Tesla Model 3 dilemma: too high a price and too strong a competitor

On July 6, the U.S. stock review website Motley Fool published an article over the weekend saying that Tesla's upcoming low-cost Model 3 is likely to fail to succeed. The pricing of this model may still deviate from the mass market and need to compete with certain models of BMW and Mercedes-Benz.

The following is the full text of the article:

Tesla has had a major hit in the ultra-luxury sedan market with the Model S. The company has been steadily increasing production of the Model S, but has been struggling to keep up with demand, without extensive advertising or discounts. As a result, many investors, stock analysts and car enthusiasts believe that Tesla will break through to the mass market with its cheaper Model 3.

However, despite being priced lower than the Model S (and the upcoming SUV, the Model X), the Model 3 will likely still be positioned in the luxury car market, competing with the BMW 3 Series and Mercedes-Benz C-Class. Tesla plans to sell 500,000 vehicles by 2020 and "millions" by 2025, but if the Model 3 is positioned in this way, it will be difficult to achieve this goal.

Real Price

Tesla CEO Elon Musk once said that without considering government tax breaks, the most suitable price for Model 3 is about $35,000. Currently, the US federal government provides a tax break of $7,500 for electric vehicles, so the final price of Model 3 will be about $27,500. If US state governments provide tax breaks, the price will be even lower.

In theory, the Model 3 will be very affordable. Although it is still more expensive than the Toyota Prius, the Model 3 also has better performance. Of course, this model does not consume fuel. At this price, the Model 3 can target middle-class consumers who like hybrid cars, as well as technology enthusiasts.

However, there are still not many consumers willing to spend less than $30,000 to buy a Model 3. In fact, such consumers are usually willing to spend $40,000 or even $50,000. This means that Tesla's positioning of the Model 3 will still be a luxury car rather than a mass-market model.

Why is the Model 3 so expensive?

First, past sales of the Model S indicate that the Model 3 "beggar version" will not be very attractive. Tesla originally planned to launch a 40 kWh Model S entry-level model. This model costs $52,400 after including federal tax incentives and has a range of 160 miles (about 257 kilometers). However, when the first generation of Model S was shipped, Tesla abandoned this version to simplify production. At that time, orders for this entry-level model accounted for only 4% of the total orders for Model S models.

Recently, Tesla even abandoned the 60 kWh model, which had a range of 200 miles (about 322 kilometers), and launched a 70 kWh version, which costs $4,000 more. Overall, Model S sales are clearly tilted towards the more expensive version, with an average selling price of about $100,000.

Tesla will likely also offer a battery upgrade for the Model 3. Since there is not much demand for the 40 kWh and 60 kWh Model S, a 300-mile range seems necessary for now.

Furthermore, to ensure a lower price, many of the standard features of the Model S will become optional in the Model 3. The option packages on the Model S can easily cost more than $10,000. Therefore, the final price of the Model 3 is likely to be more than $35,000.

Meanwhile, the $7,500 federal tax credit won’t last much longer unless the administration tweaks the rules. Under current rules, the credit is scrapped after automakers sell 200,000 electric or hybrid vehicles in two quarters.

If demand for the Model S and Model X remains strong, Tesla will consume half of its 200,000 quota before the Model 3 goes on sale. It's likely that the discount will no longer be available within the next year and a half.

What is the market size?

In short, the federal incentives for Model 3 won't last long. In addition, Model S sales show that most consumers will want to upgrade the battery. Therefore, the factory price of such a model will be about $40,000, not $27,500 or less. In addition, most buyers will want to buy option packages, resulting in a final price of more than $50,000.

This has two effects. First, Tesla's pricing will be out of the mass market. In the United States, luxury cars account for 11% of the entire auto industry. Without federal tax incentives and expensive options, even the most ardent environmentalists will not be willing to upgrade from a Toyota Prius to a Model 3.

Secondly, at this price point, Tesla will face stronger competitors. BMW and Mercedes-Benz both have loyal fan bases. If Tesla hopes to achieve high sales, the models it launches need to be as high-quality as the Model S.

The goal of reaching millions of annual sales by 2025 will pose a greater challenge. Even the mighty BMW has failed to break through 2 million annual sales. To achieve this goal, Tesla needs to launch a car that is cheaper than the Model 3.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.