Like over 400,000 other people, I have a Tesla (NASDAQ:TSLA) Model 3 reservation. The electric-car maker reported fourth-quarter earnings last night, and the expected focus was the ongoing Model 3 production ramp. In its shareholder letter, the company reaffirmed its goal of hitting a Model 3 production rate of 2,500 per week by the end of the first quarter, a lowered target that was set about a month ago.
Following the announcement, Tesla sent reservation holders an email notifying them that their delivery estimates had been "adjusted to a slightly later window."
Tesla currently only offers First Production configurations, which includes a long-range battery and premium upgrades. The $35,000 Standard Range and dual-motor options have not been released yet, but Tesla had been setting customer expectations that Standard Range would be available first. My reservation (for my wife, since I own a Model S) had previously shown an earlier estimated delivery window for a Standard Range Model 3, with dual motor previously expected in the fall.
The delivery estimates switched last night, with dual motor now expected to precede Standard Range.
When asked about the apparent change in timing, a Tesla spokesperson provided The Motley Fool with the following statement:
We've made significant progress in Model 3 production, having delivered Model 3 to customers in more than 20 states, and we continue to target weekly production rates of 2,500 by the end of Q1 and 5,000 by the end of Q2. We have been inspired by the response to the car and appreciate the continued support of our reservation holders. We are working hard to deliver more cars soon.
The new timeline is not sitting well within the Tesla enthusiast community, particularly as there are meaningful financial implications due to the forthcoming expiration of the U.S. federal tax credit that applies to Tesla. For customers that are only interested in the most affordable Model 3, they might be out of luck.
Anecdotally, many reservation holders are now contemplating canceling if they're unable to claim the tax credit.
Why Tesla is justifiably changing priorities: "deeper level of hell"
Historically, Tesla has always prioritized delivering high-end configurations, which carry higher price points and higher margins, in order to recoup its capital investments faster.
Model 3 had a negative gross margin last quarter due to production constraints. The depreciation, amortization, and other fixed costs associated with Model 3 manufacturing infrastructure had to be spread across a small number of units, as the vehicle remains in a "deeper level of hell than we expected," according to CEO Elon Musk.
Tesla has not yet officially confirmed what the dual motor option will cost. For reference, dual motor was priced at $5,000 back when it was an option on Model S, and it will presumably cost less this time around. By introducing long-range, dual-motor configurations before Standard Range, Tesla is hoping to maximize average transaction prices (ATPs), which is justifiable since the company's already well behind its original forecast for cost amortization.
Tesla knows how important the tax credit is
The bad news is that Tesla is also effectively delaying its arrival to the mainstream market. Beyond instant torque or cheap Supercharging, the $35,000 price tag is the most important selling feature of Model 3. After factoring in the current $7,500 federal tax credit, that brings the base price down to $27,500 -- cost competitive with some of the best-selling cars in the U.S., especially after factoring in gas and maintenance savings over time. Some states also offer incentives, bringing that cost down even further.
Tesla is keenly aware of how important this tax credit is, as Musk previously acknowledged that the credit was part of Tesla's production plan.
As soon as Tesla hits 200,000 in U.S. deliveries, the clock starts ticking. The full credit is available for the remainder of the calendar quarter in which that threshold is reached, as well as the subsequent quarter. After that, 50% of the credit is available for two quarters, followed by 25% for the next two quarters before phasing out completely. Importantly, there is no volume limit during this phase out period, so whether or not Model 3 customers receive the credit, in full or in part, will depend entirely on the production ramp.
Ideally, Tesla crosses 200,000 at the beginning of a calendar quarter, and ramps quickly to maximize the number of units it can deliver in the subsequent five to six quarters. There are even clues that the company is carefully managing its U.S. delivery total. Electrek reports that Tesla is now focusing on Model 3 deliveries in Canada sooner than expected, which could allow the company to continue ramping deliveries but in an adjacent geographical market -- deliveries that wouldn't count toward the 200,000 figure.
It's conceivable that Tesla is intentionally slowing U.S. deliveries (which would irk U.S. customers) to postpone hitting 200,000, specifically in order to maximize the number of customers that will receive the credit once it does (which would help U.S. customers). It's going to be a tough balancing act: Tesla needs to weigh its own financial needs against those of its customers.
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