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Comment by partiallypro | Hacker News Reader

Automotive is a low margin, high liability industry. I think Google is approaching this correctly in staying out of the hardware (for the most part.) Apple developing a full car that has to meet x & y regulation from every single different country could end up being a big disaster. Tesla isn't even profitable and has a cash burn that makes a winter furnace seem tame. I don't see how Apple can escape that reality too.

I'm sort of surprised that Microsoft & Amazon are sort of just sitting back, watching. I guess neither of them care so long as the back end is running on their cloud.

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> Automotive is a low margin, high liability industry.

It's a lower margin for the classic companies that use a dealer model to sell cars. Direct sales like Tesla have pretty decent margins. It's unlikely Apple would use a dealer model. That's pretty outdated and will eventually go away (though not without kicking and screaming from the existing dealers).

Don't forget many Android phones have awful margins but the iPhone? HUGE margins. Apple sells premium products. Ultimately it won't matter what the margins are for any of the existing companies when they move into a new industry.

> I'm sort of surprised that Microsoft & Amazon are sort of just sitting back, watching. I guess neither of them care so long as the back end is running on their cloud.

I would be surprised if both companies haven't done some research into this. Microsoft's R&D is pretty famous for working on tons of moonshot ideas, many of which never see the light of day. Amazon seems to move into whatever space they think they can get into. Right now they're kicking ass with their brand new AI initiatives so I think they have their hands full (if I were them I'd shove Alexa into every product I could).

No, that's a really bad analysis of margins on cars.

Look, the margin on a $700 iPhone is somewhere in the vicinity of 30%. That means that the price that an iPhone user pays for the privilege of having an iPhone per se is about $200, maybe $300 on the outside.

For a car whose manufacturing costs are $30,000, a 30% margin would mean selling at $42,000. The size of addressable market that can afford to spend $12,000 on Apple brand is microscopic compared to the market size of people who can pay $300 on Apple brand. The "luxury" market for cars is inherently much, much, much, much, much smaller than the luxury market for smart phones.

So if Apple does try to attain iPhone-like margins in the car market, they will necessarily address a tiny market. If they don't, they'll still address a much smaller market than the smartphone market, and with smaller margins to boot.

> No, that's a really bad analysis of margins on cars.

I'm not seeing how. You post is talking about market size. The parent I replied to was only talking about margin. Two very different things which, as you were pointing out, will have two very different outcomes as far as profitability due to market size but that was never something brought up in the context of the original conversation.

> So if Apple does try to attain iPhone-like margins in the car market, they will necessarily address a tiny market. If they don't, they'll still address a much smaller market than the smartphone market, and with smaller margins to boot.

Smartphones are one of the biggest markets in the world so of course they will be addressing something smaller. Though car market is still pretty huge especially in the corporate selling of vehicles. What if Apple sold fleets to taxi / uber / lyft type companies? Maybe they create their own rival to uber / lyft and you can get picked up in an Apple car.

Seems there is so much speculation here that no one is going to be able to paint an accurate picture of what Apple's entrance into the car market would look like let alone figure out what the margins and revenue would be.

Tesla makes 25% margin on their cars.

But still loses money

I wouldnt be surprised if Apple is working with Tesla for the model 3. They have the money to invest and help, I can see them owning 25% of Tesla for it. But the fact they are hiring away Tesla engineers argues against this point.

Tesla is a public company. Apple would have to disclose a buying significant stake, plus it is publicly available information.

I dont think they have yet, but Im wondering if hiring Tesla engineers is a way to skirt that issue and help to collaborate/co-develop a product. I dont see Apple building it's own car from scratch, especially given Apples quality track record the last 5 years.

There is a big difference between loosing money because you build and sell individual cars at a loss, and investing in further capacity. They make money on the cars they build and sell, the overall loss comes from investing in the new factories and product lines. This should come as no surprise to anyone familiar with startups.

You're supposed to include capital expenses and depreciation in margins. Just because they're building factories doesn't mean they have higher margins.

This is why startups underestimate their expenses.

The new factory isn't part of the current production cars Cost of Goods Sold because it isn't being used yet. See the matching principle. The depreciation of the factory will absolutely factor into the COGS of the cars it produces in the future, but the increase in sales volume should compensate for that.

