I hope he is correct. Because if what the UBS analyst is saying is true then it puts a clear marker on the $35,000 standard battery Model to compensate the loss through multiple avenues at Tesla’s disposal to make the high-volume model a reality.
First, What did the UBS Analyst say?
According to CNBC:
“The engineers hired by UBS to examine a $49,000 2018 Model 3 were “crazy” about the powertrain, “highlighting next-gen, military-grade tech that’s years ahead of peers,” said UBS analyst Colin Langan in a note dated Wednesday. But the costs were higher than expected, and the cars would lose about $6,000 each at Tesla’s original plan to sell an entry model at $35,000, he said.”
So, what are the options available for Tesla to compensate $6,000?
Not every $35,000 Model 3 buyer is going to pay for Autopilot. But there will be a good portion of customers who will opt for it.
Out of the more than 90,000 vehicles with Autopilot 2.0 hardware in Tesla’s global fleet, the owners of about 77% of them have purchased ‘Enhanced Autopilot’ and ~40% have purchased ‘Fully Self-Driving Capability’, sources familiar with the matter told Electrek.
If 77% and 40% of standard battery Model 3 buyers pay the standard $5000 for EAP and $3000 for FSD, it could help cover the overall $6,000 loss per car by quite a bit. Even more if enough customers opt for them later at an additional $1,000 per feature.
Tesla can also break up its option package that includes heated seating, premium audio system, LED fog lamps and premium connectivity just like other manufacturers, and charge a little bit additionally to increase the price of the car relative to the cost of materials.
I think Tesla is already looking at both options to improve its cost vs profit equation for Model 3. Otherwise, why would Model 3 have a design layout that’s completely different from Model S and Model X?
The Interior Selection part of the Design Studio looks prepared to add more options in the future.
What about Scale?
Tesla wants the Model 3 price to drop to $35,000 because that’s the sweet spot of the US Small Size Luxury segment, which reported sales of over 450,000 vehicles in 2017. The top three in the segment, Mercedes Benz C-Class, BMW 3 Series and Infiniti Q-50 had combined sales of 177,635 units, accounting for a whopping 38.64% of segment sales.
Mercedes Benz C-Class starts at $40,250, BMW 3 Series starts at $34,900 and Infinity Q50 starts at $35,200. Tesla clearly planned the price point after taking a good hard look at the segment.
For a long time, the Model S and Model X have punched above their weight by competing with ultra-luxury competitors. Tesla wants to punch below its weight with Model 3, by targeting the entry point of the small size luxury segment. Because Tesla needs volume. And volume brings economies of scale.
Let’s agree for a moment that the $6,000 loss per unit is correct. But the segment offers the potential to sell lots and lots of units every week. Tesla captured nearly a quarter of the large luxury segment in the United States. If Tesla captures 20% of the US small size luxury segment with its $35,000 Model 3, then Tesla will be looking at nearly 90,000 unit sales per year in the United States alone.
It must also be noted that Tesla does not eat up market share within the segment, it also eats market share from other segments as well.
During the second quarter earnings call Tesla’s sales head Robin Ren surprised everyone by saying this:
“So, we looked at what people who are buying Model 3 cars in the United States, what cars they are trading in. What we found is through this year, from January to July, the top five non-Tesla cars people are trading in to get into a Model 3, they are Toyota Prius, BMW 3 Series, Honda Accord, Honda Civic and Nissan Leaf.”
Model 3 now stars at $49,000 and people are trading in Toyota Prius, BMW 3 Series, Honda Accord, Honda Civic and Nissan Leaf. Multiple segments.
So, a $35,000 Model 3 is certainly going to attract plenty of customers from many different segments.
If Tesla sells 100,000 Model 3s priced at $35,000, that’s an average of nearly 2,000 units per week. How much leverage will it get from its suppliers to reduce the cost of the products they supply?
According to Tesla CEO Elon Musk there are 10,000 unique parts in Model 3. 10 cents saved per part will reduce thousand dollars in cost.
Will you drop your price if your customer says that he will give you additional 8,000 orders every month – additional?
You know the answer, and Tesla knows it too.
Mercedes Benz Price: C Class
BMW Price: 3 Series
Infiniti Price: Q50
Goodcarbadcar: US Small Luxury Segment 2017 Sales
Futurism: Autopilot user data