The electric carmaker, Tesla, is finally launching its long-awaited standard Model 3 and announces that they will take the e-commerce route.
Tesla CEO, Elon Musk, announced that it would be bringing the long-promised, Model 3 with a base price cut of $35,000. The automaker previously promised this to its consumers ever since it revealed the mid-size sedan in 2016. This move is a significant decrease from the previous models that cost $45,000 base price.
The base model of the Model 3 will have 220 miles of range, a top speed of 130 miles-per-hour and accelerate from 0 to 60 mph in 5.6 seconds, the company said.
Also, they will also be releasing the Model 3 Standard Range Plus with 240 miles of range, a top speed of 140 miles-per-hour and accelerate from 0-60 mph in 5.3 seconds at the base price of $37,000.
Musk said he anticipates demand of more than 500,000 Model 3s a year. The company delivered 145,610 Model 3s in 2018 at a previous $45,000 with 260 miles of range.
“The interior will be slightly better than was originally promised,” Musk told reporters on a conference call Thursday, adding that the base price doesn’t factor in tax incentives or gas savings that may further lower the cost of buying and owning a Tesla.
“It’s an incredible car, and at $35,000 there are still some pretty significant consumer tax credits that can be had,” Musk said.
Moreover, Tesla is also changing the customer shopping experience. People can no go to Galleries and try the vehicles before buying. The automaker now also offer full refunds if a car is returned within a week or reaching 1,000 miles.
Critics are skeptical with Tesla’s decision of bringing the price range of the Model 3 much lower compared to other models and how it could affect profits.
The company won’t profit in the first quarter, Musk said, although he expects Tesla will return to profitability in the second quarter.
“Given that there is a lot happening in Q1, and we are taking a lot of one time charges, there are a lot of challenges getting cars to China and Europe, we do not expect to be profitable. We do think that profitability in Q2 is likely,” Musk said.
In addition, Tesla is converting to a pure e-commerce system where all sales can now be accomplished online through a
“You can buy your car on your phone in about one minute in the US,” Musk said. “We will still have stores, but they will be converted to galleries and information centers.”
There aren’t many showrooms across the USA as Tesla is focused on catering to well-off communities but the company is closing some stores to reduce head count and ultimately, expenses.
The cut is necessary to enable the company to sell the car at a much cheaper price.
“There’s just no way around that, I wish there was some other way,” Musk said. “It is excruciatingly difficult to make this car for $35,000 and still be financially sustainable,” he added.
Tesla did need the lower-priced Model 3 to draw in that larger market they have been aiming for, but they will have to carefully weigh the benefits of selling a lot of cheaper cars against making greater profits, said Wedbush analyst Dan Ives.
“I kind of view it as a balancing act, but a key ingredient to their success in the long term was coming out with a $35000 vehicle that can have more mass demand and ultimately get to a gross margin profile in line with targets,” Ives said.
However, some analysts argue that releasing a cheaper model would affect gross margins as consumers would flock the cheaper alternative and abandon the higher priced model that brought in higher gross margins for the company.
“Tesla’s blended average sales price between the Model 3, S and X was approximately $66,800 last quarter, so this is really going to degrade their average price realizations. It might be different if Tesla had the production capacity to drive volume and margin for this lower priced version, but they don’t currently and to add the incremental capacity would require significant additional capital investment,” said Garrett Nelson from CFRA.
The company prioritized the production of more expensive versions of the car in order to keep profit margins high. Musk has defended the decision by saying that making lower-priced versions was unprofitable and would cause Tesla to ‘die’, as reported by CNBC
The company’s shares were halted, and Tesla suspended all orders on its website ahead of Thursday’s news. It also redirected users to a page teasing a mystery announcement Musk promised to reveal at 5 p.m. ET, saying: “The wait is almost over.”