IIRC, Tesla has had only one profitable quarter since 2003, its founding.

Last quarter, they had 1.4 Billion in cash and had a $280 Million shortfall. In ONE quarter.

That's AFTER accounting for the +$350 Million-ish they brought in from the Model 3 pre-orders btw. I don't think they are going to repeat the +350ish thousand preorders at +$1000 cash per anytime soon.

But they are also growing by about 50% year over year (and more!). In 2015 they sold as many cars as Porsche sold in 2000, this year probably as much as Porsche in 2004. Tesla is spending every dollar they can get hold of into growth. The preorders for the Model 3 equal a possible revenue of 15 Billion alone.

Sales went up 50% YoY. Loses went up 83% YoY.

They have the Bank of Musk, which is a massive advantage. Apple does have all of that cash on hand, though, so that's less of an advantage if they are truly working on a car.

This doesn't give a completely accurate picture of Tesla's financial situation. Tesla has MASSIVE capital expenditures and will continue to have so for years. They could probably become quite profitable on a quarter-to-quarter basis by stopping all new development and manufacturing investments, but this would kill their possibility of becoming a major auto manufacturer.

The gross margin on Model S is indeed 25%, and the gross margin on Model X is also expected to exceed 25% once volume production is finished ramping up.

I disagree.

Tesla only had to go Model S -> Model 3, just as originally planned, and they'd be much more profitable than today. Model X, despite its 25% margins or so, isn't making money due to manufacturing issues. Its too complicated with its Falcon doors, and doesn't really have an impact from a sales or marketing perspective.

Instead, Tesla spends billions ramping up Model X, only for GM Bolt to release before the Tesla Model 3. BMW and other companies are catching up as well.

Even the Nissan Leaf may release a 200+ mile model before Tesla's Model 3, all because of the delays incurred with the Model X divergence.

I really think the Model X divergence was a mistake. If Model 3 launched just a year earlier with more money in the bank, Tesla would be in a much healthier position.

I'm undecided on whether Model X was a mistake even when seen in retrospect. It might be the case. But assuming that it was, Tesla couldn't have known this beforehand. Model S demand turned out to be more than twice as high as Tesla initially expected -- at least six months of the Model X delay was caused by the deliberate decision to increase Model S production rather than carry on with the initial plan to produce Model X right away. Maybe Tesla could have backed water at this point, but I'm not sure that it would have been a good risk-adjusted move, given that Model X represents very good diversification in the premium-vehicle segment. There is low overlap between luxury sedan and luxury SUV buyers.

Model X was initially thought necessary to produce enough revenue through the time at which Li-ion batteries could be produced cheaply enough in large quantities to launch a cheaper, good electric car. That the Model S turned out to be so popular wasn't at all obvious in 2012, when it first entered production.

I find that shocking. They are using new/expensive technology, high quality parts and low volume production methods and they are making a higher margin than a company like BMW or GM who have the benefit of scale and ability to squeeze suppliers?

Not saying your number is wrong, I'm just really surprised.

BMW or Mercedes make million different models of their vehicles. Some of them make a lot of money, some of them are probably losing money and always will - M or AMG products are very expensive, but they sell relatively few cars every year - their brands keep those cars to be leaders in their sectors, not because there's a huge amount of money to be made on them(good example of that is the Veyron made by the VW group - VW said that they will never make profit on that car, despite it costing over $1 million USD, because the research to make it was so costly. The only reason it exists and you can buy one is so that VW can say they make the fastest car in the world).

Tesla on the other hand, makes 3 models, they are not trying to cater to every single market, so they can afford the focus and very high profit margins that come with it.

>despite it costing over $1 million USD, because the research to make it was so costly //

Does the research only apply to the Veyron? I'd be surprised if they can't use advances there in other lines of cars or get patents that they can profit from when used by other car manufacturers.

It does however speak to good marketing to say "we make this car for the love of making cars" rather than "we use this as a way of targeting R&D that we can then exploit in other vehicle lines".

/cynicism

Well, that's a good point. I'm pretty sure VW uses technologies invented for the Veyron in their other cars, but I guess it's hard to estimate the cost/profit ratio in this case. In any case, the point I was trying to make was that other car companies don't maintain 25% profit on all of their vehicles like Tesla does, because they have a much more varied portfolio of models.

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