By Tim Higgins
Sales of Tesla Inc.'s high-end Model S sedan have taken a big
hit in the company's most important U.S. market, California, as the
electric auto maker is leaning more heavily on selling the
lower-priced Model 3 compact car, new data show.
Falling sales of the Model S -- and its sister sport-utility
vehicle Model X -- threatens Tesla's growth goals and profit
ambitions as it must rely more on its cheaper Model 3 to make up
Registrations of new Model S sedans in the second quarter
plummeted 54% to 1,205 in California, according to the Dominion
Cross-Sell report that compiles data from state motor-vehicle
records. The Golden State is a strong indicator of demand as
Tesla's largest U.S. market, representing 40% of Model S
registrations in the country last year, according to auto-sales
tracker Edmunds.com Inc.
The new data from research firm Dominion Enterprises indicates
the stylish sedan that arguably changed car buyers' view of
electric cars is losing its luster. Tesla is increasingly dependent
on sales of the smaller Model 3, which starts at about $35,000,
less than half the price of the most basic Model S.
Registrations of Tesla's expensive Model X sport-utility vehicle
also fell by about 40% in California during the quarter. Model 3
registrations, by contrast, nearly doubled in the state to 16,372.
Registrations, which tend to lag sales by weeks, provide insight
into where deliveries take place.
On Wednesday, Tesla is scheduled to report second-quarter
results that could shed light into the erosion of high-end
automotive sales and how it is affecting sales and profits. Tesla
doesn't break out its sales by state.
Ahead of the earnings, Tesla shares recently traded at $257.80,
down 15% over the past year but up 44% from their low in June.
The sales decline of the older, higher-end vehicles threatens
the underpinning of Tesla's business, which Chief Executive Elon
Musk has said was built on the assumption of delivering a combined
annual total of 100,000 of the Model S and X vehicles. The company
is targeting at least 360,000 total global deliveries this year, a
more than 45% rise from last year.
Concerns about whether demand for Tesla vehicles have peaked
emerged after the first quarter when sales dropped dramatically.
Those concerns were eased by a return in the second quarter to
growth for the smaller Model 3. Still, Model S and Model X
continued to struggle six months into the year, raising questions
about whether the Model 3 was eating into Tesla's established
business. Sales of the two more expensive vehicles are down 33% for
the year so far.
Analysts surveyed by FactSet, on average, expect total
deliveries of the Model S and Model X vehicles to drop 30% this
year compared with last year. Tesla has delivered a total of more
than 158,000 of its three vehicles through the first half and would
need to increase the pace of sales in the final two quarters
compared with the record second quarter to meet its year-end
"The key is cash flow, and people will look for whether they
traded profit for volume in Q2," said David Whiston, an analyst for
Morningstar Research Services. "Also, did they get enough [Model] 3
volume to offset the 21% decline in combined S and X sales."
Mr. Musk is betting the Model 3 will transform the company from
a niche luxury car maker to one that sells affordable electric
vehicles. He envisions selling millions of vehicles a year, an
ambitious jump from selling just tens of thousands of vehicles two
With Tesla selling cheaper vehicles, analysts are increasingly
worried about the company's ability to maintain higher margins.
Analysts on average predict second-quarter margins, excluding
revenue from the sale of credits, will fall to 20.1% compared with
24.7% in the fourth quarter. Some analysts, however, think Tesla
has made progress in reducing costs and can stave off a steep
The Model S made its debut in 2012 to rave reviews and helped
Tesla credibly challenge against luxury sedans offered by Daimler
AG's Mercedes-Benz and BMW AG. Though seven years old, Tesla has
frequently updated the car's software, improved its front end and
made other upgrades. Tesla earlier this year began offering a
version that could travel 370 miles on a single charge.
Part of the issue for Tesla may be that the cheapest Model S is
competing with the most expensive Model 3, said Shane Marcum, a
vice president of Dominion Enterprises, the research firm that
issued the registrations report. Until recently the difference in
price was about $6,000.
That gap has widened to about $16,000. The most expensive Model
3 version now sells for almost $64,000, down from a fully loaded
version going for about $69,000. Tesla last week increased the cost
of the standard Model S to $79,990. It also effectively lowered the
highest-priced version of the Model S to about $113,000 from about
$130,000 by making the previous $20,000 Ludicrous Mode upgrade part
of the performance version.
Simplifying the lineup could help Tesla reduce manufacturing
complexity at its Fremont, Calif., factory ahead of starting
production of the Model Y compact SUV planned for next year.
David Packham, 42 years old, said he is a happy Model 3 owner
since buying the car in March. The Naples, Fla., man originally
sought the most basic Model S but changed his mind after realizing
he could get similar options with the fully equipped Model 3.
"When I added up what I got for the money...it was a
no-brainer," Mr. Packham said. He said he would like to eventually
trade the Model 3 in for the larger Model S if Tesla comes out with
an updated version of the sedan with longer range and a more
Mr. Musk on Twitter in recent days has tried to extinguish talk
of a major refresh of the Model S, though the company already has
hinted at a 400-mile range car coming someday.
Write to Tim Higgins at Tim.Higgins@WSJ.com
(END) Dow Jones Newswires
July 23, 2019 14:30 ET (18:30 GMT)
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