As Part of Negative UBS Analysis Of Tesla Profitability, We Learn Entry-Level Tesla Model 3 Will Ship With Sub-60 kWh Battery

Ever since Tesla Motors [NASDAQ:TLSA] unveiled the Model 3 electric sedan at the end of last month, Tesla fans around the world have been keeping busy. In addition to placing down $1,000 refundable deposits just to get in line to buy a Model 3 when it enters production late next year, Tesla faithful have been scouring every online forum and analysing every section of the Model 3 launch event — and every tweet from Tesla CEO Elon Musk —  in minute detail to glean as much information about Model 3 as possible.

Some analysts don't believe Tesla can hit the claimed $35k Model 3 MSRP.

Some analysts don’t believe Tesla can hit the claimed $35k Model 3 MSRP.

Based on what we’ve seen in the past with Model S and Model X, it makes sense for Tesla fans and the world press to be looking in both those places, especially given Musk’s predilection for late-night tweet fests in which (intentionally or not) details about upcoming Tesla products are inevitably alluded to.

But sometimes, details about Tesla’s next big electric car — like the fact that the entry-level Tesla Model 3 will ship with a battery pack smaller than 60 kilowatt-hours in size and that the car will only be partially made of aluminum — come from an unexpected source instead.

A source such as  Jeff Evanson, Tesla’s Vice President of Global Investor Relations.

Tesla disagrees, claiming it's already producing cells at $190 per kWh.

Tesla disagrees, claiming it’s already producing cells at $190 per kWh.

As Electrek reports, the disclosures were by Evanson during a recent hosted call with industry analyst Colin Langan from swiss-based financial services company UBS in which Langan predicted that the Tesla Model 3 will not be profitable for the company at a sticker price of $35,000. Joined by Jon Bereisa, President & CEO of Auto Lectrification, the call focused on how lithium-ion cell technology wasn’t yet at a price point for Model 3 to turn a profit at Tesla’s claimed sticker price.

Bereisa, former chief engineer on the Chevrolet Volt range-extended electric car who worked at GM for more than 35 years before setting up his own consulting business, explained that slow progress in lithium-ion cell chemistry since 2014, namely in cost and energy density, meant Tesla’s target price would not yield a profit for the firm. Predicting a best-case price per kilowatt-hour of between $133 and $155 per kilowatt-hour by 2025 he estimated Tesla would be paying around $260 per kilowatt-hour for its Model 3 battery pack. Additionally, high costs for Tesla’s usual extra sensors, powerful electric motors and aluminum construction meant Bereisa placed the factory variable cost (FVC) of Model 3 $36,510 — $1,510 above the entry-level price of Model 3. Consequently he predicted, Tesla will lose $1,510 on each entry-level Model 3, at least initially.

At the same time, he claimed his former employer GM would see a more favourable FVC $4,980 below the Chevrolet Bolt’s entry-level price of $37,500. The difference he explained, was down to the Bolt’s more conventional design and less performance-oriented components, as well as a more favorable battery cell price from its partner LG Chem.

Because the call was essentially a public one for investors and members of the media to listen in on, it also meant that it was easy for Evanson to dial into the call during the Q&A session post-discussion, primarily to contradict some of Bereisa’s assumptions. And it was here that Evanson was able to let two key pieces of information slip about Model 3.

Conventional logic suggests Model 3 will lose Tesla Money

Conventional logic suggests Model 3 will lose Tesla Money

First of all, he stated, Model 3 won’t exclusively use aluminum for its body panels and chassis, something that Bereisa had assumed based on the fact that Aluminum is used extensively in Model S and Model X to keep weight down while retaining excellent structural rigidity and safety. For Model 3 Evanson said, Tesla will be using other materials alongside aluminum, lowering production costs and affecting Model 3 FVC.

But perhaps the most important piece of news it that the entry-level Model 3, despite assumptions to the contrary, will travel its 215 miles of predicted range using a smaller capacity battery pack than previously thought. Instead of a 60 kilowatt-hour lithium-ion battery pack similar in size to the pack in the 2017 Chevrolet Bolt and rumored to be the size planned for the next-generation Nissan LEAF, Evanson says Tesla’s entry-level Model 3 will use an advanced lithium-ion battery pack that is smaller than 60 kWh in size.

In addition he said, Tesla is already producing battery packs for its Model S at costs of less than $190 per kilowatt-hour, far below the $260 per kilowatt-hour claimed by Bereisa.

