A decade ago, Tesla CEO Elon Musk envisioned building an electric car that would be both thrilling to drive and affordable.
Does the Model 3 car that Musk handed off to the first 30 customers last Friday meet that description? Almost. But Tesla still has more work to do to improve affordability.
The basic version of Tesla’s Model 3 car starts off at $35,000 (before incentives), which is the average transaction price for a car in the U.S. today. But the Model 3 can quickly run up into the $50,000 range if a customer adds on a few of the extra features. The fully loaded version will cost $57,000.
If a customer wants a paint color for the Model 3 that isn’t black, that’s an extra $1,000. A version with a longer battery range adds on an extra $9,000. Autopilot technology (Tesla’s self-driving car tech) will cost an extra $5,000 to $8,000, depending the level of sophistication.
Back in Tesla’s early days, when the lower-cost car had the code name “Bluestar,” Musk talked about making a car in the price range of $20,000 to $30,000. At that price, add-on features would probably deliver a transaction cost around $35,000 off the lot.
The reality is that many Model 3 customers will be paying much more than $35,000 for their cars (which, for the enthusiastic early adopters, is still probably acceptable).
The Model 3 is a big deal for Tesla and the electric-car industry in general. However, it shows how Tesla is still constrained by current battery costs, and how the electric car industry is still in a stage of transition.
The batteries that went into the first 50 Model 3 cars were made at the Gigafactory as planned. But the Gigafactory doesn’t appear to be operating at scale yet. It likely won’t be for quite some time.
The timing on this is critical. The Gigafactory (at scale) is supposed to lower Tesla's battery costs by a third. Previously, Musk said Tesla could not make the Model 3 at a reasonable price without the Gigafactory.
Part of the battery cost improvements will come from simple economies of scale. Part of the savings will come from vertical integration and sourcing chemicals from local sources. Tesla is also looking to lower costs by using a larger battery form factor in the Model 3, and even potentially a new chemistry.
It's unlikely that Tesla has achieved these cost savings in the as-yet-unfinished, still low-volume factory. Initial battery production at the Gigafactory started just six months ago in conjunction with Panasonic. Those batteries were mostly for Tesla’s grid projects.
At the Friday event, Tesla was unusually reticent about the battery specs for the Model 3. At the current juncture, the company seems only to want to talk about range in very general terms.
But although the Gigafactory is still a work in progress, Tesla is at the forefront of lithium-ion battery improvements. The company recently claimed a 35 percent cost reduction at the Gigafactory, even at limited production volumes.
GTM Research and Wood Mackenzie predict that lithium-ion battery costs will fall by around 65 percent between 2016 and 2030.
By the middle of the next decade, electric cars are likely to be cheaper than gasoline cars in the U.S. and Europe. (This is the reason why so many analysts are revising their electric car sales projections upward.)
Tesla's Model 3 is priced at $35,000 before incentives. That's good for early buyers. However, Tesla will lose its eligibility for the federal tax credit after it delivers 200,000 cars. It will hit that number fairly quickly.
State incentives could play a strong role in reducing the sticker price, but that will only help customers in states with aggressive subsidies such as California.
As Bloomberg points out, Tesla’s standard and long-range batteries for the Model 3 have already made big strides. The long-range Model 3 has the cheapest price per mile of range of any electric car out there.
Tesla will likely continue to lead in battery performance and cost improvements. But it's still at the beginning of a long road to true mass-market affordability.