Professional Documents
Culture Documents
17 April 2018
INDUSTRY UPDATE
Global Autos & Auto Parts
European Autos & Auto Parts
Industrie 4.0 vs. Tesla’s ‘lights out’? NEUTRAL
Unchanged
German OEM CEOs don’t need to sleep on the factory floor: In 2017 Tesla won the PR
For a full list of our ratings, price target and
war, even if Chinese OEMs took the electric sales crown. But we expect EU premium earnings changes in this report, please see
carmakers to fight back in 2018/9. And it's not so much about headline-grabbing table on page 2.
products (although the Porsche Mission E, Audi E-tron and Jag I-PACE are snapping at
the heels of Tesla on range and performance), but about the more mundane war of European Autos & Auto Parts
production efficiency. Despite his vision for full factory automation, Elon Musk is Kristina Church
sleeping on the factory floor again during his current Model 3 “production hell” woes, +44 (0)20 3134 2199
and tweeting about his underuse of human workforce. We think German OEMs are kristina.church@barclays.com
Barclays, UK
about to launch an onslaught of attractive AND profitable electric products; we expect
them to hit targets. The German (and Japanese) model of a harmonious blend of robot Dorothee Cresswell
and human, perfected over 100 years of 'kaizen', together with the benefit of Industrie +44 (0)20 7773 2192
4.0 will ensure a speedy and efficient production ramp. dorothee.cresswell@barclays.com
Barclays, UK
BMW is our new Top Pick in European Autos, replacing VW (OW, PT €212).
Adam Rae, CFA
Underappreciated modular capabilities as well as a supportive product cycle and positive
+44 (0)20 7116 1579
mix through 2018 and 2019 lead us to reiterate our OW on BMW with a PT of €115
adam.rae@barclays.com
(previously €114). We downgrade Daimler from EW to UW on the back of a relatively late Barclays, UK
and, as a result, more expensive commitment to electrification at a time of weakening
earnings momentum and mix at Mercedes. We therefore apply a 15% discount to U.S. Autos & Auto Parts
historical multiples, which takes our SotP-based PT to €73 (previously €82). Brian A. Johnson
+1 212 526 5627
The German OEMs don't just promise, they deliver: Silicon Valley may be better at PR brian.a.johnson@barclays.com
and building brand, but we believe EU premium OEMs are quietly creeping up on their BCI, US
Space-aspiring counterpart (as are Chinese OEMs). Incumbent OEMs have >100 years
Dan Levy, CFA
of know-how on world-leading processes from Just-in-Time, Lean Manufacturing, to
+1 212 526 8047
modular design and now Industrie 4.0, utilising AI (artificial intelligence) and IoT
dan.levy@barclays.com
(Internet of Things). And the incumbents are generating serious cash and profit, even in BCI, US
the face of declining diesel and tech disruption. We believe BMW's modular production
won't be threatened on range by native EV platforms. With the 5th-gen electric about to Steven Hempel, CFA
+1 312 609 7260
launch, we believe BMW is well placed to enjoy the returns of profitable BEV production,
steven.hempel@barclays.com
whilst peer Mercedes, on its first gen, may see margins at greater risk.
BCI, US
And don't forget the importance of scale, global reach and product diversity:
Whereas Tesla has design innovation to its credit, BMW (Mercedes and Audi too) have
more cash to invest, a broader portfolio over which to spread costs and with which to
entice customers, global modular manufacturing (and distribution) expertise and long-
standing supplier relationships. With the surge in SUVs globally, the slow death of diesel
should be more than offset by strengthening mix and modular product breadth.
Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with
companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision.
This research report has been prepared in whole or in part by equity research analysts
based outside the US who are not registered/qualified as research analysts with FINRA.
PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 78.
Barclays | Global Autos & Auto Parts
Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold)
Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E)
Old New 16-Apr-18 Old New %Chg Old New %Chg Old New %Chg
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CONTENTS
EXECUTIVE SUMMARY: 1) THEMATIC ........................................................ 4
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17 April 2018 4
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There are two key points we plan to explore in more detail in this report:
1) Can Tesla break into mass-market manufacturing and does a higher degree of
automation help?
2) Are native/standalone platforms for electric vehicles discernibly better than fully
modular production across all powertrains?
And don't rule out the traditional OEMs, who have been perfecting cost-effective, highly
automated processes over 100 years of manufacturing know-how from Lean
Manufacturing, to Just-in-Time and TPS (Toyota Production System), to modular toolkits and
now Smart Factories/Industrie 4.0, We think they know how to produce EVs that have been
designed to cost (DTC). A joint study between McKinsey and A2Mac1 (“Trends in electric
vehicle design”, October 2017) recently pointed out that second-generation EVs tend to
achieve far improved performance and component integration than their predecessors.
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We acknowledge that a native BEV (ie, vehicle developed on a standalone platform designed
just for BEVs) has the ability to optimise the battery packaging and position and achieve
optimal energy capacity. Native EVs also achieve a larger interior space (sometimes by as
much as 10%) for the same wheelbase. In theory this means native EVs can obtain best
range too. We therefore think it makes sense for a company with the scale of the VW Group
to pursue this strategy. It may be higher risk, given the greater costs associated, but given
the learnings of MQB (which stands for Modularer Querbaukasten, translating from German
to "Modular Transversal Toolkit"), we think it will prove a successful and cost-effective
solution. But we also note the nearer term premium cars (Audi E-tron and Porsche Mission
E), will be launched on a derivative of the existing MLB-platform i.e. a modular platform
1 https://www.economist.com/blogs/schumpeter/2012/10/z-business-quotations-2
17 April 2018 6
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similar to BMW's strategy, rather than the new performance car standalone BEV platform
(PPE) which will come in the early 2020s.
FIGURE 1
Native electric vehicles may be the ultimate solution for interior space but non-native
vehicles can reach a high range at a more cost-effective price point
Vehicle range versus price
90
80
70
60
Sales Price1
50
thousands
(EUR) Non-native
40
30 Native
20
10
0
0 100 200 300 400 500 600
Range km
We think for premium OEMs, a modular strategy is more fitting shorter term as BEV
penetration ramps. We believe the advances in modularity made by premium OEMs such as
BMW are being underappreciated by the market for their ability to generate superior range
(the iX3 is expected to have >300 miles), but at a margin-protective fixed cost base. We also
believe that given the multiple approaches to EV powertrain and battery design (eg
cylindrical, pouch and prismatic) in the market currently, a company with a fully flexible
manufacturing approach, like BMW, provides itself with the best ability to adjust design if at
a later date the industry converges on an optimal technology solution. And even if no one
solution prevails, we believe BMW will be able to offer its customers a fully modular choice
of battery pack, vehicle styling and range. Given the advances already made on ICE (internal
combustion engine) vehicles with powertrains designed to cost (DTC), BMW will leverage
on these cost advantages via its modular approach, while peers pursuing standalone/native
platforms will have a much steeper learning curve to overcome.
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FIGURE 2
Design approaches to managing EV powertrain and battery thermal management still vary widely among OEMs, which is why
we believe keeping a flexible approach is key to manufacturing until a convergence on a single technology solution
Powertrain Battery
While plugged in or
Nissan LEAF None
on battery
Legend
Active Passive
Water cooling Interconnections
cooling cooling
Source: Barclays Research, A2 Mac1, McKinsey Centre for Future Mobility
We look at how different electric vehicle specs are converging with those of Tesla on range,
performance and, in our view, with much more ability to ramp to scale production smoothly
and in a cost-efficient manner.
We challenge the market assumption that >100 years of automotive engineering know-how
needs to be thrown out the window with the advent of BEVs. We are not questioning Elon
Musk’s visionary prowess nor his advances in increasing consumer acceptance of
electrification, thus forcing automotive incumbents to face up to disruption, but we
highlight why we think the market is underestimating the German OEMs (and GM too).
We also challenge the view that the Chinese have as much opportunity to deliver on EVs as
their European counterparts. We agree that they have government support, and access to
cheap battery cell supply is in their favour, but we think this underestimates the importance
of the deep learning that the traditional OEMs have enjoyed in the field of efficient
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manufacturing and the importance now of “smart factories”. We believe the German OEMs
in particular are leading the way in this field.
In our view, OEMs have been refining exactly the right levels of modularity, flexibility (fixed
vs variable costs; automation vs human expertise), working capital requirements and
vertical integration, as well as long-standing supplier relationships. With EV launches
ramping in 2018/19 we believe the Porsche Mission E and BMW iX3 will be able to perform
very strongly versus Tesla’s product offering as well as leveraging the groups’ global
breadth. We think it would be unwise to underestimate the importance of mass market
BEVs like GM’s Bolt and the Hyundai Ioniq and their ability to steal some of the Model 3’s
thunder.
And the investment isn't just into vehicle production but also consumer understanding. The
industry needs to persuade customers to want to buy BEVs as much as it has to work out
how to produce BEVs profitably. We believe the OEMs’ superior cash balances compared to
Tesla, as well as years of customer understanding via Captive Finance offerings, will help
persuade customers to buy OEMs’ BEVs en masse.
