Musk announces a $35,000 Model 3, closure of most retail stores, and a no-profit quarter
Three years after he promised to sell an all-electric Model 3 mass-market sedan for $35,000 before incentives, Elon Musk may finally be coming through. The Tesla Inc. chief executive announced Thursday the company will immediately start taking orders for the lower-priced, 220-mile-range version of the car, with the company website promising delivery in two to four weeks.
In a conference call with reporters Thursday, Musk also said the company won’t be profitable in the first quarter of 2019, as promised. He also announced a the widespread closure of most of the company’s retail outlets.
The company will move to an online-only system for car sales. Retail stores will be converted into galleries and information centers, Musk said. He didn’t say how many stores will close. Questioned about job cuts, Musk said “That’s not today’s topic.”
Ordering a car at Tesla requires a $2,500 prepayment, meaning the move could help the company preserve cash to help it pay off debts and meet current expenses. On Friday, Tesla must pay $920 million to bondholders, with an additional $183 million due on another bond issue in April.
Buyers will have the ability to “test drive” Teslas for up to a week and get a full refund if they’re not happy, Musk said. Although social media sites are rife with complaints from people waiting weeks or months for promised refunds, Musk said, “We’re going to make it super easy to get a refund, like, one quick refund.”
Tesla promised a $35,000 Model 3 in March 2016 and began taking refundable $1,000 deposits. Musk said the number of remaining reservation holders doesn’t matter. He said he has no idea how many $35,000 Model 3s the company will sell.
“I don’t know what the demand is,” he said. “We’ll see. We’ll find out.”
If Musk knows what the profit margin on the lower range Model 3 will be, he wouldn’t say. Asked that question Thursday, he said, “Yeah, we’re not going to talk about that. Next question.” In October, he said it would take six months to achieve a positive gross margin on a $35,000 Model 3.
Some analysts say the less-expensive Model 3 may be too little, too late. “If this model had come out when the Model 3 first launched and passion for Tesla was at its peak, shoppers might have given more latitude. But the expectations have been set and it’s likely going to be a tough sell moving forward,” said Jessica Caldwell, an analyst at Edmunds.
Though Musk promised last year to be profitable every quarter going forward, he said Thursday that “we do not expect to be profitable in the first quarter” because of “special charges” and the costs of sending cars to China and Europe. “There’s a lot going on,” he said. A profit in the second quarter is “likely,” he said.
Although Tesla is cutting back retail stores, Musk said the company plans a “significant increase in head count for service technicians.” The expansion of Tesla’s service network has not kept pace with increased Model 3 sales, leading to delays and customer complaints.
“My top priority this year is making service amazing at Tesla,” Musk said. According to a Musk memo to employees published by CNBC however, Musk said the increase in head count is planned for “next year.”
The CEO used his Twitter account Tuesday night to tease Thursday’s announcement. He continued teasing Wednesday, offering no details on the mystery. From the stock market’s opening Wednesday to the close Thursday, Tesla stock gained more than $18 a share, or about 6%, finishing at $319.88. In after-hours trading Thursday, the stock was down more than 3%.
The Model 3 news comes on the heels of a contempt charge filed against Musk on Monday by the U.S. Securities and Exchange Commission. The SEC says Musk violated the fraud settlement reached with the agency in September by tweeting false information about the number of cars Tesla plans to produce this year, and by sending the tweet without getting corporate permission first, as the settlement requires.
The settlement stemmed from an August 2018 tweet in which Musk falsely claimed he’d struck a deal to take Tesla private. The federal judge who will consider the contempt complaint has not yet set a hearing date but has ordered Musk to file a brief explaining himself by March 10.