Tesla seeking profitability with launch of lower priced Model 3s
Sales of Model 3 to start in Europe and Asia in 2019
At the end of June 2018, Tesla achieved its weekly production target of 5,000 units for the Model 3, its affordable EV compact sedan. The Model 3 production system has stabilized and its sales have increased since the third quarter of 2018. Tesla’s deliveries in 2018 grew approximately 2.4 times over the previous year to 244,920 units, of which 145,610 units were Model 3s, up from 1,770 units.
Deliveries of the Model 3 were limited to North American customers, higher priced grades, and cash/loan transactions only. There still remain opportunities to expand deliveries of the Model 3 as Tesla begins its sales outside North America, launches lower priced grades, and introduces leasing options.
In July 2017, Tesla released the Model 3, but, due to bottlenecks on the automated assembly process, it was not able to ramp up its output as planned and experienced an increase in operating losses in the first and second quarter of 2018. In the third quarter, the production system of the Model 3 stabilized, and the automaker gained an operating income of USD 416.76 million owing to an increase in deliveries and reductions in labor and material costs. This was a significant improvement from an operating loss of USD 621.39 million in the second quarter and an operating loss of USD 535.48 million in the third quarter of 2017. While Tesla plans to launch lower priced grades of the Model 3 in the near future, it aims to gain profitability by improving cost efficiencies including a 7% employee reduction as well as expanding sales further.
In 2019, Tesla is scheduled to start deliveries of the Model 3 in Europe and Asia, and debut the Model Y, a new compact SUV, and a new pickup truck. In 2020, the automaker plans to begin production of the Semi electric truck, new Roadster, and Model Y.
In China, Tesla lowered prices of its vehicles in November 2018 to suppress the negative impact of increased tariffs on its vehicles imported from the US. In January 2019, the company broke ground on its assembly plant and R&D center in Shanghai. The first Model 3 is scheduled to roll off the line at the end of 2019 with an initial production capacity of 250,000 units per year which will be raised to 500,000 within three years.
In October 2018, Tesla added a new feature to the Enhanced Autopilot. The new Navigate on Autopilot feature enables the Tesla vehicle to automatically change lanes on freeways, transfer from one freeway to another, and ultimately exit the freeway when approaching the final destination. In November 2018, the Summon autonomous parking feature was upgraded.
|Production of the Model 3 started in July 2018 (Photo: Tesla)||An additional Model 3 assembly line built in the large tent (Photo: Tesla)|
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Tesla releases Model 3, but delays production ramp-up plans (January 2018)
Tesla Motors: Accelerating plans for production of 500,000 vehicles to 2018 (October 2016)
OEM Electrification Strategies: Acceleration of EV and PHV Lineup Expansion (April 2018)
xEVs and lithium-ion battery trends (1) (March 2017)
Model 3 production system stabilizes; lower priced grades to be launched
In July 2017, Tesla began production and sales of the Model 3 compact sedan, an affordable EV with a retail price of USD 35,000 (base model). The automaker started accepting reservations for the Model 3 on March 31, 2016 and received 455,000 orders as of August 2017 (of which around 20% were cancelled as of October 2018).
Tesla has advanced automation on its production process to lower the price of the Model 3. Higher levels of automation was enabled by a simplification of the product design. All Model 3 vehicles use only one standard body frame, down from more than 80 for the Model S, and a wiring harness that has 50% less mass than average vehicles. The Model 3 general assembly line consists of fewer than 50 steps, which is about 70% less than conventional assembly lines. Initially, Tesla aimed to produce 5,000 units per week by the end of 2017, but due to bottlenecks on the battery module line and automated conveyor systems of components, the schedule to build 5,000 vehicles per week was postponed to the end of June 2018.
