ferragu, also had the opportunity to get an exclusive tour of Tesla's European factory and had a test drive of Model Y, produced there. Ferragu shared the findings in a note to clients.
Ferragu wrote that he was stunned by the quality of the Model Y produced at Giga Berlin. He expected it to be premium, like a Fremont-made car, but the evaluation showed that the car was already in the luxury league, as its quality was fully equivalent to that of German luxury cars. The analyst believes that the main driver of these improvements is the experience that Tesla has gained at other factories.
“The interior design is about the same as Fremont-made ones, simple, but the quality of the upholstery and overall finish is far superior - flawless. As I mentioned, the quality of the build, that you can evaluate manipulating doors, observing panel gaps, painting & color, was surprisingly excellent. How is that possible? Being based in Germany probably has a lot to do with it (local skills matter!), but my impression was that the major driver of these improvements is simply experience. Berlin is a much-improved factory compared to Fremont, and we see it in its cost efficiency as much as in the quality of the products coming out of it.”
Ferragu came to the conclusion that, compared to the Fremont factory, Giga Berlin is clearly much more efficient. Logistics inside the factory are much easier, with docks that surround the factory on all sides and ensure that parts arrive at the right place in the production chain. The single manufacturing line is designed for a cycle time of 45 seconds and will deliver 10,000 cars per week at full capacity.
The key factor is that Giga Berlin's vehicles are produced with a single-piece rear casting, and will move to rear and front castings as soon as 4680 batteries are available. The analyst reiterated that production with a structural battery pack significantly reduces cost, factory footprint, number of robots for welding, and allows for a much easier assembly.
“The trend couldn't be clearer - Tesla is delivering steady cost improvements, and yes, reading my first two points leads you to the conclusion that over time Tesla is doing cheaper and better products. It is usually a good recipe to grow proﬁtabty. On a side note, casting doesn't only reduce manufacturing costs, it also reduces the weight and increases the safety of the car, improving the product.”
The analyst shared an important fact: the total production time of a car in Berlin is 10 hours, while Herbert Diess said that at the main Volkswagen factory it takes 30 hours. This fact gives an idea of Tesla's production efficiency.
The firm is convinced that Tesla has made significant and tangible improvements in manufacturing costs, will continue to do so in the coming decade, and it will be very difficult for competitors to keep up with Tesla's pace. The analyst cites the example of Giga Press, which manufactures single-piece casts from an alloy developed in collaboration with SpaceX. The automotive industry tried to make big castings, but gave up without success.
Ferragu noted that, at the time of his visit, Giga Presses were not working, but the factory had a large number of castings. This shows that Tesla's casting technology is already very mature and the volume of castings is increasing faster than the rest of the production chain.
Production ramp. Tesla announced 10 weeks ago that Giga Berlin has reached a production capacity of 1,000 vehicles per week. Ferragu expects the factory to be able to reach a capacity of 5,000 units per week by the end of the year, even if it is not easy. A production capacity of 10,000 Model Ys will be possible at some point in 2023. In addition, the firm expects Giga Berlin to add and expand another similar production line, producing 500,000 vehicles a year.
4680 and structural battery pack. The analyst concluded that “the front casting is ready to go and only awaits the availability of structural battery pack and the 4680 cell.” He wrote that the battery production building looked “well advanced.” Based on its observations and ongoing dialogue with the company over several months, the firm expects to see 4680 cells in Model Ys in Berlin in a matter of months or quarters at most.
Demand and profitability. According to Ferragu, Giga Berlin currently only produces black and white versions of the Model Y Performance. Since this is the most expensive option, it indicates that demand is great and the factory is ramping with the most profitable setup one can imagine: “Highest ASP and low cost.”
The analyst emphasizes that Tesla is facing unprecedented demand, which even exceeds what he counted on a few years ago. Electric vehicles have become so popular that for Tesla and its competitors, market share will largely be determined by their ability to ramp volumes. Tesla is working on increasing volumes by 50% a year and aiming for 20 million units by 2030. Ferragu acknowledges that it will be difficult to achieve the goal, but emphasizes that he sees no reason why the company cannot do it.
The analyst points out that Tesla has by far the best cost base in the industry and is improving it by far at the highest pace. All this means “highly profitable growth to the great benefit of shareholders.”
Ferragu affirmed New Street Research's Buy rating with a price target of $530, which translates to $1,590 before the recent 3:1 split.
© 2022, Eva Fox | Tesmanian. All rights reserved.
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