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FIGURE 3
Three phases of electrification – who is best placed?
FIGURE 4
VW and BMW have an improving SUV mix whilst Daimler has peaked
% SUV % SUV % SUV
Models Models Models
35% 38% 34%
36% 32%
30% 34%
30%
32%
25% 30% 28%
28% 26%
20%
26%
24%
24%
15%
22% 22%
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FIGURE 5
Tailwinds from volume/price/mix versus headwinds for technology transition for Mercedes and BMW
1690
740
490
290
190
10
-130
-247
-566 -570
-813
-1010
2018E 2019E 2020E
FIGURE 6
BMW has made large advances as it moves from 1st to 5th gen electric drivetrain
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We are not alone in assuming that battery costs can come down significantly – it is outside the
scope of this report to focus on battery technologies, but we highlight two charts from P3, a
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third party engineering and technology consultancy to the Automotive industry, highlighting
their view of the economic case for BEVs vs ICEs (internal combustion engine vehicles):
FIGURE 8
Battery costs are coming down and chemistry improvements evolving
EUO / kWh
180 Between 2020 and 2021 ~100 EUR/kWh
on battery cell level will be reached
160
140
120
100
80
60
2014 2016 2018 2020 2022 2024
NMC111 NMC622 NMC811
Source: PS3, Barclays Research. Note: NMC is Lithium Nickel Manganese Cobalt Oxide (the numbers represent ratios)
FIGURE 9
On a TCO basis, BEVs are quickly reaching parity with ICE competitors
New business models & approaches in emobility
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FIGURE 10 FIGURE 11
Tesla leading the charge in US BEV sales by model in 2017 Renault still leader for BEV sales in Europe in 2017
35,000 35,000
30,000 30,000
25,000 25,000
20,000 20,000
15,000 15,000
10,000
10,000
5,000
5,000
0
0
Source: IHS, LMC and Clean Technica Source: IHS, LMC and Clean Technica
Equally, the i3, which we will argue later in the report was revolutionary in its production
ethos and set BMW as one of the earlier manufacturers to build a deep understanding of
standalone electric architectures, has also suffered a mixed reception – with consumer
worries more focused on the styling of the vehicle. However, in 2017, the i3 continued to
surpass Tesla’s Model S in European sales volumes.
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FIGURE 12
The Chinese BEV market is much more diverse and currently dominated by domestic players
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
FIGURE 13
Consolidated US, European and Chinese BEV sales 2017
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Global OEMs have aggressive plans for electrification, even if Tesla has been
earliest to the game
In Appendix 1 at the back of this report, we highlight the aggressive electrification plans of
numerous global manufacturers, all looking to take on Tesla’s lead on electric. Are the
German OEMs going to be too late to the PR war (if Renault’s experience in Europe is
17 April 2018 16
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anything to go by, you can definitely be too early to a new concept too). We think the
brand engineering that Tesla has built can be surprisingly quickly eroded, especially when
the impressive stats of the upcoming premium models are reviewed. Much has been written
about Tesla’s lead on battery technology, providing a superior range to competitors, but in
today’s note we focus more on the less-discussed lead that we expect to come from
European production efficiencies. But first, let’s take a look at some of the upcoming,
supposed “Tesla-killer” models:
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Upper end
Middle/lower end
VW ID Neo (2020)
While there’s not enough room in this report to focus on all the exciting new pure electric
products, we go into a little more depth on a few of the launches which we think will be
critical to Tesla’s competitive landscape:
Jaguar’s i-PACE
The launch of Jaguar’s first all-electric offering this month, the I-Pace, is a product pitched
as a direct competitor to the Tesla Model X, given its SUV styling. Its credentials look very
attractive, with 0-60mph in 4.5 seconds, a range of around 500km and an approximate
price point of €75-80k, ie, cheaper than an entry range Model X. Two electric motors are
powered by a 90kwH lithium ion battery and it takes 2hours for a full charge or 45 minutes
for 80% using super fast charge. Like the Porsche BEV, it uses the more expensive (but
better performance) PSM motor and can reach 400PS and 696 Nm of torque. The first
vehicles are due to be delivered this summer. Like Tesla, Jaguar is utilising the idea of OTA
(over the air) updates to ensure the latest technology, 3 screens and ensuring best
customer experience, with live charging updates to deal with range-anxiety. The company
have given no detail on their volume targets but early reviews have been very favourable.
17 April 2018 18
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FIGURE 14
Jaguar I-Pace – the first battery electric SUV launched to appeal to similar customers to Tesla’s Model X
Audi’s e-tron
Audi will supply the next big EV release in August of this year. We are looking forward to the
hotly-anticipated launch event of the Audi e-tron in Brussels over the summer, but from the
specifications already in the market, it looks to compete with Tesla on both range and
performance. The e-tron CUV will be built using the MLB-Evo architecture, a derivative of
VW’s MLB for longitudinally mounted combustion engines. However, to save costs in future
years, Audi and Porsche are looking at a shared architecture for electric cars, called PPE
(Premium Platform Electromobility) from c2022, and will be used for higher utility vehicles
than the Mission E. Stefan Weckbach, Porsche’s head of BEVs, said he plans to take the best
modules from both the J1 and MLB-Evo platforms for the PPE development, which began 18
months ago (for a deeper discussion on VW’s platforms plans, see the following section of
this report). But with 0-60mph in 4.5 seconds and a range of >310 miles and a 95 kWh
battery, we expect the car to be a strong performer. Range-anxiety will also be aided by
fast-charge capabilities within 30 mins.
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FIGURE 15
Audi e-tron – the VW group’s first electric SUV and launched using the MLB-evo architecture
Porsche “Mission E”
One of the most exciting new BEV launches, we think, will be Porsche’s offering from next
May (the concept is named Mission E). It will be a sport sedan which will seat 5 people, with
an 800 volt battery, a range of c300 miles/500km (under NEDC so more like >250 miles
under WLTP) and 0-60 mph in 3.5 secs. It will be capable of “Turbo Charging”, ie charging
to 80% in 15 mins from ultra-fast DC at 350kW and 800 volt. All Ionity chargers will support
800 volt as will Electrify America, the VW built EV charging network in the US.
The Mission E will be produced at Zuffenhausen from 2019 with factory capacity of
c20k/annum, although with some flexibility to flex higher if necessary. We will discuss
platform strategies in the later section of this report, but while the parent group VW is
focused on modularity, Porsche is aiming to retain its exclusivity via a standalone
architecture for the Mission E, called J1. The Mission E Cross Turismo BEV crossover
concept unveiled at Geneva this year will be based on the same platform.
FIGURE 16
Porsche Mission E – will be the first electric 5- door sports-car product to fully compete against Tesla’s Model S
17 April 2018 20
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What is different about the Porsche BEV versus competitor products is that it will utilise a
Permanent Magnet Synchronous Motor (PSM) versus Asynchronous Motors (ASM) used by
other vehicles. We believe this will be a key differentiating factor versus Tesla’s Model S, as it
will enable the car to maintain high speeds for a sustained period of time, eg on the German
autobahn. ASM has high peak performance but lower continuous performance.
From recent discussions with Porsche AG executives, it seems that Porsche management
are comfortable that the lower complexity of BEVs will ultimately bring opportunities in
terms of profitability (definitely in comparison to PHEVs, which require a much more
complicated design due to the need for both a battery and combustion engine). We imagine
BEVs will still come in below the profitability of ICE (internal combustion engine) for now,
but management assure us that they can be profitable at 20k/annum. The project budget
for the Mission E was c€700mn but employees shouldered some of the burden for this cost
via paycuts, which they will hope to recoup at a later date.
And don’t forget that Porsche also sells PHEVs, with the company to offer two variants in
future including the high-performance “Turbo S E-Hybrid”. In fact, almost 60% of Panamera
sedans Porsche now sells in Europe are the plug-in E-Hybrid version. And in addition, in the
U.S. 20% of its Cayenne SUV sales are the E-Hybrid, and that's before the new generation of
Cayenne E-Hybrid goes on sale. We believe this breadth of offering, along with the highly
successful and profitable combustion engine vehicles, should enable the Porsche brand to
compete head on with Tesla.
Wait until late 2019/20 for Mercedes and BMW’s new BEV launches
Consumers have to wait for late 2019/early 2020 for the competitive offerings from
Mercedes and BMW. Both companies will launch new BEV products pitched against the
Model X given their SUV body styles.
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FIGURE 17
Mercedes EQC is the first of the EQ family products for Mercedes and shows the consumer preference for SUV styling
We also argue later in the report that we believe Mercedes are behind their Munich-peer in
terms of in-house capabilities on electric and therefore have a steeper ramp up in spending
over the coming years. Whilst BMW is preparing to launch the fifth-generation electric
drivetrain, Mercedes’ EQ brand is still very much in its infancy. We think Mercedes’ recent
delivery on product styling should enable a very successful reception for the EQ family at
launch, but we believe the phasing of spending will hold back Mercedes’ margins for the
next two years and restrain share performance – hence today’s downgrade to UW.
