Published on July 2nd, 2018 | by Steve Bakker0
In Search Of The $35,000 Tesla Model 3
July 2nd, 2018 by Steve Bakker
I knew of a guru who once stated: “Cooperation plus tolerance equals peace.” A simple, easy-to-understand maxim. Yet difficult to manifest. The strategy may only have a chance of working if there is faith on the part of all parties.
Speaking of faith, Tesla is testing the faith of its followers right now. This of course has been true from the beginning. It has always taken a leap of faith to buy into the next Model automobile that Tesla announces it will produce. From the Roadster down to the Model 3, there have always been delays. Recent announcements from Tesla/Elon Musk are once again testing the belief that the long promised $35,000 Model 3 will become a reality. We now know that the base priced version of the car will likely not be produced this year. The latest word is that the entry level configuration will ship in Q1 2019. This means that even a year and a half after the commencement of production in July 2016, the much anticipated $35,000 Model 3 will not be on the road.
This test of the faithful is exacerbated by the fact that the federally mandated Plug-In Electric Drive Vehicle Credit will soon start ticking a countdown clock as Tesla will likely deliver its 200,000th car sometime in the 3rd quarter of this year. Bottom line: the generous $7,500 federal tax credit will likely be cut in half to $3,750 as of the first of next year. Bottom bottom line: no one is going to be able to buy a base Model 3 and still be eligible for the full credit.
For a lot of people, this is disappointing news. It’s new bad news on top of old bad news. The carrot at the end of the stick keeps sliding further from view. Customers reserving a Model 3 even in the past few months who are willing to pay for a premium version of the car (starting at $49,000) are now estimated to expect delivery sooner than the $35,000 holdouts who reserved when the car was first announced back in late March of 2016. Some reservists feel manipulated … taken advantage of. “Bait and switch!” is a common cry. “Elon has us by the short hairs!” is another.
Tesla is being accused of gaming the huge demand for the Model 3 by producing only the most profitable versions of the car. Others claim Tesla is effectively transferring the tax credit dollars from the consumer to its own coffers. Although Tesla never once promised that the $35,000 Model 3 would come with the full tax credit, the $7,500 incentive was mentioned on the pricing page and people made reasonable estimates as to the net cost of the car.
As it happens, the optimistic estimates were incorrect. Reality trumped the forecasts and expectations. A whole lot of particles had to line up just right for production of the base priced Model 3 to manifest by now, but the particles simply didn’t cooperate. Parts suppliers had some hiccups. Battery production faltered. Model 3 production lines needed tuning, and cosmetics and reliability were not ideal at first.
Is Tesla gaming Model 3 demand by further delaying production of the base configuration? Yes. Definitely. It is absolutely taking advantage of the fact that so many buyers want a premium variant of the car. It is common knowledge that Tesla needs, and has promised, a profitable quarter before year end. Tesla may believe that becoming profitable in the near future outweighs all other priorities due to the short selling activity in its stock. A profitable company has less need of capital infusions and is thus less vulnerable to short selling pressures. The pressing need for profitability is summarized in this EV Annex article. Selling the most profitable versions of the car into demand is a key part of an overall strategy to go into the black. Tesla needs to part the red sea, if you will, and cross over to the promised land of a future free from the naysayers pursuing the company. But beyond that, is it fair to characterize this move as bait and switch? As manipulative? As deceitful?
Everyone has to answer that for themselves, but I will share my personal take. I signed up for a Model 3 on Day 2 (April 1st 2016). Inspired by a story about Tesla announcing a $35,000 pure electric vehicle, I instantly navigated to the reservation page on the Tesla site. After later watching the initial reveal of the car, I flat out fell in love with the Model 3. In particular, I was enamored with the $35,000 version of the vehicle. When people get in my car and go “Ooh. Ahh. How much did this wonderful car cost!?,” I want to be able to say “Only 35K.” It’s an evangelical calling to help covert the unwashed masses of the world to no-compromise pollution-free driving (I’m also a notorious penny pincher).
A few months after making the deposit, my trusty old Corolla unexpectedly died on vacation, and a few hours later, I found myself strapped into a Prius and locked into a 3-year lease. Suddenly, my Model 3 went from an expected 1–2 year delay to a 3 year deferment. Still, I had no doubt whatsoever that when I turned my Prius into Santa Barbara Toyota in July of 2019, I’d be able to Uber straight over to the Tesla store 4 miles away and take delivery of my $35,000 Model 3.
But now, for the first time, I’m not dead certain that my dream electric car will be ready for me when I’m ready for it. There have been so many surprises, so many delays. For all we know, Tesla may continue to produce only the premium models until demand is fully satiated. Therefore, I do get conflicted at times. A devil will appear on one shoulder and whisper in my ear, “Buy a Bolt … you dolt!” On the other shoulder, an angel will materialize and whisper: “Support the coup … take the long view!” Here is a photo of me suffering through that conundrum:
I know, I know. I look exactly like the character “Larry” in Animal House when faced with a classic moral dilemma. People remark on the resemblance. But seriously, the devil/angel dilemma has been a recurring theme on this roller coaster ride called “When will I get my Model 3?” Reservists want to support the Tesla ideals … but they want their car! How could one not feel disappointed at all the twists and turns? Especially the folks for whom the car was a financial stretch, and who had counted on the maximum tax credit. Is it unreasonable for them to feel that the tax credit is going to go to those who may not need it as much as someone trading up from, say, a Ford Fusion? If you think about it, that’s what the tax credit was created for … to help taxpayers afford an electric car.
