Tesla Announces Price Cuts & Record Output While Stock Slips on Expected Falling Demand
Throughout 2018, Tesla struggled to ramp up production of the Model 3, the automaker's first mass-market electric car. Tesla CEO Elon Musk described the logistics problems with the Model 3 as "production hell" and the company appears to have finally worked through most of them. This past summer, Tesla even set up a temporary assembly line at its Fremont, California assembly factory to boost Model 3 output.
Now that Tesla is steadily producing around 6,000 Model 3's per week, the full $7,500 federal EV tax credit is no longer available. The tax credit ended for the company on Jan 1 and has been reduced by half. As a result, the automaker announced price cuts to offset the reduction of the tax credit on the purchase of a Tesla vehicle.
The electric automaker said it is cutting prices of the Model 3, Model S and Model X SUV by $2,000. The price cuts take effect today.
Tesla's surprise announcement weighed on the stock, pushing it down nearly 7 percent to close at $310.12 after falling nearly 10 percent.
However, some Wall Street investors see it as a sign that Tesla may experience softer demand for the Model 3 going forward, now that the automaker has finally delivered tens of thousands of its first mass-market car to early reservation holders. In addition, investors are concerned that demand for the Model 3 may decline further as the tax credit is halved again in June.
Tesla's Record Output
Tesla produced 86,555 vehicles in Q4, an 8 percent increase over its previous all-time high set during the previous quarter. The figure includes 61,394 Model 3 sedans and 25,161 Model S sedans and Model X SUVs. In the fourth quarter of 2018, Tesla delivered 90,700 cars in total, compared to 83,500 in Q3. That number is up from 29,870 a year ago.
The company delivered a total of 245,240 vehicles in 2018. In 2017, the automaker sold 102,807 vehicles after struggling to increase production of the Model 3 which began in July 2017.
Model 3 deliveries reached 63,150 in Q4, up from 55,840 in Q3. Tesla said it produced more than 63,150 Model 3 sedans in the final three months of 2018, an increase of 15 percent from the third quarter.
However, none of Model 3 sedans delivered were the long-awaited entry level version, which Musk promised would start at $35,000. This raised concerns with investors over Tesla's ability to achieve profitability by selling a lower priced Model 3.
During an October 2018 earnings call, Musk said "If we could produce a $35,000 car today, we would do it. We need more work, there is more work to do before in order to make a $35,000 car and have it be positive gross margin. We're probably less than six months from that. That's our mission."
Tesla CFO Deepak Ahuja added that the automaker still need further manufacturing efficiency improvements, including more economies of scale in battery production in order to deliver the base Model 3 and still turn a profit.
The federal EV tax credit for Tesla buyers was halved from $7,500 to $3,750 on Jan. 1 after Tesla became the first automaker to surpass the 200,000 vehicle threshold that Congress set for each automaker. General Motors also hit the 200,000 vehicle limit last month.
Customers who take delivery of Tesla models between January 1st and June 30th, 2019 are still eligible for a $3,750 federal tax credit, along with any other local incentives. For customers taking delivery between July 1st and December 31st, 2019, the tax credit falls to $1,875, before being phased out completely a year from now.
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