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Urban Car of the Year". BMW were also the first to offer the concept of fully flexible leasing
packages on the i3 to overcome early adopters “range-anxiety” on BEVs (eg providing an i3
customer with an X5 for longer journeys for a specified number of days of the year).
FIGURE 18 FIGURE 19
After the iX3, BMW returns to the sedan shape for the BMW But the new electric Mini will keep more traditional styling
iVision –
Currently BMW offers nine electrified models and management have stated their aim to
launch 25 new electrified models, including 12 BEV models by 2025. In addition to the
existing i3 and i8, other future models include the ix3 coming in 2020, iNEXT crossover, and
an i4 sedan (previously called the i Vision Dynamics), which are due in 2021. BMW recently
patented a list of nine names spanning from iX1 to iX9 in addition to the i1 to i9 names
patented back in 2010. We believe the company has plans to fully electrify its fleet, but with
minimal disruption to profitability by ensuring complete flexibility across powertrains (as we
discuss in the following sections of the report). We believe the benefits of being about to
launch the fifth generation of eDrive will provide BMW with superior electric technological
know-how than competitors.
BMW has also signed a letter of intent with Great Wall to develop and produce the electric
Mini in China. We understand the drivetrain and the battery technology will be sourced
locally, but the launch date and exact production location are yet to be announced.
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and traction. We expect this product to be based on the fifth generation eDrive and to be a
very credible BEV product, appealing to SUV-orientated consumers.
VW’s ID Range
After VW’s e-Golf and e-UP! City car, VW will launch its I.D. range of BEVs beginning with
the A-segment sized ID Neo in 2019, the first VW-badged MEB model. The ID Neo will be
followed by the ID Crozz, a small CUV that also will be sold in the U.S. beginning in 2020.
Next is a battery-electric sedan (likely around 2021), followed by a CUV one size bigger than
the Crozz. The I.D. Buzz, a modern interpretation of the VW Bus/Campervan, is due in 2022,
followed by additional derivatives and yet another MPV/CUV prior to 2025. Commercial
vehicles based on the MEB platform may also be on the cards. All the cars will have >250
mile range. The final car in the group was launched at this year’s Geneva Motorshow, the
I.D. Vizzion, and will come by 2022 with >400 miles of range and 111kWh battery, which is
greater than Tesla’s current offering.
FIGURE 20
VW ID Crossover concept showcases the popularity of mini SUVs, or CUVs (crossover utility vehicles)
Source: VW website
The ID Neo, is claimed to boast a range of 249-373 miles, easily eclipsing the 186-mile
range of the face-lifted version of the e-Golf. And it will have its electric motor at the rear,
freeing up space within the front section of the ID, which means that VW can exploit the
packaging advantages inherent in pure electric drivetrains to provide a roomy four-seat
interior offering accommodation similar to today’s larger Passat. VW describes the battery
used by the ID as being scalable and hints at differing capacities in each of its upcoming
electric models in much the same way that it offers differing power outputs in today’s
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combustion engine models – ie, a fully flexible offering due to its modular manufacturing
concept (more on this later). Little is being said about the charging system for the ID,
although VW management claim that its battery can be recharged to 80% within 30
minutes, so it is likely to be enabled for an 800V system similar to that employed by Porsche
on the Mission E.
Or put another way, on a 50kWh battery system, the legacy OEMs would be at a
$2,000/vehicle cost disadvantage. But with ~$15,000 of materials and assembly costs in
the rest of the car, a 10% scale advantage for the legacy players could close all but $500
of the cost gap.
We acknowledge that at a starting price of ~$36k (pre EV tax credits), the Bolt is a fairly less
compelling offering than the Tesla Model 3, which offers much more of a luxury appeal, and
which will comp more to a vehicle like the BMW 3-Series. Rather, the Bolt, while offering a
nice option package, will still comp against other mass-market offerings.
That said, we believe the introduction of the Bolt marked a very crucial step for GM’s push
into electrification. In particular, GM will be able to leverage the Bolt as it expands in
electrification. GM is expanding its current EV platform with two new crossover entries in
2020. And perhaps more importantly, the learnings of the Bolt can be leveraged as GM
launches an all-new modular EV platform in 2021, which will encompass multiple brands
and segments. The platform will support vehicles in the US and China, and will have a
structurally integrated new battery system – benefiting from the ability to manufacture
batteries at scale, while modular cell assemblies enable flexibility.
Moreover, while the Bolt currently sells at a loss (we’ve heard estimates up to $9k
loss/vehicle), the Bolt is a crucial step toward making GM’s EVs profitable. GM is targeting a
30% cost reduction per unit, driven by lower battery costs (cell cost to decline to sub-
$100/kwhr vs. the current level of $145/kwhr), as well scale and manufacturing
improvement. And with its EVs to ultimately be priced comparably to current ICE prices, it
likely implies that GM expects its EV powertrain cost to be at parity or better by the time the
new platform emerges.
Finally, beyond serving as GM’s first legitimate purely electric offering, the Bolt is also
significant, as it is at the center of GM’s autonomous ridesharing platform, which GM
highlights offers simpler integration of technologies, while also is optimal for urban
environments.
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FIGURE 21
Latest generation of GM’s autonomous Chevy Bolt, highlights GM’s advances in
autonomy as well as electrification
The list of upcoming BEVs could go on, but suffice it to say there’s lots of competition
coming in the battery electric vehicle market and much of the competition comes from
global auto manufacturers that know how to make cars efficiently and at scale.
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FIGURE 22
Comparison of upcoming BEV product offerings
Nissan Hyundai VW Renault BMW GM Tesla BAIC Tesla Jaguar BMW Mercedes Audi Porsche Tesla
17 April 2018 27
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FIGURE 23
There is a proliferation of BEV launches coming from traditional automakers over the next two years
Production Range
OEM Brand Model Type SOP Comment
region (mi)
2017 Launches
On sale in US winter 2017, Europe as Opel
GM Chevrolet Bolt Car Sep-16 North America 238
Ampera
EV version of Golf, 125m range, US and
Volkswagen Volkswagen Golf Car Apr-17 Europe 125
Europe
Hyundai Hyundai KONA SUV Jun-17 Japan/Korea On sale in Europe and NA in 2018 210
In slow ramp in NA, Europe sales later in
Tesla Tesla Model 3 Car Jul-17 North America 310
2018
Europe & NA & On sale in Europe and NA in January 2018;
Renault/Nissan Nissan Leaf Car Dec-17 151
Asia 151m range
2018 Launches
Tata Jaguar I-PACE SUV Feb-18 Europe On sale in Europe spring and NA summer 298
e.GO e.GO Life Car Apr-18 Europe Expected pricing ~$16k, 130km range 78
Chery Chery Tiggo2 SUV Sep-18 Europe Electric variant of Chinese SUV -
McLaren McLaren Ultimate Series SPORT Sep-18 Europe Pure electric hypercar likely >€1mn ??? -
Dimensions like Q5, 300m range, on sale
Volkswagen Audi e-tron quattro SUV Aug-18 Europe 275
in fall
Hyundai Kia Soul SUV Oct-18 Japan/Korea Redesigned for 2018 with 111m range 111
2019 Launches
Hyundai Kia Telluride SUV Jan-19 North America EV version of three-row SUV -
PSA Peugeot 208 Car Feb-19 Europe EV variant of 208 Car, 50kWh bat ~250
PSA Peugeot DS3 Crossback SUV Apr-19 Europe EV variant of new small SUV 280
0-60 in 3.5s; capable of long-range at
Volkswagen Porsche Mission E Car May-19 Europe >310
high speed
Daimler Mercedes-Benz EQC SUV Jun-19 Europe 0-60 in <5s; ~300
General Motors Buick B-CUV EV SUV Oct-19 North America Bolt based Buick crossover ~230
Based on Vizzion concept, 413m NEDC
Volkswagen Volkswagen ID Car Nov-19 Europe ~350
range
Urban EV concept, targets 2019 Europe
Honda Honda B-Hatch EV Car Nov-19 Japan/Korea 155
launch
May be more like 2020 or 2021, no
Tesla Tesla Model Y SUV Nov-19 North America ~300
factory yet
Small SUV EV, for US, Europe and Asia by
Ford Ford B-CUV SUV Dec-19 North America ~300
2020
Concept introduced at Shangahi show in
Volkswagen Audi e-tron Sportback Car Dec-19 Europe 275
2017
BMW Mini Mini E Car Dec-19 Europe Urban EV concept >190
Expected spring 2019 as an "indulgent,
Tata Jaguar XJ replacement Car May-19 Europe 300
super-luxury" car
Geely Volvo XC40 SUV Dec-19 Europe Based on 40.2 concept 310
During
BMW BMW iX3 SUV Europe All electric version of popular SUV 300
2020
During Nothing confirmed for 18/19 but 8 by
Renault Renault TBC TBC Europe
2022 2022
Source: Barclays research, company data, Autocar, Electrek, Autoexpress, carwow
Note: ranged stepped down from NEDC to EPA
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Tesla may have won many devotees on its vehicle design and tech features, but it has
become clear that Tesla’s execution on mechanical issues is far from legacy auto
industry standards — slow production ramps with quality issues, especially in the early
days of each model. And the Model 3 has been no exception – in February, 2017 Tesla
forecast that it would achieve an exit rate of 5000/week for the model 3 in 4Q17, a
forecast Elon Musk repeated in a tweet in July 2017. In reality, production ended 1Q18 at
a rate of ~2000/7-day week, a pace that appeared to continue into April.
