Tesla Halts Online Sales of $35,000 Version of Model 3

Date: April 12, 2019
Source: Wall Street Journal
Tesla Inc. stopped online sales of the $35,000 base version of its Model 3 car weeks after introducing it, the latest shift in sales tactics as the company struggles to deliver long-promised affordability and avoid losing money.
The company’s announcement late on April 11 said customers can still order the $35,000 version of the car by telephone or in its network of stores. But it effectively raises the minimum price of the Model 3 by nearly 13 percent for online shoppers, after announcing in late February that it was shifting its sales to the internet as it began making the $35,000 “standard” version available for order.
In a blog post April 11, Tesla said the move was to “simplify our production operations to better optimize cost, minimize complexity and streamline operations.”
The announcement marked the fourth change to the compact car’s starting price this year, and followed worse-than-expected deliveries of Tesla vehicles in the first quarter, which raised questions among investors about demand for the company’s electric vehicles.
The auto maker’s sales in the first quarter suffered after the U.S. government began to phase out incentives for consumers of Tesla’s vehicles, lowering the tax credit to $3,750 from $7,500. The credit ends at the beginning of next year.
The lowest-cost Model 3 version offered online now starts at $39,500, and is a pricier variant of the “standard plus” version that now includes Tesla’s Autopilot driver-assistance system as a standard feature. The standard-plus version has slightly more range on a charge than the lowest-end standard version, among other differences. Tesla said it is now pushing the standard-plus version online because that has been selling far better than the standard version.
To lower the cost of the Model 3 to $35,000 from its $46,000 level at the beginning of this year, Tesla slashed its workforce several times and took the unexpected step at the end of February to announce that it would close many of its stores and move to an online-only sales model.
Shortly afterward, Chief Executive Elon Musk pared the closure plans, though customers would still be directed to make the final purchase online.
The troubled first quarter means Tesla has abandoned its guidance of delivering a third consecutive quarter of profit, and raised concerns again among analysts about the company’s limited cash balance. Several analysts believe the company will need to raise money. Tesla has said it ended the first quarter with sufficient cash on hand.
Musk had long promised a $35,000 Model 3, but when production began in 2017, that price point was pushed off into the future. He has said that introducing the vehicle at the $35,000 price would have killed the company, and it needed to get its costs lowered to profitably deliver it at that goal.
“Even though most buyers would opt for a pricier upgraded Model 3, the $35,000 price tag became the defining feature of the car,” said Jessica Caldwell, an analyst for Edmunds, an automotive website that tracks the industry. “Tesla’s rally cry of an EV for the masses for that specific price is what created the frenzy around the Model 3, but it’s now become the most iconic symbol of Tesla’s tendency to over promise and under deliver.”
The Model 3 is Musk’s gamble that Tesla can make an affordable all-electric car, evolving the company from a niche luxury brand better known for selling vehicles that typically sell for $100,000.
The Model 3 on average sold for $57,000 last year, according to estimates of analysts surveyed by FactSet. The urgent push to lower the price left some analysts to assume that Tesla had reached a ceiling of buyers willing to pay for the higher-priced version of the compact car, which competes against a similarly priced BMW 3 Series and Mercedes-Benz C-Class.
On April 11, Tesla also said it would begin offering leases for the Model 3, something the company had noticeably lacked in a segment where such financing is common. Tesla said it would limit annual miles driven to between 10,000 and 15,000 for leasing customers, and customers wouldn’t be given a chance to purchase the vehicles at the end of the term because the company plans to use those vehicles in a Tesla ride-hailing network.
Tesla has teased the potential of using its yet-to-be-released fully self-driving vehicles as a robot taxi service. The auto industry and tech companies globally are racing to develop driverless-car technology, though none has launched a commercial service without a person behind the wheel to ensure safety.
The latest price changes followed a Nikkei report that Tesla and its battery supplier, Panasonic Corp., are freezing investments plans at the auto maker’s factory outside of Reno, Nev. The report rattled investors, with some analysts saying it signaled weaker-than-expected demand.
Tesla responded in a separate statement on April 11 that it continues to invest in the facility, though the company noted it believes it can get more efficiency from improving existing production lines while spending less on new equipment.
“Our demand for cells continues to outpace supply,” a Tesla spokesman said. “It remains the fundamental constraint on Tesla vehicle and [stationary battery pack] production.”
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