Tesla Is Smart To Prioritize Premium Versions Of The Model 3

by Trefis Team
Tesla Motors
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Over the last weekend, Tesla (NYSE:TSLA) CEO Elon Musk outlined details of Tesla’s new dual-motor, all-wheel-drive version of the Model 3 which will be priced at $78,000, while also indicating that the company would continue to prioritize the production of higher variants of the sedan over the base version, which may only see shipments towards the end of this year. While Tesla’s continued focus on the premium market likely didn’t go over well with some potential customers, we believe the company’s strategy of prioritizing production of premium models is sound for multiple reasons.

We have also created an interactive dashboard analysis which outlines how Tesla’s revenues, operating profits and free cash flows could trend over the next three quarters.

Tesla’s Model 3 Likely Has An Average Selling Price Of About $50k Currently 

While Tesla launched the Model 3 at a starting price of $35,000, the company has not started delivering the base version of the vehicle for customers. The first version of the Model 3 that the company has been producing is the variant with a long-range battery pack, which costs an additional $9,000 and the premium package, which comes at an additional $5,000. This likely pushes up the average price of models being currently delivered to roughly $49,000. The company’s autonomous driving option, Autopilot, can cost as much as $9,000 extra, and Tesla also intends to offer new options such as all-wheel drive as it ramps up production. This implies that most Model 3 vehicles that are being delivered currently are likely to have average selling prices of upwards of $50,000.

Tesla Has Good Reason To Go With This Strategy

Tesla’s cash burn has been accelerating, with Q1 cash outflows standing at about $1 billion, and the company needs to quickly generate cash, considering that it doesn’t want to take on another round of funding (related: When Will Tesla Have To Raise More Cash?). Premium vehicles typically have much thicker margins compared to mass market cars, and luxury car buyers are also more likely to take on options such as Autopilot, which could be strongly accretive to Tesla’s margins. This gives Tesla good reason to focus on higher variants of the car initially. Tesla’s production also currently lacks the scale of the big auto companies, proving a barrier to producing a truly mass market car at this juncture. The company has guided for margins of about 25% on the Model 3 by sometime next year, and it will likely need to sell a larger mix of premium vehicles to meet this target.

Tesla has indicated that the base $35,000 model would only be available three to six months after the company begins producing 5,000 Model 3 cars per week, a milestone it projects that it will reach towards the end of June. Considering Tesla’s recent difficulty in reaching its production targets, it’s possible that the base model will only ship sometime next year. This could give the company time to build scale and also take advantage of potentially lower battery costs. That said, there are likely to be some trade-offs. Tesla has over 450k reservations for the Model 3 and it’s possible that customers looking for lower-end variants decide to cancel due to delays. Roughly 35% of Tesla’s $2.7 billion in cash comes from refundable deposits, which the company has taken from prospective Model 3 buyers.

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