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Cars
Published on June 3, 2019 |
by Maarten Vinkhuyzen
June 3, 2019 by Maarten Vinkhuyzen
The price policy of a product is a mix of equity and what the market can support. If you are too kind to your customers, your shareholders will not be happy. If you take a penny out of your customers, they will not want to do business with you anymore. In addition to these issues, there is the question of competitive prices. What is the price of competing products? Established products may charge a premium, new products often have to incur a price incentive.
Looking at China's prices for the new 3 SR + model, we can see the aspects of this at work. With punishment and retaliatory tariffs in the Trump-induced trade war increasing prices by 25%, Tesla decided to be tough on shareholders and loyal to customers. Part of the fares were paid outside the car's natural margin, which divided the difficulties of the commercial war between the company (the shareholders) and the customers.
With the pricing of Gigafactory 3 products, we see a decision based on different criteria. A lower price can bring you a bigger share of the market, a higher price will sell less product. The good price will sell as much as you can produce. Of course, it is difficult to predict what this price might be.
Competitor prices are another important criterion. In this case, the main competitors are the Mercedes C-Class and BWM 3 produced locally. In "Tesla Model 3 Chinese Price with Prices for BMW 3 Series and Mercedes C-Class", the Tesla offer is compared to these two models. Model 3 is a more advantageous proposition for a slightly lower price. The goal is to fly around 250,000 customers to the competition.
The last, but not least, point to consider is a margin decision. Production, once fully operational in the new plant, will likely be at a lower cost than Fremont's – thanks to a combination of improvements in the assembly line, an easier-to-produce model and lower labor costs. Battery cell costs are probably a bit higher than in Fremont, California. For the purpose of this argument, suppose that they are about the same in a network.
The US 3 SR + model price is $ 39,900 at the moment. This is probably just too low for a healthy margin. The imported 3 SR + model costs about $ 54,600 in China. In this price, the shipping and import rates are included. With a price of $ 47,500 halfway between the two prices, Tesla shares the benefits of local production equally between customers and shareholders.
Another aspect is that during ramping, production costs per car can be (much) higher than when the line is running at full capacity and at the end of the learning S curve. In Fremont, this was the reason why, at first, only produced the most sophisticated models and accepted heavy losses. In China, with a much shorter ramp phase, hopefully, these basic models can probably be achieved at equilibrium, even after a very short period, followed by an increasingly attractive margin .
When production is at its peak and the market does not demand a lower price due to weak demand, it can be a very nice extra margin for Tesla, up to $ 1.875 billion.
The reality is never so rosy. For 2020, however, this can realistically translate into an additional margin (greater than that generated by the Fremont-produced SR +) of $ 250 million per quarter – less at the beginning of the year, but more the end. If Fremont's SR + gross margin is 25%, China's gross margin should be greater than 35%.
This is clearly an imminent bankwuptcy case.
About the author
Maarten Vinkhuyzen Old grumpy man. The best thing that I have done in my life has been raising two children. Only finished primary education, but when you do not go to school, you have plenty of time to read. I went from accounting to software development and my career as a system integrator and architect ended. My 2007 boss bought two Lotus Elise electric cars to show decision makers the future direction of energy and transportation. And since then I have been trying to replace my diesel cars with electric vehicles.
And putting my money where my mouth is, I bought Tesla shares. I have the intention to keep them until I can redeem them for a Tesla car.
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