NEW YORK (Reuters Breakingviews) - Elon Musk is firing up the engine for a battle with short sellers. The Tesla chief executive is finally selling Model 3s for $35,000 a pop – and shutting most of the firm’s stores to pay for it. That means it will soon be clear whether he has indeed built the profitable mass-market electric-car maker that he has long promised, or a business fast running out of juice as his Wall Street foes contend.
Demand has been slowing in the United States for the pricier versions that first went on sale in mid-2017. Even at the tail end of the peak, though, Tesla overall only managed to eke out a 3.2 percent pre-tax profit margin on an average Model 3 sales price of about $59,000. Expanding its availability to Europe and China should help. But Musk’s goal has always been to make the lower-priced vehicle the mainstay of the company’s portfolio.
That entails cutting enough production costs to be able to hit Musk’s gross margin target of some 20 percent without sacrificing too much performance or quality. As the specs accompanying Thursday’s announcement show, buyers will already have to accept a battery with a top distance, at 220 miles, almost a third shorter than that of the top-of-the-range model.
Musk is already talking up just how successful he thinks Tesla vehicles, led by the cheaper Model 3, will be. In a podcast a couple of weeks ago he said he reckons sales could hit 1.5 million in 2021 – and then double within two years. That’s even more optimistic than the estimates of his interviewer, Tesla bull and ARK Invest CEO Catherine Wood.
Tesla naysayers, meanwhile, are convinced not only that sales will prove far more disappointing, but also that the $35,000 car cannot turn much, if any, of a profit until battery costs fall.
Within a year, perhaps less, it should be clear which side is right.
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