CARS.COM — Tesla’s March 31 unveiling of the all-new Model 3 had shoppers lining up at dealerships like Black Friday at an electronics store. By the end of April 2, the California automaker had 276,000 reservations worldwide for its new, smaller and cheaper electric car. Five days later, Tesla said reservations had topped 325,000, and the prospect of $14 billion in future sales would make it “the single biggest one-week launch of any product ever.”
It’s a massive level of interest, but questions abound. Will Tesla be able to meet its late-2017 launch target for the car? How many buyers will be eligible for government tax credits? And can Tesla build enough cars to keep up with demand?
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“It’s reservations — it’s not orders, and I think that’s important to be clear,” IHS Automotive senior analyst Stephanie Brinley told us. Brinley doesn’t think every reservation, which requires a refundable $1,000 deposit, will translate into a sale. But she still thinks they constitute a “huge number,” and it will take time for Tesla to simply build that many cars.
Tesla CEO Elon Musk tweeted April 2 that “all efforts are focused” on accelerating the production ramp-up — a sentiment echoed April 7, when Tesla said it’s working to increase its Model 3 production plans.
Tesla says it wants to kick off deliveries, not just production, in late 2017. That’s a long way off, and whether Tesla can meet that deadline is open to doubt, given the automaker’s reputation for production delays.
Then there’s the enormous task of filling so many orders. Tesla says its Fremont, Calif., factory has an annual production capacity of more than 100,000 units, and that total has to include the Model S and Model X. Musk reportedly wants to expand capacity to 500,000 annual cars by 2020, but just how fast Tesla can ramp up will determine just how long Model 3 reservation holders have to wait for a car.
“We will have more details on production schedule closer to when we begin production in late 2017,” a Tesla spokesperson told Cars.com via email. “We are revising our production plans to minimize delivery waits.”
The timing and pace of production won’t just affect when the Model 3 shows up; for a lot of buyers, it could affect how much the car costs. That’s because the federal government’s $7,500 tax credit for buyers of plug-in cars expires after an automaker sells 200,000 total qualifying vehicles in the U.S., a point Tesla would hit while it’s building the Model 3s already reserved.
Tesla doesn’t report monthly sales figures like other automakers, but Ed Kim, vice president of industry analysis at AutoPacific, pegs Tesla’s U.S. sales total through 2015 already at 63,000; Tesla launched its first car in 2008.
By the time the Model 3 arrives in late 2017, Brinley thinks the Model S and Model X could rack up another 100,000 U.S. sales. That could leave the full tax credit open to just a scant group of Model 3 buyers.
It’s unclear how many of last week’s reservations would count against the 200,000 ticker, as the reservations are a global total. Tesla did not specify the portion of U.S. buyers, but Brinley thinks American shoppers accounted for a majority. Still, the uncertainty complicates any estimate of when Tesla will hit 200,000 in sales.
“It’s a little difficult to say when in 2018 or 2019 it’ll hit,” Brinley said. “But it will hit.”
Kim reckons Tesla will hit the quota at “some point in 2018,” a timeframe that would allow “only the early customers” for the Model 3 to get the full tax credit.
A considerable number of extra cars may still legally qualify for all or some of the credit, however. Under the EPA’s drawdown procedure, plug-in electrified vehicle tax credits don’t immediately stop when an automaker sells its 200,000th qualifying car. Instead, as the EPA explains, the IRS merely announces that an automaker has hit its sales quota and sets up a phase-out schedule. That schedule doesn’t take effect until the second quarter thereafter, which can allow for months more of full-credit sales.
A Possible Scenario
How does this all play out? Consider if Tesla sold its 200,000th qualifying electric car on July 15, 2018. That’s in the third calendar quarter of 2018 (i.e., July 1 through Sept. 30). The drawdown wouldn’t happen until the second quarter after the announcement, which is the first quarter of 2019. In essence, you could still buy a Tesla until Dec. 31, 2018, and reap the full $7,500 credit, even though Tesla hit the quota the prior summer.
The drawdown schedule then calls for a half of the credit to be available in the subsequent two quarters, and then a quarter-credit for the following two quarters before the credit fully expires. In the above scenario, Tesla buyers from Jan. 1 to June 30, 2019, would be eligible for up to $3,750, while buyers from July 1 through Dec. 31, 2019, would still get up to $1,875.
The credit wouldn’t fully expire until Jan. 1, 2020, nearly 18 months after Tesla hit its quota. By then, plenty of Model 3 buyers could see at least a partial federal tax credit.
Will Congress raise the tax credit sales limit? With the 2016 elections still undecided, Kim said it’s too early to tell. Brinley thinks there could be some pressure to do so, but there will be equal pressure from opponents on the grounds that electric cars need to be able to sell “at market price” to be sustainable in the long run.