Car economics, electric vehicles and the automotive supply chain
A price waterfall from showroom to carmaker profit, platform economics, battery cost, the economics of an electric scooter in India, and how the supply chain runs.
Industry brief, with a one-minute summary: Automotive and electric vehiclesKey takeaways
- Of the price a buyer pays for a car, a large share goes to tax and the dealer, and most of the rest pays for parts.
- Just-in-time: car plants hold little stock. Parts arrive in the order they are needed, sometimes within hours.
- Tiers: a carmaker may deal directly with a few hundred tier 1 suppliers, but thousands of companies sit below them.
- Battery supply chain: minerals are mined in places such as Australia, Chile, the DRC and Indonesia, but much refining and cell making is in China.
Key idea
Of the price a buyer pays for a car, a large share goes to tax and the dealer, and most of the rest pays for parts. The carmaker keeps only a small slice as profit, which is why scale, platforms and battery cost decide who wins.
Worked case
From showroom price to carmaker profit in Europe
The prompt
Kavrin Motors (a fictional carmaker) sells a compact car in Germany for EUR 30,000 including 20 percent VAT. The dealer margin is 8 percent of the price before VAT. For each car, parts and materials cost EUR 16,000, assembly labor EUR 1,500, and logistics and warranty EUR 1,000. Fixed costs (plants, R&D, overheads) are EUR 3,000 per car at planned volume. What does the carmaker earn per car, and what is its operating margin?
The structure
- Showroom price, minus VAT, minus dealer margin = carmaker revenue; minus variable and fixed costs = profit
- Price before VAT = showroom price divided by 1.2
- Carmaker revenue = price before VAT minus dealer margin
- Contribution = revenue minus parts, labor, logistics and warranty
- Operating profit = contribution minus fixed cost per car
Working it through
1. Price before VAT
Remove 20 percent VAT.
Price before VAT (EUR):30,000 ÷ 1.2 = 25,0002. Dealer margin
8 percent of 25,000.
Dealer margin (EUR):25,000 × 0.08 = 2,0003. Carmaker revenue
25,000 minus 2,000.
Carmaker revenue per car (EUR):25,000 - 2,000 = 23,0004. Contribution
Subtract parts, labor, logistics and warranty.
Contribution per car (EUR):23,000 - 16,000 - 1,500 - 1,000 = 4,5005. Operating margin
Contribution 4,500 minus fixed cost 3,000 is 1,500 per car, divided by revenue.
Operating margin (percent):(4,500 - 3,000) ÷ 23,000 × 100 = 6.52
The recommendation
Kavrin should protect volume and cut parts cost, because of the EUR 30,000 the buyer pays it keeps only about EUR 1,500 of profit per car, a margin of about 6.5 percent. First, VAT takes EUR 5,000 and the dealer EUR 2,000, leaving EUR 23,000 of revenue. Second, parts and materials of EUR 16,000 are the biggest cost, so small savings there matter. The risk is lower volume: fixed cost per car then rises above EUR 3,000 and this small profit disappears. As a next step, test savings from sharing platforms across models.
Platform economics
A platform is shared engineering that several models are built on. Developing it is a fixed cost. The more cars sold on it, the less each car carries. This is why carmakers share platforms across brands and why many form partnerships. Volkswagen Group, for example, builds many brands on shared platforms.
A new electric car platform costs USD 2 billion to develop. If it is used for one model selling 500,000 cars over its life, the cost per car is USD 4,000. What is the cost per car if four models share it and together sell 2 million cars?
Electric vehicles: the battery is the key cost
An electric vehicle (EV) replaces the engine, fuel tank and gearbox with a battery, electric motors and power electronics. The battery pack is the most expensive part. Its cost is quoted in USD per kWh of storage. BloombergNEF's 2025 survey put the average pack for battery electric cars at about USD 99 per kWh, with packs in China cheaper than in Europe and North America. There are two main battery chemistries: LFP (lithium iron phosphate) is cheaper and safer but stores less energy per kg; NMC (nickel manganese cobalt) stores more energy but costs more. EVs cost less to run per km, so buyers compare purchase price with running cost savings.
An electric car has a 60 kWh battery pack. At a pack price of USD 99 per kWh, what does the pack cost, in USD?
Worked case
Is an electric scooter worth it for a delivery rider in India?
The prompt
A delivery rider in Bengaluru rides 30 km a day, 300 days a year. A petrol scooter does 50 km per litre and petrol costs INR 100 per litre. An electric scooter uses 3 kWh per 100 km and electricity costs INR 8 per kWh. The electric scooter costs INR 30,000 more to buy. How long does the rider take to earn back the extra price from fuel savings? Ignore maintenance for now.
The structure
- Payback = extra purchase price divided by yearly running cost savings
- Petrol cost per km = petrol price divided by km per litre
- Electric cost per km = kWh per km x electricity price
- Yearly saving = saving per km x km per year
Working it through
1. Petrol cost per km
INR 100 divided by 50 km.
Petrol cost (INR per km):100 ÷ 50 = 22. Electric cost per km
3 kWh per 100 km at INR 8.
Electric cost (INR per km):8 × 3 ÷ 100 = 0.243. Yearly saving
Saving of 1.76 per km on 9,000 km a year.
Yearly saving (INR):(100 ÷ 50 - 8 × 3 ÷ 100) × 30 × 300 = 15,8404. Payback
Extra price divided by yearly saving.
Payback (years):30,000 ÷ 15,840 = 1.89
The recommendation
The rider should buy the electric scooter, because it earns back the extra INR 30,000 in about 1.89 years. First, petrol costs INR 2 per km against INR 0.24 for electricity. Second, at 30 km a day for 300 days, the saving is INR 15,840 a year, which means heavy users such as delivery riders gain the most. The risk is battery life and resale value. As a next step, confirm access to charging or battery swapping near the rider's routes.
Supply chain and operations
- Just-in-time: car plants hold little stock. Parts arrive in the order they are needed, sometimes within hours. This saves cash but means one missing part can stop the whole line, as the chip shortage of 2021 and 2022 showed.
- Tiers: a carmaker may deal directly with a few hundred tier 1 suppliers, but thousands of companies sit below them. Risks deep in the chain (a single chip or magnet supplier) are often invisible until they break.
- Battery supply chain: minerals are mined in places such as Australia, Chile, the DRC and Indonesia, but much refining and cell making is in China. Carmakers are signing long contracts, building joint venture battery plants, and shifting to LFP to reduce risk and cost.
- Plant operations: body shop, paint shop and final assembly. Key measures are hours per vehicle, first-time quality and line uptime.
- Outbound logistics: finished cars travel on special ships (car carriers), trains and trucks. Days of inventory at dealers is watched closely; too much stock leads to discounts.
- Two- and three-wheelers: assembly is simpler and cheaper, many components are made locally, and in India battery swapping networks let riders exchange an empty battery for a full one in minutes.
Sources for this lesson (2)
- Recognized public explanations of case-interview concepts and frameworks
- BloombergNEF, "Lithium-ion battery pack prices fall to $108 per kilowatt-hour", December 2025
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