Op-Ed: Tesla needs to find new customers for the Model 3

Posted Feb 17, 2019 by Ken Hanly
After Tesla had a year first of "production hell" and then "delivery hell" as far as Model 3 production was concerned the question now arises how many more customers are there for the vehicle especially the higher priced models.
Tesla s showroom.
Tesla's showroom.
As noted in a recent Digital Journal article Tesla ended up the year with surplus stock of the Model 3 after earlier being in a huge rush to up production which it did.
Demand for higher priced Model 3s may be dropping
This is especially true in the US. However, in other parts of the world Tesla there may still be an opportunity for Tesla to keep on selling them. Tesla still has not started production of the cheaper $35,000 version even though it was originally promised back in 2016. The situation is worrisome for some as auto manufacturers are warning that 2019 will be a rough year for auto sales in the US. Tesla will also face less of a government tax credit on its EVs.
Wedbush analyst Daniel Ives said that Tesla's problems were shifting from production to demand. He said Tesla has a hard job ahead.
Tesla Chief Executive Officer (CEO), Elon Musk remained optimistic:
“The demand for Model 3 is insanely high. The inhibitor is affordability. It’s just, like, people literally don’t have the money to buy the car. It’s got nothing to do with desire. They just don’t have enough money in the bank account. If the car can be made more affordable, they will... the demand is extraordinary.” Musk sold about 140,000 of the higher priced Model 3s in 2018 which was its first year of production,
If the problem is pricing when will prices decline?
It is not clear when Tesla will solve the pricing problem. Musk admits that the company has not yet figured out how to make any money on a lower priced $35,000 Model 3 a model originally promised. The models available have cost thousands more than the base model some tens of thousands more.
Tesla has made some headway in lowering the price of the Model 3. The cheapest model is now at $42,900 after it was lowered by $2,000 in January. This is still around $6,000 more than the average selling price of a car in the US which was about $37,149 in January according to the Kelley Blue Book. However, a top version of the Model 3 can cost up to $70,000, so expensive that Tesla has removed base versions of the Model S and Model X to avoid overlap,
The situation is complicated by the fact that Tesla EVs are no longer eligible for the full $7,500 federal tax credit for electric vehicles. Tesla's own website says production of the $35,000 version of the Model 3 is 4 to 6 months away. By that time there will be only a few months during which the cars are eligible even for a reduced tax credit.
The end of the EV tax credit
After Tesla sold its 200,000th EV in the US last summer the federal tax was reduced by half to $3,750 on January 1st this year. Some dealerships kept open until midnight on New Year's Eve to take advantage of the tax credit and clear inventory. The credit will drop again on July 1st of this year to $1,875. At the end of the year it will expire completely. Unless Tesla can convince the US Congress to better the incentives the situation looks bleak. Trump does not seem the type to push for better incentives to purchase EV's. Some state incentives can still take up to $2,500 off the price of an EV but that still leaves the price about $2,500 above what was hoped to be an under $30,000 price tag after the federal tax credit.
Tesla needs to sell higher priced models in the EU and China
Jeffrey Osborne of Cowen's said that despite the company's focus on expanding supply said he thought that demand for the higher priced versions of the Model 3 had largely been exhausted in the US. Growth rates in US sales appear to be rapidly dwindling. Cuts to Tesla's work force has added to worries that investors have. Osborne said that Tesla would have to rely on sales of these higher priced variants of the Model S in Europe and China at least for the short term.
CEO Musk said that leasing Model 3s would be another way of dealing with the situation.
Musk said that success in new world markets such as the EU and China could see the company sell 700,000 to 800,000 model 3s annually. If there is a recession he said this could decline to about 500,000.
As of now Tesla cannot make that many cars in a year. For 2019 the company expects to sell only 360,000 to 400,000 EVs world wide. About 100,000 of those will be model S and Model X rather than Model 3s.
The GIgafactory in China needs to come into production
The Tesla factory in Fremont California is already maxed out as far as production is concerned with Model 3s being made in a tent outside the factory. Last month Tesla broke ground for a Gigafactory in China but production will not be started until the end of 2019 at the earliest. Recently Musk said that the Shanghai Gigafactory is the largest variable in reaching the production of 500 thousand plus Model 3s each year. Tesla estimates the factory will be able to make 7,000 model 3s each week by the end of this year.
Tesla has not provided data about the number of reservations in China or Europe. Tesla has had problems with early deliveries in Europe. In China, Musk wants the Gigafactory up and running before there are any more trade barriers.
Tesla's profits
A recent article in the Verge notes: "Tesla made a $139 million profit in the fourth quarter of 2018, the first time the electric automaker has ever posted back-to-back profitable quarters in its 15-year history. It was also Tesla’s fourth profitable quarter ever, according to an investor letter published on Wednesday. Tesla generated $7.2 billion in revenue in the quarter, a record for the company.
Total revenue for 2018 was $21.4 billion — another record for the company — though Tesla still posted a $1 billion loss across the year. Tesla remains short of CEO Elon Musk’s ultimate goal of generating a full-year profit, but it has been clawing back its losses and finished the year with $3.7 billion in cash. Last year, the company lost $2 billion. Musk and CFO Deepak Ahuja wrote in the letter that 2018 was the “most pivotal year in Tesla’s history.”
Tesla will need to improve its deliveries in Europe and make sure that its Gigafactory is up and running by the end of the year if it is to have any hope of having a profit for this year. It appears it cannot rely on a large increase in sales in the US to bring its first yearly profit. The appended video provides an interesting history of Tesla's financial results.