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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