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Tesla CEO Elon Musk reveals challenges faced by large automakers and how they make profit

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Citing the zero or low margins of legacy car makers, he explained that big car companies make their profits not from the sales of their cars but from the sales of replacement parts like “razors and blades”.

Tesla CEO Elon Musk reveals challenges faced by large automakers and how they make profit

Tesla CEO Elon Musk says that it is “extremely hard” to create a profitable car manufacturing company. Citing the zero or low margins of legacy automakers, he explained that big car companies make their profits not from the sales of their cars but from the sales of replacement parts like “razors and blades”.

Elon Musk admitted that the production, especially profitable production of cars, is extremely difficult to accomplish in his reply to product designer Anthony Smith, who shared an excerpt from James Dyson’s new book and said, “Great read. Still gutted they canned this. ‘At a relatively low volume, we would have to sell the car at $210,000’.Makes Tesla’s achievements all the more astounding…”

“Production is hard. Production with positive cash flow is extremely hard," Musk tweeted.

James Dyson’s new book “Invention: A Life” details the British tech giant’s efforts to design a high-end electric vehicle and how it was ultimately scrapped after years of research and development.

British tech giant Dyson spent $700 million in hopes of designing their own electric car, the high-end N526 EV, but ultimately failed in its attempts.

Talking passionately about Dyson’s efforts to build a new EV, founder James Dyson described how they had gone so far as to design a “convincing car” with a pair of 264 horsepower Dyson electric motors with an estimated top speed of 125 mph or approximately 200 kmph.

“The team eventually grew to 500, and by mid-2019 we had a very convincing car, with a pair of 264 hp Dyson electric motors, one at the front, one at the rear of the car. Although weighing 2.87 tons, the EV could have accelerated from 0 to 60 mph in 4.6 seconds. Its top speed was estimated at 125 mph,” Dyson wrote in his book.

Dyson went to explain that since they were trying to establish a brand-new car company, all the suppliers charged them 25 percent higher for new parts, adding to the final price tag of the car.

“At a relatively low volume, we would have to sell the car at $210,000. There are not many people who will buy a car at this price,” he wrote in the book.

Dyson said that their plans to sell directly rather than use dealers and the fact that they wanted to manufacture fewer cars compared to traditional car companies added to their woes.

Musk echoed this sentiment and tweeted, “Large incumbent carmakers sell their cars at low to zero true margin. Most of their profit is selling replacement parts to their fleet, of which 70 percent to 80 percent are past warranty. Like razors & blades.”

Musk added that new car companies that did not have the sales or service infrastructure are at a disadvantage. "New car companies lack this advantage. Also lack sales & service infrastructure," said Musk.