Tesla’s CEO Elon Musk mentioned “too much automation too quickly”, and dialed back automation on a part of the process and built another assembly line in a large tent constructed by the plant building. As a result, the automaker achieved a target of 5,000 Model 3 vehicles per week at the end of June 2018. In the third quarter of 2018, production of the Model 3 totaled 53,239 units, with average weekly production of roughly 4,300 units. Tesla started the quarter producing only Rear Wheel Drive (RWD) Model 3s quipped with one motor, and ended the quarter producing almost entirely Dual Motor All-Wheel Drive (AWD) versions. Even though AWD versions are significantly more complex to build, the company did this without disrupting its production rate. In the fourth quarter of 2018, production of the Model 3 totaled 61,394 units, up by 15% from the third quarter.
Tesla’s production and deliveries
|Model S & X||83,922||98,342||24,728||24,761||26,903||25,161||101,553|
Source: Tesla Production and Deliveries (Q1 2016-Q4 2018)
In 2018, Tesla’s production increased 2.5 times over 2017 to 254,530 units. Of them, production of the Model S & X grew by 3.3% year-over-year (y/y) to 101,553 units while output of the Model 3 increased from 2,685 to 152,977 units. Deliveries in 2018 rose 2.4 times over the previous year to 244,920. The Model S amounted to 50,630 units, down by 7.5% y/y, and the Model X totaled 48,680 units, up by 4.6% y/y. Total deliveries of the Model S & X were a little shy of the sales target of 100,000 units. Deliveries of the Model 3 increased from 1,770 to 145,610 units.
Deliveries of the Model 3 were limited to North American customers. Giving priority on profitability, higher priced grades including the RWD, AWD and Performance grades with a long-range battery as well as the grades with a mid-range battery were sold in cash or with loans. There remain opportunities to increase deliveries of the Model 3 by starting sales outside North America, launching lower priced grades, and introducing leasing options. However, starting in 2019, competition will be intensified with releases of premium EVs from other OEMs such as the Mercedes-Benz EQC, Audi E-Tron, and Porsche Taycan.
Model 3’s grades
|Top speed||Production period||Price|
|Long range||One Motor
Rear Wheel Drive
|310 miles||5.1 seconds||140 mph||July 2017-
|310 miles||4.5 seconds||145 mph||July 2018-
|310 miles||3.3 seconds||155 mph||USD 64,000|
Rear Wheel Drive
|264 miles||5.6 seconds||125 mph||October 2018-
Rear Wheel Drive
|220 miles||5.6 seconds||130 mph||To be determined||USD 35,000|
Tesla achieves an operating income in the third quarter of 2018
In 2017, Tesla recorded revenues of USD 11,759 million, up by 68.0% y/y, and an operating loss of USD 1,632 million. The company released the Model 3 in July 2017, but due to bottlenecks on its assembly process, operating losses expanded in the first and second quarter of 2018. In order to generate sufficient funds, Tesla securitized its leasing portfolio in February 2018 and required the customers who confirmed their orders for the Model 3 to pay a deposit of USD 2,500 from June.
In the third quarter of 2018, the Model 3 production system stabilized and Tesla’s revenues significantly increased to USD 6,824 million, up by 128.6% y/y. Owing to an increase in output of the Model 3 and reductions in labor and material costs, the automaker achieved an operating income of USD 417 million, a significant improvement from an operating loss of USD 621 million in the second quarter and an operating loss of USD 535 million in the third quarter of 2017. Tesla reported free cash flow of USD 881 million that turned positive for the first time in eight quarters.
On August 7, 2018, Tesla’s CEO Elon Musk tweeted that he could take Tesla private presumably due to complaints about the investors seeking only short time profits. The US Securities and Exchange Commission (SEC) started an investigation into the company regarding the way it discloses information. Musk withdrew his plan to take the company private on August 24. Later, the SEC sued Musk, alleging that he deceived shareholders with misleading statements. Musk and Tesla have agreed to settle the charges against them with the SEC by each paying a separate USD 20 million penalty.
The US federal tax credit of USD 7,500 for Tesla vehicles was reduced by half on January 1, 2019 as 200,000 Tesla vehicles have already received the credit during 2018. The credit will be halved in the beginning of July again and will be eliminated after January 1, 2020. In order to reduce the impact of expiring tax credits, Tesla lowered the prices of all models being distributed in the U.S. by USD 2,000.
