Tesla Is Gearing Up To Allow Customers To Lease The Model 3
Rumors began springing up today that Tesla is preparing a leasing program for its cheapest model on offer – the Model 3. An internal company memo revealed, via sources close to the matter, that Tesla sent an email to employees to let them know they will soon be able to lease a Model 3.
A Tesla ([stock}NASDAQ: TSLA[/stock]) spokesperson actually confirmed the story to electrik but remained vague on a possible timeline:
This is simply an internal document to ensure teams are prepared for when we eventually introduce a leasing option to customers. No decision has been made about when Model 3 leasing will be available, but it will definitely be after the dates outlined in this document.
Tesla Model 3: Running short on demand or taking advantage of boosted production?
4000 Tesla cars loading in SF for Europe pic.twitter.com/BODbSzo3Fr
— Elon Musk (@elonmusk) February 20, 2019
Tesla enjoyed a large amount of fanfare in 2016 and 2017 regarding the hundreds of thousands of eager buyers that lined-up to plunk down cash to reserve a Model 3. The company never disclosed a final pre-order number but many speculated, based on available information, that there were nearly half a million pre-ordered vehicles; however many were canceled after delivery times stretched out beyond initial estimations.
Production of the Model 3 began in mid-2017 and while early volumes were low, the company really began to ramp manufacturing numbers towards the middle of last year. That enabled Tesla to ultimately post back-to-back profitable quarters.
It seemed that even at 5,000 Model 3’s a week, Tesla would enjoy sustainable demand well into 2019 and perhaps even into 2020. Now the company is aiming to produce anywhere from 7,500 to 10,000 units a week and that resovoir of pre-orders may be drying up much more quickly.
The question here seems to be, is Tesla simply taking advantage of its increased production throughput in order to monetize additional vehicles? Or is it that production finally catching up to demand, and thus there is a surplus of Model 3’s waiting to find homes?
It doesn’t bode extremely well that just a few weeks ago Tesla cut down its deliveries team via a fresh round of layoffs.
Model 3 leasing will affection Tesla financials
Currently, about 20 percent of Tesla’s other (and more expensive) models, such as the Model X and Model S, are lease options. Those vehicles can and often do breach the $100,000 mark, while Model 3’s start at around $40,000, which attracts a completely different consumer demographic. It could be that potential Model 3 buyers will be more likely to lease the cheaper Tesla model.
Elon Musk actually spoke on the topic of a Model 3 leasing program during the recent earnings call to investors:
Well, we’ve been reluctant to introduce the leasing on Model 3 because of how its effect our GAAP financials. So it is worth noting that demand to date is with zero leasing. So obviously, leasing is a way to improve [Model 3] demand but it makes our financials look worse.
-Elon Musk, CEO
And this makes perfect sense; instead of an upfront payment of $50,000, the company would receive monthly payments for a couple of years, plus the depreciation of the vehicle once it is returned at the end of the lease period.
It’s probably no small coincidence that this program coincides with the reduction of Federal EV credits available to buyers. A lease option never qualified for the program and now the option to lease versus buy just might be more attractive. Tesla knows its audience well and this actually makes a lot of sense.
The bottom line is Tesla buyers are famous for remaining loyal, and a low-barrier-to-entry lease option, at least for those with established credit, might be a way to reach new customers for the EV-maker. While the program for employees will begin in “the next few weeks”, a public program make take much longer, possibly because Tesla wants to delay the GAAP effect that leasing new vehicles will have on the company’s books.