Published on October 29th, 2018 | by Steve Bakker0
Revisiting The Elusive $35,000 Tesla Model 3
October 29th, 2018 by Steve Bakker
If the base Tesla Model 3 has a gender, it’s likely female, because the car is as elusive as Botticelli’s painting of Venus. Don’t take me wrong. Anyone who has read my past articles knows I’m a pretty big fan of Tesla. The company, with all its warts, is truly changing the paradigm (a worthy use of the term in this case). It has altered the automotive manufacturing mindset and recast what’s possible in the clean energy space.
But, of course, people being people, and notwithstanding all of Tesla’s many accomplishments, the question may arise: “Yeah, but what have you done for me lately?” Or for the folks waiting on the entry-level version of the Model 3, the question might be phrased: “What are you doing for me tomorrow, and by the way, when is tomorrow going to arrive?”
Being a reservationist waiting patiently for a $35,000 Model 3, that is certainly my question. In fact, I penned a piece on this very topic back in July. Now, here it is a mere four months later, yet somehow in Tesla years it seems far longer. And in a way, it is. Here we are, only two months away from rolling over to a new year, the forecasted 4–6 month delivery window for the base Model 3 that’s been advertised for a while now is aging, and many perspective buyers have had their expectations tempered to look for delivery in the first quarter of 2019.
Tesla’s recent third quarter report and conference call was heavy with Model 3 information, including specifics on the base model. Is there anything new in this update that would cause us to re-temper our expectations? Maybe. Maybe not. This article attempts to summarize what was said regarding the base model car.
Let’s start with the written report. Amid all the truly remarkable tidbits that Tesla divulged in the third quarter report, not the least of which was the news that many buyers of the optioned Model 3s were up-buying (their previous car had cost less than $35,000 new).
We learned that the Model 3 turned profitable in Q3. And not just a little profitable (Q2 reported slightly positive margin on the 3 at its current option level). Gross margin for the Model 3 is stated to now be 20%. It was put like this in the report:
“We also delivered on our internal cost efficiency targets, leading to GAAP Model 3 gross margin of more than 20%, which exceeded our guidance”
Even better was this passage:
“While the average selling price will gradually decline as we introduce lower priced variants, we are not expecting this to impact profitability.”
While that latter statement is open to interpretation, it does portend that Tesla still: a) sees a lower priced variant on the horizon, and b) sees the forecasted profit margin on the base model as achievable (Tesla expects to produce the car for $30,000 or under). However, neither of those statements provide a temporal marker as to when the base Model will become available, so let’s keep digging into that report:
“Margin growth was caused by gradual cost improvements driven by lowering labor hours per vehicle, reduced cost of raw materials, and various other cost efficiencies.”
That’s a very hopeful statement that indicates it’s not just good margins on options such as the long-range battery, the premium interior, or even the Autopilot packages that produced that 20% gross margin figure. Tesla has lowered the cost of producing the vehicle. That’s what “the ramp” promised, and that’s what the ramp appears to have delivered.
Switching now to Team Tesla’s comments during the conference call, we find a rather realistically minded Elon Musk saying:
“If we could produce the $35,000 car today, we would do it. We need more work — there’s more work to do before we can make the $35,000 car and have it be positive gross margin. We’re probably less than six months from that. But that’s our mission.”
“If we could do the small [battery] pack now, we absolutely would. It’s just gonna take us at least 3 months to get production going, and then you have to spool up production, and that production has to go to — we gotta makes packs, packs have to go to the vehicle factory …” and “customers will probably see the small battery pack on the order of like March, or February maybe. Something on that order.”
So, there are a couple of fresh time estimates that put the standard-range battery — and thus the hope of the base model car — shipping anywhere between February and late April of 2019. There’s a caveat for that statement, but freeze that thought for a moment while we hit another couple of high points:
“It’s not like we’re holding back this lower cost version of the car intentionally. [We asked ourselves] is there anything we can do to provide a lower cost car now? And that’s where we came up with the depopulated long range pack … having a long range pack with fewer cells. Like, we really care about providing the end customer with the most affordable car we can possibly produce…”
“Well, we’re trying to provide the most affordable electric car options that we can. And so as we can — we just don’t have the ability to get to the $35,000 car right away — we thought this might be a way to offer it as an intermediate step. And that’s really it.”
