You mean production rate?
Boy you sure like stats. You should understand basic supply and demand before trying to tackle manufacturing engineering territory.
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Best Way to Honor the Intent of the Tax Credit?
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You mean production rate?
Boy you sure like stats. You should understand basic supply and demand before trying to tackle manufacturing engineering territory.
Good point on depth of the financial ladder.
The sales of 3 series class cars might define market size.
With some introspection, I only placed my order after hearing that the team would try to get the incentive for as many as possible. I would like a Model 3. With the incentive I can afford it. Without the incentive I cannot - will opt for a used car priced around $16K. SO that says I will pay $10K more than otherwise to support the Tesla objectives.
ChadS
Last tank of gas: March 2009
I see the OP's point that fewer people will buy without the tax credit, and agree that is true to some extent - though we don't have the data to say just how much.
However, I have a few other issues:
1. I don't believe the presumptive "intent" of the tax credit is correct. While hoped-for competitive pricing after the tax credit expires was definitely a factor in justifying passing the tax credit, if you look at the number and the amount it is clear that was not the intent. The number is not large enough for a full run of a mass-market car below costs, and the $7,500 amount was very specifically chosen as an NPV offset of the $12k in subsidies that the GAO estimated (at Bush's request in 2008 for this purpose) the average gas car got over their lifetime. It was to level the subsidy market to make prices more comparable; not to get them to drop after the subsidy is removed. There are indeed linked effects between the two, but the difference in intent is large enough to change the conclusions.
2. Hybrid prices did not drop when their subsidies were removed. I have read studies on this, and in fact the presumption in the studies was that this was a good result. Prices dropping would have meant that the company was just pocketing profit at the government's expense with no extra sales of the desired technology. The feds do not expect EV makers to drop prices by $7500 when the tax credits expire. The purpose is not to get on-the-edge buyers to be able to afford one either. It's to drive buying behavior of a technology that pays off for the US in economic and strategic terms - the expectation is that the vast majority of new car (especially new tech) buyers can afford it with or without the tax credit, but the incentive nudges them towards a car that most would otherwise avoid in the early days because of standard new-tech fears. After the cars have been around for a while, people are willing to pay more for that no-longer-scary tech, which is why (in general terms; the details are very complicated) automakers can keep selling at the same price despite the tax credit going away.
3. As pointed out by others, different countries have different incentives. So do different states. EV makers aren't adjusting their prices as these other incentives come and go. The feds don't expect it in this case.
4. Automakers don't just set a random price for a car. It has to be above their per-car costs, in fact enough higher that all fixed development costs ($1B per car is a typical industry number; this is why volume is so important to automakers) will be paid for over the car's run. It is a complicated profit-maximization calculation; higher prices mean greater margins but fewer cars sold, so there is some variation but not a lot - especially when competitors are doing something similar which greatly increases price elasticity. Ford was able to greatly undercut other cars at the time not just by fiat, but by greatly reducing production costs (which was no mean feat; it took him more than one try to be able to pull it off).
5. Given #4, prices can't dramatically change mid-stream of a product. They often do go down slightly as the car ages and becomes less competitive, or as per-car costs drop (which may be the case with batteries). Although adding content is another method that Tesla seems to favor.
In sum, I agree with Skotty - the tax credit does help drive down the price of EVs, but automakers won't be able to (and are not expected to) just drop prices when it goes away. Instead, they will be able to sell more cars in the early days when most people might otherwise buy a "safer" gas car; and then use the profits and price reductions (from volume, institutional knowledge, revs of new tech, etc) from the larger-than-otherwise run of an early car to be able to produce another, cheaper line of cars in the future.
However, I have a few other issues:
1. I don't believe the presumptive "intent" of the tax credit is correct. While hoped-for competitive pricing after the tax credit expires was definitely a factor in justifying passing the tax credit, if you look at the number and the amount it is clear that was not the intent. The number is not large enough for a full run of a mass-market car below costs, and the $7,500 amount was very specifically chosen as an NPV offset of the $12k in subsidies that the GAO estimated (at Bush's request in 2008 for this purpose) the average gas car got over their lifetime. It was to level the subsidy market to make prices more comparable; not to get them to drop after the subsidy is removed. There are indeed linked effects between the two, but the difference in intent is large enough to change the conclusions.
2. Hybrid prices did not drop when their subsidies were removed. I have read studies on this, and in fact the presumption in the studies was that this was a good result. Prices dropping would have meant that the company was just pocketing profit at the government's expense with no extra sales of the desired technology. The feds do not expect EV makers to drop prices by $7500 when the tax credits expire. The purpose is not to get on-the-edge buyers to be able to afford one either. It's to drive buying behavior of a technology that pays off for the US in economic and strategic terms - the expectation is that the vast majority of new car (especially new tech) buyers can afford it with or without the tax credit, but the incentive nudges them towards a car that most would otherwise avoid in the early days because of standard new-tech fears. After the cars have been around for a while, people are willing to pay more for that no-longer-scary tech, which is why (in general terms; the details are very complicated) automakers can keep selling at the same price despite the tax credit going away.
3. As pointed out by others, different countries have different incentives. So do different states. EV makers aren't adjusting their prices as these other incentives come and go. The feds don't expect it in this case.
4. Automakers don't just set a random price for a car. It has to be above their per-car costs, in fact enough higher that all fixed development costs ($1B per car is a typical industry number; this is why volume is so important to automakers) will be paid for over the car's run. It is a complicated profit-maximization calculation; higher prices mean greater margins but fewer cars sold, so there is some variation but not a lot - especially when competitors are doing something similar which greatly increases price elasticity. Ford was able to greatly undercut other cars at the time not just by fiat, but by greatly reducing production costs (which was no mean feat; it took him more than one try to be able to pull it off).
