Tesla’s battery strategy to drive strong margins on Model 3

Tesla’s battery strategy to drive strong margins on Model 3

In wake of Model 3 e-car’s official launch in late July, Tesla’s recently held Q2 earnings call indicated that the new sedan could garner gross margins of up to 25 per cent at some point in 2018. The estimated margin of up to 25 per cent is quite impressive, considering that margins on the company’s luxury Model S and Model X also stand at the same levels; while rivals auto giants like general Motors and Ford are getting margins of under 15 per cent.

There are quite a few possible explanations for how Tesla is able to project such thick margins on this new product.

Model 3 sedan’s battery costs will likely be lowest in the industry. The cost per kWh of lithium-ion batteries has slipped from an average of roughly $400 in 2012 to less than $150 now. Battery costs for the new Tesla e-car could be even lower as the company continues to work on improving its battery technology.

In addition, Tesla is offering two versions of the Model 3 sedan, with focus on the pricier version. The standard model has been priced at $35,000, while the extended model has been priced at $44,000. If we assume battery cost of $130 per kWh, the 50kwh battery on the base model will cost $6,500, while the 75kWh battery on the extended range model will cost $9,750. Thus, the incremental cost will be nearly $3250. However, the extended range model’s additional price of $9,000 will command a healthier dollar gross profit of around $5750.