Tesla's initial plan for model 3 at $ 35,000 is dead

Tesla completely set fire to his initial plan for Model 3 at $ 35,000. Late Thursday night, the company announced a fundamental change in the version supposed to be the most affordable version of its first mainstream car.

Compared to the February 28 release, the new $ 35,000 model 3 will now use a different battery, will no longer have manual seats or fabric upholstery, and will only be available on order by phone or by telephone. Tesla stores.

But the recently announced changes go beyond functions and cosmetics. The version of the car announced by Tesla in 2016 with a selling price of $ 35,000 was supposed to be affordable because of the advances in design and engineering and the economies of scale associated with the production of mass. The version sold by Tesla is different, and it took the company cuts in other areas of its business for this to happen.

And while customers will end up with a seemingly better car for the money than it replaces (assuming they reverse the trend that 78% of Model 3 sales are made online , or do not get angry when trying to buy it on the internet, in person or on the phone), this is a sign that Tesla's well-documented chaos can break some of the most concrete goals of the company. business.

Picture of Chris Ziegler

Model 3 was supposed to be Tesla's first car for the wider market. From the beginning, the company's "blueprint" – defined by CEO Elon Musk in a blog post in 2006 – was as follows: build a desirable electric sports car to convince people that electric vehicles can be cool ( which was not an easy task (time), use the revenue from it to finance a more affordable luxury sedan and unlock the necessary funds. this effort in a car that hundreds of thousands of people could buy. All this happened and this the plan succeeded.

When Model 3 was finally unveiled 10 years later, in March 2016, Tesla had promised that it would start at $ 35,000. He has compiled a list of pre-orders of over 400,000 customers based, at least in part, on this promise. Each of these customers also paid $ 1,000, giving Tesla some $ 400 million in cash to help support its business without selling shares of the company or raising funds that would add to the growing debt of the company. the society.

But in the beginning, Tesla had such a hard time increasing model 3 production in the early months that she had to push back many of her own deadlines. After suffering several months of delay and headaches – what Musk has dubbed "the hell of production" – the company has spent billions of dollars faster than ever before.

To solve this problem, Tesla essentially recycled the original approach of Musk's "master plan". The company first focused on building the most expensive versions of Model 3 because they yielded the most profits. If the company sold the version of the car at $ 35,000 too soon, Musk said Tesla "would die". The tens of thousands (or even hundreds of thousands) of customers waiting for the cheapest version of their cars should wait, the federal electric vehicle tax credit is slowly disappearing.

Throughout 2018, Model 3, worth $ 35,000, was threatening Musk. In numerous investor teleconferences, he explained how hard it was to make a version of the car that Tesla could sell at that price, as if meager profit margins were not known in the world. ;automobile industry.

"Our goal is really to make electric cars that everyone could afford," Musk said during a phone call in October. "If we could produce the $ 35,000 car today, we would do it. We need more work, we still have work to do before we can win a $ 35,000 car and get a positive gross margin. We are probably in less than six months, but that's our mission. "

During these calls, Musk and his colleagues talked about everything that should be done to make this version elusive from the car. Tesla is expected to achieve very high volumes, using economies of scale to reduce overall costs. This should also be done with the batteries he manufactures with Panasonic at the company's Nevada Gigafactory, to lower the price per kilowatt hour enough for the $ 35,000 price to work. Tesla should also make comfort concessions, such as manual seats or fabric interiors.

It was so difficult, and it took so long for Tesla to create an entirely new version of the Model 3 – a mid-range version with a 260-kilometer battery pack – in the meantime. Announced in October, it was an attempt to pick up low-income buyers (many of whom were likely expecting Model 3 of $ 35,000) while helping the company achieve its high sales targets over the course of the year. of the last months of 2018. (Musk called the mid-range Model 3 "an intermediate step" to the $ 35,000 version .It has since been discontinued.)

While Musk is well known for his missing deadlines, Tesla announced that the $ 35,000 car was up for sale on February 28 – in line with his "six month" October prediction. But this "mission" to do the "work" to meet the costs of producing the $ 35,000 car until Tesla could make a profit was virtually dead upon his arrival. That day, Tesla announced two versions of the car: the standard 35,000 dollar model 3 with fabric trim and manual seats and the standard range over $ 37,500 with an additional range of 20 miles and a high interior of range.

On February 28, Tesla also said it could not reach the long-promised $ 35,000 price by cutting costs elsewhere in its business, shutting down most of its stores, selling online, and laying off workers. . (Tesla eventually overturned this decision and kept some stores open, although it still left sales staff behind.) After years of work, Musk has not been able to solve all the design issues. , engineering and manufacturing necessary for the sale of the product. original $ 35,000 version of the car that he imagined. Either that, or he felt like he was running out of time and money to keep trying after the company recently had a record drop in shipments.

Tesla, however, never shipped one of these $ 35,000 models. Customers who placed orders saw their delivery windows delayed by weeks or months, and some indicated that Tesla vendors had attempted to resell them to Standard Range Plus in the meantime.

This week's announcement was the last nail in the coffin. The planned range of 220 km, model 3, with manual seats, fabric interior and Tesla's cost reductions, is dead. Tesla will now sell a $ 35,000 model 3, but it will be the Standard Range Plus version of the car, featuring a high-end interior and a software-limited battery. It will not be sold online, where Tesla achieved 78% of its Model 3 sales before the announcement of store closures. Some features of the Standard Range Plus will also be disabled, such as Tesla streaming music service, live navigation and heated seats.

Tesla says the decision was made because the Standard Range Plus model was selling six times more than the $ 35,000 version. "Given the popularity of Standard Plus over Standard, we made the decision to simplify our production operations to further optimize costs, reduce complexity and streamline operations," the company writes.

As is often the case with Tesla, reactions to this change have been mixed. Macquarie Capital analysts Maynard Um and Tim Liu, who rate Tesla's stock more optimistic than most investors on Wall Street, said in a research note Friday that the move could be good, but mainly because it will encourage more people to buy more expensive versions of the car, leading to more profits.

But others are not optimistic about what it means for consumers. "It's Tesla who decided that $ 35,000 was the magic number for an affordable EV," said Jessica Caldwell, executive director at Edmunds, in a statement. "The company took a decisive step by saying that model 3 was the exact price without knowing exactly how it was going to go about it."

As Tesla buyers often pay more for high-tech features (like autopilot), Caldwell said the latter initiative "will probably not have a major impact on Model 3 sales." . "

Tesla supporters will point out that Tesla has found a way to sell a version of Model 3 for $ 35,000, which is higher than the company's promised car. It now comes with electric seats, a better interior and the ability to pay for a slightly larger range and other features that it might not have had otherwise.

But if Tesla's behavior in terms of whipsaw in recent years is an indication, nothing is ever etched in stone. The $ 35,000 model has finally arrived after a number of difficulties. Will someone stay for a long time?