The Real Challenge with the Model 3

The Real Challenge with the Model 3

With the hype of the presentation and all the preorders everyone seems to be forgetting the real challenge. It's not the dash or lack of a hatch in the back or whether or not supercharger is free. It is if Tesla can actually sell the car at $35,000 and make a profit. That is what will determine the success of Tesla.

TesMD | 02. April 2016

I agree but I assume Tesla has done their job in calculating the cost of building M3 and built a profit margin before coming out with 35k price point for base model 3. Unlike GM which could afford to lose money on Bolt which would allow them to sell a gas guzzler truck, Tesla has to make profit on each car.

I think the base price for Model 3 will be adjusted accordingly in two years when in production. If after two years the base goes to 36.5k, I highly doubt there will be a lot of cancellations. Other cars prices go up as well with time and that is just the norm.

matt | 02. April 2016

Lower component price is now a little easier when you have +250K reservations. Vendors like to see committed volumes, and they might be willing to lower costs. Tesla must make a profit on the M☰. The initial reservations definitely help.

Darthamerica | 02. April 2016

I think people make to many assumptions about the cost. The volumes alone will make cost much cheaper compared to S and X. Also much of the NRE cost are already paid for. They've surely thought about the cost. Tesla is not going to just give away a mass market car. In any case it seems they are pleased with the volumes based of pre-order numbers. I think the real challenge is in how to keep the volumes high over the long term in the face of competition from established auto firms.


cephellow | 02. April 2016

The competition has truly been caught flat footed. The problem is that the ICE makers are so married to their current business model and they can't afford to make a truly successful electric car, until they can't afford not to. We are witnessing controlled-flight-into-terrain mindset among the competition. They haven't sufficiently invested in battery production supply chain, and they have no charger network. People think because the competition is big that they can't fail. GM was bankrupt, Chrysler sold to Fiat just 8 short years ago. Tesla will have to raise more capital, which it can, thanks to all who made reservations; and get the factories cranked up!

SUN 2 DRV | 02. April 2016

TesMD: Elon set the M3 price long ago without any hard data about what margins could/would be. 200 mile range for $35k was the top down mantra and they designed an built a car with that goal... Price came first, car came second...

Tesla won't initially need to make a profit on the $35k base config because they won't be delivering any/many for a long time. With so many reservations to pick from, they can keep themselves busy building profitable high spec cars until their margins improve enough to make the base model profitable too. I think they're likely to mix in a few base models along the way to keep the press from going Ape, but those few won't drag down their overall margins much. | 02. April 2016

Lose a little on every car and make it up in volume...:-))

Actually, it may be possible to sell the base model ≡ with a positive gross profit. Cost of battery pack with 55 kWh load will be less than half of the 90kwh pack because the box will be smaller, they will only be using 60% as many cells and toss cells, made in NV, will cost half of what they now cost imported from Asia IMO. That means the rest of the car will have to cost less than about $18-20 K to build. If they use the same motor as they use front and rear in the MS70D in the RWD car, they will realize cost savings for the drive train.

Use of steel in place of Aluminum for sheet metal and other parts will provide a major savings. The control electronics hardware could be shared with the MS and MX, another source of savings.

Higher volumes than for the S will provide economies for the unique parts.

But the lower cost battery pack is the key. | 02. April 2016

Those cells made in Nevada...

TesMD | 02. April 2016


I completely agree with you on the higher priced/loaded cars being delivered first and profitable and I think for most people, if able to afford a 35k car, people might stretch their budget to get AP or SC access. But eventually, it would be nice to know that Tesla will not lose money if they sell a base model 3 because for some, the base model might be a stretch.

Red Sage ca us | 02. April 2016

TytanX: The traditional automobile industry admits to a 6% overall average profit margin. Those companies that drop below 5% go out of business in auto sales (Suzuki). Well, a BMW 3-Series 'roller' apparently costs around $22,000 -- it is a vehicle without engine or transmission. The entry level car currently sells in the US for $33,150. So, assuming a 5% margin for the 'independent franchised dealership' at MSRP, and a 6% margin for the manufacturer, that means the car costs roughly $29,063 to build. Honestly, I rather doubt that a 180 HP 4-Cylinder engine paired with a six-speed manual or eight-speed automatic transmission actually yields an internal cost of ~$7,000 for BMW, but whatever...

