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Published on March 1, 2019 | by Steve Bakker
March 1, 2019 by Steve Bakker
This is what Peter Thiel, former trading partner of Elon Musk, said about this man: "Never bet against Elon Musk". And once again, against all odds, this is true. By bringing Model 3 back to the long-awaited goal of the $ 35,000 mission, Tesla's Secret Master Plan is being realized. In a real "4th Low and objective "By analogy, Musk has achieved what is undoubtedly a Hail Mary pass to maintain sales volume, eliminating goal posts by a hair.The holy grail of the affordable, profitable, a long-range electric car – sought since GM developed the EV1 in the 90s – is in sight. Tesla rightly enters history as a company that has seized this copper ring.
So, this may be my last post of what is now a trilogy of articles on the $ 35,000 car (see: here and here). This is the first quarter of 2019. And just as we were talking about when the $ 35,000 Model 3 would be at its lowest, we're getting a rather startling news. I mean, whether you're a fan or a skeptic, there is something surreal about the fact that the infamous Tesla Model 3 is now sold at the price promised by Elon Musk almost three years ago when the car has been announced. (Related: If a Tesla model has appeared, what does it mean for Model 3?)
Now, I'm going to share something with you, something I never dare to say aloud, and I wonder how many of you think the same thing. I thought 2019 would be potentially the most difficult year in Tesla's history. No big ideas here. It's just a matter of looking at the landscape and wondering how Model 3 sales could maintain a high volume in 2019. We had no serious indication that the $ 35,000 car was on the horizon. The year also began with a federal tax credit that had just been split in half from $ 7,500 to $ 3,750. Therefore, anyone with a tax greater than $ 3,750 had a good reason to buy in 2018. And many have done so. Of course, there is Europe and China on which to rely to support sales, but a January report indicated European Model 3 orders for only 6,000 cars. It's much less than a month's production.
And yet, Tesla was in such a position that he must maintain a high volume of sales to minimize production costs. It was like some sort of reverse Catch-22. In addition to that, we had the company's email that had been leaked last November, stating that it would cost about $ 38,000 to produce a $ 35,000 car at that time. To achieve the low target of 20-25% of Tesla's gross margin, the car should be built for around $ 28,000.
How would the company do that? Since the only sure way to maintain and even increase the sales volume in 2019 was to publish the $ 35,000 version of the car, $ 10,000 had to be reduced production costs for this change to be achievable, and that production in China will not be online for at least a year … how would Tesla achieve that?
You can just see detractors incorporate these facts and figures into their models, then their models flash red: No way! No friggin way. You can not squeeze the blood of a turnip.
But as the saying goes, never bet against Elon Musk. He has now authorized the sale of the basic car model to $ 35,000. It's happened.
But let me ask you, do you think Tesla has reduced that $ 10,000 cost of production since November? It's a lot to cut in just three months. And although after the 3rd Tesla quarterly report announced a further reduction of working hours to produce the model 3, again, $ 10,000, this is a lot of wampum. I suspect that the margins of Model 3 at $ 35,000 are currently only slightly positive (although many potential buyers will likely turn to the $ 37,000 version of the car, with its partially premium interior).
So, how did Tesla solve the 2019 problem? It had already pushed hell out of the market with a variety of limited offerings, such as free recharge for life – but January sales still dropped. I entered my local Tesla store in January and it was empty. A business consultant with whom I had spoken previously admitted that he had died since the first day of the year. So what was left to do? Well, Musk is out of the box. He cut costs by closing stores. Bold gesture! Some might say that c-r-a-z-y moves there. Hiding the shops is a radical change in Tesla's business model. Especially since the stores were chosen to take over sales of Tesla Energy. Not to mention a psychological impact for both customers and employees. Some will compare this move to Pompey leaving Rome to Caesar and the retreat being called a rare species of victory. But it looks so much like Musk to make such a change. His will to do anything, no matter what, to carry out the secret master plan is unshakeable. The situation is as if a director was sitting with a film of two hours and a half, he loves every minute, knowing that the film must be reduced to two hours or the theaters will not broadcast it. There is no choice. The film must be cut.
Tesla, however, had to take drastic measures to maintain the sales volume of 3. Analysts and the stock market are generally disappointed by this decision. And you can not blame them. What Tesla has provided is a tacit admission that the margins of Model 3 are not yet what they were supposed to be at the moment. On the sidelines, some claim that Elon / Tesla was lie for us throughout the potential profitability of the model 3. In my opinion, this is not true. If you go back three years ago to the time when the $ 35,000 car was first announced, you could definitely say that Musk was somewhat optimistic – that he was taking a spreadsheet and treated it as a fact. You could even claim that Elon had a dose of irrational exuberance. But lie? Nope. Not in his character. If you do not understand this, you do not understand the man. The reality is that Tesla had the best idea of the cost of building model 3, and then wanted to make it public and launch it.
And now, Tesla is doing what it is best to keep alive until Model 3 margins improve further. Of course, it is unfortunate to see the stores closed. But of all the radical movements we've seen this company do over the years, all the mistakes, silly tweets, weaknesses in the production chain, all price fluctuations, and so on. A key area: Tesla sticks to its weapons, its plan for accelerate the advent of sustainable transport by quickly bringing to the market electric cars of high consumption and at attractive prices. This main mission is unchanged. Tesla is not a question of evolution. It is a revolution. With Musk, it is fundamental, and society is facing reality by doing what is necessary to achieve this goal.
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Do not forget that we are only the next time marker of this saga. Shops close and sellers are laid off. But will the buildings be returned? In particular properties hosting service centers (not all service tasks can be performed by a mobile service). We could witness the resurrection of stores at some point in the future. More importantly, there is China. When this facility is commissioned, the cost structure of Model 3 will include another earthquake. Even if all the models 3 built in China remain in China, the rest of the world will benefit from the upward pricing of the supply chain and the next iteration of the assembly line.
So, yes, Tesla launches a gambit. But based on past experience, it is more likely that it works. In my opinion, the company is able to continue doing what has always been described as impossible for a simple reason:
There is nothing more powerful than an idea whose time has come.
About the author
Steve Bakker is a semi-retired teacher, writer and technologist who is currently trying to remedy his ignorance of how electric cars work.
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