The Model 3’s wild growth finally cools off
Tesla’s sales have fallen for the first time in nearly two years. The
Silicon Valley automaker announced that it delivered 63,000 cars globally in the first quarter of 2019, about 50,900 of which were Model 3s. That represents a 31 percent decline in deliveries compared to the final quarter of 2018. The last time Tesla saw a quarter-to-quarter sales decline was in the first half of 2017 — just before the Model 3 went into production.
As a result, “we expect Q1 net income to be negatively impacted,” according to a company statement. The statement also said the carmaker had “sufficient cash on hand.”
The decrease in sales to the start the year will likely buoy critics who believe Tesla has exhausted demand for the Model 3 in North America. But Tesla reaffirmed sales guidance of 360,000 to 400,000 cars deliveries in 2019. The company also said its US orders for “Model 3 vehicles significantly outpaced what we were able to deliver.” Tesla said that production outpaced deliveries by 22 percent.
And while Tesla recently began shipping the Model 3 to Europe and China, the company apparently hasn’t generated enough momentum in either of those two markets to fully continue its strong finish to 2018, where it delivered nearly 91,000 total cars in the final quarter alone. (A customs issue in China and logistics issues in Europe didn’t help.)
“A massive increase in deliveries in Europe and China,” the company said in a statement, “which at times exceeded 5x that of prior peak delivery levels, and many challenges encountered for the first time” meant that only half of the quarter’s deliveries were made by March 21 — just 10 days before the quarter ended. “This caused a large number of vehicle deliveries to shift to the second quarter.” About 10,600 vehicles were “in transit to customers globally” at the end of the quarter, the company said.
Model 3 sales increased across 2018 as Tesla dramatically expanded its manufacturing capacity, which included building the cars in an outdoor tent and suffering through so-called “production hell”. The company delivered about 140,000 Model 3s in North America across all of 2018, in what CEO
Elon Musk called “the most challenging [year] in Tesla’s history.” About 120,000 of those deliveries came in the second half alone. In all, Tesla more than doubled its 2017 output.
Tesla did all this while selling more expensive, higher-margin versions of the Model 3, too; the most affordable version available throughout most of 2018 started at about $49,000. And by the end of the year, it appeared that Musk finally delivered on his often-repeated claim that production of Tesla’s first mass-market car would grow exponentially. The result was the Model 3 became the best-selling EV in the world, and the car helped Tesla pull in back-to-back quarterly profits for the first time in company history.
But in early 2019, some Wall Street analysts worried Tesla ran dry the market for those more expensive versions of the car in North America, which is why it wasn’t surprising when Musk said in January that Tesla was almost completely focused on making Model 3s for Europe and China. Both regions represent a huge opportunity for Tesla — China is the biggest car market in the world, and Europe’s EV sales are typically on par with the US.
In February, Tesla finally announced the long-awaited $35,000 Standard Range (220 miles) Model 3, as well as a $37,500 Standard Range Plus version, both of which could theoretically unlock new customers. But that base model appears to be delayed. Meanwhile, a “mid-range” model — which was announced in October — has been discontinued. That means every one of Tesla’s cars, save for the Standard Range Plus, is still more expensive than the current average cost of a vehicle in the US.
Tesla also announced in February that it was closing most of of its stores in order to make it possible to sell cars at and around the $35,000 price level. At the same time, it announced price cuts of about 6 percent across most of its models as a result of the cost savings. But the company eventually reversed course and said it would only close about 10 percent of its stores, and subsequently raised prices again by about 3 percent.
Musk had previously hinted that Tesla could be in for a rough quarter as the company shifted its attention to Europe and China. In February, he warned that Tesla would likely post a loss in the first quarter, saying that the early months of any given year are typically slow for auto sales, in part because of bad weather. Tesla’s cars also lost eligibility for the full federal EV tax credit on January 1st.
But Musk also said in January that he doesn’t believe Tesla has a demand problem. “The demand for Model 3 is insanely high. The inhibitor is affordability,” he said. “It’s just, like, people literally don’t have the money to buy the car. It’s got nothing to do with desire. They just don’t have enough money in the bank account. If the car can be made more affordable, they will... the demand is extraordinary.”
Exactly what kind of demand Tesla expects in 2019 is hard to pin down. Tesla said in a January 30th letter to shareholders that it expects to sell between 360,000 to 400,000 cars this year. Later that day, Musk said on an investor call he believed Tesla might sell as many as 500,000 Model 3s this year. Musk then tweeted that same estimate on February 19th, and less than one week later, the Securities and Exchange Commission accused him of breaking the terms of the settlement he agreed to last year over securities fraud charges related to his “funding secured” tweets. The commission has asked a court to hold Musk in contempt; a hearing is scheduled for Thursday, April 4th.