Despite Tesla’s VP of Investor Relations jumping on the call however, Bereisa said he remained skeptical about Tesla’s claimed battery pack costs, since raw material costs for current-generation lithium-ion battery packs hovers around $160 per kilowatt-hour (assuming 40 percent supplier margins). Similarly, based on size and predicted weight, Bereisa maintains Tesla will need at least 55 kilowatt-hours to get 200 miles of range using current technology.

We hope Tesla turns a profit on Model 3.

We hope Tesla turns a profit on Model 3.

Moreover, he isn’t alone. Other analysts seem skeptical that Tesla’s math adds up. While FVC include parts, material and assembly labor for each car, they don’t account for the other operating costs associated with bringing a new car to market. And right now, Langan can’t see how Tesla plans to make a profit, especially when most automakers require a 45 to 55 percent markup from FVC to break even.

Using this logic, neither the Tesla Model 3 nor the Chevrolet Bolt will initially be profitable. Given conventional business wisdom — even with Tesla’s figures for battery pack costs — Tesla would need to sell Model 3 at between $45,000 and $48,000 before it breaks even on the long-range plug-in. And that’s before you even account for Tesla’s current losses.

Here at Transport Evolved, we’re no business analysts, but having covered Tesla for as long as we have, we know something for sure. If there’s one company out there that can pull the metaphorical rabbit out of a hat, it’s Tesla. It’s something the California automaker has done several times in the past.

But unlike its previous electric cars, Tesla has mainstream rivals to contend with, each vying to produce a car that matches Model 3 in terms of specification and price point. And that means Tesla will have to walk a very fine line between competitive pricing and turning a profit. And while many would argue that Tesla deserves to dominate the plug-in marketplace, it will be going up against car companies with much deeper pockets for the first time in its short, meteoric career.


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  • vdiv

    Still don’t buy the steel argument even if it was confirmed somewhat by the Tesla drivers at the Model 3 unveil. The weight savings of using aluminum are substantial and key for long range EVs. Even the Leaf uses aluminum panels and yet it is now in it’s seventh year and costs below $30k.

    • Joseph Dubeau

      I don’t believe there is much of a cost saving using steel instead of aluminum.
      I sure she going to get a bunch hate mail for this article.
      I think everyone is interested to know how they going to bring the cost down below 35k.

      • vdiv

        Well, they are not bringing it below $35k and that is in 2015 dollars, by 2018 when it comes out it will be $38k 😉

      • Martin Lacey

        The base cost of steel and aluminium are different, as is the skill set required to make body panels and weld these different metals. Steel fabrication is a more widely held skill and so there is a bigger pool of employees and a lower salary cap. Steel works out cheaper for those reasons.

        • Eric Zucker

          Tesla obviously has those skills already, and the assembly is largely robotized. That leaves the base material cost differential vs weight reduction gains.

          • Martin Lacey

            Yes and no,

            Whilst the bulk of the manufacturing process relies on a robotic workforce the QC teams will need to have the relevant skill set to spot and rectify problems. Staff costs are a major implication in the industrialized world.

            But you’re quite right that base cost is a main driver.

            I am speaking with a friend who is a fabricator about weld strength, time and quality, which all influence the decision making process.

            Hope to have more to say tomorrow!

          • Martin Lacey

            Something else to consider is the huge cost of repairing aluminium panels – check the Tesla forums and see what Model S owners have to say!

    • Michael Thwaite

      I wonder what the amount of steel/aluminum required is? I have three cars in the garage, none of which have any exposed (painted) metal – it’s all polycarbonate panels or CF in the case of the Tesla. I’d guess that the finished Model 3 will be more metal frame with polycarbonate panels than sheet aluminium.

      • Cesar Deschamps

        So, the side panels of the S are Plastic (polycarbonate panels)?

        • Michael Thwaite

          No, the S is aluminium, my Roadster is CF.

          • Martin Lacey

            Do you get damp/condensation issues in the roadster? Like fiberglass?

          • Michael Thwaite

            Nope, not at all.

    • Cesar Deschamps

      Does that mean that these vehicles would benefit from replacing more steel components with aluminum or plastic. I always wondered why some cars embrace plastic body panels (Honda Element) and other do not. I always thought it is because of the high profits from selling parts to the autobody industry.

  • Joe Viocoe

    Pfft…. these analysts weren’t right about their Tesla predictions 5-10 years ago either.

    Remember when so many of these analysts were talking about $1000/kwh batteries… while Tesla was already well below that?

