Why Tesla will Start Delivering Model 3 in Europe?

Gigafactory security threat

The first clue to that question lies in the delivery timeline of Model 3 base version.

Deliveries of the $35,000 – 220 mile range Model 3 (base version) is expected to begin in six to nine months from now. So Tesla has a maximum of six to nine months to start overseas delivery of its current models, Performance Version, Dual Motor All Wheel Drive and Long range battery – Rear Wheel Drive.

Tesla is building only these three models now. Production process is set and the company is on the verge of hitting a max production rate of 5000 Model 3s per week.

If Tesla manages to build an average of 3000 to 5000 cars per week over the next six months, they will deliver 81,000 to 135,000 cars during this period. At that pace, its extremely likely that Tesla will exhaust its entire pool of North American customers who are ready to pay for these higher priced versions.

But if you are Tesla, you obviously want to sell as many of these models as you possibly can.

After Tesla exhausts its current market in North America for these models

  1. Will Tesla continue to build high margin versions and start exporting them?

    Or

  2. Will they start building lower margin versions and deliver it to US customers?

Tesla is certainly not going to choose the second option, because it makes no sense. No Automaker will ever choose the second option over the first one, unless there are some external factors influencing their decision.

How many of these high margin Model 3s can Tesla sell in North America?

Even Tesla does not have a clear answer to that question.

That’s why the recent Model 3 price cut and mass invitation to Model 3 reservation holders in North America. To size up the potential market for these models.

Let’s do some math to narrow things down.

  • Tesla had more than 450K net reservations for Model 3 by the end of March 31, 2018.

  • In 2017, United States accounted for nearly half of Tesla’s sales. Model 3 is not going to deviate far away from that number.

  • Lets assume 50% of net reservations are from North America. (Tesla sales in Canada was just 3,478 last year)

  • 50% of 450K is 225k.

How many among this 225k potential customers are willing to pay more than $50k for Model 3?

Data Source: Goodcarbadcar

The US luxury segment reported sales of 835,572 units in 2017. As you can see from the chart above, the size of the market shrinks drastically as price moves north.

Tesla was able to garner hundreds of thousands of Model 3 reservations in United States because the small luxury segment (+$35K) where it wants to compete is worth half a million units annually and the mid-size luxury segment (+$50K) is worth more than a quarter million units.

Had Tesla announced Model 3 price will be more than $50k at the time of unveil, the number of total reservations would have been much lower than were it is now.

Let us assume that Tesla’s reservation base to have the same volume distribution as US luxury car segment.

  • Large luxury car – 9.55%,

  • Mid Size luxury – 35.44%

  • Small luxury – 55%

More than half of Tesla’s current reservation holders will be around the $35K price point. (50% is a highly conservative estimate and I expect it to be much higher. )

Potential size of customer base for the higher priced versions of Model 3.

  • 10% of reservations holders – 22,500 Customers

  • 20% – 45,000

  • 30% – 67,500

  • 40% – 90,000

Tesla is very close to reaching Model 3 production capacity of 5000 cars per week.

If Tesla manages to build an average of 3000 to 5000 cars per week over the next six months, they will deliver 81,000 to 135,000 cars during this period.

Tesla will clearly exhaust its customer base in North America for these high priced models  within the next six months.

My Take

Tesla will definitely start shipping Model 3 overseas during the fourth quarter of the current fiscal. If production capacity keeps ramping up at the current pace, there is a good chance for Tesla to start overseas shipping during the third quarter itself.