The Tesla Model ☰ has the initial advantage of a starting price a bit higher at $35,000 instead. Tesla Motors also enjoys the advantage of not having to give any of their margin away to 'independent franchised dealerships' either. So, that's two points of potential toward profitability. Now, if Tesla were to only have a 6% profit margin at $35,000 it would mean they could use as much as $32,900 to build each car. Once upon a time, JB Straubel said that their internal cost for a battery pack amounted to 25% of the car's cost. So, using that same ratio, Tesla would have $8,225 to use toward a battery pack.

There is a lot of speculation as to Tesla Motors cost for battery cells. Some estimates are as high as $240 per kWh... Others are as low as $180 per kWh. Yesterday I saw an article that claimed it was $200 per kWh. But, in any case, the Gigafactory is expected to bring their cost down by at least 33%. Thus, a range of $120 to $160 per kWh.

So, given $8,225 to work with, we get anywhere from 51.4 kWh to 68.5 kWh as a battery pack capacity on a $35,000 car. You could have a 60 kWh battery pack at $137 per kWh. But what if this new pricing is for individual battery cells that are slightly larger, and hold more energy each...? So, you need fewer of them to reach a given capacity. If those cells were to hold say... 33% more energy each... Then you would only need 75% of them to get the same targeted capacity... And if you used the same number of cells you'd get a higher capacity total for the same money... So, a 60 kWh battery pack at ~$103 per kWh would only cost you ~$6,168 instead... And an 80 kWh battery pack would be $8,225. While a 100 kWh battery pack would be about $10,300 or so.

Here the thing is... The Tesla Model ☰ will probably have a margin more like 12% to 15% for the base version. And, as you add options, that will likely grow to the 22% to 25% range. This means it could cost as little as $29,750 to build the $35,000 car. And it's battery pack might be around $7,438. Thus a 60 kWh capacity would be right at $124 per kWh... or less.

That is absolutely doable.

Chunky Jr. | 02. April 2016

@joehuber : +1
Agree that there won't be any 35K models from the get go. They have done the math and calculated how much the cost of the Roadster, S, and X have lowered over time due to increased manufacturing efficiency and cost reductions, and must be confident they can get to that point fairly quickly. I bet very few are ever sold for 35K. Almost everyone will select at least one option package.

JeffreyR | 02. April 2016

@joehuber said,
...Elon set the M3 price long ago without any hard data about what margins could/would be. 200 mile range for $35k was the top down mantra and they designed an built a car with that goal... Price came first, car came second....
While the true detailed, hard costs of the Model ≡ are still being negotiated, I think that Elon's sense of how they could get to the target price of a $35K M≡ was well understood. Look at @Red Sage's calculations above. I'm sure that is a lot of what Elon understood. They would start w/ a target base and target Average Sales Price (ASP) which they would understand from the Model S/X and how much different major parts of the cars would cost:

Battery Pack — Model S/X help w/ BP management, container, shield costs; new cells allow for tech and cost improvements; Gigafactory brings savings from taxes/tariffs, shipping, supply chain, and economies of scale
Body in White — Model S/X help w/ understanding aluminum, using more steel helps control costs; thousands of hours w/ robots helps to understand how to scale and improve
Motors — Model S/X probably will use the same motors; economies of scale and experience will help too
Wiring — cars have an enormous amount of wiring that goes into them; Model S/X will help them understand wiring harness design and costs
Wheels — economies of scale and new designs will help; Elon tweeted that new designs will go into production version
Seats — since Tesla has brought seat manufacturing in-house for the Model X, they probably have a better understanding of what they need for the Model ≡ now; but they also know what portion of the costs would have been for the Model ≡ from the outset
Interior — many have complained about the 15-inch solo screen, but it was supposedly a key design element (due to cost savings?); a HUD may still be an option, and the new approach helped w/ total leg room
Paint — Tesla has already upgraded their paint department, so they should understand paint costs very well
Glass — the novel design of the Model X must have helped them understand how to do the all-glass roof of the Model ≡.
Others Components — economies of scale and huge reservation demand can only help

You take all of the above and you "budget" for each major component in the $35K base and $42K ASP. That might have been how they decided to get rid of the fancy steering wheel and digital dashboard. I can see how Elon would have broken the features down from the beginning:

5-star safety rating in all categories
Seat 5 adults w/ x-inch leg room in back
200-mile EPA 5-cycle range
Use motor w/ X bhp (or maybe <6-second 0-60 mph time), base
0.20 Cd
Assume BP will cost $XXXX for 50-ish kWh
~20% smaller than Model S (or about the size of an Audi A4)
Put the BMW 3-Series to shame in driving dynamics and performance
Make sure that AP hardware is included (safety is #1, we need the data, and want most people to upgrade)
Make sure that Supercharging is supported (we'll figure out upgrade option/included later)

