| 2:10 PM EST

Cool Cars and Profitability

#GeneralMotors #McLaren #Tesla


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By and large, it seems, the auto industry is predicated on economies of scale. That is, as volumes go up there is a reduction in the cost per unit. Which is why most automotive companies—be they OEMs or Tier One suppliers—tend to be globally massive. By having the wherewithal to invest in highly productive manufacturing technology, these companies are able to mass produce products such that they are far more affordable than were they to build them in modest numbers.

Said a simpler way: it is the difference between shopping for your groceries at Costco versus Whole Foods. The price of a pork loin as long as your arm versus the length of your foot is going to be markedly less, at least based on the number of servings that can be achieved from both.

Another aspect of the major manufacturers is that they generally have the financial resources for doing R&D, an activity that is becoming increasingly important as there is the transition to smarter, electrified vehicles. Smaller companies tend not to have the ability to build and develop and it isn’t just a matter of being able to buy something that has been developed by someone else. Chances are, the new tech is going to be too expensive for the smaller company.

In some ways, it almost seems as though scale is not just an economic necessity by something of a virtue. Just think of the proclamations of “the best-selling” this, that or the other thing, and the executives boasting of becoming “number one.”

The electrification of powertrains offers the promise of new OEMs—based on the driveline being much simpler than one that’s based on pistons and a multitude of gears—but it seems as though many of these startup EV companies are the automotive equivalent of software “vaporware.” Almost real but, poof!

And let’s face it, even though Tesla has a valuation that seems to defy gravity, the amount of money the company has made selling cars is equal to the aforementioned vaporware. (Elon Musk seems to have some magic dust. Poof!)

So I find it fascinating that McLaren Automotive recently announced its 2016 sales numbers (yes, it announced them in late June), which shows a 99 percent increase in unit sales compared to 2015—and it sold 3,286 cars. (The company became the McLaren Group after releasing its 2016 numbers.)

What’s more, the company, which is in its sixth year of selling cars, had its fourth consecutive year of operating profit: at £65.8-million, that’s a 180 percent gain over 2015. It had sales revenue of £649.8-million, a 44 percent increase. And its profit before tax of £9.2-million was up 70 percent over 2015’s £5.4-million.

Now those numbers are, vis-à-vis big OEMs, rather small, as, for example, General Motors announced 2016 net revenue and net income (both GAAP) of $166.4-billion and $9.4-billion, respectively). And as for that 3,286 vehicles sold by McLaren in 2016, know that in the U.S. GM sold 3,388 Cadillac Escalades—in December 2016. Of course, given the McLaren sales revenue of £649.8-million and the 3,286 cars it sold, they’re selling vehicles for considerably more than a loaded Escalade.

Yes, McLarens are expensive. The starting price for a 570GT is £154,000, and weakening of the pound post-Brexit vote or not, that’s still a lot of money. Still, having a high price tag on something doesn’t necessitate profitability.

McLaren builds its cars in a facility in Woking, which is about 25 miles west of London. It is hard to describe the McLaren Production Centre (MPC) as a “factory,” because it is more like a cleanroom than a place where cars are manufactured. Or hand-assembled. The cars are composite intensive; McLaren has been working with the material since 1981 for racing vehicles and 1993 for road cars (the F1). It hasn’t built a car without it since.

The MPC has added a second shift to the facility this and now has an output of 20 cars per day, or some 5,000 per year. This is a doubling of what it had been able to produce. Given that its limited-production volume vehicles tend to sell out shortly after they’re announced, they probably have a high level of confidence that the volume is appropriate to demand.

Two points about McLaren.
1. They are producing cars to demand. That is, they are not producing lots of cars and hoping that they’ll be bought. Even though the traditional auto industry has “right-sized” since the 
Great Recession, arguably there is still a whole lot of excess production going on, which is not beneficial to anyone’s bottom line.
2. They are using flexible production methods. One of the most expensive aspects of building a car is the price of the tooling to stamp the body panels. The price of composite tooling is a fraction. Sure, it is limited in what it can do vis-à-vis the dies used to produce steel or aluminum panels, but it provides tremendous flexibility.

Those points are what really matter. And let’s face it, the cars are incredibly cool, too.