The long wait for $35,000 Tesla Model 3 is finally nearing its end. Tesla has been accepting pre-orders for the 220-mile range standard battery Model 3 in International markets while the reservation system has been replaced with direct orders in North America.
Buyers in China can book Tesla Model 3 by paying 8,000 Yuan ($1150) and expect delivery sometime in 2019. In Europe, Tesla asks for €1000 to reserve your spot.
International customers have been patiently waiting for more than two years and they are still waiting. According to Tesla website, “International deliveries of vehicles with the steering wheel on the left start in the first half of the year”.
Tesla CEO Elon Musk has insisted for a very long time that the company will launch the standard battery Model 3 with a starting price of $35,000.
During the third quarter (2018) earnings call Musk said, “If we could produce a $35,000 car today, we would do it. We need more work, there is more work to do before in order to make a $35,000 car and have it be positive gross margin. We’re probably less than six months from that. That’s our mission.”
Though Elon has been saying that Tesla will soon launch the standard battery $35,000 Model 3, not many believed that it was possible. One of the most often cited reason was Tesla’s financial position.
How can a company that’s struggling to stay profitable, lower the price of its models? Many even argued that Tesla will be bankrupt sooner than later. So the odds of Tesla launching $35,000 Model 3 remained low in their point of view.
But Tesla turned things around during the third quarter of 2018. As manufacturing cost per unit plunged to its lowest levels, Tesla reported adjusted net profits of $516 million.
As long as Tesla keeps increasing its production volume the company can keep driving operating expense per unit to lower levels. Musk thinks that Tesla needs another six months to reach that volume and drive expenses to a point where it becomes possible to launch the standard battery model.
Operating Expense increased from $984.62 million in Q3-2017 to $1.106 billion in Q3-2018. Despite the 12.4% increase in total operating expense, Tesla’s operating expense per unit plunged by 64.4%, thanks to a three-fold increase in production during the period.
Tesla has plenty of room to decrease operating cost per unit. In the third quarter of 2018, Tesla manufactured 80,142 units or 6,164 units over a 13 week period. By pushing past 10,000 units per week, Tesla can increase production capacity by 40%. If Tesla manages to limit its operating expense growth to 12%, per unit manufacturing cost will drop by 30%.
Simply put, as long as Tesla’s production number grows faster than its operating expense, the manufacturing cost per unit will keep plunging. Tesla can further accelerate that drop by improving cost efficiency, negotiating better deals with suppliers and so on.
As unit cost keeps dropping, Tesla will use that cushion to keep lowering Model 3 price.
With manufacturing strictly remaining US-based, the North American market will be the first to receive standard battery Model 3. Tesla is more likely to opt for a gradual global rollout for its lowest-priced sedan, adjusting demand with production.
As Tesla depletes backorders in a country or when it gets closer to depleting backorders, it will launch the product in the next region and increase production volume. As volume increases it reduces manufacturing costs allowing Tesla to lower Model 3 sticker price. Tesla will have to keep doing this till Model 3 price hits $35,000.
Don’t expect Tesla to make a sudden announcement that they are now ready to deliver standard battery Model 3. It will be a slow and steady march to that level, few thousand dollar drop at a time.