It’s easier to compare the gross margins of the same product at two different sale prices than comparing two different products. For example, if a car is sold for $50,000 with 10% gross margin and we decide to discount it by $2,000, the new gross margin would be $3,000/$48,000= 6.25%.

The reason this is a straight-forward calculation is that in both scenarios COGS is the same because it’s the same product. There is a similar situation when comparing the rear-wheel-drive versions of Model 3. There are three versions: Standard Range, Mid Range, and Long Range. These cars are the same except the battery size. Based on my research, the battery specs are as follows:

We also have an idea about battery cost at the cell level based on Elon’s comment a few months ago.

Elon Musk: We think at the cell level probably we can do better than $100/kWh maybe later this year (Tesla Shareholder Meeting, 6 June 2018)

Therefore it’s possible to calculate what the gross margins would be for the first two versions if the Long Range version has 5%, 15% or 25% gross margin. I will show all three scenarios. I assume $115/kWh cost at the cell level and $7,000 worth of options which is typical.

Scenario 1: If Model 3 LR’s gross margin is 5%, then Model 3 MR’s would be 0.4%

Scenario 2: If Model 3 LR’s gross margin is 15%, then Model 3 MR’s would be 11.2%

Scenario 3: If Model 3 LR’s gross margin is 25%, then Model 3 MR’s would be 21.9%

Looking at these numbers, it’s difficult to understand why Tesla released the Model 3 MR version and discontinued the LR instead of starting production and deliveries for Europe. One possible explanation is that this was a planned move against the drop in federal tax credits. Tesla buyers who take delivery in Q1 and Q2 2019 will get $3,750 instead of $7,500 and then $1,875 in Q3 and Q4 2019. Another possible explanation is that the LR was discontinued to encourage buyers to go for the Model 3 LR AWD. I’m not sure either is a good reason to discontinue the LR.

Update (20 Oct 2018): I think the reason might be Elon’s desire to help out Model 3 Standart Range reservation holders before the $7,500 federal tax credits is over. Tesla had to cancel the LR temporarily in order to deliver most of the early MR orders by the of this year. Displaying prices after savings makes more sense in this context. This is Elon’s way of saying, “hey we couldn’t deliver the $35K version in 2018 but if you upgrade to the MR, you still get a good deal after incentives.”

Update (21 Oct 2018): I want to clarify how the calculation works. For example, in the last chart, Cost of Goods Sold for the Model 3 Long Range is $42,000 because we assumed 25% gross margin. COGS will be the same for the Model 3 Mid Range except for the cell cost. Cells will cost $7,849 instead of $9,258 ($1,409 cheaper) . Therefore when we subtract $1,409 from $42,000, we find $40,591 for COGS for the MR version and from there we can calculate the gross margin.

Not all the potential LR RWD customers will move down to buy MR RWD, some will still want longer range, and will now have to purchase AWD, which likely has higher margin than LR RWD.

It is more like:”We could not provide the 35k version with 25k after incentives, so would you buy 10k more expensive version instread?”

Unfortunately, really few will…