Hollis Johnson/Business Insider
- Tesla CEO Elon Musk admitted that selling a $35,000 version of the Model 3 would be a disaster for the company.
- The base Tesla Model 3 is now planned for deliveries in late 2018 or early 2019.
- Musk has to do this to save the company from ruin, even if he ends up jilting prospective owners.
Everybody has been giving Tesla CEO Elon Musk a hard time for his savage Twitter ways of late, myself included. But that doesn't mean, amid all the trolling of haters and big media, Musk doesn't sometimes tweet out an insight.
For example, Musk offered this tweet in response to a question about when the long-promised $35,000 Model 3 sedan would arrive, after he announced a $78,000 high-performance trim level: "With production, 1st you need achieve target rate & then smooth out flow to achieve target cost. Shipping min cost Model 3 right away wd cause Tesla to lose money & die. Need 3 to 6 months after 5k/wk to ship $35k Tesla & live."
That's not exactly what I heard when I was at the Model 3 launch in July of 2017. Then, my understanding was that Tesla would first build the $44,000 Model 3 with a long-range battery pack and a single motor over the rear axle to keep things simple. After all, the company had never mass-produced the car before and had skipped a so-called "soft tooling" phase of the ramp-up, when it could fix problems with the assembly line before settling on costly gear.
I did know that Tesla usually sells expensive trim level before cheap ones — and sometimes doesn't see very much demand for less-expensive versions of its vehicles.
That's not a bad thing, as pricier Teslas are better for topline revenue and should eventually be a boon for bottom-line profits if the company can stop losing billions of dollars annually. In fact, a little over a year ago I argued that selling a $35,000 car wasn't such a great move for Musk.
"It bears repeating: the Model 3 represents a move for Tesla in the opposite direction of where the money is in the car business," I wrote. "A $35,000 compact sedan brings in a lot less than a $100,000-plus mid-size SUV. For Tesla, the Model 3 is a far greater risk than the Model S or X were."
My headline was "The Model 3 could be the worst thing that ever happened to Tesla," so I take a doleful victory lap on that one.
Tesla's $35,000 Model 3 is on the back burner
Mark Brake/Getty Images
So if you pre-ordered a Model 3 expecting the $35,000 version to launch in 2018 —sort of like what you might anticipate from any other carmaker on Earth, minus the need to plunk down a $1,000 deposit — I'd say forget about it until 2019 at the earliest.
Or perhaps forget about it ... forever.
I've always struggled to figure out why Tesla wanted to sell a $35,000 vehicle anyway. Unless the company can convince the Trump administration to extend a $7,500 federal tax credit that will phase out after a carmaker sells 200,000 electric vehicles in the US, that perk will vanish for the el-cheapo Model 3 crowd.
Besides, the customers who could use the tax credit would tend to be folks who might owe the IRS money, in other words, wealthier citizens who wouldn't be disinclined to purchase the base version of anything. D0 you really want to be rolling up Sand Hill Road in a no-frills Model 3?
Building an affordable, long-range EV is also a walk in the park for a major carmaker; General Motors went from unveiling to on-sale with the Chevy Bolt in about a year. The Bolt is currently the only sub-$40,000 EV with over 200 miles of range that you can buy. The vehicle has sold better than GM expected, but it's probably losing the carmaker thousands of dollars for each unit.
But GM doesn't need to make money on the car — it just needs to force Tesla to also lose money in that segment. GM can afford it because it prints cash with sales of pickups and SUVs.
Why would Tesla want to compete with that?
The $35,000 Model doesn't die, it just ... fades away
Perhaps Musk has come to that conclusion and will now reliably undersell the bargain trim level of the Model 3. I certainly hope he does because that will broaden Tesla's portfolio of luxury offerings and provide a shot at survival. A lot of Tesla bulls think the Model 3 could post impressive margins, but my take is that it could post decent margins only at a relatively high price point.
The $78,000 Model 3 is a case in point. I shouldn't need to present any path-to-profit math on a vehicle that has essentially the same battery as the roughly $50,000 version of the car, but adds a second motor to provide all-wheel-drive and snappier acceleration. The $28,000 difference should function as a profit light bulb.
OK, Musk might go ahead and nominally sell the $35,000 for a short period in 2019 before letting it wither or quietly declining to allow reservation holders to configure their cars. That would be smart, if sort of deceptive, but my guess is that anybody who put down a grand on a Model 3 would forgive Elon because that deposit was more like a vote of confidence than a promise to convert.
Those jilted customers would probably chalk up their disappointment to the cost of changing the world. They'd also be in a better position to get the money back if Tesla doesn't go bankrupt. And if that's what it takes to save Tesla, you can bet that Musk will do it.
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