Electric Fantasy: Will the Next Tesla Sell for $25,000?

Tesla has confirmed the price of the Model 3. Now the race is on for tax incentives that would make it even cheaper.
Illustration by Stephanie Davidson

Tesla Motors Inc. was built with one overriding objective: to bring electric cars to the masses. After more than a decade of work, Tesla Chief Executive Officer Elon Musk believes it’s just about time. The company is set to begin taking pre-orders on its $35,000 Model 3 next month—and by $35,000, Tesla really means as little as $25,000. 

Tesla has confirmed that the $35,000 price tag on the Model 3 doesn't include the significant federal and state incentives available to electric car buyers. Official confirmation from the company echoes what Musk told reporters at an auto show more than a year ago: "When I say $35,000, I'm talking about without any credits."

The distinction Tesla is making here between the price before and after tax subsidies is crucial; these tax incentives can knock off as much as $10,000 from the cost of purchase, drastically increasing the size of the market for the Model 3. The pre-subsidy price was increasingly in doubt after the company set the starting price of its Model X luxury SUV at $80,000, more than analysts initially expected 1

"We can confirm it's $35,000 before incentives," a Tesla spokeswoman, Khobi Brooklyn, told Bloomberg. "We haven't changed our minds." 

To understand why pricing is so important, just look at what Americans are currently willing to spend. The average new car costs about $31,000, according to an analysis by Salim Morsy of Bloomberg New Energy Finance. Almost all the mass-market vehicles sold above that price threshold are SUVs and trucks. There's only one car comparable in size to the Model 3 that amasses more than 100,000 in annual sales with a $35,000 price tag: the BMW 3 Series.

Mass-Market Cars Need Mass-Market Prices

Screen Shot 2016-02-08 at 7.34.50 PM
Salim Morsy; BNEF

A $25,000 Tesla would upend the U.S. auto market. Incentives vary widely state by state, but the base incentive is a $7,500 federal income tax credit available to everyone in the country. Bringing the $35,000 sticker price of the Model 3 down by that amount would expand the potential market by roughly 50 percent, according to Morsy. Additional incentives would further knock down the price in more than a dozen states, including an additional $6,000 in Colorado and $2,500 in California, Massachusetts, and Tennessee. The only limiting factor for sales of a Tesla in this price range would be the company's ability to crank out cars. 

The chart below shows how U.S. car buyers are more willing to look at long-range electric cars once the purchase price drops. The cost of long-range electric cars (in green) is tumbling as Chevrolet, Tesla, and Nissan release their next-generation electric vehicles over the next two years. By 2030, an electric car at $22,500 2  would be a practical choice for almost 70 percent of car buyers (gray line). 3  

Screen Shot 2016-02-08 at 7.25.43 PM

Total addressable market for vehicles with a 200-mile range. 

Salim Morsy; BNEF

Tesla is facing intense scrutiny from investors after production delays for the ongoing rollout of its Model X SUV. The stock has tumbled 38 percent in 2016, wiping out $12 billion in market value. Pressure is already mounting for a speedy launch of the Model 3, which Musk says will go to production next year. Don't count on it. 

Big Potential, Tiny Window

Whether anyone will actually get the Model 3 for $25,000 will depend on Tesla getting it to market on time, and running on schedule isn't Tesla's strong suit. The company is notorious for years-long delays for new products, from its original Roadster to the recent Model X. Morgan Stanley analyst Adam Jonas, a longtime proponent of buying Tesla shares, doesn't believe Tesla's Model 3 will hit the streets until late 2018—at least a year after Musk has promised it would appear.

To make matters worse for cash-strapped Tesla enthusiasts, the first cars off the production line probably won't be the sticker-price base model. Tesla likes to launch new products with a feature-rich Signature Series, which in the case of the Model X would cost about 75 percent more than the base model. For the Model 3, Jonas anticipates an initial average price of at least $60,000 before tax incentives. 

Here's where the road to a $25,000 Tesla gets a little twisted. The U.S. federal tax incentive for electric cars won't be around forever. It is designed to help ease carmakers into the electric market. The credit is applied to the first 200,000 electric sales for each new manufacturer; then the value of the incentive slowly fades to zero over about a year and a half. 4

Tesla is on track to reach its 200,000th sale around the middle of 2018. 5  If Model 3 deliveries don't start until the end of 2018, and a higher-priced Signature Series soaks up the incentives for 2019, then by the time a "mass-market" buyer gets a shot at a lower-priced Model 3, the incentives could be gone. In that case, a $35,000 Tesla would just be a $35,000 Tesla. In the meantime, however, Chevy has plans to start selling its 200-mile-range Bolt for $30,000 by the end of 2016, which would mean beating Tesla to its goal of an affordable long-range electric car by a significant margin.

For now, Tesla insists the Model 3 is still on schedule for production starting next year. Khobi Brooklyn, the Tesla spokeswoman, declined to offer any details about the car beyond its sticker price. "The Model 3 is on time, and everyone is going to learn more about it at the end of March," she said. "That's when we've committed to talking about it and giving a really great update, and that's what we're going to do." 

Watch Next:Here's How Tesla Gets to 500,000 Sales a Year 

Tesla Might Be the Next Model T
  1. In 2013, Tesla said the Model X would be priced similarly to the Model S, which at the time started around $60,000. 

  2. In today's dollars.

  3. This analysis doesn't include the fuel savings for electric vehicles, which would expand the addressable market further. 

  4. Here's a hypothetical scenario to show how the subsidy is designed to expire. Say a company were to reach its 200,000th sale in the first quarter (Q1) of a calendar year. Two quarters later, the $7,500 subsidy would drop to $3,750 for the following two quarters of the company's sales (Q3-Q4). Then it would drop to $1,875 for two quarters (Q1-Q2 of the following year). Then: zero. 

  5. I modeled this using a 50 percent annual growth rate. This is a bit less than Tesla's historical growth rate, but it's roughly in line with Tesla's forecasts and analyst estimates for future sales.  

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