Wage rises sharpen Tesla cost reduction focus

“We are definitely aware of the cost increases which are coming through because of the wage increases.” So says Vaibhav Taneja, CFO of US EV pure play Tesla, after his firm committed to paying its workers more this year.

The pay increments are almost certainly an effort to head off appetite by Tesla’s workers in the US and Europe to unionise in pursuit of a potentially stronger collective bargaining position with their employer. But they also mean pressure on Tesla’s bottom line, which it is looking to offset elsewhere, particularly given that 2023 also saw Tesla rack up record capex — and expectations of another $10bn+ in 2024 — and R&D expenses.

“We keep looking at other cost opportunities and try to figure out where else can we cut down,” says Taneja. “There is definitely more opportunity to bring down costs further.

“We are focused on reducing the cost of our vehicles,” the finance chief continues. “This is a very extensive and involved exercise whereby we look not just at the component cost, but down to the packaging used to get the materials to the production flow. Each element of the cost is scrutinised to optimise further. A few pennies saved at the subcomponent level, whether through engineering redesign or from many other things… leads to cost reduction."

Tens of millions

The push is organisation wide. “We are chasing lots of cost opportunities on the design side still for 2024, north of eight figures is what we are [looking at] just in my organisation,” says Andrew Baglino, Tesla’s senior vice-president, powertrain and energy, adding that “Lars has got a bunch” too. Lars Moravy is the firm’s vice-president, vehicle engineering.

And, while Tesla as already reaped some of the benefits of the current bear cycle in commodities markets, because “it is such a long cycle time through the whole material supply chain that, even with what we have already seen to this point… there is more to come on commodities reductions”, in Baglino’s view.

He sees battery materials as providing some of the runway for further reduction in input costs, while vehicle engineering chief Moravy also identifies aluminium and steel as raw materials that will come even cheaper.

The appetite to eke out every marginal saving comes right from the top. “It boggles my mind to think that if we make a 1pc improvement in costs, that's $1bn,” says Tesla CEO Elon Musk. “On average, if we reduce the cost by one penny, [that is] $1bn.”

“We are constantly looking for what we can do to reduce cost,” Taneja expands. But the finance chief cautions that Tesla is “approaching the limits within our current platforms”, not least because a significant proportion of the falling commodity prices have already fed into lower input costs.

“There is more which we are still chasing,” Taneja nonetheless continues. “I would say a big kudos goes to the team out here at Tesla — both the engineering team as well as the supply chain team. Because every time we give them a challenge, they go gangbusters to try to figure out whatever they can to take out further cost.”

Leaning into scale

Karn Budhiraj, Tesla’s vice-president, supply chain, stresses that Tesla’s ever-increasing scale brings cost benefits. “As we introduce new products, we have the opportunity to renegotiate existing suppliers for better pricing. We are looking at every penny.”

As an example, Budhiraj points to Tesla’s inbound logistics cost coming down by 22pc year-over-year. And it is granular stuff.

“This is because of optimisation on using returnable packaging as opposed to cardboard — which is even better for the environment; optimising trucking routes; negotiating better pricing with shipping companies, with trucking companies; going with full truckloads,” Budhiraj explains. “The bigger we become, the more we put thought into these things and the more efficient we become as a result of it."

“We are also getting into the tiers of supply chain to see if there are opportunities — getting into the tier 2, tier 3, tier 4 levels, and then negotiate those pricings as well to get more efficiency out of the system,” says Taneja.

And it is not just within the supply chain that Tesla is squeezing until the pips squeak. “On the design side, we are not static, especially in areas where the technology is still improving rapidly,” says Baglino, citing power electronics as an example.

“We continue to bring improvements there that are fundamentals— driven from the device up — that result in cost reductions, generation over generation. And they do not only go into the new vehicles, they come to the old vehicles as well.”