Tesla aims to expand sales of EVs by reducing the price of the Model 3 as low as that of internal combustion engine vehicles. While the automaker had been delivering higher priced Model 3s until now, it has to launch cheaper grades with reduced costs in and after May 2019 for the customers who reserved and newly ordered such grades. On January 18, 2019, Tesla revealed plans to reduce its workforce by 7% to secure profitability even though it launches less profitable grades of the Model 3.
Tesla’s business results (2015-September 2018)
|Income (Loss) from operation||(716,629)||(667,340)||(1,632,086)||(1,033,945)||(801,609)|
|Net income (loss)||(888,663)||(674,914)||(1,961,400)||(1,286,050)||(1,115,574)|
|Research & development||(717,900)||(834,408)||(1,378,073)||(1,023,436)||(1,104,073)|
Source: Tesla Q4 2016/Q4 2017/Q3 2018 Update Letter
(Note) Net income (loss) shows “Net income (loss) attributable to common stockholders. This applies to the table below.
Tesla’s quarterly business results (Q2 2017-Q3 2018)
|Income (Loss) from operation||(240,916)||(535,480)||(598,141)||(596,974)||(621,392)||416,757|
|Net income (loss)||(336,397)||(619,376)||(675,350)||(709,551)||(717,539)||311,516|
|Research & development||(369,774)||(331,622)||(354,637)||(367,096)||(386,129)||(350,848)|
Source: Tesla Q2 2017-Q3 2018 Update Letter
Moves to take Tesla private
|August 7, 2018||Tweets a plan to take Tesla private: Tesla’s CEO Elon Musk tweeted “Am considering taking Tesla private at USD 420. Fund secured.” This was a 23% premium over the then current share price. Tesla’s share price surged.|
|August 8||The US Securities and Exchange Commission (SEC) investigates: It was reported that the SEC began investigation into Tesla regarding the way it discloses information.|
|August 13||Additional explanation about securing fund: Musk posted a blog entry that he had been negotiating with the Saudi Arabian sovereign wealth fund over funding for a going private transaction for Tesla. However, the SEC alleged that Musk had not discussed specific deal terms with any potential financing partners.|
|August 15||It was reported that the SEC issued a subpoena to Tesla to offer testimony and to submit documents.|
|August 24||Withdraws the plan to take Tesla private: Musk posted a blog entry that he would withdraw the plan. Since most of Tesla’s existing shareholders believe that Tesla should be a public company and the process of going private would be more time consuming and distracting than initially anticipated, Musk met with Tesla’s board of directors and agreed that the better path is for Tesla to remain public.|
|September 18||It was reported that the US Department of Justice also started investigation over Musk’s tweets. A group of investors consider filing a class action suit against Tesla for losses caused by Musk’s tweets.|
|September 27||SEC files its lawsuit against Musk: The SEC sued Musk alleging that he deceived investors with misleading statements, and that Musk should be ousted from his position as chairman of Tesla.|
|September 29||Settles charges with SEC: Musk and Tesla agreed to settle the charges against them with the SEC. The settlements require that: Musk will resign Chairman and be replaced by an independent director to oversee the company. Musk will be ineligible to be reelected as Chairman for three years, but will remain CEO. Tesla will appoint two new independent directors to its board and establish a new committee of independent directors to oversee Musk’s communications. Musk and Tesla will each pay a separate USD 20 million penalty without admitting or denying the SEC’s allegations. The USD 40 million in penalties will be distributed to harmed investors under a court-approved process.|
Source: Tesla website, Elon Musk Twitter, media reports
Tax credit for Tesla vehicles phasing out; prices reduced by USD 2,000
