The Real Cost of Tesla’s New ‘$35,000’ Model 3

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It took a while, but Tesla Inc.  (TSLA) finally unveiled a more affordable version of the Model 3, with its mid-range offering. Shares were initially up on the news, but have since sunk about 2.6% to $257 about an hour before close. The reasons for the drop vary.

CEO Elon Musk is one step closer to making his dream a reality, as he revolutionizes the auto world and pushes the world toward a clean-energy future. While there are still some questions surrounding the vehicle, this is no doubt a win for Tesla and Musk.

Tesla’s Base Model 3

On Thursday evening, Musk tweeted out that the base Model 3 “Costs $35k after federal & state tax rebates in California, but true cost of ownership is closer to $31k after gas savings.”

That may be the situation in California, but in reality, the upfront cost is actually $45,000 before federal and state incentives. With just the federal tax credit of $7,500 for electric vehicles (EVs), that drops the price down to $37,500. However, that tax credit will drop to $3,750 for the first half of 2019 and again be reduced by 50% in the second half of 2019. It will then be eliminated for Tesla vehicles, now that the company has delivered more than 200,000 EVs.

The website says delivery estimate is for 6 to 10 weeks from now, which would land current buyers of the mid-range Tesla right near the year-end mark. Assuming then that a majority of drivers take delivery after Jan. 1, the cost for those buying in states without other incentives is actually $41,250. Tesla is caught in a situation where it wants to offer a low-cost all-electric vehicle but has to think about the bottom line as well.

For clarity, TheStreet spoke with a Tesla rep who said the standard battery is still four to six months away (as stated on the website). The standard battery will have an even shorter driving range than the 260 miles capable of mid-range Model 3. It will also likely come with a lower price tag, perhaps getting Tesla down to that incentive-free price of $35,000, or at least close to it. 

Can’t Satisfy the Bears

Musk said his goal was to bring a $35,000 all-electric vehicle to the market. Why that meant he had to or he was a fraud, I don’t really know. General Motors’ (GM) Mary Barra or Ford’s (F) Jim Hackett wouldn’t be getting ribbed if they came up slightly short of that mark. Admittedly, the $45,000 (pre-incentive) mid-range Model 3 isn’t that close either, but there’s still one more Model 3 to come. At $36,000 or $37,000, that’s pretty close to Musk’s original goal. 

Management teams set goals and sometimes come up short on that goal. Whether that’s the case with Tesla’s Model 3, we don’t yet know. Many bears said the $35,000 base Model 3 would never come and yet, we’re making progress toward that goal. 

So now the argument shifts to profitability, gross margins, production headaches and whatever else they can wrap their hands around. I’m not trying to take sides with Tesla here. Its financials are one thing — a mess, certainly — but why can’t we give credit where credit is due?

For one, Tesla’s vehicles are the safest on the road, according to NHTSA. Second, the Model S and X are luxury all-electric offerings. Even after being on the market for years, the competition can’t catch up. With electric debuts coming from Porsche, Audi, Mercedes-Benz and BMW in 2019, 2020 and beyond, even these automakers simply can’t beat out Tesla.

They’ve had years to catch up, far more access to R&D capital and decades of experience in automotive development. Yet even then, the upcoming vehicles have, at best, comparable specs to Tesla’s current lineup.

So why don’t we give credit where credit is due: Tesla is making some amazing products and continues to improve its methods. If it didn’t have a sub-optimal financial situation — and that’s putting it mildly — this company would be a slam dunk. With that, we also have to pay attention to its shortcomings, but this is a positive step toward expanding the company. 

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2018-10-19 19:13:07

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