    They have every incentive to cast doubt about their competitors. Just because they can’t get their costs down, or have to take huge margins to survive, doesn’t mean Tesla has to follow the same rules.

  • “At the same time, he claimed his former employer GM would see a more favourable FVC $4,980 below the Chevrolet Bolt’s entry-level price of $37,500”

    No. It is factory gate price that counts for Chevrolet, not MRSP. Dealers will need some margin to cover their costs.

  • Eric Zucker

    I’m sure Tesla must have extremely aggressively negotiated the battery price and margins with Panasonic, just by the sheer volume of business.

    Real-world reports of energy usage for Model X is 350Wh per mile, Model S approx 280Wh per mile, a BMW i3 uses about 180Wh per mile, we could conservatively guesstimate Model 3 at 220 Wh per mile. For 215 mile range, that’s 47.5 kWh, say a 50kWh pack, or $9500.

    Elon has strong financial objectives to reach 30% gross margin, that’s got to be very close to what he’s aiming for on the Model 3 once it reaches volume production. Maybe he’d tolerate 28% on a bare-bones $35k model, and much better than that at the average transaction price of $42k.

    Working it backwards, $35k less 30% is about $27k, less the battery we’re at $17.5k for the rest.

    Did you notice Model S recently got a range increase without changing the battery size? Tesla must have developed more efficient software, electronics or drive train components recently. Tesla’s induction motors do not use rare earth materials, they must be fairly inexpensive. Then you have the usual body, wheels, brakes, suspension, lights, shocks, HVAC, seats, glass, wipers, touchscreen and electronics, airbags. Autopilot components cannot be that expensive as they are installed systematically in the S and X.

    Did you note the Model 3 is Supercharger capable ? At no moment did Tesla say it would be included or free. There is another possible revenue stream, either as pay per charge or opt-in subscription if you need to supercharge on long trips. To get people used to the convenience I would include a limited number of free Supercharges per year, corresponding to a typical long-distance trip.

    • Lance Pickup

      If we were holding a pool, I would put my money on 240-250 Wh/mile for the 3. I agree that the pack will be less than 60kWh, but probably not a lot less. I’d say 55kWh for the base, and 70 for the up-level.

      And while Bereisa is supposedly an expert and should know better, I do think he’s estimating Tesla’s costs well on the high side. He’s either not taking into account the passage of another 2 years, or the fact that Tesla is co-investing in the manufacturing facility with Panasonic and is therefore going to get ultra premium pricing.

      And yeah, the entry level would probably be a loss leader for Tesla at first, but we all know they’re not going to start making those (beyond maybe a token few). They’ll start with the more profitable up-level cars first that they can actually make money on and allow even more time to pass to get the costs down for the base model.

      • Martin Lacey

        I hope not – I have to save £1.3k ($1.9) a month between now and when I expect to be placing my actual order. I don’t want to get pushed down the line by those with more money and a propensity to tick the options boxes. Especially considering some of the things Elon said before the reveal about regional and date stamping of reservations. Yes S/X owners get a partial move up the queue – and they tend to have bigger cheque books.

    • Cesar Deschamps

      I really hope Supercharger is included in the base price of the Model 3. The Supercharger Network is the killer App of the Tesla Echo system. If the 3 is like any other car out there, then Tesla looses a significant competitive advantage and Mindshare.

      • Eric Zucker

        How often would you travel out of your home area? If 12 or 24 anual charges were free, this would allow free long distance travel for most people. Use them twice a month, or in two weeks as you wish.

        Trying to curb local charging is key. Tesla can’t have every car supercharge all the time the infrastructure won’t scale fast enough.

        Extra charges could be possible at a cost.

        Charging at home for daily driving is ideal.

  • Chris O

    Weird story. The umpteenth analyst comes up with a “Tesla will fail” story that no doubt fits his investment position and some Tesla Investment relation guy starts spilling the beans on cost to refute the obvious nonsense?

    Because the nonsense is pretty obvious. For instance why would GM have lower battery cost than Tesla by sourcing from LG? Seems to me it’s Gigafactory economics vs the smaller production LG has going. It’s all based on guesstimates, this analyst has no first hand in either companies battery cost and analyst have in the past *systematically* overestimated those cost and underestimated the rate at which these cost have been coming down.

    The idea that Bolt that will have a production run that’s an order of magnitude lower than Model 3 is slated for would yet be cheaper to build just flies in the face of economies of scale logic.