Oh and make it cost <$30K to build.

bb0tin | 03. April 2016

@Chunky Jr
I believe that Tesla will produce the Model 3 in order of region and reservation priority, batched for efficient production. I believe this will include producing base configurations at the same schedule as tricked-out versions, perhaps even deliberately first. The Model 3 is designed for the average joe to buy, unlike the roadster, S and X. It could be interpreted as a bad look if earlier base model reservation holders had to wait while others got their cars. It may also be that the base model can be produced in greater numbers more quickly than the tricked out versions due to supplier and assembly issues. Elon has tweeted that the focus is now on a quick ramp up.

deeageux | 03. April 2016

Mainstream Western Auto firms earn an average of 6%.

Mercedes Benz and BMW had roughly the same net profit as GM on 1/4 the volume.

Luxury car margins are 4x that of standard cars.

Japanese and Hyundai have higher margins on their mainstream models.

And Tesla brought in monopost and final assembly of the second row X seat in house.

Futuris and Recaro make most of their seats.

And Elon promised Supercharger Access as standard.

I have no doubt base Model 3 will be profitable once Tesla gets around to building some plus they will sell ZEV credits generated by the sale of each one. Since they don't need them to offset Suburban or Navigator sales.

deeageux | 03. April 2016

OOps Correction.

Each Model 3 sold in a ZEV State will generate revenue from the sale of ZEV credits.

bb0tin | 03. April 2016

I should have added that the federal tax credit will start decreasing soon after Model 3 goes into production. It would be sad if those who can afford more get a larger tax rebate than those who can afford less.

Zakynthos | 03. April 2016

You build the car around the price not the price around the car. Tesla knows exactly what they're doing and what things had to be sacrificed or left out in order to meet targets. This car will have a profit margin (just like the S does). The volume is everything and also as r&d will not be at the level it is now so they won't burn through investor cash. They've been planning this out for over 10 years I don't have any doubt they can make it not only succeed, but thrive.

Haggy | 03. April 2016

There are a few things we know for certain. Tesla has a general idea of how much various things contribute to the cost of making a car. Tesla was in a good position to tally up the essentials and determine a base price. The announcement didn't go into a lot of details about options or features, and many of the available features didn't have an announced price. There are cars made by the auto industry that sell for that price or less. That means that by making non-essential features optional, Tesla can do the same. Tesla knows that they can't spend more to produce a car than what they sell it for. $35K for a basic car isn't cheap. As long as Tesla knows it can produce a battery pack and a motor that can work in combination to give the announce range and 0-60 speed, there's plenty of wiggle room for everything else. Tesla knows what it will cost to make battery packs and motors. Tesla needs to make a car that competes well in its price range at the base level, and they didn't overpromise what will come with the most basic version.

Even if Tesla has thinner margins on the Model 3, it's fair to assume that the profit margin on options will be higher. Since the software implementation costs for autopilot aren't different from the implementation costs of the general software, given that other vehicles will have autopilot, and given that the cars will have the hardware anyway, and given that the testing and calibration is still needed for emergency auto braking, lane keeping, etc. it's likely that features such as autopilot will be highly profitable add ons. Chances are if you add up the total number of hours that a person will spend occupying a supercharger space, and compare it to the cost of enabling supercharging capability, there will be plenty of room for profit. I wouldn't be surprised if there's more profit from adding those two options than there is from selling the base car alone.

People will buy upgraded sound systems and larger batteries. People will buy AWD. People will buy paint and seat options. And I imagine some will get the base car.

robgorman | 03. April 2016

I read that for each Model S Tesla sells it receives 3 'carbon credts' that it then sells on the open market for several thousand dollars each. So in addition to the purchase price of the MS, Tesla receives almost 20% more for carbon credits. This additional income likely applies to the Model3.

Red Sage ca us | 07. April 2016

robgorman: The Zero Emissions Vehicle (ZEV) Credits are a concession that traditional automobile manufacturers lobbied for and got as a reward for releasing California Air Resources Board (CARB) compliance cars. The ZEV Credits are used to reduce a manufacturer's exposure to fines for not meeting the EPA's Corporate Average Fuel Economy (CAFE). The more ZEV Credits you have, the more you can artificially increase your company's CAFE rating. Otherwise, you pay a fine to the EPA of around $5,000 for each point you are below the mark, per car. They also lobbied that since some companies were going to be over the CAFE mark anyway, due to having fuel efficient fleets, any extra ZEV Credits they held would not disappear, but could be traded/sold to other manufacturers to fulfill their need.