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FIGURE 24
Model 3 production forecasts
And yet the Model 3 production ramp is still not going to plan and we keep coming back to
our conference call questioning of Mr Musk and his leadership team on the differences
between the Toyota Production System and what Tesla is trying to do in the Gigafactory
and the M3 line in Fremont. From their answers, and from subsequent discussions with
Tesla IR, it appears that they are seeking to get to a nearly ‘lights out’ factory. That is,
assembly lines with little human labour beyond some workers monitoring computer
displays of production flows. As Mr. Musk said:
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Yes. Imagine like if the Model S was -- or the way you design a Model S, design your
factory like it's a car. You still have a lot of workers. You still have a lot of people. I
mean, just like with Model S, say, we have a large service organization. There's
scheduled maintenance. There are things that break. There are crashes that need to be
repaired. There are technology upgrades. But you don't actually ship people with the
Model S. That would be weird. That's not like hanging people in the car. So you have --
we expect that the Tesla factory has people -- a lot of people around the factory but
very few people in it. (Source: Tesla 4Q17 call)
The details around involving humans in the process by building a front line culture of quality
cannot be ignored, in our view. But as even Tesla executive Doug Field (ex Apple) noted,
even if this were possible for an iPad – which is still highly manual production at Foxconn –
a vehicle is far more complex.
Yes, the model at Foxconn was very different where very quick product ramps and
very high scale was achieved through manual processing of also what is
fundamentally a product whose simplicity is orders of magnitude below ours. And
iPad is less complicated than our centre screen in many ways. So it's a very
different order of magnitude in terms of the kind of product you're building, and it's
extremely manual because that is the way that you have to ramp very quickly and
then end the life of our product and bring up a new one.
The question at this point, in our view, is whether Tesla went for too much automation, and
is having difficulty – not just at the Gigafactory, where they acknowledge production
equipment was not operating well and the assembly line had to be redesigned – but at
Fremont as well. This is what has led to Mr Musk’s description of “production hell”. And
what was his solution out of the hell? Bringing in German automation companies offering
“plug-and play” systems.
Mr Musk further explained: “The most fundamental difference is thinking about the factory
really as a product, as a quite vertically integrated product.” He envisions the most
automated vehicle plants in the world, where material delivery, manufacture, and assembly
will be done without human intervention, and where his production lines will be far faster
than the conventional manual assembly lines that he mocks: “Grandma with a walker can
exceed the speed of the fastest production line.”
We disagree with this view. We think the traditional automotive production process has
been evolving over many years to ensure minimal waste, optimum quality and the optimal
interfaces between human and machine interaction (which is by no means zero human
intervention). Automation works well in a stable environment, but in the auto industry there
is a turbulent environment of rapid product and technological change – people are much
more capable of adapting to these changes. This is something we think the traditional
OEMs have learnt over many years, starting with the early paradigm of lean manufacturing.
We think it makes sense to take a step back and remind ourselves just how far the
traditional OEMs have evolved in their methods of auto production:
Traditional OEMs cannot risk their brand reputation with poor execution on early models
(hence months of beta testing in deserts and tundra) and have therefore been forced to
take a less disruptive route to electrification, but one, we believe, that is more assured of
success.
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Three main pillars run through the TPS, all of which remain relevant today:
1. Just-in-time, ie, making what is needed, only when it is needed and only in the amount
that is needed in order to eliminate as much waste as possible
2. Jidoka, ie, automation with a human touch, with a focus on stopping to fix problems
immediately in order to ensure the highest quality right from the start. Toyota were
adamant that the human touch was necessary to ensure this quality and also focus on
future development of the business via organisational learning
3. Kaizen – continual improvement and always striving for innovation and evolution
Toyota’s now well-known manufacturing system was first popularised in a book by three
MIT academics called The Machine That Changed the World, which became a best-selling
in the 1990s and sparked many other manufacturers to emulate the strategy. The principle
of the indispensability of people and their importance to the process of “kaizen” were
heavily emphasised by Toyota.
These concepts have been copied by many other automakers (as well as non-automotive
companies) over the years to ensure minimal production glitches, downtimes, etc. The
efficient production concept has also ensured that the car industry has better managed its
cost base over the cycle to ensure a tight balance between fixed and variable costs,
employing a high level or temporary labour to ensure maximum flexibility but also best
quality. Toyota learnt that given the high fixed costs in the industry, building to demand was
the best way to ensure as flexible a cost base as possible. However, this requires the very
opposite of Mr Musk’s vision, ie, a reduction in automation, to lighten the fixed cost load
and ensure “intelligent automation”.
The social part of the equation shouldn’t be forgotten – traditional OEMs have strong relationships with their
employees, suppliers and distributors – a culture built over many years which is hard to replicate, particularly by
a company like Tesla, which we think is so intent on ignoring the sociological aspect.
2For a more popular read on the topic, see The Machine That Changed the World, 1990 Womac, Jones and Roos and
Lean Thinking
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The modular design philosophy is to manufacture and sell as many models as possible
while using the same parts as much as possible. Under the MQB approach, VW’s platforms
were intended to feature a greater degree of plug-and-play modularity, flexibility and parts
commonality, with products tailored for specific markets/segments but at reduced cost.
The idea was to protect the different brands’ characters and individuality but significantly
enhance profits.
The ultimate targets of modular design are so called Lego blocks 3 . A modular design
strategy depends on design technology, and due to the high technological hurdle, the first
vehicle maker to achieve this goal was leading truck maker Scania4, now part of the wider
VW Group:
Figure 25: Scania’s high profit margins stemmed partly from modular design technologies
Scania: Modular design concept
Need to guarantee quality Modular design has a high technological hurdle because it requires at the design stage for
based on combination of each part that products can be made by assembling all of the various parts. In other words,
individual parts quality assurance is required not only at the individual parts level, but also at the stage of
assembling these parts. We do not think Tesla has been able to replicate this idea, partly due
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to lacking scale and partly due to Mr Musk’s manufacturing vision which relies on hiring
engineers (and now engineering systems of automation from Germany) to make the
system work, rather than developing talent from within. Also the speed of product design
was such that Tesla did not focus on a design that could be built with quality and
adaptability in mind.
In particular, we think strict safety standards in the automobile industry serve to increase
the modular design hurdle. Should a specific part be defective, the number of models
subject to recall increases in proportion to the number of models that use that part. As a
result, the development and design of individual parts requires greater caution than under
non modular systems (and would therefore not suit the “production hell” scenario of Tesla’s
current Model 3 production woes).
Greater cost benefits if However, the achievement of modular design (the ability to make different products using
achieved the same parts) results in significant cost benefits. Reducing the number of parts facilitates:
1) lower manufacturing fixed costs (dies and machine tools) for parts production, and 2)
economies of scale. Tesla may currently have the cost-leadership on batteries but we think
the gap is closing here and yet they are unable to close the gap on production cost
capabilities with traditional OEMs.
Another advantage of modular Another advantage of modular design is the inability to imitate, as indicated by other global
design is an inability to imitate commercial vehicle makers historically being unable keep pace with Scania despite seeing
its high profit margins. Modular design expertise is in the design technology, and
competitors are unable to learn this expertise through the reverse engineering of finished
products. Not only do we believe this sets the Western OEMs apart from Tesla, but also
from their Chinese competitors in terms of manufacturing – it may be easy to copy a
vehicle’s styling but less easy to replicate a global modular engineering strategy, even if the
companies enjoy a lower overall fixed cost base. We also believe the success of modularity
relies on a degree of scale which Tesla so far has been unable to attain.
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FIGURE 26
MQB share in overall production is rising steeply
80%
60%
40%
20%
2015 2017 2018 2020
Source: VW Shaping the Transformation Together Presentation
One of the negatives of the system may have been to allow VW to let differentiation of
product spiral out of control, but we believe this is something they are now working hard to
bring back into line.
