The Cost of Being an OEM

A number of stories have recently surfaced, positing that Tesla will have to burn a lot of cash to stay in the auto manufacturing business:

Tesla Motors Inc. will continue to burn through large amounts of cash in its quest to become a bigger car maker, and Wall Street may be underestimating how much spending is still to come, analysts at Barclays said in a note Friday.

Tesla TSLA, -2.70% doesn’t have a good track record in spending efficiently, and its business strategy will keep it a capital-intensive company, the analysts said. They estimated Tesla, which has consistently lost money, will go through $11 billion in capital spending over the next five years.

This, of course, contrasts with Google’s business model, which is to focus on software and leave the manufacturing to others.

I’ve always wondered why the price of (standard, human-driven) cars hasn’t fallen further. What are the costs of making a car? This Quora answer is short, so I’ll post it in its entirety:

OEMs (e.g. Ford, GM, VW etc) do not make car parts. What they do is the final assembly at their JIT [DS: I assume this stands for Just-In-Time] plants.

So the basic costs associated making a vehicle are:

-payments to auto parts suppliers (overhead console, flooring, door panels, electric wires-pretty much everything 🙂 )

-payments to auto part makers investment (mould and stamping machines etc)

-logistic costs

-SG&A of an OEM

Diving in a little further, Ford’s most recent Form 10-K shows that ~88% of their costs fall under “Automotive cost of sales”, which is accounting-speak for the costs of producing cars. Actually, that probably understates the case a bit, because Ford also has a small financial arm, and some of the remaining costs are attributable to that.

Of course, “Automotive cost of sales” encompasses the first three bullet points above, and the 10-K doesn’t have enough information (at least upon a quick scan) to break down the costs further.

It would be interesting to know more about where Tesla has the opportunity to wring costs out of the system.

Originally published at on November 14, 2015.

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