Ultimately, we have to be high-minded and pull back and see the Big Picture. Darn it. We have to remind ourselves why Tesla was formed. Why SolarCity was formed. The same with SpaceX. And The Boring Company. The idea is to fashion a more sustainable model for humankind. That is what Musk is all about. He is taking the long view. Regarding the tax credit, it seems that the company would likely be producing the premium versions of the Model 3 exclusively whether the credit existed or not. Aside from Tesla possibly having done some shifting around to help insure that the most customers get the most credit before the countdown timer phases out the max $7,500 option, the company is isolated from the program. The tax credit incorporates no means-testing, and you can’t fault Tesla for that. Nor can you blame Tesla for the coincidence of the credit starting to wind down prior to Model 3 profitability kicking in.
It’s important to note that right now Tesla is losing money on every Model 3 it sells. That’s what the company stated in the First Quarter 2018 Update letter. Here’s an excerpt:
“… grow Model3 gross margin from slightly negative in Q1 2018 to close to breakeven in Q2 and then to highly positive in Q3 and Q4. Ultimately, the growth of Model 3 and the profit associated with it will help us accelerate the transition to sustainable energy even faster.”
So, do I feel baited and switched? No. It comes down to a question of intention. Tesla is not about profits first. It’s doing what it’s doing simply to insure it is around long enough to materialize the long view. To insure everyone gets a Tesla who wants one. I don’t think Musk ever intended to deceive. It’s not in his nature. It is natural, however, for him to over-promise … to ignore the variables borne on the winds of reality. But Elon never sees it that way. We’re dealing with a man for whom the word impossible does not exist. If that quality was missing from his psyche, then Elon would never have predicted 100,000–200,000 Model 3s produced by the end of 2017 (as forecast at the 2016 shareholders conference). But, also, all the cool things that Tesla has done would never have been done. The cars, the tech, the breakthroughs, the spinoffs. Most of what Tesla has accomplished was viewed as “impossible” to pull off. That’s why no one else had done it yet!
With that in mind, each time those creatures pop onto my shoulders, the choice is always the same in the end. I go with the Angel. The long view wins. As much as I am in love with the Model 3, I’m even more in love with “the vision.” The Tesla vision of a cleaner world. Call it TeslaVision. It’s bigger than any one of us.
Will the $35,000 Model 3 Ever Be Produced?
Even though I accept all the delays and policy changes affecting the base model, it doesn’t mean I’ve hit the Start Designing button on my reservation page (thousands of reservationists have recently been invited to configure their car, but there is no option for the base model yet). It would be great to funnel a few extra dollars toward the cause, but this boy is holding out for the base model. Yes, it is another act of faith. But Tesla has been pretty good at rewarding the faith of its followers. I’m willing to take a chance that the $35,000 version of the Model 3 will be produced at some point.
It’s helpful to remember how long the auto industry has been trying to build a profitable yet affordable long-range EV. It goes back much further than Tesla. The dream of the electric car was revived in the 1960s when the issue of air pollution came front and center. Until Tesla stepped up, it had been GM doing the majority of the heavy lifting. The behemoth has spent billions on EV development. GM reached a pinnacle in the ’90s when it reached for the brass ring vis-à-vis the EV1. Although only available on lease, the price tag of the EV1 was set at $35,000. Only one problem: it cost GM a reported $150,000–250,000 to build each car. The EV1 program was another billion dollars down the drain. Even in contemporary terms, best estimates have it that the Chevy Bolt is produced at a loss. That’s not sustainable.
Thus, the $35K price point is H-U-G-E. It will represent a revolutionary breakthrough in the electric car world. Although Elon Musk is just the kind of badass to pull this off, he can’t just rip a hole in the space/time continuum and pull the future into the present. He may talk like that is one of his superpowers, but no, not really. So we don’t know for sure yet if a thirty-five thousand dollar, affordable, profitable, long-range pure electric car is just around the corner. The particles are lining up, though. And given the implications of reaching this goal, is it not worth having a tad more faith?
Perhaps the guru’s earlier words could be paraphrased to read — “Faith plus patience equals a 35K Model 3.” I’m sure that’s what he meant to say. Or we could turn to the classic TV show Kung Fu. With a hopeful remark, Master Kan reminds Kwai Chang Caine that the Praying Mantis demonstrates that speed and patience are not mutually exclusive. Seems reassuring somehow.
So, for all those early reservists holding out for a $35,000 Model 3, be disappointed. Be very disappointed. Lament the fact that of the thousands of Teslas sold, not a single buyer of the most affordable model will be eligible for the full $7,500 tax credit. Then, let go of it. Reset, and think about taking a 6 month hiatus before getting back to checking your estimated delivery date. Have to go now. Time to feed my insects.