Tesla has completely torched its original plan for the $35,000 Model 3. Late on Thursday night, the company announced a fundamental change to what is supposed to be the most affordable version of its first mass-market car.
Compared to the version that was put on sale on February 28th, the new $35,000 Model 3 will now use a different battery pack, it will no longer have manual seats or cloth trim, and it will only be available to order by phone or at one of Tesla’s stores.
But the newly announced changes go beyond functions and cosmetics. The version of the car Tesla announced in 2016 with a $35,000 sticker price was supposed to be affordable because of design and engineering advancements and the economies of scale associated with mass production. The version Tesla’s selling now is different, and it took the company making cuts to other parts of its business to make it happen.
And while customers will wind up with an ostensibly better car for the money than the one it’s replacing (assuming they buck the trend that 78 percent of Model 3 sales happen online, or don’t get up-sold when trying to buy it on the phone or in person), it’s a sign of how the well-documented chaos at Tesla can crack some of the company’s most concrete goals.
The Model 3 was supposed to be Tesla’s first car for the broader market. From early on, the company’s “master plan” — as set out by CEO Elon Musk in a 2006 blog post — went like this: build a desirable electric sports car to convince people that EVs can be cool (which was not an easy task at the time), use the revenue from that to help fund a more affordable luxury sedan, and plow the funds from that effort into a car that hundreds of thousands of people could buy. All of that happened, and that plan succeeded.
When the Model 3 was finally unveiled 10 years later, in March 2016, Tesla promised that it would start at $35,000. It built up a preorder list of over 400,000 customers based, at least in part, on that promise. Those customers each put down a $1,000, too, giving Tesla some $400 million in cash to help buoy its business without having to sell equity in the company or raise money that would add to the company’s expanding debt.
But then Tesla had so much trouble growing production of the Model 3 in the early months that it had to push back many of its own deadlines. As it suffered through months of these delays and headaches — which Musk famously dubbed “production hell” — the company burned through billions of dollars faster than ever.
To fix this, Tesla basically recycled Musk’s original “master plan” approach. The company focused on building the highest-priced versions of the Model 3 first because they returned the most profit. If the company made the $35,000 version of the car too early, Musk said Tesla would “die.” The tens of thousands (or perhaps even hundreds of thousands) of customers who were waiting for the cheapest version of Tesla’s cars would have to wait, all while the federal EV tax credit slowly disappears.
Throughout 2018, the $35,000 Model 3 loomed over Musk. He kvetched on numerous conference calls with investors about how hard it was to make a version of the car that Tesla could sell at this price point, as if thin profit margins weren’t a known quantity in the auto industry.
“Our goal really is to make electric cars that everyone could afford,” Musk said on a call in October. “If we can produce the $35,000 car today, we would do it. We need more work, there is more work to do before we can make $35,000 car, and have it be positive gross margin. We’re probably less than six months from that, but that’s our mission.”
On these calls, Musk and his fellow executives talked about all of the things that would have to go right to make this elusive version of the car. Tesla would have to make it at very high volumes, using economies of scale to bring down the overall cost. It would also have to do this with the battery packs it makes with Panasonic at the company’s Gigafactory in Nevada in order to lower the price per kilowatt-hour enough to make the $35,000 price tag work. Tesla would also have to make creature comfort concessions, like manual seats or a cloth interior.
This was all so difficult, and it took so long that Tesla created an entirely new version of the Model 3 — a “midrange” version with a 260-mile battery pack — in the meantime. Announced in October, it was an attempt to scoop up lower-income buyers (many of whom were presumably waiting for the $35,000 Model 3) while helping the company hit its high sales targets in the last few months of 2018. (Musk called the midrange Model 3 “an intermediate step” to the $35,000 version. It has since been discontinued.)
While Musk is well-known for missing deadlines, Tesla announced that the $35,000 car was for sale on February 28th — coming in under his October prediction of “six months.” But that “mission” of doing the “work” to bring the cost of producing the $35,000 car down to a point where Tesla could turn a profit was mostly dead on arrival. Tesla announced two versions of the car that day: the $35,000 Standard Range Model 3 with cloth trim and manual seats and a $37,500 Standard Range Plus with 20 more miles of range and a premium interior.
Tesla also said on February 28th that it was only able to reach the long-promised $35,000 price point by reducing costs elsewhere in its business and closing most of its stores and shifting to online sales, as well as laying off workers. (Tesla later partially reversed this decision and is keeping some stores open, though it continues to let sales staff go.) After years of work, Musk wasn’t able to solve all of the design, engineering, and manufacturing advancements required to sell the original $35,000 version of the car he imagined. Either that, or he felt he had run out of time and money to keep trying after the company recently saw a record dip in deliveries.
Tesla never shipped any of those $35,000 Model 3s, though. Customers who placed orders saw their delivery windows get delayed by weeks or months, and some reported that Tesla salespeople tried to up-sell them to the Standard Range Plus in the meantime.
This week’s announcement was the final nail in the coffin. The planned 220-mile range Model 3 with manual seats, cloth interior, and whatever cost reductions Tesla was planning is dead. Now, Tesla will sell a $35,000 Model 3, but it will be the Standard Range Plus version of the car with the premium interior and a software-limited battery. It won’t be sold online where Tesla saw 78 percent of its Model 3 sales take place before it announced the store closures. It also will come with some of the Standard Range Plus’ features disabled, like Tesla’s music streaming service, navigation with live traffic, and heated seats.
Tesla says the decision was made because the Standard Range Plus model was selling six times more than the $35,000 version. “Given the popularity of the Standard Plus relative to the Standard, we have made the decision to simplify our production operations to better optimize cost, minimize complexity and streamline operations,” the company wrote.
As is often the case with Tesla, the reactions to this change have been mixed. Macquarie Capital analysts Maynard Um and Tim Liu, who rate Tesla’s stock more optimistically than most on Wall Street, said in a research note on Friday that the move could be good — but mostly because it will drive more people to buy higher-priced versions of the car, leading to more profits.
But others aren’t optimistic about what this means for consumers. “Tesla was the one who decided that $35,000 was the magic number for an affordable EV,” Jessica Caldwell, executive director at Edmunds, said in an emailed statement. “The company backed itself into a corner by making such a big deal about the Model 3 being that exact price without knowing exactly how they were going to do it.”
Since Tesla buyers often pay more for higher-tech features (like Autopilot), Caldwell said this latest move “likely won’t have a huge impact on Model 3 sales.” But she said it “does deliver another tough blow to the company’s reputation.”
Supporters of Tesla will point to the fact that Tesla found a way to sell a version of the Model 3 at the $35,000 price point that is better than the car the company originally promised. It now comes with power seats, a better interior, and the option to pay for slightly more range and other features that it might not have otherwise had.
But if Tesla’s whipsaw behavior over the last few years is any indication, nothing is ever set in stone. The $35,000 Model here is finally here after a number of fits and starts. How long this iteration remains is anyone’s guess.
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