American electric automotive giant, Tesla Motors Inc , unveiled its new electric car earlier this year, on the 31/03/2016. The Model 3 is their first vehicle truly aimed at the mass market, & it is a crucial part of any long-term success for the California based firm. CEO of Tesla, Elon Musk, has previously said that the company needs to sell 500,000 vehicles per annum to be profitable. Most of the vehicles sold will be Model 3s.
Doubts Raised Over Profitability of Tesla Motors Inc (TSLA)’s Model 3
Within just a few months after the Model 3’s unveiling, Tesla Motors Inc had received nearly 400,000 reservations (each reservationist paid a $1,000 refundable fee.) Musk described it as “the biggest product launch ever”, but it should be noted that the Model 3 is being sold at just $35,000 (before incentives), & some experts have expressed doubts over its profitability.
According an article published on Electrek in April 2016, the CEO of Fiat Chrysler voiced his doubts over the Model 3. Specifically, he said ““I am not surprised by the high number of reservations, but then the hard reality comes in … making cars, selling them and making money doing so.” Marchionne went on to say that he didn’t understand how Tesla could sell the vehicle at such a low price, & still generate a profit.
Tesla Looking to Utilize Economies of Scale
Tesla has made it very clear that they need to take advantage of scale of economies in order to make the Model 3 profitable (by slashing costs.)
Their new Gigafactory is central to this principle. A section on Tesla’s website gives more information on the benefits of their new Gigafactory, which is scheduled to open on the 31/07/2016. The post read “In cooperation with Panasonic and other strategic partners, the Gigafactory will produce batteries for significantly less cost using economies of scale, innovative manufacturing, reduction of waste, and the simple optimization of locating most manufacturing process under one roof. We expect to drive down the per kilowatt hour (kWh) cost of our battery pack by more than 30 percent. The Gigafactory will also be powered by renewable energy sources, with the goal of achieving net zero energy.”
However, if the EV manufacturer fails to generate a profit by lowering costs, they could increase the selling price of the Model 3. This is undesirable for Tesla, but the vehicle will be still a bargain, given its performance etc. Tesla Motors Inc’s stock is currently valued at $220.40 per share, giving the firm a market cap in excess of $30 billion.