Late last month, Tesla (NASDAQ:TSLA) handed over the first 30 Model 3 sedans to employee-customers at a very public launch event. Now, the electric vehicle pioneer faces the grueling task of ramping production from an average of a little more than 100 per week in the third quarter to an ambitious goal of 5,000 per week by year-end.
Tesla also took this opportunity to offer more details on pricing. As promised, the base version of the Model 3 will have a starting price of $35,000. However, you can't buy that version yet. Furthermore, most customers will probably feel compelled to buy at least some of the available options packages -- which can drive the car's cost way beyond $35,000.
The Model 3 gets a range boost
At the launch event, Tesla revealed that the base version of the Model 3 will offer 220 miles of range, up from a previous estimate of 215 miles. Yet that still lags the 238 miles of range offered by General Motors' (NYSE:GM) competing Chevy Bolt.
Of course, Tesla has a big built-in advantage in the form of its Supercharger network. Even fast-charging for the Chevy Bolt is a lot slower than Supercharging a Model 3 -- and those fast-charging stations are few and far between.
Nevertheless, Tesla found another way to outdo GM. A second version of the Model 3 will have a generous 310 miles of range: even more than most of Tesla's pricier vehicles. The extra 90 miles of range represents a big boost in utility, so most potential buyers would be likely to prefer this option. The catch: it costs $9,000 for this upgrade, which is the only Model 3 version that Tesla will build until at least November.
Options are expensive
Other options packages will also add significantly to the Model 3's price. A $5,000 package upgrades the interior to something more in keeping with luxury car standards. It costs another $1,500 if you want 19" wheels instead of the standard 18" wheels, $1,000 for a color other than black, and $5,000 to activate Autopilot. An extra $3,000 will unlock "full self-driving" capabilities -- once regulators give the green light.
Thus, a fully loaded Model 3 would cost nearly $60,000 today. This doesn't even include future upgrades like a dual-motor configuration and "Ludicrous" mode, which will undoubtedly cost even more.
About that tax credit
Tesla appears to be following its well-worn playbook by building the most profitable versions of the Model 3 first, in order to bolster profitability. As long as Tesla has enough orders for the 310 mile range, upgraded-interior Model 3 to fill all of its production capacity, I doubt it will bother building many (or any) of the baseline $35,000 versions.
That's probably rational for Tesla, but it's bad news for anyone looking to save money. Based on Tesla's production plans, the $7,500 federal tax credit for electric car buyers is likely to start phasing out in mid-2018, before disappearing entirely in mid-2019.
Thus, by the time Tesla gets around to producing $35,000 Model 3s in high volume, the full $7,500 credit is unlikely to be available. Anyone ordering a Model 3 today is likely to qualify for a $3,750 credit at best, and potentially less (depending on whether Tesla can meet its production goals).
This isn't a very affordable car
So far, the Tesla Model 3 is getting rave reviews all around. Even electric car enthusiasts who liked the Chevy Bolt agree that General Motors' electric car can't hold a candle to the Model 3.
That's hardly a surprise, though. The Model 3s that reviewers are testing cost upwards of $50,000, and customers ordering today won't qualify for the full $7,500 federal tax credit. This means the final price is well into BMW/Mercedes territory. By contrast, you can walk into a Chevy dealer today and buy a fully loaded Bolt (which is still a far cry from the Model 3) for less than $40,000, while ensuring that you qualify for the $7,500 credit.
Tesla clearly has a legion of fans who are clamoring to get the Model 3 no matter what the price. Nevertheless, I remain skeptical about the long-term size of the market for a vehicle with an average selling price of around $50,000. BMW and Mercedes-Benz each sell fewer than 400,000 vehicles annually in the U.S. across all of their product lines, with no individual model from either one breaking the 100,000 mark in annual unit sales.
For the Model 3 to be the mainstream success that Tesla bulls expect, I believe that the company will need to pack in most of the premium options currently available at a price close to the advertised $35,000 starting price. For now, getting a Model 3 that feels like a "real" Tesla is too expensive for the vast majority of car buyers.