5. Given #4, prices can't dramatically change mid-stream of a product. They often do go down slightly as the car ages and becomes less competitive, or as per-car costs drop (which may be the case with batteries). Although adding content is another method that Tesla seems to favor.
In sum, I agree with Skotty - the tax credit does help drive down the price of EVs, but automakers won't be able to (and are not expected to) just drop prices when it goes away. Instead, they will be able to sell more cars in the early days when most people might otherwise buy a "safer" gas car; and then use the profits and price reductions (from volume, institutional knowledge, revs of new tech, etc) from the larger-than-otherwise run of an early car to be able to produce another, cheaper line of cars in the future.
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I hate to rain your parade but if your budget is around $16k there is no way that even the cheapest tesla is in your grasp. you should realize that the $7500 tax credit is taken against taxable income, if your income is not in a high enough range you might not be able to take that credit.
What makes you think that Tesla's cost is $26K? What makes you think that Tesla should make cars for no profit?
Also, your calculations are very Americancentric. The US has a tax credit of $7.5K, + 2.5K in CA. My country and province have no incentives to buy EVs whatsoever.
alseTrick
Active Member
The world may never know.
I do agree, though, that some current reservation holders won't be able to afford it without the full tax credit. But if someone isn't able to afford the Model 3, then that's just how it is. I'm not able to afford the Model S, but I'm not telling Tesla to sell it cheaper for me just because I want something I can't afford.
ModelNforNerd
Active Member
really? all 400,000 of us can't pay for the car without the tax credit?
Even if I have well over $45K in "ready liquidity" (cash) and an 810 credit score?
Everyone I was in line with in MA either already had at least one Tesla, or was in a high paying job.
I met a surgeon and at least 3 software developers.
Your blanket statement is wrong.
ModelNforNerd
Active Member
if your financial situation is such that you actually NEED the incentive to afford the vehicle....
maybe you should buy a lower cost vehicle and have a rainy day fund. you can revisit your Model 3 dream when there are some CPOs on the market. you won't get the tax credit, but depreciation may put the vehicle down in your range.
I agree with almost everything said here. Our of respect for the world (and at risk of further revealing my ignorance), here is some shaky math:
I have to use 'after tax' money (that is the only kind of money in my checking account) to pay taxes. Money out of my checking account started as $7,500* 25%, or $9375 income.
So the coupon has the same buying power as $9375 in income. So it is worth more than a check for $7500.
This is really shaky.
Will stick with $26K for a Model 3 quality vehicle as a price point that will fill the factory.
ModelNforNerd
Active Member
VERY shaky.
You should be looking at used cars, and having a trusted adviser look over the paperwork before you sign.
Can we say the presumptive intent is to have factories running full tilt delivering clean vehicles?
I think a Model 3 at $26K is the price.
I also think the Tesla team can do that profitably.
deonb
Active Member
You don't use 'after tax' money to pay taxes...
To be eligible for a $7500 tax credit, you need to be already paying more than that today in Federal Taxes (Not just FICA). You can't just have that money in the bank.
That means you have to be earning at least $61'000 as single, or $77'000 if married, in that year in order to be eligible for the full $7500 tax credit. And you need to earn even more if you're already using itemized deduction e.g. for a mortgage. So for most people this means over $80k to take the full credit.
And in the year you take the credit, instead of taking home e.g. $50'000, you get to take home $57'500.
So, no, there is no "after tax" $9375 effect here.
ucmndd
Well-Known Member
Hogwash. The *average* transaction price of a new vehicle in the US is $31k. Why would Tesla need to come in $5k below that to sell cars?
I expect the model 3 will have a very respectable reservation to delivery conversion rate. I expect losing cars on the inability to obtain financing to be a tiny fraction of those that don't ultimately purchase.
For that matter, if you're depending on a tax credit to get financing, you're Doing it Wrong(tm), as you'll need to finance the entire purchase price regardless - the tax credit comes up to a year later. Then there's the matter of being able to utilize the full non-refundable credit in the first place (certainly not a given if you can't qualify for financing on a $35k car).
JeffK
Well-Known Member
The OP's entire post is misguided from the very first sentence.
The tax credit is not for manufacturers at all but for consumers as an incentive to adopt EVs... The manufacturers do not get that money.
Tesla does not and will not price according to tax incentives, they've already publically stated that. Now unless you want the price in the US to be $35k+7.5k until it runs out then it drops to 35k after that, then that's your business, but that's not how Tesla does things.
In order to "honor the intent of the tax credit" people (consumers) need to buy more EVs and reduce dependence on oil... it's that simple.
The tax credit is not for manufacturers at all but for consumers as an incentive to adopt EVs... The manufacturers do not get that money.
Tesla does not and will not price according to tax incentives, they've already publically stated that. Now unless you want the price in the US to be $35k+7.5k until it runs out then it drops to 35k after that, then that's your business, but that's not how Tesla does things.
In order to "honor the intent of the tax credit" people (consumers) need to buy more EVs and reduce dependence on oil... it's that simple.
Actually, my math?, says they make more profit at $26K.
The factory capitalization gets smeared out over 2 to 3 to 4 times as many vehicles.
deonb
Active Member
Seeing that Tesla is going for 15% margin on the base Model 3 (which they won't immediately achieve), it makes the manufacturing cost $29'750.
Contrary to what you may have heard, you can't make a loss on each item and make it up in volume.
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