    It’s well possible that Model 3’s streamlined design make a smaller battery than Bolt’s possible to get similar range. Together with its no frills design and conventional materials, the very large production run it’s slated for and its average estimated sales price of $42K I don’t see any obvious reasons for Model 3 to not be very profitable indeed.

    BTW: That Model 3 will be a mix of steel and aluminum has been know for at least a year now, so I wonder how that could be news to anyone.

    • Martin Lacey

      Li-on batteries made by different manufacturers will have different components/chemistry.

      GM will have a higher cost base because they have never bothered to get the most out of battery packs in their previous compliance models. If the Bolt is a true mainstream project in GM hearts and minds, then I expect they will also see significant yield improvements and cost savings over the production cycle. If it’s just a compliance vehicle, then what they have will be all you’ll get.

      Tesla have had three models (Roadster, S & X) and several years to work on battery improvements which have seen increased battery packs introduced over that time. Why shouldn’t they reduce pack sizes as yield and range improvements are made?

  • Martin Lacey

    Maybe Colin Langan and his guest should have factored a very low aerodynamic drag co-efficient, low center of gravity and even weight distribution into their equations. I’m not surprised the base model 3 will have a sub 60KWhr battery pack, I’m sure I have commented elsewhere that I reckoned on 50KWhr.

    I’m sure that the Aluminium/steel debate took place before the reveal and was dealt with then… I’m guessing carbon fiber is out of the question though.

    I don’t think Tesla are losing money on the cars they make or sell, it’s just that they are spending big on infrastructure and production facilities (Freemont and Gigfactory). It’s the colossal spend which shows up in the red column. Elon Musk thanked Model S owners for making the Model 3 possible at the reveal – i.e the capital Tesla were able to leverage from the sales of S and X cars.

    Have I missed a 200 mile EV claim from BMW, Audi or Mercedes Benz? These are the manufacturers who Tesla have hit with the S and the X. They are also the manufacturers they are aiming at with the 3.

    • Michael Thwaite

      Remember talks with BMW in the past? I’m expecting a lot of polycarbonate and carbon fibre composite to match a 45kWh battery. Let’s also remember that 230 miles is going to be range mode – 170 day-to-day standard mode. I predict two models at launch – the 45 – skinny tires, refined aero – and the P60D wide fat tyres handling and performance.

      • Martin Lacey

        I would be very (pleasantly) surprised to see carbon fiber on the 3 It’s much slower to work with (therefore expensive) and the 3 is a mass production vehicle.

        Tesla are only making one body version at launch, battery pack size and add-ons will differentiate as with the S/X. Other variants may happen further down the road, but with 400k reservations why muddy the waters for two/three years?

        • Michael Thwaite

          I’m thinking carbon fibre composite – shredded carbon fibre in polycarbonate – cheap and cast like the i3. I’m not expecting more than one body but I do expect a more aero dynamic trim set – no spoiler, flush lighting, no air ducts, flat, narrow wheels, etc. versus the P60D that has fat tires, fancy wheels, pop-up spoiler, etc.

          • Martin Lacey

            I can’t see a basis for skinny wheels – not if Tesla stick to “all model 3’s being sub 6 seconds 0-60mph” and “highest safety levels across the board”.

            But next time I’m wrong, won’t be the first!

          • Michael Thwaite

            Low rolling resistance tires seem to be getting better, the i3 manages a 6.5 second sprint. I’m just imagining that the entry level 3 will be pretty basic and to hit the numbers it’ll be very ‘ optimized’ in order to manage it. We’ll see, it’s just a hunch really.

  • It’s bankers like this – fudging numbers against non-incumbents – who put the finger on the scale against advances.

    Yes, it’s their job to be conservative. But when they’re usually wrong, one should be skeptical of them just as you’d be skeptical of blue-sky reports from a company.

    • Cesar Deschamps

      The entire history of TESLA seems to be riddled with the bullshit predictions from these investors, analysts and industry experts. All proven wrong to-date.

  • Cesar Deschamps

    I agree with all your points. Also, history has shown that Tesla has improved the efficiency and innovated the chemistry of the battery. I wont repeat the details here, there are plenty of well documented essays on how Tesla has improved Battery capacity.

    Suffice it to say that in 2 years at the debut of the Model 3, we will most likely find that a Battery option for the model 3 will begin at 215 miles and can be upgraded to 300+ miles as an option package. This would not surprise me, since most of the Model S/X cars delivered today are optioned up. That would put this whole argument of profitability to rest. A company’s profit lays in its option packages.