Elon Musk's Great Model 3 Bait and Switch

The Tesla Model 3 was supposed to be the "entry-level" electric vehicle for the middle class, that "made it up in volume": leading up to the release of the Model 3, it was positioned as the people's EV that everybody could afford and that, once mass produced, would help Tesla generate cash and profits consistently. The car's relatively modest $35,000 price tag was heralded as one of its key selling points, low enough that Tesla could generate the volume needed to gain operating leverage from selling it to the masses. 

But as Elon Musk himself admitted this weekend on Twitter, selling a $35,000 Model 3 right now would cause Tesla to "lose money and die". 

So, instead of selling this mass-market vehicle, Tesla has focused on selling a more expensive version of the vehicle. A much, much more expensive version, in fact more than double the base price... and, if Elon Musk's Tweets this weekend are any indication, Tesla doesn’t have any near-term plans to start selling the vehicle at anything close to the $35,000 price tag that was initially promised anytime soon.

Instead, Musk was busy introducing yet another high priced variation of the Model 3, this time the dual motor, all wheel drive Model 3 that could run a price tag of just under $80,000.

As Bloomberg details, " Musk unveiled specifications for a faster and more powerful version of the Model 3 in a series of tweets over the weekend. It will cost $78,000, more than double the $35,000 base-model starting price discussed into the run-up before the electric car’s deliveries started last year. And that doesn’t include the Autopilot driver-assist feature."

The increasingly expensive configurations for the Model 3 are planned steps, if somewhat counterintuitive ones, toward Musk’s vision of Tesla Inc.as a mass-production player with vehicles affordable to a broader swath of buyers. The $78,000 sticker puts the electric sedan beyond reach of many consumers, and, by Musk’s own estimations, brings it closer to the realm of luxury cars.

Ever since the Model 3 has started being delivered, the price tag has done nothing but drift higher, fueling critics who have stated that the $35,000 price point once touted would not be achievable. Bloomberg continues: 

When Model 3 deliveries started in July, Tesla described the $35,000 price for a Model 3 with a standard battery with a 220-mile range before options or incentives. But its focus was on fulfilling orders for customers who wanted longer-range battery packs with faster charging, pushing the price up to about $44,000.

Tesla said in February a dual motor version would come at midyear and a standard battery pack would be available in late 2018. In a letter to shareholders earlier this month, Musk said that the company would begin offering new options such as all-wheel drive -- and a base model with a standard-sized battery pack -- once his factory in Fremont, California, reaches a production rate of 5,000 cars a week.

Only the expensive performance model was mentioned in Musk’s tweets this weekend. The company’s current business model and financial position -- it’s operating at a loss and has negative operating cash flow -- mean “that this is not the time for a $35,000 Model 3,” Tynan said in emailed comments.

And now, we have Elon Musk touting his new $78,000 model on Twitter, even stating that the price point was about that of a BMW M3. As Bloomberg notes, however, "a BMW M3 sedan has a starting manufacturer’s suggested retail price of about $66,500". Also, M3s are not exactly everyday cars for your average motorist. In fact, quite the opposite.

More bad news: Bloomberg cite an analyst who predicted that those waiting for a plain old, boring, boneheaded, and very much uncool base model of the Model 3 would likely have to wait for years.

The pricey version of the Model 3 is in keeping with Musk’s earlier practices with the Model S luxury sedan and Model X sport utility vehicle -- adding options and higher specifications to help generate cash that can be used to eventually build vehicles for mainstream buyers.

Shipping a minimum-cost Model 3 right away “would cause Tesla to lose money and die,” Musk said on Twitter. The company needs three to six months after achieving production of 5,000 units a week before it can ship a $35,000 Model 3 and survive, he said.

...

The profit is in the higher trims, Ivan Drury, senior manager of industry analysis at Edmunds.com, said by phone. “The idea that it’s supposed to be a car for everyone is kind of laughable,” Drury said. “Anyone who wanted a base model may have to wait years out.”

But wait, it gets worse: because aside from not getting the price point for the car that they were promised, potential Tesla customers also have another reason to give their Tesla purchase a second thought: insurance.

In an article published over the weekend by Clean Technica, the author details how a small dent in a front left fender of a Tesla - caused by hitting a parking sign that the car's cameras also somehow missed - ultimately cost the shocked owner nearly $7,000 to fix and replace. The author of the blog was stunned by the price tag:

I decided to file a claim and asked the body shop folks to coordinate the repair with my insurance company. After a few days without any meaningful updates, I asked my insurance company (Liberty Mutual) what was the hold-up. The claims specialist told me, “Well the shop’s estimate was a bit higher than we expected.” How much higher? “Nearly $7,000, of which $5,000 was labor.” I had heard that the Model S was expensive to fix, mostly due to its all aluminum construction. But the Model 3’s “simple design” and the planned use of steel over aluminum where possible was supposed to make things like this less complicated (and less costly). It turns out that there is still quite a bit of aluminum in the Model 3, as you can read about in articles like this one.

And the cherry on top: to replace the fender on the vehicle, there was a significant amount of the car's body that needed to be removed, racking up thousands of dollars in labor charges:

But more complicated and labor-intensive than the painting is the “R&I” — short for “Removal and Installation.” To repair this fender apparently requires removal and reassembly of much of the left side of the car, including all of the trim pieces, moldings, and the driver’s mirror, as well as the front bumper. And when you reinstall the front bumper, you also have to “aim” (re-calibrate) the front distance sensor. The repair also required disassembly of the rear seats in order to access (and disconnect) the high-voltage battery connectors. Apparently, they do this so as not to electrocute the folks working on the car (always nice to not kill anyone).

The insurance company balked at the estimate and sent their own adjuster. So a few days later, I got the news: the second adjuster’s estimate was not far off from the shop’s own appraisal. It was around $6,250 — about $500 lower than the original appraisal. So the insurance company approved the repair, and I had to wait a few more days for the shop to finish the work.

We can only guess that if baseline Model 3 orders ever do ship, customers will be equally as shocked by what should be soaring insurance costs, given the extensive amount of labor and cost involved with making such a small repair, for a company which was all about rolling out the next big thing while support and maintenance was only a casual  afterthought.

We also assume that Tesla will still be solvent by the time Tesla gets to shipping out the baseline Model 3 which in light of recent developments, is a very bold assumption.