Tesla (TSLA) could finally be turning the corner on profitability as the business is delivering Model 3 in volume. In Q4’18 and Q3’18 Tesla reported two consecutive profitable quarters of $0.78 and $1.75 GAAP Dil. EPS, respectively. What shareholders are hoping for in the next couple quarters is a seamless production ramp for its Model 3 that shouldn’t hamper profitability but should instead drive volume profits at similar margins.
This could be a little tricky, because this year coincides with the launch of the base model, which is priced at $35,000. This price point is crucial, because this segment of the market is where Tesla was supposed to build-up its entry-level segment but got delayed with various production struggles over the course of 2018.
A transition into lower-priced units also leads to the unenviable conclusion that the company has to make cost adjustments everywhere they possibly can. In terms of the vehicle itself, they’ve adjusted the features to match the pricing tiers. At the base model level, the vehicle is just slower, and has less battery range, and you won’t have access to Tesla Autopilot, and you might be tempted to even upgrade the wheels to make them sportier, for $1,500 but even if you don’t, it still looks good for a $35,000 car.
With the announcement of its base model at $35,000 on February 28th, 2019 the company initially announced that it wasn’t going to raise prices, but instead “wind down a lot of stores.” This sounded like a really vague term, but when we fast forward a month later, they mention that they closed down 10% of their store locations, places where they get less car and foot traffic and would shift to a more online model with service centers.
Most car companies still have tons of dealerships out and about everywhere you drive in any major city with big signs and expansive service centers as well. So, it can’t completely bail on the idea of having a store footprint even if it wanted to. What Tesla’s likely abandoning are the non-performing stores with low traffic, and probably a greater shift towards service centers where vehicle maintenance and various other services are actually done. Even the deliveries get picked-up at the Tesla Service Centers, so the emphasis on stores has gone down, they have 378 locations according to their Q4’ call, so maybe they reduced the number of stores by 30 locations at this point. However, they continue to maintain the Service Center count at 120 according to their support website.
So, they might have 250 retail locations they could probably reduce by 50 or 60 locations, but they’ll likely open more service centers in Mainland China where they integrate their Asian supply chain for Asian market deliveries for Southeast Asia like Korea and Japan which they already ship to. So more new openings of Service Centers, but also closings of retail looking stores.
This will help trim costs down following the announcement of the Model 3 base model at $35,000.
Following efforts to consolidate stores, the company is shifting towards an on-demand vehicle servicing model. They believe 80% of incidents can be resolved with a mobile technician driving to the car to repair it on site or deal with the situation. Hence, they might not need as many locations globally to fully saturate the auto market with reasonable customer service.
Tesla also announced a 3% price increase across all Model 3 variants besides the $35,000 Base Model. People who purchased the Model 3 up until March 20th or Wednesday this week purchased at the same price tiers but following the March 20th cut-off there’s roughly 3 fiscal quarters where an added 3% price increase could improve profitability. This might spark a lot of debate in the coming quarters, as the profit narrative seems to depend heavily on improving operations and pricing adjustments.
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