How Tesla Motors Inc (TSLA) Plans To Top 25% Gross Margin

How Tesla Motors Inc (TSLA) Plans To Top 25% Gross Margin
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Tesla Motors Inc (NASDAQ:TSLA) can make electronic cars efficiently enough to level the gross profit margin of Porsche Automobil Holding SE (ETR:PAH3) (FRA:PAH3) claimed CEO Elon Musk a few months back. The market value of electric car manufacturers has hiked three times this year. Targeting Porsche margin is long term, but for the short term, Tesla Motors Inc (NASDAQ:TSLA) is looking forward to achieving 25 percent gross margin this year according to a statement from Musk at the company’s annual meeting.

How Tesla Motors Inc (TSLA) Plans To Top 25% Gross Margin

How Tesla plans to do so

This Palo Alto based car maker is bidding on 25 percent margins on the back of its new, bold and ambitious technology. Tesla Motors Inc (NASDAQ:TSLA) has picked electric instead of internal combustion engine technology, which was the dominating trend in the auto industry for almost 80 years.

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Tesla is expected to produce 40,000 units from the current assembly line compared to the earlier expected of around 25,000-30,000 for 2013. Given the current fixed cost configurations, the additional output will result in incremental margin helped by increasing demand of the vehicles outside U.S. Other factors expected to fuel gross margin expansion are regulatory credits, price hike and yen weakness, says a report from istockanalyst.

A weaker yen should be of great assistance to increase the margins because a minimum of $20,000 Model S cost of goods sold is purchased in Yen.

Another factor likely to support Tesla Motors Inc (NASDAQ:TSLA) in achieving margin target is cumulative volume targets on supplied components. Usually it is a tedious task for suppliers of the auto industry to look to make back their upfront capital costs quickly but this procedure has been made simple with Tesla.

Margins can be further expanded by re-sourcing of parts. Tesla does not get any interest from large auto part suppliers owing multiple components, which made them to produce these parts on their own or get it from low-volume job shops. The scenario has changed now as Tesla will be able to source various parts to higher volume suppliers with better pricing.

Analysts also in support

According to Deutsche Bank analyst Dan Galves, investors and others will be contented to see gross margin anywhere but above 20 percent. Regulatory credits will play a significant role in enhancing the margin over 25 percent in the fourth quarter. Other factors like production growth and betterment of designs along with re-sourcing activity will be significant in 2014.

A report from Wedbush by analysts Craig Irwin and Min Xu, expect Tesla Motors Inc (NASDAQ:TSLA) to earn gross margin of 18.0 percent in the second quarter, upside 90bps quarter over quarter assisted by factory efficiency and less vehicle rework before or after delivery. However under absorption of overhead for the inventory build and not so good options mix will bring margin down.

The report says that Tesla Motors Inc (NASDAQ:TSLA) will clinch 25 percent gross, excluding credits, in the fourth quarter margin backed by Roadster, reduction in production cost per vehicle among other factors.

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