Business Costs and Profits - Economies of Scale at Tesla

In this short we look at examples of economies of scale exploited by Tesla Motors. It is a business almost obsessed with reaping economies of scale and efficiency gains as their production grows.

At the heart of Tesla’s rapid growth is a recognition of the importance of economies of scale in manufacturing. It produces more than 300,000 vehicles each quarter.

Tesla’s market capitalisation is far higher than any other carmaker and it continues to have a strong lead in electric vehicle production.

Examples of some internal economies of scale:

1. Unit cost of batteries and solar power cells fall as scale of manufacturing expands
2. Tesla uses buying power when purchasing inputs externally
3. Optimising production in very large integrated factories
4. Using robots in all stages of vehicle manufacturing
5. Vertical integration of business - for example, manufacturing their own vehicle seats

With each model and each factory, the learning process improves causing unit costs for Tesla to fall. This is known as “learning by doing” or “moving down the experience curve.”