December 19th, 2019 by Steve Hanley
The price of Tesla Model 3 sedans manufactured at the Shanghai gigafactory could drop by as much as 20% sometime next year, according to a Bloomberg report republished by the Los Angeles Times. The market for electric cars in China has been in free fall since the government slashed incentives designed to encourage people to buy one instead of a conventional car with a gasoline or diesel engine. Though, Tesla Model 3 December sales are expected to be relatively strong in the country.
The price of a locally manufactured Model 3 today is 355,800 yuan, equivalent to $50,800. A price cut of 20% would lower it to around 300,000 yuan ($42,800). To put that into perspective, the new P7 sedan from Xpeng will start at 270,000 yuan ($38,520) and the least expensive NIO ES6 SUV is 358,000 yuan ($51,074).
“People shop on price. This will help grow the market share of electric vehicles,” Bill Russo, founder of Shanghai-based consulting firm Automobility Ltd, told Bloomberg. “This will also force the competing products to make adjustments.”
And how would Tesla lower the price of the Model 3? By using more local components, according to people with knowledge of the situation. Fewer imported parts would mean paying fewer tariffs. And then there is the price of batteries. LG Chem will supply the battery cells for the first Model 3s that roll off the assembly line in Shanghai, reportedly because it was the only supplier with a factory in China that could meet Tesla’s battery specifications. But CATL is said to be waiting in the wings to supply batteries for Chinese made Teslas. Is it possible its batteries would cost the company less than the ones provided by LG Chem? That is pure speculation, but people with inside knowledge suggest the lower prices would probably happen after the middle of 2020.
Finding a battery supplier who can deliver less expensive batteries could go a long way toward making cuts to the price of the cars possible. The scale of the price cuts and the timing could change depending on market situations, the sources say. A Tesla representative in China declined to comment.
The upheaval in the Chinese EV market is largely due to the government’s decision to halt subsidies for cars with limited range — some as low as 80 to 150 miles. The Tesla Model 3 certainly does not have a range problem. And last month, the government certified that the Shanghai-made Model 3 is eligible for a rebate of as much as 24,750 yuan ($3,530, so it’s not like subsidies have dried up entirely. EV buyers also get significant special treatment in China, starting with immediate issuance of license plates. Buyers of conventional cars in China’s congested cities often have to wait months or even years before they can register them.
How price reductions will affect the profitability of Tesla’s Chinese operations is unclear, but the company seems to have a good understanding of the Chinese market and its competitors, both foreign and domestic. It has every intention of building a compelling electric car that is price competitive with the cars manufactured by its competition. The danger is that by signaling its intent to lower prices in the future, it will dampen demand for its cars today. Additionally, Tesla has another option other than dropping the price — it could achieve high margins (or “super margins”) on Chinese Model 3s. See this story for more: “The Chinese Tesla Model 3 “Super Margin” (Forecast).”
Negotiating the waters in foreign countries is tricky stuff, but there is little doubt Tesla is up to the task.
Images courtesy Tesla
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