Published on March 1st, 2019 | by Steve Bakker
March 1st, 2019 by Steve Bakker
That’s what one of Elon Musk’s former business partners Peter Thiel said about the man: “Never bet against Elon Musk.” And once more, against all odds, this is proving to be true. In bringing the Model 3’s price tag down to the long awaited mission target of $35,000, Tesla’s Secret Master Plan is being fulfilled. In a veritable “4th down and goal” analogy, Musk has pulled off what is arguably a Hail Mary pass to maintain sales volume, clearing the goal posts by a hair. The Holy Grail of the affordable, profitable, long-range electric car — sought after since GM developed the EV1 in the ’90s — is in sight. Tesla will deservedly go down in history as the company that grabbed that brass ring.
So this may be my final post of what is now a trilogy of articles on the $35,000 car (see: here and here). It’s the first quarter of the year 2019. And just when talk of when the $35,000 Model 3 would appear was at something of a low, we receive the rather startling news. I mean, whether you are a fan or a skeptic, there is something surrealistic about the idea that the infamous Tesla Model 3 is now being sold at the price Elon Musk promised nearly three years ago when the car was announced. (Related: If A Tesla Pattern Has Emerged, What Does That Mean For Model 3?)
Now I’m going to share something with you, something I dared not say aloud before, and I’m wondering how many of you were thinking the same thing. I have been thinking that 2019 would potentially be the most challenging year yet in Tesla’s drama-filled history. No great insights here. It’s just a matter of observing the landscape and thus wondering how Model 3 sales could sustain a continued high volume in 2019. We went into the year with no solid indication that the $35,000 car was on the immediate horizon. The year also commenced with a federal tax credit that had just been sliced in half from $7,500 to $3,750. Therefore, anyone with a tax liability greater than $3,750 had good reason to purchase in 2018. And many many did. There are, of course, Europe and China to count on to bolster sales, but one January report had European Model 3 orders at only 6,000 cars. That’s well under a month’s production.
And yet Tesla was in a position whereby it must maintain a high volume of sales in order to keep production costs minimized. It was like some kind of reverse Catch-22. On top of that, we had the leaked company email from last November noting that it would cost about $38,000 to produce a $35,000 car at that time. To achieve the low end of Tesla’s 20–25% gross margin goal, the car would have to be built for about $28,000.
How was the company going to do that? Given the likelihood that the only sure way to maintain and even increase sales volume in 2019 was to release the $35,000 version of the car, that a whopping $10,000 had to be trimmed from production costs to make such a move feasible, and that China production wouldn’t be coming online for at least one year … just how was Tesla going to pull that off?
You could just see the detractors plugging those facts and numbers into their models, and then their models flashing in red: No way! No friggin’ way. You can’t squeeze blood from a turnip.
But as the saying goes, never bet against Elon Musk. He has now authorized the sale of the base model car at $35,000. It has arrived.
But let me ask you, do you think Tesla has shaved that $10,000 off the cost of production since November? That’s a lot to cut in only three months. And although subsequent to the 3rd quarter report Tesla did announce a further reduction in labor hours to produce the Model 3, again, $10,000 is a lot of wampum. I suspect that the $35,000 Model 3 margins are currently only slightly positive (although, it is likely even many holdout buyers will jump on the $37,000 version of the car with its partial premium interior).
So, how did Tesla deal with the 2019 problem? It had already incentivized the hell out of the market with a variety of limited offerings, such as free lifetime Supercharging — yet January sales still fell off a cliff. I walked into my local Tesla store in January and it was empty. A sales advisor I had spoken with before admitted it had been dead since the first of the year. So, what was left to do? Well, Musk went out-of-the-box. He cut costs by closing the stores. Bold move! Some may say, c-r-a-z-y move. Shuttering the stores is a massive shift in the Tesla business model. Especially since the stores were slotted to take on Tesla Energy sales. Not to mention a psychological impact to both customers as well as employees. Some will liken this move to Pompey abandoning Rome to Caesar and the retreat being termed a rare species of victory. But it is so Musk-like to effect such change. His willingness to do anything, any-thing, to bring the Secret Master Plan to fruition is unwavering. The situation is somewhat akin to a movie director who is sitting with a 2½ hour film they love every minute of, knowing that the film must be cut to two hours or theaters won’t run it. There’s no choice. The film must be cut.
Tesla had to do something drastic to maintain sales volume of the 3. Analysts and the stock market are generally disappointed by the move, though. And you can’t blame them. What Tesla has provided is a tacit admission that Model 3 margins are not yet what they were expected to be at this point in time. On the fringes there are some who assert Elon/Tesla has been lying to us all along about the profitability potential of the Model 3. In my view, not true. If you go back three years ago to when the $35,000 car was first announced, you could certainly say that Musk was being somewhat optimistic — that he was taking a spreadsheet projection and treating it like fact. You might even claim Elon had incurred a dose of irrational exuberance. But lying? Nope. Not in his character. If you don’t understand that, you don’t understand the man. The reality is that Tesla took a best guess as to what the Model 3 could cost to build, and then had the balls to make that public and go for it.
And now Tesla is doing what it feels is best to keep the game alive until Model 3 margins improve further. It is, of course, unfortunate to see the stores close. But of all the helter-skelter moves we have seen this company make over the years, all the mistakes, the silly tweets, the production-line foibles, all the pricing gyrations, etc., at the same time we have witnessed remarkable consistency in one key area: Tesla has been sticking to its guns, its plan to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible. That primary mission is unchanged. Tesla is not about evolution. It is about revolution. With Musk, this is bedrock, and the company is dealing with the reality of the situation by doing what is necessary to insure that goal is fulfilled.
Image by lutz6078
Keep in mind we are only at the next temporal marker in this saga. Stores are closing and salespeople are being laid off. But will the buildings be surrendered? Especially those properties that house service centers (not all service tasks can be performed by mobile service). We may see the resurrection of the stores at some point in the future. Most importantly, there’s China. When that facility comes online, there will be another earthquake in the Model 3 cost structure. Even if all the Model 3s built in China stay in China, the rest of the world will benefit from the scaled up supply chain pricing and the next iteration of assembly line evolution.
So, yes, Tesla is running a gambit. But based upon past experience, it is more likely to work than not. In my view, the company is able to keep doing what has traditionally been characterized as impossible for one simple reason:
There is nothing so powerful as an idea whose time has come.
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