In this article, I try to mostly ignore the Elon Twitter drama and the TSLA stock market drama and focus on what’s changed for Tesla buyers interested in the Model 3 or Model Y, their two least expensive models. right now.
I have been a Model 3 and Model Y fan and my family currently owns 2 Model Y and 1 Model 3 vehicles. of its vehicles is much lower than that of BMW, Mercedes and Audi cars which have similar prices. I argued for 4 years that if you include fuel savings, maintenance and repair savings, and more recently depreciation savings (due to long life and over-the-air updates) , driving a Model 3 could be as affordable as driving a Honda Accord or Toyota Camry. The Model Y may also be affordable, but its price has skyrocketed over the past 18 months. (Note: Aldrich Bautista (@AldrichBautista) maintains a Tesla Car Price History Tracker.)
The lowest priced Model Y available in the US went from under $40,000 in February 2021 (for the standard RWD line) to $65,990 (for long-range all-wheel drive) in June 2022, an increase of 26 $000 or 65% in just 16 months! The apples to apples comparison is $49,990 to $65,990, an increase of $16,000 or 32%! The reason given for the price increases was to discourage buying until production in Fremont, Texas, Shanghai and Berlin could ramp up and meet demand.
The Model Y became so popular that the waitlist was as common as 6 months or more, and Tesla honors the price you get when you pay the $250 ordering fee. So Tesla was concerned that if people reserved cars two or three years in advance and inflation caused the price of labor and materials to rise, they might get in trouble and have to sell the cars. at the break-even point or at a loss. I reserved a Model Y three years ago, and this spring Tesla told me I had to either buy the car or cancel my reservation. I had waited until my daughter was ready for the car. So my daughter got a Model Y a little before it was ready, but since the price was over $10,000 below market price, it made no sense to let Tesla cancel the order.
Tesla also doesn’t think the waiting list is too long for a good customer experience. I tend to agree that the price system is a good way to match supply and demand. Then the people who can best use the cars get them first.
What changed?
Over the past few months, some things have changed.
- The economy has slowed down. Some people say we’re in a recession, others don’t think it’s a recession. Others (like Elon) think a recession is coming. Whatever you think, interest rates on car loans have gone up a lot and that has burst the used car bubble. If you want to know more about it, check out the Manheim Used Vehicle Index. A funnier way to follow the market is to listen to Lucky Lopez on his Youtube channel.
- Tesla has dramatically increased production in Shanghai and ramped up Model Y production in Berlin and Austin. They increased production a little bit in Fremont.
- I could say competition has increased, but that hasn’t been a big factor in the United States. It is more a factor of China and Europe.
- The Model Y just isn’t as good a deal at $65,990 as it was at $39,990.
- the Inflation Reduction Act was passed and many of the changes take effect on January 1, 2023. No one is quite sure whether Tesla vehicles will be eligible for the full $7,500 or only half of the tax credit from a week on, but when it was announced that the rules on critical battery mineral and component requirements” were postponed to April a few days ago, people came to the conclusion that everyone building electric vehicles in North America would get a pass for the first few months and that Tesla had forced customers to delay their deliveries. Why not wait a week to save $3,750? (You wouldn’t save the full $7,500 since Tesla gave a $3,750 credit for a few weeks.) Well, Tesla increased the credit to $7,500 the next day and threw away 10,000 free Supercharger miles for good measure (worth maybe $1,000, depending on how you use it).
- Tesla investors are concerned that demand for Tesla vehicles is weak and the stock is weak.
- Elon Musk has been more vocal about his personal politics (which I classify as moderate to slightly right-wing, but you may disagree) and those views have upset many progressives in the United States, traditionally those most likely to buy a Tesla or other electric vehicle. On the other hand, Elon’s more right-wing views make the car more palatable to the right-leaning half of the country. All in all, I think it’s a slight downside to demand, but it could work both ways – it’s too early to say.
- This week Elon was on Twitter Spaces (like Callin or Clubhouse) and he said a lot of things, but what’s important for this article is that when asked how Tesla would handle a global recession, he said replied that he could either slow growth to preserve profits or increase volumes faster and sacrifice profits. He said (in line with Tesla’s mission to accelerate the transition to electric vehicles) that he would choose growth over profitability, as long as Tesla has sufficient cash reserves to avoid any risk of bankruptcy. As a Tesla shareholder, I’m not thrilled with this response, but it should be welcome in the environmental community. (Note: it seems some have forgotten how much Elon, through his work at Tesla, has done for the environment.)
Conclusion
I think we’ll see a more affordable Model 3 and Model Y available in the next year. I don’t know if it will be January, April, or later in the year, but with the volume Austin and Fremont are releasing Model 3 and Model Y vehicles, it’s clear (and Elon clearly understands this) that Tesla needs to have vehicles available at lower prices.
- The Model 3 is already available for under $40,000 with the $7,500 Tesla Credit. On January 1, I expect Tesla to announce that it will be eligible for the $7,500 tax credit. Tesla also gets thousands of other incentives to produce batteries in the United States. Then, depending on how demand changes throughout the year, I expect Tesla to maintain the Model 3’s entry-level price (after the $7,500 tax credit) either in below $40,000, or the $2,000 drop every few months until demand equals supply. I think the net price will probably reach $35,000 and maybe less than $30,000 by the end of the year. A Tesla Model 3 under $30,000 would make it very difficult for Toyota to sell very many Camrys and for Honda to sell very many Accords.
- The Tesla Model Y will see bigger changes. I expect the entry-level Model Y price to drop back below $40,000 (from $65,990 just a few weeks ago) when they reintroduce the Rear-Wheel Drive (RWD) Model Y standard range in a few weeks or months. Then, depending on how demand changes in 2023, the price (including the $7,500 tax credit) could fall to $35,000 or even below $30,000. Remember that Tesla has always said that the Model Y has similar build costs to the Model 3. But with Tesla having a lot more capacity to build the Model Y and not wanting those gigafactories to run at less than full capacity, I think they will need to price the Model Y very aggressively.
Good car Bad car think Tesla sells over 100,000 vehicles in the United States every quarter now. They ranked the Model Y as the 8th best-selling vehicle in Q3 and the Model 3 as the 11th best-selling vehicle. Pricing the Model 3 and Model Y between $30,000 and $35,000 (after tax credit), as I suggest above, should allow Tesla to roughly double sales of these two cars to around $200,000 per quarter. . That’s about what I expect from Fremont and Austin’s production capacity in 2023 as well. This will allow the Model Y to overtake the Toyota RAV4 as the best-selling crossover and the Model 3 to overtake the Toyota Camry as the best-selling sedan. It will be some time before the Cybertruck can challenge the Ford F-150 for the best-selling truck in the United States. Let’s see how the initial production goes before I predict.
Disclosure: I am a shareholder of Tesla [TSLA]BYD [BYDDY]Nio [NIO]XPeng [XPEV]and Hertz [HTZ]. But I am not offering investment advice of any kind here.
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