Taken at face value, that remark should allay anyone’s fear that the standard-range battery may be off the table. Rather, the mid-range battery seems like a win-win scenario for both customer and carmaker. Tesla is doing what it can, when it can. Baby steps.
Having said all that, here’s a statement that gave me pause:
“We expect to start producing a significant volume for Europe in January, and obviously take some time to ship. So, deliveries — probably if we finish the deliveries in Europe kind of in the late February, March time frame.”
Oops. That comment is sort of a double-edged sword, is it not? While European buyers were no doubt delighted at this news, back in North America, buyers waiting for the base model car must be cringing at the thought of mass quantities of Model 3s heading overseas before they get their car. As someone who lives three hours from the factory, I certainly recoiled over that statement. In fact, a reference was also made to possibly start shipping cars to Asia by Q2.
On the other hand, sustained volume of sales as production ramps further can only help the $35,000 cause.
Of course, this latter thought raises the question: “How many reservists waiting for the base model have yet to pull the trigger?”
We don’t know! Tesla is playing its cards close to the vest in that regard. All we learned on the conference call is that fewer than 20% of the reservists have cancelled their reservation. But perhaps it’s a moot point. Given the steady demand for the optioned versions of the car, demand for the $35,000 Model 3 is probably unquenchable for the foreseeable future. If people are trading in their Honda Civics for the $50,000+ versions, one can only imagine the variety of car buyers that will be targeting a base Model 3 once the gates open.
So what does it all mean? Based upon Tesla’s fresh guidance, will we see a $35,000 Model 3 in Q1 2019? Again, maybe yes. Maybe no. Factoring in Tesla Time, I personally would not be surprised to see the $35,000 version slip to Q2. But in saying that, one must also keep in mind the Elon Musk factor, which means he will never ever give up on the affordable Model 3. In his own words:
“Our goal really is to make electric cars that everyone can afford…”
Here’s one twist we may see in Q1 however: Based upon the rollout so far, it would not be at all surprising to see a Model 3 introduced with the standard-range battery … but with the $5,000 premium interior option. I’d bet a nickel on that eventuality. [Editor’s note: I’d bet $5,000–10,000 on it. 🙂 ]
Although the standard-range battery will employ a brand new pack to contain the cells (the mid-range battery uses the existing long-range pack), that seems a relatively straightforward Gigafactory issue. More complex may be the Fremont factory gearing up for a standard interior. That may be a significant undertaking. The line(s) will have to accommodate different seats, a different stereo system, side mirrors, console, cabin materials, etc. Therefore, a standard-range battery / premium interior combo may be the next step in the evolutionary cycle of the Model 3.
That of course is assuming that Tesla does not start including the premium interior at no charge, as it recently did with the $5,000 Performance Upgrade Package. Be ready for anything.
In summary, the Q3 report is a landmark event in Tesla’s journey to bring a clean energy solution to the transportation sector. Elon Musk’s vision has been validated, the naysayers have been slaughtered (even though some un-dead variants may not have gotten the message yet — are you listening, Bob?), and we have every reason to believe that the base priced Model 3 is truly in sight. There’s a pair of glowing headlights at the end of this tunnel.
In the big scheme of things, it matters not whether Tesla pulls a $35,000 car out of its hat in Q1, Q2, or even later in the year. The company is now profitable, there’s still a long line of buyers waiting for even the optioned cars, so it is no longer a question of hope or even faith that we will see the affordable Tesla. It’s now a matter of trust. Just keep trusting Elon, the vision, and the entire Tesla team that is manifesting thousands of these paradigm-changing automobiles every week. They’re keeping their eye on the ball. Let’s do likewise. We will get our $35,000 car, and with evidence accumulating that the million-mile powertrain goal will be achieved, that car may just outlive some of us. That’s what I’m planning on.