After reading the title, I believe that some of the Model 3 owners who received their cars in September have already clenched their fists. But before you act, let me say something. Actually, I can really understand your feelings of being told “there will be no price reduction in the near future” and then being “cut off” in October. However, I must say that Model 3 will not reduce its price again this year, and this is definitely not to incite you to buy a car before the end of the year or to make baseless speculation. The reasons behind this will be explained in the following paragraphs.
Before I explain the reasons, I want to say “Welcome to the family” to the Model 3 owners who received their cars in September. As for Tesla, price reduction is inevitable. As the saying goes, “you can never buy the cheapest Tesla”. Since entering the Chinese market, Model 3 has gone through six price reductions. Let me briefly review them for you.
The Price Reduction History of Model 3 Over The Years
On February 1, 2019, Model 3 was launched in China with a long-range version of rear-wheel drive. At the time, there were three imported models for sale:
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Long-range RWD version for CNY 433,000;
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Long-range AWD version for CNY 499,000;
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Performance version for CNY 560,000.
At that time, Model 3 neither had new energy subsidies nor enjoyed the exemption of purchase tax policy, and the basic version of Autopilot was not included as a standard feature either. The cheapest long-range RWD version of Model 3 was priced at 500,000 CNY. Considering the product positioning of Model 3, this price can be said to have no relation to the cost-performance ratio.
Therefore, those who bought Model 3 at that time can be regarded as the ones who made contributions and sacrifices for “accelerating the world’s transition to sustainable energy” in terms of money.
“The Beginning”
One month later, Model 3 saw its first official price reduction:
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Long-range RWD version for CNY 407,000 (-26,000);
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Long-range AWD version for CNY 455,000 (-44,000);
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AWD high-performance version for CNY 516,000 (-44,000).
Tesla explained that it decided to close most of its offline stores at that time and pass on the cost savings to customers. There was nothing wrong with this explanation and the purpose was good, but customers who bought Model 3 just one month ago couldn’t help feeling disappointed because there was no buffer notification before the price reduction. And the sentence “pass on the cost savings to customers” was also seen by old car owners as “pass on the cost savings to later customers”.### Once there’s the first time, there will be the Nth time
However, the price of Model 3 went up again afterwards, as the effect of closing the stores was not as expected, and the official raised the price a bit. In the following three months, the official made multiple adjustments, including but not limited to making Autopilot a standard feature, launching the standard range upgrade version, and giving away FSD for all vehicles.
In the rest of 2019, in addition to two official price cuts, Model 3 was finally embraced by our new energy policy – exemption from purchase tax and enjoy new energy vehicle subsidies.
In 2020, Model 3 has had three official price cuts, with the latest one during the National Day, when the domestic standard range version dropped to 249,900 and the rear-wheel drive long-range version dropped to 309,000. This is also the longest interval between price cuts for Model 3 in the past two years, with 5 months having passed since the last price cut.
As usual, Tesla did not make any notification before the price cut, and some users who just picked up their cars before October experienced the feeling of being “Tesla leeks” while still fresh. Discussions about Tesla prices on the Internet have become a hot topic again. And during this period, there is a question that many people care about – will Model 3 prices continue to drop?
Yes, but it is unlikely to happen this year.
The price of Model 3 will definitely continue to decrease, but I think there will be no official action this year. And as for why the price of Model 3 continues to drop, let me first explain my understanding.
Tesla does not do business at a loss when it comes to selling cars. As early as 2012, when Model S was launched, Tesla’s gross profit per vehicle was close to 20%, and in the most recent Q2 financial report, Tesla’s overall gross profit margin per vehicle was 25.4%.
There is no reliable information on the gross profit margin per vehicle for the Chinese market’s Model 3, but what we do know is that Model 3 has been pursuing the localization of components in all aspects since it was manufactured in China, and one of its main objectives is to reduce costs.
Using Contemporary Amperex Technology Co., Ltd.’s LFP battery in Model 3 has saved a lot on its material costs, and this is only the power battery. In all aspects, Model 3 is rapidly advancing towards localization.