So, yeah... A lot of guys call these 'carbon credits', but they aren't about that at all. It is about emissions requirements in California, and Federal fuel economy ratings for a company. You have the choice of paying the fines, and passing that cost on to your Customers, or building compliance cars and fuel efficient vehicles to improve your company's CAFE rating, or paying another manufacturer for their ZEV Credits while you continue to build gas guzzlers.

What chaps the hide of so many who speak out against Tesla Motors, is that they turned the entire system on its head, simply by following the rules. The stated purpose of the program was to improve air quality while saving fuel. The actual purpose of the program is to allow traditional automobile manufacturers to 'look good' to the unwashed, long-haired, barefoot, hippie tree-huggers who otherwise would have regulated them out of business. Meanwhile, with CARB fully infiltrated with board members with longtime ties to the automotive industry, they held all the same biases against Zero Emissions Vehicles as those they were supposed to regulate. They set up requirements that no one thought anyone would ever actually make an attempt to satisfy, on a wink and a nod.

Not one of them anticipated the appearance of a company that would build viable electric cars exclusively, and en masse, and thus be able to stockpile ZEV Credits as a result. Since Tesla Motors' cars are all EPA rated at an MPGe mark FAR ABOVE the current CAFE standards, and there are no gas guzzlers in the Tesla Motors fleet at all, any of the ZEV Credits they EARN simply by offering their cars in CARB compliant States don't need to be turned in. They can hold the ZEV Credits for up to two years after earning them to trade to someone else later. Or, they can simply hold them until they expire.

Since the fine is $5,000 ZEV Credits typically sell for less than $4,000 each. Often for much less than that. This is money paid in a business-to-business transaction. If another manufacturer does not want to buy ZEV Credits, they don't have to. No one is forced, or ordered, or required to purchase ZEV Credits. These transactions are very likely negotiated on a case-by-case basis, and done privately. I do suspect that the majority of ZEV Credits that Tesla Motors has sold went to Mercedes-Benz, though.

But it has been said the entire ZEV Credit system is being phased out. This may begin in 2017, and they would all be gone by 2019. That is, unless it is reinstated at some point. There has even been a relatively recent adjustment to the program, whereby the highest possible benefit in terms of ZEV Credits per vehicle was awarded solely to Hydrogen Fuel Cell Electric Vehicles, while those for Battery Electric Vehicles were reduced. Further, it seems that the California State Rebate for an Electric Car is now tied to the annual income of the buyer. So, if you earn more than a certain amount per year, you no longer qualify for the $2,500 amount.

lolachampcar | 08. April 2016

Probably nothing to get too excited about but I can not help but think (as a shareholder) that Elon may be completely honest when he says the company's mission is to accelerate the adoption of BeVs (note the absence of "and make a profit").

I would not give up much and it would be for a good cause but I am going to have to smile if, ten years down the road, the company was designed to do just that - accelerate the adoption of BeVs and not make a profit.


jordanrichard | 08. April 2016

lolachampcar +1. I think Elon and company really despise wall street and their short sighted, quarterly eyesight. Wall street is a necessary evil for them and I am sure if at all possible at some point, the company would go private.

MarlonBrown | 08. April 2016

I hope it is profitable. Tesla deserves it and it is needed to allow company to thrive. is it right to price base compared to the 328i? I dont think so. The model 3 base car likely offers traction control superior and many people may just get the model 3 base and do fine in snow. Then reflect that in the price (as bmw would) and car should be $38k. I think that is pse to a Benz c300 base anyway.

PhillyGal | 08. April 2016

@Marlon - Just for fun I looked at the configuration for a PHEV 3-series (I forget what it's called but has an 3 at the end so 3XX2) and the amount of money I'd have to add to get some of the things that the Model S has is staggering. Heated seats, parking sensors - things that come in any bargain brand's "LX" trim level - made the darn car a fortune. Oh, and I think it goes like 13 miles on battery :-/

Captain_Zap | 08. April 2016

I seem to recall hearing that the Model 3 would be the "bread and butter" car while the Model S and Model X would be the "gravy" car. But, this was long ago when the S&X were called "whitestar" and "bluestar". Plans evolve.

Red Sage ca us | 08. April 2016

Captain_Zap: I believe at some point in 2012 what Elon noted was that the 328i was the 'bread and butter' of BMW's product line. That it was renowned worldwide as a benchmark for automotive excellence. That Tesla Motors would target that vehicle with their Generation III vehicle.