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Home / Business / Tesla is getting more and more desperate to sell expensive Model 3 Sedans – The Motley Fool

Tesla is getting more and more desperate to sell expensive Model 3 Sedans – The Motley Fool



Just over a week ago Tesla (NASDAQ: TSLA) attempted to pump sales of Model 3 by telling potential US customers that they were entitled to the full $ 7,500 federal electricity – Tax credit for vehicles if they placed an order by 15 October. Tesla's tax credit will be reduced to $ 3,750 for deliveries after January 1, 2019.

This tactic does not seem to have been very successful fact that the lead times of Model 3 have not changed. As a result, Tesla shifted course last week and replaced the cheapest version of the Model 3, which it had sold with a new "mid-range" model at a slightly lower price. The sudden decision to adopt a new Model 3 variety suggests that Tesla is seeking a well-functioning balance between stimulating sales and protecting its profit margin.

Tesla's Dilemma

Following the announcement of the Model 3 in early 201

6, Tesla quickly gained hundreds of thousands of reservations. The proposed starting price of $ 35,000 before government incentives – and much less after tax credits – for a vehicle with a range of at least 215 miles was clearly pushed into a deep pent-up demand for high-quality electric vehicles. However, when the Model 3 went into production in mid-2017, Tesla began with the only rear-wheel drive equipped long-range battery version, which was equipped with a high-quality interior package. This caused the starting price (before tax credits) to $ 49,000, while other options could possibly push the price much higher.

When Tesla became a branch at the beginning of the year, she added even more expensive dual-engine models. The goal was clear to increase the gross margin of the model 3. Right now, Tesla can not profitably build a $ 35,000 version of the Model 3.

  A silver Tesla Model 3 parked on a street with a green field in the background

The $ 35,000 basic version of the Model 3 will not be available for months yet. Source: Tesla

Tesla even expects the gross margin of Model 3 to be 20% below the target of 25% despite a super-premium production mix and rising production in the fourth quarter

problem for Tesla that the demand for the Model 3 is limited to the price offered so far. Order book of confirmed orders seems to be shrinking as many US reservation holders are waiting for the cheaper $ 35,000 model to become available.

Attempts to increase sales

It seems pretty clear that Tesla would not have a shortage of orders It made the $ 35,000 Model 3 now available. With such a cost structure, however, this would lead to large losses. Tesla does not have the financial means to absorb this kind of blow to its end result. It needs more orders at the higher pricing points of the Model 3.

Tesla was probably hoping that October 15, the last day of guaranteed delivery by the end of the year, would trigger a large influx of orders from customers who choose to pay for options they did not need, but risk losing the tax credit.

This week, it tried a different approach. On Thursday, CEO Elon Musk tweeted that Tesla had just made a new mid-range version of the Model 3 available at a lower price. The mid-range Model 3 offers 260 miles of range, compared to 310 miles for the long-haul models and an estimate of at least 215 miles for the standard-range version that has not yet entered production. The starting price is $ 45,000 before tax credits.

As of Thursday night, the lead time for mid-range Model 3 orders was six to ten weeks, meaning that buyers would receive their vehicles by the end of the year. Tesla announces that the starting price in California for federal tax credits would be $ 35,000.

That Looks Like Another Trick

There's no way to be sure what Tesla intends to provide any tactics to fill his model 3 order book for the rest of 2018, without the margin- to make the $ 35,000 killing version available.

Many US customers waiting for the $ 35,000 Model 3 will not be allowed to drive their vehicles until then. By then, the federal tax credit will only be $ 1,875 less than the tax credit available today.

The potential loss of $ 5,625 tax credits was not enough to get many bookmakers to order a $ 49,000 long-range model last week. Tesla probably believes that developing a $ 45,000 midrange model will change that calculation. Taking into account the potential difference in available tax credits, the mid-range model can currently cost only $ 4,375 more than the $ 35,000 base version of Model 3.

Simultaneously with the launch of the new $ 45,000 Tesla Die Option for rear-wheel drive with long reach has been removed from the order page for model 3. (Musk says it can be ordered for another week.) This means that the cheapest 310-mph option is now a more expensive dual-engine option with a starting price of $ 54,000. This means that higher profits from long-range models could offset much of the headwind by introducing the more favorable $ 3,000 mid-range model 3 in the quarter.

Tesla will get some respite in early 2019 as it launches Model 3 deliveries outside of North America. It will be possible to start with the most expensive versions with the highest margins first. But soon it will have to make the $ 35,000 version available – or dramatically reduce sales targets. If Tesla can not massively improve its cost structure by then, the Model 3 alone is not enough to make the company sustainably profitable.


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