A recent report by Zhongtai Securities Research Institute shows that the material cost of domestically produced Model 3 is only 126,300 yuan. Although the numbers cannot be verified, we can speculate that the gross profit margin of domestically produced Model 3 is very considerable, and there is still a lot of room for price cuts.
Then why is there no hope for it to happen this year?On October 8th, Elon sent an email to all Tesla employees, with the core content of motivating everyone to work hard to achieve the goal of selling 500,000 cars annually, and mentioned that Q4 will be the focus of Tesla to achieve this goal.
Tesla’s delivery data for the first three quarters of 2020 were as follows:
- Q1 88,400 units
- Q2 90,650 units
- Q3 139,300 units
The cumulative delivery for the three quarters is 318,350 units. To reach the target of 500,000 units, 181,650 units are still needed. This is not a small number, and it’s more than the sum of Q1 and Q2. Therefore, Tesla is eager to sell as many cars as possible in Q4.
If this is the case, then shouldn’t the domestic Model 3 reduce its price to pursue delivery volume by the end of the year?
There is some truth to this, but the key issue is not here.
In Q3 of this year, Tesla’s delivery volume increased significantly compared to the first two months, one important reason of which is that Q1 and Q2 were severely affected by the pandemic. During this period, the Fremont factory was also forced to shut down for a period of time in response to government requirements. The factory was only in operation for about 4 months in the first half of the year.
However, due to the shutdown of the factory, Tesla’s production capacity was seriously affected, which was reflected in the cumulative sales of 33,164 units of Model 3 in Europe in the first half of this year.
Because the Berlin factory in the European region has not been built yet, all Tesla vehicles in the European region are produced in the United States, and the Model 3 destined for Europe is produced by the Fremont factory. In May, only 2,278 Model 3s were delivered in Europe, while in June, this number increased to 7,224. Correspondingly, the monthly delivery volume of Model 3 worldwide has also continued to increase in recent months.
On the other hand, the Model Y, which is still ramping up production capacity, is also affecting the success or failure of the annual delivery volume of 500,000 units. Its global delivery volume in July and August were 7,542 units and 8,052 units respectively, which contributed 15,594 units to Q3.
In short, the key to achieving the goal of 500,000 units currently lies in production capacity.
This is the last price reduction of the year.Talking about the Chinese market again, the price reduction in October has already had a good incentive effect, and the actual sales data will definitely show certain lag, if the price is reduced again in November or even December, it will not have much impact on Tesla’s global deliveries for this year.
In the short term, for consumers who are planning to purchase a car in the near future, they definitely do not want to see another price reduction, especially a continuous one, unless it is for a specific sales target, which, combined with the previous section, leads to another important deduction that Tesla will not reduce prices again this year after the October price cut.
Prediction on Price Reduction
As mentioned earlier, price reduction is certain. Since it is predicted that there will be no price reduction for the rest of the year, when will it happen next year and what would the new price be?
Let’s talk about the price first. The price of Model 3 long-range rear-wheel drive version is currently RMB 309,900. As long as the price is below RMB 300,000, consumers can enjoy a subsidy from the government of RMB 22,500, which is equivalent to “buy one, get two free”, a great deal.
For Tesla, reducing the price by RMB 9,000 is not a problem at all. After the reduction, the long-range rear-wheel drive Model 3 will be sold for less than RMB 280,000, which, needless to say, will attract a larger customer base.
However, the problem is that after the price cut for the long-range rear-wheel drive version, the price difference with the standard range upgrade version is only less than RMB 30,000. If we look back at the history of price drops, we can see that Tesla has always been carefully controlling the price difference between the long-range rear-wheel drive and the standard range upgrade versions, with a minimum difference of RMB 40,000.
This consideration is to prevent “self-competition” and maintain the proper price difference between target customers for the standard range and long-range versions. Therefore, once the long-range version is reduced, in order to maintain the price difference, it is highly likely that the official price of the standard range upgrade version will also be reduced by RMB 20,000 to RMB 30,000.
