The Model 3 that got the tear-down treatment was a $50,000 version with a black paint job. Munro estimated the total cost to build was $34,700. Adding in logistics costs and a generous assumption for labor, Munro estimates that gross profit margins would exceed 30 percent.
A cheaper version of the Model 3 examined by his team would cost less than $30,000 to build, Munro said, because the smaller battery is less expensive and some other equipment would come out of the car. By comparison, Munro estimated the cost to produce the Chevrolet Bolt at a little more than $30,000 in parts, while the BMW i3 costs less than $33,000. Munro said his margin estimates don’t count costs like R&D investment and engineering.
Musk has described consultants working for Tesla as “barnacles” that need to be scraped off, but Munro is the rare outsider who did get his attention. After he put out an initial report in April, identifying problems with the design of the Model 3, Musk’s team arranged a call. The manufacturing analyst warned the Tesla chief that his car was heavy, too expensive and needlessly complicated to assemble. According to Munro, Musk replied that he had already fired the engineer responsible for the body’s design.
“Not fast enough,” Munro recalls saying, adding in the interview that Musk, “never should have hired him.”
Musk did not say who he fired, but there has been a lot of turnover at the company in high-level positions. Doug Field left Tesla as chief of vehicle engineering in June. He never developed cars before arriving at Tesla.
“Tesla wants to do things their way, not the conventional way,” said Morningstar Inc. analyst David Whiston, whose $179 a share price target is among the lowest of analysts covering the company. “The company is still young and has a lot of things to work out.”
Musk has said that the company is working to boost efficiency, especially in the body shop. Tesla can better design for ease of manufacturing and change its approach how it joins different parts of the car together so that it's lighter, cheaper and stabler, he said on an earnings call in August.
The Model 3’s profit potential as assessed by an outsider like Munro is impressive—but it comes with a huge caveat. Tesla hasn’t let Munro visit the company’s car factory in Fremont, California. So Munro created his estimates as if the Model 3 had been built in an average Toyota or GM plant. Tesla has far more employees than Toyota and GM had when they jointly ran the same Fremont factory, and that inefficiency could hinder profits.
Tesla has roughly 10,000 employees in the Fremont plant. At their peak, Toyota and GM had 4,400 workers who made 450,000 cars a year at the same facility, said Ron Harbour, senior partner with consulting firm Oliver Wyman. Tesla, he said, has way too many workers.
If Tesla can consistently turn out 5,000 Model 3s per week, the plant would build at most 350,000 total vehicles, including Model S and X, next year. Part of that workforce can be explained by Tesla’s decision to do a lot of work in house that other carmakers don’t, like build its own seats. But Munro said that even with extra work, the staff appears bloated.