Tesla plans to make 4 million of its next generation affordable vehicles per year

Tesla is planning to build out its supply chain to enable it to produce 4 million units per year of its third generation platform vehicle that was recently announced at the company’s Investor Day presentation.

“The model will be a smaller version of the Model Y, for which Tesla is building an annual capacity plan of up to 4 million units” says the Chinese news site CnEVPost story which in turn quotes a Chinese language media outlet 36kr.

The report says that Tesla is planning to manufacture 4 million units of the new model per year by 2030, including 2 million at the new factory in Mexico, 1 million in China at the Shanghai factory, and another million at Giga Berlin.

There has been a lot of speculation about Tesla’s ability, and desire, to produce a low cost EV, although it has been shy about any details or timetable. However, Tesla’s 4 hour Investor Day presentation last month did provide details on how Tesla could cut its cost per vehicle by 50% from $US39,000 to less than $US20,000.

The news out of China appears to show that Tesla is now working to lock in suppliers for an annual production rate of 4 million units of the new model which based on the size of current global market would equate to around 5% of total annual global car production.

Vertical integration and manufacturing innovation key to getting costs down

The 36kr report quotes a source as an engineer from a leading car manufacturer who said that their company had previously planned to launch an affordable BEV but that it was extremely difficult to achieve vehicle BOM (bill of materials) for less than 150,000 yuan (~$US22,000).

The cost of each part is made up of the raw material cost, the production cost of the part plus the profit margin that a supplier adds to the part.

While traditional automakers have for decades moved towards a model of outsourcing a lot of the parts that go into their cars, Tesla has done the opposite focussing on vertical integration by making as many parts in-house as they can.

Vertical integration means that the additional profit margin component of purchasing a part from an external supplier disappears once the part is made in-house.

As more parts are produced in-house and as new manufacturing techniques are developed, the cost per part will approach the raw material cost of the materials that make up the part.

This raw material cost is generally considered the cost floor or barrier in manufacturing however even here Tesla has indicated it sees opportunities for reducing costs.

In its Investor Day presentation Tesla said it will be commissioning a 50 GWh/year lithium refinery by the end of this year.

During various interviews Tesla CEO Elon Musk has also hinted that Tesla may even get into mining in future.

With the ambition to vertically integrate the entire supply chain all the way to resource extraction while developing ever more automation into the production process, over the next few years Tesla could take big strides towards its states goal of a sub $US20,000 cost of production per vehicle.

Tesla’s goal is to sell 20 million EVs per year by 2030, a production rate that is double the current largest car maker Toyota which produces around 10 million petrol and diesel cars per year.