|Under the tax system revision passed by the US Congress in 2017, tax credits for EVs are available for the first 200,000 such vehicles sold by an automaker. Since Tesla’s sales of EVs in the US reached 200,000 in July 2018, the tax credit of USD 7,500 for Tesla vehicles was halved to USD 3,750 from January 1, 2019 and will be reduced by 50% again to USD 1,875 from July 1. The tax credit for Tesla vehicles will be eliminated on January 1, 2020.|
|On January 2, 2019, Tesla announced that it cut prices for all three of its models (Model S, Model X, and Model 3) being sold in the US by USD 2,000 to suppress the impact of lower green tax credits on sales.|
Tesla to slash workforce by 7% to gain profitability with launch of lower priced Model 3s
|On January 18, 2019, Tesla announced plans to cut its workforce by 7% or approximately 3,000 people. The layoffs were necessary because Tesla has to further improve cost efficiencies to produce cheaper grades of the Model 3. While its base model is priced at USD 35,000, only higher priced grades with a large capacity battery have been available until now to secure profitability. The most affordable grade of the Model 3 currently sells for USD 44,000. In and after May 2019, lower priced Model 3s should be produced for the customers who reserved and newly ordered such grades.|
Tesla to start production of Model Y and new Roadster in 2020
In 2019, Tesla plans to start deliveries of the Model 3 in Europe and Asia and unveil the prototypes of the Model Y, a new compact SUV, and a new pickup truck. In 2020, the automaker will begin production of the Semi electric truck, new Roadster and Model Y.
Tesla’s new model roadmap
|2019||Model 3 rollout in Europe and Asia in February.|
|Model Y unveiling (planned in March) (Model Y: a new compact SUV underpinned by the Model 3’s platform)|
|Pickup truck unveiling|
|2020||Semi production begins (Semi: a new electric truck)|
|New Roadster production begins (new Roadster: a sports car featuring a removable glass roof, a 2 by 2 layout, and all-wheel drive. It can accelerate from 0-60 mph in 1.9 seconds and has a top speed of 250 mph and a range of 620 miles.)|
|Model Y production begins|
|Semi electric truck to be launched in 2020 (Photo: Tesla)||Model 3 to be introduced in Japan in 2H of 2019: taking pre-orders begins|
Tesla to build a plant in Shanghai and start production by the end of 2019
In 2014, Tesla began sales of its vehicles in China, the largest automobile and a prospective EV market in the world. The automaker delivered 5,931 Model Ss and 8,848 Model Xs imported from the US to China in 2017. However, in the ongoing trade tension between the US and China, the Chinese government raised tariffs on vehicles imported from the US to 40% while the US government charged a 15% tariff on automotive components imported from China in July 2018. In order to mitigate the negative impact on its sales in China, Tesla lowered the prices of its vehicles for China to absorb a significant part of the tariffs that the Chinese government charges.
On December 14, 2018, the Chinese government announced that it would temporarily suspend additional tariffs on US-made vehicles from January 1 to March 31, 2019 based on the agreement at the China-US summit meeting to ease their trade war. Following the announcement to halt additional tariffs, Tesla lowered prices of its vehicles for China again.
Tesla will build its plant and R&D center in Shanghai to improve price competitiveness of its vehicles in China. In April 2018, the Chinese government announced to ease limits on foreign ownership of NEV ventures (which used to be 50%). Tesla intends to build a wholly-owned EV assembly plant with a battery factory. The automaker broke ground on the Shanghai plant in January 2019, and the first phase of construction will be completed and production of the Model 3 will start by the end of 2019.
