In a brutal earnings call last week, EV maker Tesla revealed that the company may have to push back a ramp-up of production of its Model 3 electric car by three months, into March of next year.
Originally, Tesla wanted to grow its production of the Model 3 to 5,000 units per week by the end of 2017. But the company, run by billionaire entrepreneur Elon Musk, has hit bottlenecks in manufacturing and won’t make that timeline. As of the end of the third quarter of 2017, Tesla had delivered just 222 Model 3 cars.
While Musk tried to downplay the adjustment -- calling it “a relatively small shift” -- the timing of the delay could have important implications, particularly when it comes to one key factor: the expiration of a significant federal tax credit. With the new timing, fewer Model 3 customers will be able to take advantage of the tax credit, and that could dampen future Model 3 sales.
The U.S. federal government has been offering a $7,500 tax credit for each plug-in electric vehicle sold in the U.S. starting at the beginning of 2010. But the credit begins to phase out when an automaker has sold 200,000 qualified cars in the U.S.
After an automaker has sold 200,000 cars, the full credit lasts through the quarter in which the limit is reached, followed by two quarters where half of the credit is offered, or $3,750. That’s followed by two quarters where 25 percent of the credit is offered, or $1,875.
Tesla could hit that 200,000th-car mark within the first half of 2018. According to Edmunds, Tesla has sold 132,303 cars as of the end of September in the U.S. Electrek reports a similar number -- 140,000 cars as of the beginning of October. A note from the analysts at Cowen and Company estimates that Tesla has shipped around 143,000 cars to date.
Considering the projections for how many Model S and Model X cars that Tesla now plans to deliver in the fourth quarter of 2017 and the first half of 2018, Cowen and Company predicts that Tesla could hit that 200,000-car mark by either the end of the second quarter of 2018 or the beginning of the third quarter of 2018.
Tesla could reach the 200,000-car mark even sooner, potentially at the end of the first quarter of 2018, though that estimate was made before the Model 3 production delay was announced.
The timing is important, because with the Model 3 manufacturing delay, many more Model S and Model X customers could now be in a position to use the remaining tax credits in lieu of Model 3 customers. If customers on the Model 3 reservation list -- who have only put down a refundable $1,000 deposit to get in line -- think they have little chance of accessing the credit, it could lead to some of them dropping off the list.
Given that the Model 3 is Tesla’s first mainstream-market model, offered at $35,000, those customers are likely to be more price-sensitive and keener to access the $7,500 tax credit. In contrast, the credit represents a much smaller fraction of the price of a $100,000 Model S or X.
Cowen and Company writes that it will be “interesting to see churn on the deposit base of Model 3 holders, especially as the timing to receive the car is elongated -- deposits today likely receive it at best in late 2018 but more likely 2019, a period in time when the buyer would be well past the ability to receive the $7,500 tax credit. [...] What does time and the lack of a tax credit do to demand elasticity?”
These estimates are also assuming that Tesla does indeed hit a production rate of 5,000 Model 3 cars per week by March of next year. Production estimates in general seem rather uncertain for Tesla right now. The company was somewhat quiet on its progress with another of its production goals: whether or not it would be able to grow that manufacturing rate even more to 10,000 Model 3 cars per week by sometime in 2018.
As Cowen and Company pointed out: “Management had one of the longest pauses we have heard in recent earnings calls when asked if they would achieve 10,000 units of Model 3 production per week in 2018, which was the team’s rhetoric just 3 months ago.”
A political factor is also at play causing uncertainty with the electric car tax credits. Last week, House Republicans released an early version of a tax plan that would kill the $7,500 plug-in electric car tax credit outright.
If House Republicans succeed in ending the tax credits, the timing wouldn’t be all that bad for Tesla, given that the company is likely going to start losing the credit next year. The timing is far worse for automakers that are just getting started selling electric vehicles.
Some are worried that the elimination of the tax credit could kill the electric car industry in the U.S. Indeed, for lower-priced electric cars, an elimination of the credit that could make up a fourth or fifth of the total price of a car may have a significant dampening effect on sales. In Georgia, EV sales crashed when lawmakers eliminated the state's $5,000 tax credit. If that's any indication, the outlook for mass-market EVs is not good.
Elimination of the federal tax credit could also lead to sales of electric cars persisting only in states that have their own strong subsidies like California. That would mean that states without EV subsidies could see even greater drops in sales.
Regardless of what happens with the tax credit, Tesla is laser-focused on trying to fix bottlenecks with the Model 3 manufacturing. The company has even pulled engineers from other divisions and shifted resources away from other projects.
Tesla originally planned to show off a prototype of an electric semi-truck in September. But the company said it needed to push that event back first to late October, and now to November 16, due to the need to work on Model 3 manufacturing.
