As Tesla tax credits disappear, will Model 3 deposit-holders stick around?
Dennis Dorfman was hoping to replace his Toyota Prius with something sexier.
When Tesla began taking reservations for the new Model 3 electric sedan in March 2016, Dorfman got in line at a Tesla retail store near his Calabasas home. He waited hours to lay down a $1,000 refundable deposit.
That was two years and three months ago. He’s still waiting for his car. And now he’s worried that he might not get a $7,500 federal tax credit that was key to his purchase decision.
“I’m frustrated,” Dorfman said. “A lot of people like me are frustrated.”
You’d think Tesla’s recent news would hearten him: The company announced Sunday it had managed to manufacture 5,000 cars in the last seven days of June, after months of what Chief Executive Elon Musk called “production hell.” On Monday, the company said it produced 28,578 Model 3s over the last three months.
Dorfman is not impressed. He bought into Musk’s promotion of the car, he said, as a $35,000 vehicle for the masses. The federal government’s $7,500 tax credit for buyers of electric cars would lower the price to $27,500.
But no $35,000 Model 3 exists today. You can’t touch one for under $50,000. The company’s website says that the lower-range $35,000 model won’t be available for six to nine months. Dorfman said he no longer trusts Tesla’s timelines.
His biggest concern: federal subsidies will run out before he gets his Model 3. “If I don’t get the full rebate, I won’t buy the car,” Dorfman said.
It’s possible he won’t get it. Makers of all-electric cars and their buyers qualify for the $7,500 subsidy until the company sells a cumulative 200,000 vehicles in the United States. At that point, the full credit continues for a calendar quarter. For six months after that, the subsidy is reduced to $3,750. The next six months, $1,875. Then it disappears.
The only other company that is close to the 200,000 threshold is General Motors, which sells the Chevy Volt and Bolt-EV electric cars.
Researchers at the online publication Inside EVs said Tesla probably reached the 200,000-unit mark on its models 3, X and S in June. However, Tesla could have worked the numbers so the target will be hit in July, by shipping more cars to Canada, for example.Under Internal Revenue Service rules, the first subsidy cutback, to $3,750, would begin for cars delivered in October or January, depending on when the 200,000 limit is hit.
How many deposit-holders will bolt at that point is an open question, with serious implications for Tesla sales.
On Monday, the company said it still holds refundable Model 3 deposits from 420,000 potential customers. Last week, Tesla said anyone with deposit money could now order a car, but the $35,000 vehicle isn’t available to be ordered yet. The online order would require an additional $2,500 deposit, and neither that nor the original $1,000 would be refundable. Customers don’t get a delivery schedule until they pay up.
Efraim Levy, a stock analyst at CFRA Research, said that the high number of deposits indicates the end of subsidies won’t affect Tesla much.
“There might be some people who drop out because their purchase is contingent on the tax credit, but I think there are ample buyers to replace any dropouts,” he said.
But Karl Brauer, executive publisher at Kelly Blue Book, wonders how many buyers exist for the higher-end Model 3s, which range in price from $50,000 into the $70,000s when options are added.
Tesla’s high stock price is predicated, in part, on mass-market volume for the Model 3 — Musk originally had planned to make 400,000 Model 3s in 2018. With the delay of the $35,000 model and the reduction in subsidies, Tesla is “reducing or removing the average consumer from the equation,” Brauer said.
New electric-car competitors are entering the market, with the $69,000 base-price Jaguar I-Pace SUV due to hit U.S. showrooms this year. Luxury-level electric cars from Audi and Porsche are set to follow early next year.
Tesla will be at a price disadvantage as its subsidies fade away. That’s probably less of an issue at the high end, where car buyers are less price sensitive and $7,500 accounts for a smaller share of the car price, Brauer said. (California pays up to $2,500 in subsidies for electric cars; they are expected to remain in place even as federal subsidies reach their limits.)
“The phaseout will create some interesting market dynamics over the next few years, and automakers may have to adjust prices to keep their vehicles competitive,” said Colin McKerracher, head of advanced transport for Bloomberg New Energy Finance.
Analysts agree that Tesla will make more cash — which it desperately needs — on its expensive, high-margin cars than it will on the $35,000 version.
As Model 3s begin streaming to buyers in greater numbers, many of them report they’re happy with their cars. There have been reports of quality problems, though. And some deposit-holders are speaking out about the delays.
“I don’t want to say lied to, but it seems like we’ve been duped, taken advantage of,” Dorfman said. “I don’t know (Musk) personally, but his statements, what people relied on, and what’s happened? Those are two different things.”
July 3, 7:00 a.m.: This story was updated with additional material to clarify IRS tax credit rules.
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