- Tesla Motors
Tesla unveiled its mass-market Model 3 vehicle in Los Angeles last week.
It was an exceptional reveal: Nearly 300,000 preorders have been placed for the $35,000 car, which the company says can do zero to 60 mph in six seconds and get over 200 miles on a charge.
The car looks pretty sharp, and it has already proved itself a hit with Tesla’s cult-like followers.
This has all led some analysts and industry followers to conclude that General Motors should throw in the towel on its one long-range, mass-market electric vehicle, the Chevy Bolt, which will hit the streets this year.
There’s no question that the Model 3 has a more arresting design than the Bolt, but both cars are aiming to provide similar utility – and GM’s commitment to beat Tesla to market by a full year (at least) shouldn’t be discounted.
But GM has something else going for it in the coming battle with Tesla.
It doesn’t need to make money on the Bolt.
Tesla, by contrast, must make money on the Model 3.
Just one problem …
Unfortunately for Tesla, it isn’t likely to make as much money on the Model 3 as it can on its current vehicles, the Model S sedan and the Model X SUV. Both usually sell for about $100,000, and if Tesla weren’t pouring money back into the company, the two could be generating double-digit profit margins.
Margins are notoriously slim in the mass-market segment, while they’re fattest on the large pickup and SUV front. This is where the bread of big automakers like GM and Ford is buttered. With midsize passenger cars, they barely make any money at all.
So let’s say that Tesla manages to book sales on something like 300,000 Model 3’s by 2018-2019, by delivering them all to customers. If Tesla can make $5,000 a vehicle, higher than what is typical for midsize sedans, then the company will make about $1.5 billion.
Tesla really needs to do better than this. Its cash burn is now something on the order of $400 million a quarter, according to The Wall Street Journal, and with $1.2 billion in cash on the balance sheet as of the fourth quarter of 2015, it can’t sustain that burn rate for an entire year. The Model 3 preorder (those 300,000 bookings all come with a $1,000 deposit for a total of about $300 million raised so far), however, will buy it an extra quarter, at that rate.
Tesla also projects that it will turn a corner on profitability by the end of this year or the beginning of next year, once the costs of launching the Model X and of building the huge Gigafactory battery plant in Nevada have ebbed. Elon Musk and his team are looking forward to banking more of the high transaction prices that the luxury vehicles bring in.
No worries in Detroit
GM doesn’t have to worry about any of this because it’s already just breaking even on sedans but raking it in with pickups and SUVs. As long as gas prices don’t spike, that situation should persist. And the carmaker has about $23 billion in cash on its balance sheet.
- LouLouPhotos / Shutterstock.com
This sets up a nightmare scenario for Tesla. The Model 3 already looks as if it will be very successful – the most successful electric vehicle in history, based on preorders. But the cruel economics of the auto industry will make the Model 3 Tesla’s least profitable vehicle. Of course, it will still have to build the Model 3, and it may even have to carve into Model S and Model X production to bring the Model 3 in on schedule.
And while the Model 3 may capture the largest chunk of the affordable-electric-vehicle market, Chevy isn’t going to sell zero Bolts. Furthermore, GM can deeply discount the Bolt if it wants to. And GM can much more easily manufacturer the Bolt at scale worldwide, given its well-established European and Chinese businesses.
Tesla has until now been in the position of having the name-brand electric-car space all to itself. With the Model 3 debut, the company has demonstrated that the Tesla market is bigger than anyone might have thought (the preorders will most likely exceed total EV sales for all of last year by a factor of three).
But Tesla won’t be able to completely rewrite the rule book for the auto industry. And the bottom line is that the mass market is tough for a reason: It’s hard to make money if your competition doesn’t always have to.