Published on June 3, 2019 |
by Maarten Vinkhuyzen
3. June 2019 by Maarten Vinkhuyzen
Price policy for a product is a cross between justice and what the market can bear. If you are too kind to your customers, your shareholders will not be happy. If you squeeze every penny out of your customers, they will start delaying doing business with you. Next to these issues, there is the question of competitive pricing. What is the price of competing products? Established products may require a premium, new products often have to show price incentives.
Looking at China prices for the new Model 3 SR +, we can see aspects of this at work. With the penalties and retaliatory tariffs in Trump-induced trade war increasing prices by 25%, Tesla decided to be difficult on shareholders and loyal to customers. Some of the tariffs were paid out of the car's natural margin, the dividend pain in the trade war between the company (shareholders) and customers.
With the Gigafactory 3 product price, we see a decision based on various criteria. A lower price can give you a larger share of the market, a higher price will sell less product. The right price will sell as much as you can produce. Of course, it is difficult to predict what this price may be.
Another important criterion is the competitors' prices. In this case, top competitors are the locally produced Mercedes C-Class and BWM 3 series. In "Chinese Tesla Model 3 Price Crushes BMW 3 Series and Mercedes C-Class Prices," the Tesla offer is compared to these two models. Model 3 is a better value proposition for a slightly lower price. The goal is to steal about 250,000 customers from the competition.
The last, but not least, to consider is a margin decision. The production, when it is up and running in the new factory, is likely to be cheaper than in Fremont – thanks to a combination of assembly line improvements, a simpler model and lower labor costs. The cost of battery cells is probably slightly higher than in Fremont, California. For the sake of this argument, let's assume they are about the same in the network.
The US Model 3 SR + price is currently $ 39,900. This is probably just too low for a healthy margin. The imported Model 3 SR + costs in China about $ 54,600. Transport and import tariffs are included in this price. With the price of $ 47,500 half-way between the two prices, Tesla benefits the benefits of local production 50/50 between customers and shareholders.
Another aspect is that under the production frame, the production costs per car can be (much) higher than when the line runs at full capacity and at the end of the learning S curve. In Fremont, it was the reason to produce only the highest models in the beginning and accept big losses. In China, with a hopefully much shorter ramp phase, these base models are likely to be interrupted shortly, followed by an increasingly attractive margin.
When at full production and if the market does not ask for lower prices through low demand, this can be a very nice extra margin for Tesla – at a quantity of $ 1,875 billion.
The reality is never this rosy. However, for 2020, this could realistically result in an additional margin (higher than SR + produced in Fremont) of $ 250 million per quarter – less at the beginning of the year, more at the end. If the SR + gross margin in Fremont is 25%, the Chinese gross margin should be over 35%.
This is obviously a case of impending bankruptcy.