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How Exactly Can Tesla Motors Inc (TSLA) Keep The Model 3 at $35,000?

Tesla Inc (TSLA)

Tesla Motors Inc Elon Musk has confirmed that the Model 3 will cost $35,000 in line with his earlier promises. Of course, there are options that could drive up the price up from $35,000 possibly all the way to $70,000. However, he has noted that that $35,000 sticker price was not a gimmick and that if you buy the car without options, you’ll still be buying an essentially great car. Yet, most people want to know how Tesla plans to build and sell the Model 3 at $35,000 before tax incentives.

Tesla Motors Inc (TSLA) Model 3

At that $35,000 sticker price, Tesla must find ways to reduce the cost of producing the car enough to keep its promise to almost 400,000 people who have trusted Musk and his firm with $1000 each on deposits for the car.

Here’s how Tesla Motors plans to maintain the $35,000 tag

The first way Tesla could keep the cost of the car low is to use less expensive materials. Instead of the expensive aluminum body that it uses in the Model S and Model X the firm has hinted that it would use a mix of different metals in the body of the Model 3. Few would have cared what kind of body the Model 3 had; the EV is cool enough at $35,000 and the other great features that were teased about during the unveiling would make the car worth every dime to most buyers.

The problem however, is that CEO Elon Musk has boasted that the Model 3 will be able to go 200 miles on a single charge. Tesla is not building the Model 3 fully with an aluminum body (which could have reduced the weight of the car); hence, the firm is left with working around the battery, other components, and the coefficient drag of the vehicle to keep the $35,000 sticker price and still deliver 200 mileage on a single charge.

Elon Musk has tweeted that that the Model 3 will have a drag coefficient of 0.21, which would bless the Model 3 with the title of the most aerodynamic high-volume production car ever made. The Model S and Model X are among the cars with the lowest drag coefficient in the market at 0.24. However, the Model 3 has a compelling reason to obtain the lowest drag coefficient if Tesla must deliver on its promise on price and performance.

Interestingly, some revelations have emerged on how Tesla Motors might be able to reach the drag coefficient of 0.21 on the Model 3. According to Ales Alajbegovic of Exa Corporation Tesla is using turbine-shaped wheels and the smooth, grille-less front to reduce drag. He says, “Tesla uses Exa’s PowerFLOW digital simulation software in-house to design its cars. We don’t see the process, but by analyzing the cars that Musk unveiled at the end of March, we can see where Tesla has innovated”.

Battery costs are falling much faster than imagined

Tesla Motors solved one of the majors that never allowed electric vehicles to graduate from being an idea to a reality – Range Anxiety. The firm was able to cramp enough power into lithium-ion battery, fix the battery under a car, and then juice up the car to make 240miles on a single charge. Tesla was able to get its cars to go that far by a mix of engineering smarts that includes aluminum body (much lighter than steel) and reducing the coefficient drag on the vehicles.

Another factor that could make it possible for Tesla to maintain the $35,000 sticker price is to find ways to reduce the cost of the battery. Tesla is building the Gigafactory in the Nevada desert in the hopes of enjoying better economies of scale when the Gigafactory is fully operation. About 20% of the Gigafactory is already operational and industry prices of the Lithium ion used in the batteries that power electric cars are falling much faster than expected.

New insights about the dropping price of Lithium-ion cells were revealed during a conference call among UBS financial analyst Colin Langan, former GM electrification expert Jon Bereisa, who is now president and CEO of Auto Lectrification, and Jeff Evanson, head of Tesla’s investor relations group who called in much later.

You can read the more about the conference call here. However, the main points of the conference call were that Jon estimates that battery packs that will be used in the Model 3 will costs at least $260/kWh and that the Model 3 might cost much more than $35,000 because of extra sensors, faster acceleration system, lack of scale and aluminum body among others. He contends that GM’s battery pack in the Chevy Bold will cost $215/kWh because GM is sourcing the cell at-cost from LG.

However, Tesla’s Jeff Evanson begs to differ with the estimates. He  says,  “Model S’s all-in pack cost today is already <$190/kWh and that the Model 3 will have a battery size below Jon’s estimate of 60kWh.”

Bereisa thinks the cost of Lithium-ion cells to be between $133 per kWh to $155 per kWh by 2025. However, 5 years ago, very few people would have believed that battery packs would currently cost less that $300 per kWh. 2009/2010 estimates of the Nissan Leaf and Chevy Volt placed the cost of the first packs between $600 and $1200. Now, the sharp drop in current battery packs suggests that Tesla growing optimism about drop in battery prices is spot on.

Should Elon Musk consider running Apple?

While we are on the subject of Tesla Motors, the visionary leadership of Elon Musk, his doggedness to pursue his dreams against all odds, it might not be too off the mark to talk about Apple Inc. What does Tesla Motors and Apple have in common? Both firms started out with “crazy” ideas, they turned ideas into realities, and they silenced critics with their resounding successes. The major difference between both firms though is that one is on the verge of breakthrough to mass-market success (Tesla) and the other is on the verge of losing its shine in the eyes of investors.

Apple dismal earnings wiped off about $47B from its market cap, that’s enough money to buy Tesla – at least before Model 3 came into the picture. Apple has simply lost the Steve Jobs effect and I posit (I could be wrong though) that Apple could benefit from the visionary mind of Elon Musk at the helms while Tim Cook does what he is best at doing – running operations.

Apple is reportedly building iPhone on wheels with its Project Titan but I’m barely optimistic that Apple can deliver an insanely great car that could rival Tesla. Tesla on other hand could use some money (which Apple  has) to fund expansion plans and deliver 400K Model 3 before potential buyers start running out of patience. Of course, Tesla won’t be open to buyout talks from Apple, but dangling Apple CEOship before Elon Musk could lead to a merger (kindoff). I know it is unthinkable but it could make news that both Tesla bulls and bears would find hard to ignore.

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.