Tesla (NASDAQ:TSLA) cut the price of its Model 3 yet again this week. The move is the second of two meaningful price cuts for the vehicle and comes about four months after the company released a lower-cost version of the Model 3 with a smaller battery.
Another price cut for the Model 3 gets the vehicle closer to Tesla's promised $35,000 base price, which the company says on its website will be available in four to six months. But there's still work to do. Achieving the manufacturing improvements and economies of scale necessary to make a lower-cost version of the Model 3 is key to Tesla's goal of reaching a wider customer base.
Starting at $42,900
"Model 3 starting cost now ~35k (after ~8k of credits & fuel savings)," Tesla CEO Elon Musk tweeted on Wednesday after the company cut the prices of all three versions of its Model 3 vehicles by $1,100.
The $35,000 price point Musk is referring to is not the company's promised $35,000 price without estimated savings, but rather a $42,900 starting price minus a $3,750 federal refund and $4,300 in projected gas savings. These savings would, indeed, get the vehicle to $34,850. But Tesla is still $7,900 away from its target base price.
It has taken an entirely new Model 3 variant and several price cuts to get to $42,900. Initially, the cheapest Model 3 was a "long range" version with 320 miles of driving range that started at $49,000. But the company announced a "mid range" version with 260 miles of range last October for $46,000 (the vehicle was briefly available for $45,000, but the price was raised to $46,000 shortly after its launch).
Bringing the mid-range version's starting price to $44,000, the company announced a $2,000 price reduction to its entire vehicle lineup in the U.S. on Jan. 2. Now, the company's latest $1,100 price cut puts the cheapest Model 3 variant at just under $43,000.
Tesla told the media the price cut primarily reflects the savings gained from ending its customer referral program on Feb. 1.
The path to $35,000
Tesla is racing to bring to market the $35,000 version of the Model 3. Musk said in an email to employees (published on the company's blog) on Jan. 18 that it needs "to continue making progress toward lower-priced variants of Model 3," citing the reduction to the tax credit for qualifying customers on July 1 and the expiration of the credit entirely at the end of the year.
Tesla plans to achieve cost reductions required to bring to market a $35,000 Model 3 by a combination of a workforce reduction, manufacturing improvements, and greater economies of scale from higher-volume production.
"Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 mile), standard interior Model 3 at $35k and still be a viable company," Musk explained in his Jan. 18 letter to employees.
For the full year of 2019, Tesla expects to deliver 360,000 to 400,000 vehicles (up from about 246,000 vehicles in 2018), with at least 260,000 of these vehicles expected to be Model 3s. To deliver this many vehicles, Tesla will almost certainly need versions of the Model 3 that cost less than $42,900.