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Tesla (TSLA) is on a path to achieve Apple-like margins through battery innovations

(Photo: Andres GE)

Tesla’s (NASDAQ:TSLA) Battery Day outlined a path for the electric car maker to reduce its battery costs by as much as 56% over the next few years. Granted, achieving this milestone will likely take some time as per the company’s executives during the event, but if Tesla were to accomplish its targets, the electric car maker could end up achieving impressive gross margins, rivaling even industry leaders like Apple. 

Data research and analytics firm Trefis recently shared a post about the electric car maker and how its battery technology could enable the company to widen its lead over its competitors in the automotive sector. As noted by the firm, Tesla’s 56% reduction in battery costs could boost the company’s Automotive Gross Margins by 800 basis points. 

Tesla’s automotive gross margins are already industry-leading at about 21% in 2019, which was already more than Toyota’s, which stood at 17%. This was a notable accomplishment for Tesla, as the esteemed Japanese carmaker is already one of the industry’s most efficient automakers. In comparison, the automotive gross margins of fellow American carmaker General Motors stood at a more conservative 10%. 

Trefis estimates that if Tesla meets its battery production goals and actually reduces its costs by 56%, the company could boost its automotive gross margins to 30%+ levels. This would allow the electric car maker to rival the roughly 32% Hardware Gross Margins of tech giant Apple, a company that’s considered a benchmark of sorts in the hardware segment. 

While Tesla’s battery production goals are ambitious, the company has been putting in the effort to ensure that it is poised to take on its ambitious ramp into the cell production segment. Tesla has consistently reduced its battery costs over the years, and its innovations have allowed it to undercut the industry by about 20%, as per Trefis’ estimates. 

Bloomberg New Energy Finance (BNEF) estimates that industry average battery costs have declined from $288 to $176 per kWh between 2016 and 2018. Provided that the data analytics firm’s estimates are accurate, Tesla’s battery costs have likely declined from around $230 per kWh in 2016 to $127 in 2019. With a 56% reduction, Tesla’s battery costs would then fall from an estimated $114 per kWh in 2020 to about $50 per kWh. That’s enough for Tesla’s vehicles to reach price parity with gas-powered vehicles, and more. 

Read Trefis’ post about Tesla’s automotive gross margins here

Disclosure: I am long TSLA.

Tesla (TSLA) is on a path to achieve Apple-like margins through battery innovations
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