So, for the next round of price reduction prediction, I think the long-range version will drop to slightly more than RMB 270,000 and the standard range upgrade version will drop to slightly more than RMB 220,000.
Now let’s talk about the timing. The main purpose of price reduction is to promote sales, so if the price reduction can be timed at the beginning of a certain time period, the impact on sales during that period will be most clearly reflected in the financial report. Model Y, which will be domestically produced, will start deliveries in the first quarter of next year. Therefore, my prediction on the timing of the next price reduction takes into account the quarter and the delivery of Model Y. Here is my prediction:
If the pricing of domestically-made Model Y is relatively high and the price range between it and Model 3 is significant, the discount point should be at the end of the first quarter of next year. This is because the price reduction does not have much impact on the demand for Model Y, and as Model Y has just been launched, the Shanghai factory will definitely need more resources to ensure production. At this time, an increase in Model 3 demand will bring greater pressure.
However, if the price of the entry-level version of Model Y is around 350,000 RMB or even lower, then the current price of 309,900 RMB for the Model 3 rear-wheel-drive long-range version will to a certain extent “hurt itself”. In this case, the discount point should be earlier than the launch of Model Y. If this is the case, I predict that the next price reduction will be in January of next year.
What? Someone said the entry-level version of Model Y will be priced at 275,000 RMB? I don’t think it’s possible next year, maybe in 2022.
The above is my series of shallow speculations and analysis on the price reduction of Model 3, which is only my personal opinion for everyone’s reference.
Thoughts on price reduction
Because of the successive official price reductions in the past two years, a “leek culture” has emerged among Tesla users. For example, Han Lu, a well-known early Model 3 high-performance car owner, not only had a high car price but also had to pay the purchase tax. Moreover, the assembly level of the Model 3 at that time was visibly inferior to that of the domestically-made Model 3 today. The depreciation after one year is almost halved.
The first two owners of the imported rear-wheel-drive long-range version of the company’s two cars also spent nearly 500,000 RMB on their cars back then. Although I cannot personally experience the feelings of these veteran car owners, I think they are definitely not proud of making a contribution to “accelerating the world’s transition to sustainable energy”. However, buying a Tesla, becoming a veteran car owner, or “leek car owner”, is really only a matter of time, as stated in the second paragraph, you can never buy the cheapest Tesla.
However, if we look at it from another perspective, Model 3 is not a traditional car in the traditional sense, it has very strong electronic product attributes, and electronic products update quickly and prices drop quickly. If we look at it from this perspective, Tesla’s “leek culture” is not that difficult to understand.
As you can see, the iPhone is updated every year, and last year’s phone has already depreciated significantly by this year. Although Apple rarely lowers iPhone prices officially, third-party dealerships on e-commerce platforms will lower prices appropriately almost every month. Unlike Apple, Tesla is its own “dealer” and adjusts prices on its own.I believe Tesla’s pricing strategy will continue, and the models of Model 3 and other Tesla products will slowly decrease in price during their lifespan. Eventually, they will be replaced by new models, which will start at a price point similar to before the price reduction. This cycle will continue, just like with smartphones. Although the development of cars requires much more content than that of smartphones and they won’t be replaced every year, the speed of Tesla’s new car iteration is undoubtedly faster than that of traditional automakers.
However, I also thought about how even I, facing the fact that the car I bought for hundreds of thousands of dollars may depreciate by tens of thousands of dollars in a few months, would still feel uneasy. The rate of depreciation is exaggerated when compared to any other car in the same price range. Although I can afford to buy a new iPhone every year, I certainly can’t change a Tesla car every two or three years.
Yet, nobody is forced to buy a Tesla. At each step, consumers have the power to choose whether or not they want to buy, just like when buying a smartphone in a constantly updated market.
And while writing this, I also thought of a question: Currently, only Tesla is actively adjusting prices like this in the car market, but this strategy has indeed brought a significant impact to its competitors and has been effective. So, will Tesla’s “leek culture” spread to more automakers, just like its car-making philosophy?
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.