FIGURE 27:
Parts-sharing synergies cross over vehicle sizes and segments based on modular toolkit strategy
VW: Technological concept of modular design strategy
Platform strategy Modular strategy Modular Toolkit strategy
Hat
Platform Module Module
Synergies limited to same class Synergies extend across two or more classes Synergies extend to all classes
C ▷ ◁ C
Vehicle Class
B ▷ ◁ B
A ▷ ◁ A
A0 ▷ ◁ A0
A00 ▷ ◁ A00
Modules
Platform
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The Germans are not alone in deploying modular design systems, with Hyundai (NR) in
Korea starting to pursue a platform integration strategy from 2009 and Renault-Nissan’s
CMF concept operating along similar lines to VW’s modular architecture. Toyota also
moved on from TPS to launch Toyota New Global Architecture (TNGA) to enhance product
strength and reduce costs.
In other words, production processes in the auto industry have been rapidly evolving
over the years via constant “kaizen”, and we think it is naive to assume that a disruptor
such as Tesla can announce new ideas for automation of processes and wipe out the
entire learning of the incumbent industry over the last 100 years.
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BMW CEO Krueger believes: “Silicon Valley isn’t the only place where rapid progress is being made in technology”
Analyst FY17 results presentation, 21March 2018
The latest developments in both factory automation and robotics, particularly in Germany,
continue to reduce the required workforce, relieve workers of unpleasant or unsafe jobs and
help to improve reliability and product quality. We believe this enables German OEMs to
have the most efficient manufacturing processes but also to ensure the highest quality
levels for their products, whilst equally protecting profitability.
Greater speed – this can enable shorter innovation cycles and faster product innovation
and hence improve time-to-market
Logistic management – helps with “just-in-time” delivery but also enables greater
flexibility in vehicle configuration
More attractive working environment – a better synthesis of man and machine, doesn’t
take away the importance of human intervention but can improve the ergonomics and
provide more attractive work space for employees, especially given demographic
changes and differing working demands (eg, blue collar work holds less appeal in
general to the younger generation)
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FIGURE 28
Germany leading the push on automation and manufacturing efficiency
“The full potential of the industrial Internet will be felt when the three primary digital elements – intelligent devices,
intelligent systems and intelligent automation – fully merge with the physical machines, facilities, fleets and networks. When
this occurs, the benefits of enhanced productivity, lower costs and reduced waste will propagate through the entire
industrial economy.”
Source: Peter Evans and Macro Annunziata, GE, Industrial Internet: Pushing the Boundaries of Minds and Machines (2012)
In particular, we believe the BMW production lines are far more advanced than their West
Coast competitor and that the market is underestimating the benefits of BMW’s “smart
factories”. Tesla may be emulating the concept, and potentially why the purchase of
Grohman was felt necessary, but we believe Mr Musk has misunderstood the concept of
“smart factories” and has gone too far in his automated vision. We discuss each OEM’s
strategies on EV production in more detail below.
Given the increasingly diverse requirements of customers around the globe, it is important
for automotive manufacturers to ensure the most efficient manufacturing processes and
the maximum diversity for minimal cost outlay. Customers are increasingly demanding
shorter innovation cycles and the benefits of Industrie 4.0 are enabling the German OEMs to
provide this and deal with the increasing demands of electrification and digitalisation
consecutively.
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This does not mean that the Japanese system stymies innovation. Toyota is extremely proud
of allowing their employees to use their ingenuity to design new automated processes and
ensure more ergonomic comfort and more efficient jobs. And the system also fosters a
process of employee satisfaction and self-regard. Indeed in 2015 Toyota promoted a 52-
year veteran of the firm, who started on the factory floor, to head up global manufacturing,
just showing how much importance is placed on factory experience. The TNGA strategy aims
to reduce costs not primarily through labour cuts but via smarter use of materials (light-
weighting), improved modularity and trimming platform variants. Robots have a place but not
as replacements for people but rather as basic tools to enhance factory performance.
This approach may be at odds with the perceived wisdom as evidenced in many academic
studies that automation trumps all. Tesla’s CEO Elon Musk clearly follows this aspiration with
his ‘lights-out’ concept at his Model 3 plant, and Kia (NR) in Korea is also claiming productivity
improvements of nearly 200% as a result of automation (some Kia plants have >1,000 robots
but <1,000 humans on the assembly line). We have seen analysis suggesting over the next two
decades some 47% of American jobs will be lost to automation, and in China and India the
numbers could be as high as 77% and 69% respectively. However, Toyota (and many other
incumbent automakers) believes in the importance of focusing on the human ability to
innovate and improve while even the most advanced AI systems still lack full cognition skills.
When the next level of AI is available, the robot era will likely arrive but we’re not there yet.
5 https://www.economist.com/blogs/schumpeter/2012/10/z-business-quotations-2
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And we also think the market is missing the ability of the German premium OEMs to make
the highest quality electric cars. In their quieter PR approach to both electric and
autonomous, the traditional industry has been viewed as being the “dinosaur” to Tesla’s
“disruptor” credentials, but we believe the “slower but surer” approach will lead to the most
lasting products with the greatest consumer acceptance. Have you ever sat in a German
premium car and touched the leather interior and compared it to the quality of the Model S?
(although Tesla fans would point out the software experience is a more important brand
attribute than plush interiors – which we agree with for the lower volume S/X but may be
an issue as Tesla moves into the mid-luxury market)
FIGURE 29
German and Japanese brands score highly in the JD Powers’ US dependability surveys over the past few years (consistently
above the industry average
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Tesla has had more difficulty with initial quality in early production models
From blog reports it is clear that Tesla customers have had many grumbles in the early days
since the launch of each new product. For example, the S and particular the X had
numerous early quality issues (such as the issue with the falcon doors), which did not dent
the love for the vehicle amongst the early adopters 6. And legions of bloggers have noted
numerous issues with the Model 3, including panel gaps and touch screen malfunctions. 7
German OEMs do not have the luxury of being able to support such a multitude of
complaints, which are more accepted from a “start-up”. BMW’s i3 may have had its critics
as regards the styling of the first generation vehicle, but the money invested into the electric
and light-weighting technology clearly paid off in terms of the quality of the engineering.
Consumer Reports feedback has improved for Tesla – Model S now top ranked
From 2014, owners reported many powertrain issues with Tesla’s Model S sedan but in
2015 US magazine Car and Driver named the Model S the “car of the century”. However, in
October 2015, two months after naming the Tesla 'the best car ever tested,' Consumer
Reports (a US independent consumer product review magazine) declined to give the Tesla
Model S a "recommended" designation, citing too many complaints from owners.
Complaints ranged from minor issues, such as misaligned doors and squeaky body, to
severe ones – e.g. total drive train replacement and inoperable door handles. In their 2016
Annual Auto Reliability Survey, Consumer Reports improved the Model S rating to average
reliability, while reporting that the Model X has had significant malfunction issues. The
magazine also raised "serious concerns about how some automakers, including Tesla, have
designed, deployed, and marketed semi-autonomous technology”. By 2017, Consumer
Reports finally marked the car as “above average” for the first time – 3 years after launch.
And for 2018, the Model S is Consumer Reports’ highest rated electric car with a score of 94
(the Chevy Bolt comes in next at 77 and the BMW i3 scores 66). But the Model X is much
more poorly scored at just 53.
But Model X is still struggling to get a “recommended” rating (Model 3 yet to be tested)
When Tesla’s Model X was first launched, Consumer Reports wrote that the all-wheel drive
Model X 90D “largely disappoints, as rear doors are prone to pausing and stopping, the
second-row seats that cannot be folded, and the cargo capacity is too limited. Even its
panoramic, helicopter-like windshield was disapproved of as it is cranky-sounding and it is
not tinted enough to offset the brightness of a sunny day.” The report continued that overall
"the ride is too firm and choppy for an $110,000 car”. That said, Tesla addressed these
issues with several software updates, and no known issues remained after the 8.0 firmware
was released. But in June 2016, Tesla had to settle a lawsuit over usability concerns and
accept the Model X was rushed to production before being ready. It may therefore be no
surprise that the model still fails to score highly in the 2018 review.
6See http://www.jdpower.com/press-releases/tesla-beyond-hype
7See https://www.greencarreports.com/news/1115659_tesla-model-3-quality-is-terrible-but-does-it-matter-to-
buyers
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BMW fully modular manufacturing across all powertrains and body styles, building
on ibrand know-how and launching 5th gen electric drivetrain (likely more
outsourced than original i3)
Tesla: standalone BEV platform but struggling to ramp to scale and also failing to
offer consumer flexibility of non-BEV powertrains
GM: flexible, modular platform similar to BMW but leveraging scale to bring down
purchasing costs, particularly of battery cells, and utilising non-vertical integration
to buy-in commoditised components
MQB was developed for transverse-engine vehicles, alongside Audi’s MLB for longitudinal-
engine vehicles and NSF (new small family) for small vehicles. It involved a great expense
and due to the scale of the VW Group and its multiple brands and production locations, a
complex procedure to adjust all production to the new modular concept. And just when the
benefits of MQB might fully be being enjoyed within the VW group, the decision was made,
post Dieselgate, to develop a new modular system, the Modular Electrification Toolkit
(MEB), a modular system for manufacturing electric vehicles. MEB has been undergoing
development since 2015, to further optimize the strengths of the MQB, while making it
suitable for electro-mobility. The so-called Early Phase of development will come to a
conclusion in the spring of 2017, and series production of the first e-vehicle under the I.D.
banner is due to start in 2019.