Tesla lowers prices of Model S & X to address changing tariffs in China
|China raising tariffs from 15% to 40%
|In July 2018, the Chinese government raised tariffs on vehicles imported from the US to China from 15% to 40%. Tesla lowered prices of its vehicles for China by 12-26% to address this move on November 22, 2018. In order to make its vehicles more affordable, Tesla absorbed a significant part of the tariffs charged by the Chinese government. In China, the Model S started at CNY 782,900 while the Model X was priced from CNY 861,800.|
|China halting additional tariffs
|On December 14, 2018, the Chinese government announced that it would temporarily suspend additional tariffs on US-made vehicles from January 1 to March 31, 2019. Tariffs on vehicles imported from the US were reduced from 40% to 15%. According to China’s authority, this move was based on the agreement at the China-US summit meeting to ease their trade war. Following the announcement to reduce tariffs, Tesla lowered prices of its vehicles for China by 5-11%. The Model S and Model X are currently priced from approximately CNY 740,000 and 800,000, respectively. (As of late January 2019, CNY 1 = USD 0.15)|
Tesla to build a new plant and R&D center in Shanghai, China
|New plant||On July 10, 2018, Tesla signed an agreement with Shanghai authorities on a strategic partnership. Tesla will build a wholly-owned EV assembly plant and a battery factory in the Lingang area of Shanghai. The automaker broke ground on the Shanghai plant on January 6, 2019 and aims to start manufacturing the Model 3 by the end of 2019 and mass production in 2020. The Model Y, a new compact SUV to be launched, will also be produced at this plant. An initial production capacity is 250,000 units per year which will be raised to 500,000 units in three years.|
|The Shanghai plant will produce affordable grades of the Model 3 (RWD grades equipped with one motor). All Model S and X vehicles as well as higher priced grades of the Model 3 (Dual Motor AWD and Performance grades) will be built at the US plant for the worldwide market including China.|
|R&D Center||Along with the assembly plant, Tesla will set up the Electric Vehicle Research and Development Innovation Center in Shanghai to promote use of innovation technology.|
Tesla considering diversification of its sources for batteries in China
|Gigafactory 1 established jointly with Panasonic (Photo: Tesla)|
Tesla has been obtaining all batteries for its EVs from the Gigafactory in Nevada built jointly by Panasonic. However, the automaker suggests the possibility of sourcing batteries from multiple suppliers including Panasonic for EVs to be built at its Shanghai plant in China.
Tesla may source batteries for EVs in China from multiple suppliers including Panasonic
|Panasonic is currently the sole supplier of batteries for Tesla||In 2014, Tesla and Panasonic announced that they would jointly build a large battery plant called the Gigafactory 1 in the US state of Nevada. Panasonic invested approximately JPY 200 billion in the plant and plans to make an additional investment. Mass production of batteries began in 2017, but the plant’s operation rate had been stagnant as stable production of the Model 3 was delayed until mid-2018. After July 2018, Tesla was able to produce 5,000 Model 3 vehicles per week, and Panasonic was expected to raise its production capacity of the battery plant to a full capacity of 35 GWh (gigawatt means one billion watts) by the end of 2018.|
|Considering diversification of sources for batteries in China||In November 2018, Tesla’s CEO Elon Musk tweeted that he is considering sourcing batteries for EVs to be produced at the Shanghai plant from multiple suppliers including Panasonic. President Yoshio Ito of Panasonic Automotive & Industrial Systems said, “One company is not able to supply a huge amount of in-vehicle batteries alone. We will study various possibilities with Tesla.”|
|Panasonic is also enhancing its partnership with Toyota and will jointly establish a new company to produce prismatic batteries for EVs in 2020. Panasonic will transfer all its battery plants excluding a plant for Tesla (which is producing cylindrical batteries) (announced in January 2019).|
Navigate on Autopilot added; Summon autonomous parking feature upgraded
Tesla believes that fully automated vehicles will play a crucial role as full autonomy will improve safety and fuel efficiency, and provide low-cost, on-demand mobility for people who do not own a car. All Tesla vehicles including the Model 3 have been equipped with the hardware needed for fully autonomous driving capability since October 2016. The Enhanced Autopilot that offers the autonomous driving feature was made available in December of the same year via an OTA software update. In October 2018, Tesla added a new feature called the Navigate on Autopilot that guides a vehicle from a highway’s on-ramp to off-ramp, including suggesting and making lane changes, navigating highway interchanges, and taking exits. In December 2018, the Summon autonomous parking feature was upgraded.
