For now at least, Tesla (TSLA) is taking a cautious approach to bringing the Model 3 to lower price points.
The caution likely has much to do with the slower-than-expected gross margin (GM) improvement seen for Tesla's "mass-market" sedan as its production has ramped. And it might also have a bit to do with the company's promise that it will be profitable and cash-flow positive during the back half of 2018, and thus won't need to raise additional capital for the time being.
Three months after opening up Tesla's Model 3 order process to the general public -- previously, consumers had to plunk down $1,000 for a reservation to get on the order queue -- Tesla just announced that it has begun offering a version of the Model 3 starting at $45,000 prior to tax incentives that sports a "Mid Range Battery" with a 260-mile expected range. Like the other versions of the Model 3 that are currently available, its price includes a "Premium Upgrades Package" that Tesla initially sold as a $5,000 option.
Though technically a "cheaper" Tesla, the Mid Range model is easily priced above Tesla's 220-mile Standard Battery Model 3, which still hasn't entered production. Tesla has long been promising a $35,000 starting price for the Standard Battery model -- a price that has helped the Model 3 garner quite a lot of favorable press since the electric sedan was first announced in the spring of 2016.
Meanwhile, though Tesla is still offering the 310-mile, "Long Range Battery" version of the Model 3, it's now only selling the dual-motor, all-wheel drive variant of the car that starts at $54,000. The $49,000 rear-wheel drive version, which had previously cost $44,000 before Tesla started bundling the Premium Upgrades Package, is for now unavailable. And Tesla is still selling a Performance version of the Model 3; it has a 310-mile range, can go from 0-60 mph in 3.3 seconds and starts at $64,000.
As an aside, Tesla has also stopped offering a $3,000 "full self-driving" software option for the Model 3 through its order system, which was previously available to those who were already paying $5,000 to get Enhanced Autopilot support. The obvious explanation for this move: Tesla still appears to be a ways away from rolling out a fully-fledged self-driving mode.
Those wanting to buy the 220-mile, Standard Battery version of the Model 3 will probably have to wait a while longer, too. Tesla has previously signaled that the Standard Battery Model 3 won't enter production until early 2019. And in September, following a visit to the Reno Gigafactory, Tesla investor Worm Capital forecast that Tesla "will likely start producing [its] shorter-range Model 3 in the next eight months." That implies a spring 2019 launch.
Moreover, if Tesla chooses to sell the Standard Battery Model 3 the way it's currently selling longer-range models, it won't sport a $35,000 starting price. Rather, it will cost $40,000, albeit with the Premium Upgrades Package included.
A look at Tesla's Model 3 margin profile helps explain why it's trying to keep the car's average selling price (ASP) well above $40,000 in the near-term. Whereas Tesla once predicted the Model 3 would see its GM reach 25% once production stabilized at 5,000 units per week (it appears to be there now), Tesla has only forecast a 15% GM for Q3 and a 20% GM for Q4.
And that's with no Standard Battery units being sold. Back in May, Elon Musk claimed that Tesla, whose Model 3 gross margin only turned positive in Q2, would "lose money and die" if it began producing the Standard Battery version of the car right away.
Nonetheless, Tesla still has a large backlog of Model 3 reservations to work through -- 420,000 of them as of Q2, before orders were opened up. And a lot of these reservation holders appear to have been lured by the $35,000 base price Tesla originally established for the Model 3.
In that context, Tesla's decision to launch of a "Mid Range" Model 3 trim with a $45,000 starting price, while simultaneously upping the minimum price that would-be owners of a Long Range Model 3 have to pay by another $5,000, is something of a half-measure.
It's arguably an attempt to placate some fraction of Model 3 reservation holders and other prospective buyers who have been waiting for a cheaper version of the sedan to arrive, while avoiding the margin and profit damage that would likely ensue if Tesla immediately began selling $35,000 units in large volumes.
(Editor's Pick. Originally published Oct. 19.)