MEB the next step beyond MQB but is more evolution than revolution
Some in the market are disappointed that the Lego-blocks basis of MQB was not sufficient
to provide the flexibility needed for electrification, but VW is adamant that an entirely new
system is necessary to optimise electric vehicle design. The e-vehicles currently available
from Volkswagen are being made using the MQB, which shows it is possible to build EVs on
an ICE platform, but newer EV products from the ID range and beyond will launch on the
MEB. VW management’s belief is that they need an entirely standalone production system
for BEVs to ensure optimum positioning of the battery and optimum flexibility and cost
base. This differs from BMW’s fully modular concept of production across all powertrains,
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but we believe is possible due to the scale of cars produced by VW (with a target of 2-3mn
or 20-25% Group sales of BEVs alone by 2025).
VW has bullish market VW predicts industry BEV sales to account for about 10% of the global market in 2025, with
prediction for BEV sales by VW outpacing that share slightly. BEVs will control a much larger 35% of the global
2025 – 10% of the global premium segment by then, the automaker says. Pricing will be among the keys to market
market and 35% of global growth, and VW is promising to position its MEB vehicles competitively based on each
premium sales model’s interior volume. Because the MEB’s purpose-built design doesn’t have to
accommodate an engine and transmission, it allows for a flat floor and a roomier-than-
normal cabin. The upcoming I.D. Crozz CUV, for example, has a Tiguan footprint but the
interior package of the bigger Atlas model. VW says it will be priced similarly to an Atlas.
As we discussed in the ‘upcoming BEV products’ section earlier, VW has ensured a cost-
effective supply of battery cells, which helps with their plans to sell BEVs at rates
competitive with comparable diesel engines. Management have stated that they are
confident of securing battery cells at below €100 per kWh by 2020 (or ~$120/kWh), and to
continue to reduce costs beyond that. Similarly to GM, we believe this is due to the Group’s
scale and its ambitious BEV targets, but when combined with the cost advantages of MEB it
should enable VW to have significantly greater flexibility and over time a reduced cost base
than its Silicon Valley competitor, Tesla. Combined with a greater breadth of product
offering across all powertrains and bodystyles and brands, this should be a significant
competitive advantage by the early 2020s.
“We (are) more convinced VW isn’t specifying volume plans for the MEB dedicated-BEV platform, but says it expects
than ever that volume-wise demand in the U.S. for all-electric vehicles to reach 10% of the market by 2025 and that the
you can build real (full-scale) Volkswagen brand should exceed that level. There will be no mix of internal-combustion-
factories for electric vehicles,” engine cars and BEVs in production on a single assembly (as opposed to the strategies of
says VW’s Erb GM and BMW which we discuss below), though it’s possible for the vehicles to share a paint
shop and portions of a body shop.
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The use of CFRP on the scale used in BMW’s i models is the highest in the automotive industry
worldwide. It’s still unclear whether the lightweight material will ever be cost-effective but it
has clearly helped to enhance the group’s environmental credentials. The production process
for the i-brand models consumes around 50% less energy and 70% less water vs current
average production at the BMW group, which is already best-in-class. All the electricity used
to produce i-models at the Leipzig plant is wind-generated and 100% sustainable. Likewise, all
of the energy used in carbon fibre production at Moses Lake is entirely derived from
renewable, locally generated hydroelectric power and is completely carbon-free.
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FIGURE 30
High commonality between gasoline and diesel in the new EfficientDynamics family
Cylinders (inline) -3 -4 -5
Common parts
shared within
gasoline or diesel
Gasoline >60% engines is c.60%
Between the
30-40%
gasoline and diesel
engines there is
40% sharing
Diesel >60%
The ibrand wasn’t just about electrification but also about sustainable
manufacturing
We think the market is forgetting quite how game-changing the production of BMW’s i-
brand vehicles was when compared to traditional methods of manufacturing. The company
has been combining innovative materials, smart data analytics and renewable energy
sourcing for more than ten years now. BMW uses automated bonding (no need for screws,
rivets and welding), combined with the innovative use of Carbon Fibre Reinforced Plastics
(CFRP). The production lines are significantly shorter (110m versus traditional lines of
several kilometres) and smart robots proliferate. But this isn’t the fully automated
production of Elon Musk’s vision, but a smart working environment where robots coexist
with human engineers to increase flexibility, shorten production times but not at the risk of
quality. For further details on the production differences of the original i3 versus Tesla’s
model S, see BMW i – a different concept vs Tesla, 22 May 2014.
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are largely outside the control of the industry. And yet, we understand why the market
views this strategy as ‘boring’ when GM (OW) across the pond is promising to take on Tesla
with an accelerated autonomous timeline and VW is promising aggressive BEV penetration
and a wide range of products produced on a standalone platform.
BMW has the capabilities in- Currently BMW are producing all electric motors in-house and also the battery packaging,
house to understand the entire as management view this as an area where they have a technological edge. The benefit of
battery supply chain and the Gen 5 electric drivetrain is that it will be fully scalable to different power and range
development process and are requirements, from entry level to performance level, by the addition or subtraction of cell
investing heavily in the new modules. BMW also believe they have a cost advantage with their electric motor, with no
Battery Competence Centre in loss of functionality, by using no rare earth metals, but are still extremely competitive on
Munich efficiency and energy density. BMW also has the capabilities in-house to understand the
entire battery supply chain and development process, which they expect to advance further
via the investment in the battery competence centre in Munich due to open in 2019 –
management have said they will invest €200mn at the site over the next four years.
However, BMW do not intend to manufacture batteries in-house but do currently see
advantages of keeping the pack engineering capabilities in-house. The engineering team
sees many improvements in battery technology coming in the next few years, although
solid state batteries remain only in the development stages. Production facilities are fully
scalable globally to ensure BMW will have pack production capabilities worldwide as
penetration rates rise. But BMW aren't just focused on battery production and raw material
procurement; they are also aiming to look along the whole lifecycle of the battery and factor
in 2nd-life usage and recycling to their business plan.
BMW is about to move to its 5th gen electric engine when other OEMs are just
starting development of the 1st gen
We believe that BMW’s progression to the 5th generation of electric platform, and the
billions invested into modular engineering across the business’s global product range, will
ensure BEV production which in our view is not only of a higher quality than Tesla’s but also
with a much more profitable cost base.
So all in all, we do not believe that BMW is at all behind on EVs, despite the market’s
current perception. What we believe is that they will have highly credible EV options
across the spectrum of power and performance options and will be ready to deliver as
penetration rates ramp, and we clearly think this is in contrast to Mercedes, which appears
not only to be attempting the less cost-efficient standalone platform strategy for EVs, but
also to be further behind in terms of generation development of electric drivetrains (as we
will discuss below, Daimler’s current drivetrains were bought from Tesla).
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BMW’s knowledge of data analytics to ensure the smoothest functioning of all parts and
machines, cuts the error rate and minimises time. Indeed the production time of a vehicle in
the body shop has been halved (from 40 hours to 20 hours in a smart factory). Additionally,
the production requires 50% less power and 70% less water versus the old BMW
production average. And of course the i-brand factory at Leipzig is all hydro-powered. BMW
knows how to revolutionise manufacturing processes, in our view.
As CEO Krueger stated last month: “The BMW iNEXT is far more than just a car. By that, we
mean it is a future-proof, scalable modular system. It will enable the entire company and all
our brands in terms of technology, design and new approaches. The iNEXT combines
Autonomous Driving, Connectivity, Electrification and Services.”
FIGURE 31
BMW have been highlighting their “smart factories” for many years, including this chart from a 2015 production
presentation which emphasizes not only the flexibility and quality but also the importance of human-robot collaboration
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In the longer term, Daimler’s innovative cubeTEC production concept will allow electric and
ICE vehicles to share production lines from the body shop onwards, and we believe this too
explains the location of the new EV capacity. We do not see Mercedes as behind in the
arena of “Smart Factories” or use of A.I. to improve productivity. We just worry that the
company is pursuing a more expensive strategy for converting platforms to electric. All the
parts for various models/derivatives including EVs will be provided in the so-called
“Supermarket”. Driverless transport systems deliver these to GEO stations. A fully flexible
GEO station uses the jigless process: several robots on an adjustable NC axis work together
holding and turning the relevant parts into the optimal welding positions. In this way parts
of varying size can be combined automatically in the body shop. In other words, DAI fully
understands modularity and robotics and may well end up pursuing more of a similar,
modular strategy to BMW if they discover native electric platforms require greater scale.