Additional features for the Autopilot
|Navigate on Autopilot||In October 2018, Tesla announced it would introduce a new feature for the Autopilot called the Navigate on Autopilot for US customers who have purchased the optional Enhanced Autopilot or Full Self-Driving Capability. The feature will be introduced in other markets in the future pending validation and regulatory approval.|
|This is an active guidance feature that, with driver supervision, guides a vehicle from a highway’s on-ramp to off-ramp, including suggesting and making lane changes, navigating highway interchanges, and taking exits. While initially the feature requires drivers to confirm lane changes using the turn stalk, future versions will allow customers to waive the confirmation requirement if they choose to. Until truly driverless vehicles are validated and approved by regulators, drivers are responsible for and must remain in control of their vehicles at all times.|
|Summon||In December 2018, Tesla was ready to upgrade the Summon autonomous parking feature. The upgraded Summon will be available for all the Tesla vehicles produced in the past two years with the Autopilot hardware V2+. According to CEO Elon Musk’s tweet, this feature enables the vehicle to autonomously drive around a parking lot, find an empty spot and park itself in the spot. If the user holds down the Summon button on the Tesla app, the vehicle will drive to the user’s phone location and follow him/her. The user will also be able to drive the vehicle from his/her phone remotely if the vehicle is in line of sight.|
Sales Forecast by LMC Automotive: Tesla's sales to achieve 440,000 units in 2022
（LMC Automotive, Quarter 4, 2018）
According to LMC Automotive's sales forecast (Quarter 4, 2018), Tesla's global sales in 2019 are expected to be 317,788 units, up by 46.6% from 2018. It is expected that the Model 3 will be the automaker’s highest selling vehicle globally throughout the forecast horizon. The Model 3 will be followed in 2020 by the Model Y, a compact premium SUV. A roadster and pickup will also be launched at some point in the future, with the roadster set to cost in excess of US$200,000, according to Tesla. While much of the increase will come from the US market, China is also expected to generate strong growth through 2025, aided by localized build of the Model 3 and Model Y at a soon-to-be-built plant in Shanghai, which is likely to come on stream in 2020. LMC Automotive forecasts that Tesla’s global sales will rise gradually after 2020 and reach 439,840 units in 2022, up by 38.4% compared to 2019.
In the US, Tesla’s sales are projected to grow to 194,921 units in 2019, up by 26.2% year-over-year (y/y). While the automaker’s sales will decrease by 5.4% y/y in 2020, its sales are expected to rebound after 2021 and achieve 217,410 units in 2022, an 11.5% increase from 2019.
The US is Tesla’s largest market, accounting for more than 70% of the company's sales in 2018, but its sales ratio will gradually decrease as the number of Teslas sold in Canada and China increase. In 2022, the US sales ratio is expected to fall to 49.4% while those of Canada and China will rise to 11.9% and 10.6%, respectively.
In China, Tesla has signed a preliminary agreement with the Shanghai government to build a plant in the city – this would be the largest ever foreign-financed manufacturing project in Shanghai. The first vehicles are slated to roll off the production line within about two years. It will take a further two to three years for the factory to reach its full capacity of circa 500,000 units annually. Tesla also plans to build an EV development and innovation center in Shanghai, which will form an integral part of its global research and development activities. LMC Automotive expects that Tesla’s sales in the country will grow to 21,006 units in 2019, up by 28.4% y/y. The company’s sales are projected to increase steadily after 2020 and achieve 46,638 units in 2022, up by 122.0% compared to 2019.
Tesla's sales forecast (LMC Automotive, Quarter 4, 2018)
Source: LMC Automotive "Global Automotive Sales Forecast (Quarter 4, 2018)"
*The table above shows data for selected countries, so the total of the countries in the table do not match the Tesla Total.
(Note) 1. Data indicates figures of only small-size vehicles, including passenger cars and light commercial vehicles with a gross vehicle weight of less than 6 tons.
2. All rights reserved. Reproduction of any data requires the permission of LMC Automotive.
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