8https://www.cbsnews.com/news/elon-musk-tesla-model-3-problems-interview-today-2018-04-13/
9See Gibbs, “Elon Musk drafts in humans after robots slow down Tesla Model 3 production,” The Guardian, April 16,
2018
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means new10 or unique to Tesla (i.e. many of the legacy OEMs, such as Toyota, have led in
this way), the Model 3 appears relatively simpler in three ways:
As an electric vehicle not only is its powertrain simpler with fewer moving parts than an
ICE and transmission, but the body and frame of the car can be optimized to sit on top
of the battery/drivetrain ‘sled,’ as opposed to having to wrap around an internal
combustion engine, transmission, and emission system.
The design of the vehicle interior itself is rather sparse, without buttons, dials, movable
vents, etc. that add to manual labour assembly. Moreover, the lack of buttons and dials
around the car, combined with a multi-domain controller which consolidates vehicle
controls (and note, luxury vehicles currently have around ~150 ECUs, or electronic
control units), implies a more compact electrical architecture and wiring harness.
There are relatively few trim option variations on the Model 3. Powertrain options are for
different battery sizes and future front wheel drive – which Tesla appears to have
delayed. Software options for autopilot and ‘full self driving’ of course require no manual
labour. The only interior option is the premium package, which adds premium heated
seating and cabin materials, power adjustable front seats, steering columns and side
mirrors, a premium audio system, tinted glass roof, auto dimming mirrors, and a center
console with covered storage and docking for smartphones.
We would note while the product simplicity and lack of choice is fine for the dedicated early
adopters, it may not be enough variety for the mass market buyer. Tesla would need to
expand the option set to hit 500k+ annual sales for the Model 3. After all, Henry Ford’s
Model T strategy was ultimately displaced by Alfred Sloan’s GM, who was able to build car
varieties ‘for every purse and pocket.’
Note, however, that as opposed to Tesla’s cylindrical battery cell format, most other OEMs
have chosen a large pouch battery format, which makes the assembly of the packs themselves
less complex than Tesla's efforts to assemble several thousand small cell formats.
We assume Tesla’s production of the motor and drivetrain to be automated, although other
automakers told us that some hand-assembly is needed on electrical motors to piece
together delicate parts.
10 For example, we found mention of the concept as far back as 1988, see Whitney, “Manufacturing by Design,”
Harvard Business Review, July 1988
11 See Unimate/The First Industrial Robot at https://www.robotics.org/joseph-engelberger/unimate.cfm
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However, in our past visits to Tesla’s Fremont factory, we observed on several occasions
manual polishing was needed on the stamped aluminium panels, and in the CBS Morning
News workers could be observed hand sanding rear panels and using a hand-held power
grinder to smooth out a door frame.
Final assembly – attempting more, but not yet full automation, and likely the
source of some bottlenecks
Tesla appears to have attempted a path of significantly greater automation than traditional
OEMs in its vehicle assembly. While on several conference calls Elon Musk has outlined a
vision of what would be a lights-out factory (his so-called “Alien Dreadnought”), with humans
just monitoring the process as opposed to actually touching the product, it appears at least for
the Model 3 this is more of a long-term aspiration than an achievement.
We have been assured by Tesla management that Model 3 still uses hand labour for delicate
tasks involving soft parts, such as threading the wiring harness into the vehicle, applying the
headliner, and other steps.
However, Tesla has also indicated that tasks that are performed by humans in the traditional
assembly line, including securing the dashboard and applying the door panels to the hinges,
are done by robots. In legacy OEMs plants we have toured, these are performed by workers
using tools such as torque wrenches with built-in pressure sensors to make sure the nut is
neither over- or under-tightened. Indeed, as discussed in a recent piece highlighting how
Toyota is accentuating human craftsmanship amid the push toward automation:
See: Rothfeder, Jeff, “At Toyota, The Automation Is Human-Powered,” Fast Company,
9/5/17
So without having seen the Model 3 assembly (except at a distance during our most recent
Fremont visit), we make several observations:
Elon Musk himself has now admitted (via Twitter) that Tesla – under his direction – has
pushed automotion too far:
It’s unclear how long it will take to get the automated parts of the line working
consistently at a 5000/week rate – or if it will even get there without significantly more
human labour.
With people involved now in the soft assembly and, given Mr. Musk’s tweet, likely to be
more involved in other processes, the importance of involving front-line workers in
quality and productivity improvement becomes paramount. Of course, the Toyota
Production System, famously stresses the involvement of front-line workers in
improving operations and quality (and indeed, a prime example of the respect for front-
line workers at Toyota is evident with Mitsuru Kawai, a 52-year veteran of Toyota, at the
head of global manufacturing – the highest position ever held by a former blue-collar
worker at Toyota).
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Tesla has posted job listings for rework at the end of its assembly line, which would
seem to make sense, as in a more automated line there aren't employees to check the fit
and finish as the product goes down the line.
Moreover, the Toyota front-line culture has also been adopted by the Detroit
automakers, who spent painful decades working with the UAW to adopt the process.
For example, in the mid 2000s Ford F-150 was ramping up during a tour of the
Dearborn plant, we saw the assembly line stopped on several occasions while a front-
line blue collar worker explained to engineers with clipboards what she found wrong in
that process.
This process breeds a culture that respects both the front-line as well as the low-level
manufacturing employees, who might be wondering whether a culture of the CEO
sleeping at the assembly line really helps (ie, Elon Musk).
GM’s Global Manufacturing System has five key elements: 1. People Involvement, 2.
Standardization, 3. Built-in Quality, 4. Short lead time, 5. Continuous Improvement.
Moreover, GM has developed GMA as a global manufacturing process, which allows it to
quickly scale up new platforms in new geographies.
As an example, consider GM’s large pickup/SUV platform (K2XX), a platform with ~1.2mn
units annually, which likely accounts for well over half of GM’s total company profit. Over
the course of ~2 years, GM is expected to undergo a highly orderly changeover of the
platform to the next-gen version – similar to the way Ford went through a highly orderly
and largely flawless changeover of its F-Series several years ago to an aluminium body.
Such manufacturing expertise cannot be underappreciated.
But beyond its traditional lean manufacturing expertise, GM is also engaging in next-gen
“smart” manufacturing. While areas such as 3D printing and drone technology are being
employed, we’d highlight the Auto Big Data component of GM’s manufacturing, which is being
used for active monitoring and predictive maintenance. Indeed, alongside data efforts by GM’s
OnStar business, the data initiatives in manufacturing provide another indication of GM’s
leadership in the realm of Auto Big Data (see: The coming ocean of Auto Big Data, 4/26/17).
And while technology is transforming the manufacturing process, at the same time GM is
keeping the humans at the center of the manufacturing. Through the likes of “collaborative
robots” and technology which assists the front-line worker, arguably GM has an
opportunity to see enhanced manufacturing efficiency.
Finally, GM deserves credit for its leadership in manufacturing of autonomous vehicles. A bit
over a year ago GM became the first automaker to assemble self-driving test vehicles (its
autonomous Chevy Bolt) in a mass-production facility. Indeed, GM’s autonomous Chevy
Bolt, a vehicle without a steering wheel or pedals, will be assembled at its Orion Township
facility, alongside the non-autonomous Chevy Bolts. This is an important development, as
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we believe that success in the autonomous world will require aviation-grade safety and
deep automotive engineering rigor to balance out the quick development of autonomous
functionality – a balance which we believe GM offers (see: AVs – from app-grade to
aviation-grade safety, 3/26/18).
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FIGURE 32
German OEMs’ global unit sales 2017
VW BMW Daimler
9%
4% 17% 16%
3%
Europe
2% 1% 2%
Greter China
42% 45%
9% 10% 46% Middle East / Africa
2% 2% Asia (ex-China)
All three German OEMs have announced electric vehicle capacity not just for Europe but
also for the US and China. We note that VW, Daimler and BMW have been making cars in
the US since 2011, 2005 and 2003 and in China since 1984, 1997 and 1994 respectively.
By contrast, Tesla has struggled to gain a foothold in China and sales in Europe have been
more lacklustre than in the US (outside of heavily incentivised countries such as Norway
and Netherlands). Just over half of Tesla’s unit sales in recent years have been in the US.
While the growing exports of Model 3 to global markets, as well as the potential creation of
international manufacturing capabilities, may change that mix, we think investors may be
under appreciating risks in expanding internationally.
German OEMs are also at an advantage when it comes to distribution. VW sells its vehicles
in 153 countries. Daimler runs 8500 sales centres globally. And BMW is represented in
more than 150 countries with 3400 BMW, 1580 Mini and 140 Rolls Royce dealerships. It
seems hard to deny that these networks present a solid launch pad for their electric vehicle
roll out.
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FIGURE 33
Global passenger car production locations VW, BMW, Daimler – harder for Tesla to replicate a global manufacturing and distribution footprint
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FIGURE 34
Global EV production plans
VW BMW Daimler
>EUR72bn investment in
EV capacity and projects
by 2030 > Investment of EUR10bn
>16 production facilities >25 Electrified Models by by 2025 for the expansion
for EVs by 2022 (currently 2025, including 12 fully of the Mercedes electric
3) electric cars fleet
Global EV Plans
>80 new electric models by > Electrified models to > Launch 10 pure EVs by
2025, including 50 BEVs contribute 20-25% of sales 2022
(currently 8 BEV and PHEV by 2025 >EVs to contribute 15-25%
models) of sales by 2025
>Production of 3m
EVs/annum
>Electric Mini to be >EQ models to be made In
manufactured at Cowley Bremen from 2019 and
>EUR1bn investment in
European EV plant UK from 2019 later Rastatt, and
Zwickau for EV production
Plans >€200 investment in Sindelfingen
ramp up
'Battery Cell Competence >EUR500m investment in
Centre' in Munich lithium ion battery pack
> No formal >Investment of $1bn to
> Production of electric X3
North American announcement, but EV expand Alabama plant to
to start at Spartanburg in
EV Plans production likely at build EQ SUV from 2020
2020
Chattanooga facility
>Electric X3 to be
manufactured in Da Dong
>EQ SUV to be made in
from 2020
>Joint VW JAC investment China from 2019
>Letter of Intent with
of EUR10bn to develop and >Joint Daimler BAIC
Great Wall Motor for
China EV Plans produce 40 electric vehicles investment of €655m for
production of electric MINI
for the Chinese market by the production of BEVs and
> High-Voltage Battery
2025 battery packs in China
Centre opened in Shenyang
in Oct-17 (JV with
Brilliance)
>Daimler and TAAP to
> BMW to expand PHEV
Rest of Asia EV invest €100m (in part) for
battery capacity in Thai
Plans a new battery assembly
plant
facility
Of course EV infrastructure will be necessary too, to entice consumers to buy the vehicles,
but the Ionity venture across Europe should help considerably and the Chinese
government’s plans for 500,000 public charging points to encourage EV sales of 2m by
2020 provide significant support. In any case, the advantage of having a fully global
distribution network, supplier relationships and globalised modular production facilities
already in place stand in stark contrast to Tesla.
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German OEMs are investing The German OEMs have had to ramp up their spending on electric mobility significantly
heavily in the future over recent years. All three have seen their expenditure for capex and capitalized R&D drift
up not just in absolute terms but also as a percentage of sales. First and foremost this
increase reflects their efforts to meet emission reduction targets primarily through vehicle
electrification. More recently spending has been further inflated by the costs associated
with autonomy and mobility services. We expect this high level of expenditure to continue
in the coming years.
VW has announced it intends to spend €72bn on electric vehicle capacity and related
projects by 2030. Daimler has committed €10bn by 2025 to the expansion of the Mercedes
electric fleet. BMW has never released an overall spending commitment for electrification,
perhaps reflecting the fact that it committed to the EV game much earlier than its peers.
The group does, however, drip feed regular investment announcements into the market,
most recently publishing a €200m plan for a Battery Cell Competence Centre in Munich.
FIGURE 35
Spending on capex and R&D continues to drift up
EUR bn VW Passenger Cars % of sales EUR bn BMW Automotive % of sales EUR bn Mercedes % of sales
Capex and Capitalised R&D 10% Capex and Capitalised R&D 10% Capex and Capitalised R&D 10%
Thousands
Thousands
Thousands
20 9% 20 9% 20 9%
8% 8% 8%
15 7% 7% 15 7%
15
6% 6% 6%
5% 5% 5%
10 10 10
4% 4% 4%
3% 3% 3%
5 5 5 2%
2% 2%
1% 1% 1%
0 0% 0 0% 0 0%
With capex and capitalized R&D of $3.4bn (c.€2.8bn) in 2017, Tesla’s spending is around
50% at the level of BMW and Daimler. And yet as a percentage of sales Tesla outspends its
German premium competitors by a multiple of 4.
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FIGURE 36 FIGURE 37
Tesla outspends competitors by 4x as a % of revenue… …but has significantly less net cash than German OEMs
But their pockets are deep… Moreover, while Tesla ended FY2017 with a net debt position of $4.4bn, Daimler, BMW and
VW are sitting on comfortable net cash positions of between €16 and €22 bn.
…and cash generation is set to Even taking into account VW, BMW and Daimler’s significant expenditure plans on
continue electrification we expect to see solid free cash generation in the coming years. Daimler,
BMW and VW are all poised to benefit from favourable mix developments as the global shift
towards higher margin SUVs continues. Combined with moderate volume growth, an
ongoing focus on cost discipline and, in the case of BMW, new product momentum, they
are well placed to meet the challenges of the future, not just the electrification of their line
up but also the transition to autonomous driving. By contrast we forecast a continued cash
burn at Tesla until at least 2023.
FIGURE 38
Free cash flow estimates 2017-2020
EUR Mn
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
-2,000 VW industrial BMW automotive Daimler industrial Tesla
-4,000
-6,000
2017A 2018E 2019E 2020E
Source: Barclays Research, company report. Note: Barclays definition of FCF = Operating Cash Flow – (Capex + Capitalised R&D). VW FCF is pre diesel provisions
17 April 2018 58
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Tesla ‘core vs. context’ – Tesla Software vs. Tesla Auto – reinforces the cash
risks of manufacturing woes
We highlighted Tesla’s dilemma of ‘core vs. context’ in a piece in 2015, yet it still remains
highly relevant (see: “Core vs. context – the dilemma of Tesla Software vs. Tesla Auto”
11/13/15).
Simply, the challenge Tesla faces is that while it has an advantage over its competition in
the crucial area of software (which will be the defining factor for vehicles moving forward),
this advantage is at risk of being overshadowed by Tesla’s challenges in the more mundane,
yet crucial, task of manufacturing efficiency.
We think the ‘core vs. context’ framework is an appropriate one to use for Tesla. Broadly, if
it creates differentiation, it’s core; if not, it’s context. Both core and context are necessary for
success, but context does not provide a competitive advantage. Ideally, you invest more
resources in core and less in context.
Applying the ‘core vs. context’ model to Tesla, “core” is software and “context” is its auto
manufacturing ops. While Tesla is currently spending the right amount on software, we are
concerned that it has been inefficient on the “context” side. While this model may have
worked for Models S/X, it may not work as Tesla ramps on Model 3. Simply put, if Tesla
doesn’t significantly improve its capital efficiency on the context products/processes, then
it will likely be unable to invest enough on the core products which will make Tesla truly
differentiated.
Thus far, the capital efficiency track record for Tesla hasn’t been good, and the capital calls
are only going to be more intensive moving forward. We think the market likely under-
appreciates the capital intensity that comes with vertical integration (supporting elevated
machining and engineering costs – tooling, forging, casting, product design, etc). Moreover,
with Tesla expanding its focus into other areas (i.e. energy storage, trucks), risk exists that
capital efficiency could get worse.
We estimate all of this adds up to nearly $27bn of capex for Tesla through 2023, with a FCF
burn of $7.5bn during that period, as profit per vehicle remains low.
Of course, the saving grace to all this is if the capital markets remain an open well for Tesla – if
investors remain willing to fund their losses and cash requirements, then none of this is an issue.
FIGURE 39
The flow of innovation – core vs. context
Core Context
Invest more Extract some
resources resources
here here
Mission Critical
2. Deploy 3. Manage
Enabling
Invest some Extract more
resources 1. Develop 4. Offload resources
here here
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FIGURE 40 FIGURE 41
Tesla will need to spend $27bn of capex through 2023… …driving a $7.5bn cash burn
Capex, $mn $27bn of capex between 2018 and 2023 Free Cash Flow,
$mn $7.5bn cash burn between 2017 and 2023
$6,000 $1,000
$500 290
5,064 5,235
$5,000 $0
4,577
4,312 -6
4,100 4,209 -$500 -219
$4,000 -505 -635
-$1,000
3,415 -853 -807
-$1,500 -1,024
$3,000 -$2,000 -1,591
-1,954
-$2,500
$2,000 1,635 -$3,000
1,281 -2,964
970 -$3,500
$1,000
-$4,000
239 264 -3,932
-$4,500
$0
2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E
2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E
Source: Company reports, Barclays Research estimates Source: Company reports, Barclays Research estimates
FCF defined as cash from operations less capex, inclusive of collateralized lease
borrowing
FIGURE 42 FIGURE 43
Capex per unit, capex as % of sales – both will remain …while operating profit per unit is likely to remain low given
elevated through Tesla’s ramp… significant investment in R&D and SG&A
Capex per unit Capex as % sales Adj. EBIT per unit
$90,000 70%
$6,000 4,671
-$12,000 -11,294
$0 0%
2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E -$14,000
2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E
Capex per unit (LHS) Capex as % sales (RHS)
Source: Company reports, Barclays Research estimates Source: Company reports, Barclays Research estimates
17 April 2018 60