Tesla's BIG Problem With the Model 3 - Something is Cannibalizing Its Sales

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Tesla has a big problem with the Model 3 right now and we have some recommendations of what it can do about it.

The Tesla Model 3 - The Problem

Inventory for the Tesla Model 3 is starting to increase, and this signals a problem - that demand for the vehicle is less than the supply. When this happens, a company must lower prices if it wishes to sell all of its inventory.

However, there is a problem here. Tesla has already lowered its prices for the Model 3. A standard range Model 3 RWD is $43,990 and only the white paint option is free. With inventory increasing, Tesla has a problem.

The other part of the problem is that the Model Y is selling out fast and is likely taking sales away from the Model 3. The reason for this is that the long range Model Y price is only about $9,000 more than the standard range Model 3.

This is way too close of a gap for two vehicles that offer a drastic difference in value. The Model Y is a much better overall car with more room, a better heat pump and air filtration system, and better experience. The Model 3 is more for people who don't need space, a more efficient vehicle, and just need to get from Point A to Point B (like me).

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The Tesla Model 3 - The Solution

What can Tesla do about this problem? If it does nothing, inventory of the Model 3 will simply continue to pile up.

The first thing Tesla can do is to lower prices on the standard range Model 3. It can lower the price to $39,990, breaking the $40,000 barrier. With the U.S. IRA tax credit, this puts the price at about $32,490. As Tesla gets close to the $30,000 mark, it can address about 40% of the automotive market, according to ARK Invest.

The second thing Tesla can do is raise the price of the Model Y. Right now, the price difference is too small. A consumer is going to choose the Model Y every time with such a close price difference.

The third thing Tesla can do is to really make progress on Project Highland. Tesla needs to find a way to drastically reduce the cost of the Model 3. It needs to be in the eventual price range of about $35,000 as a base price, as it was originally intended. This can be done with single castings, simplifying the exterior and interior, and automating more processes.

The fourth thing Tesla can do is bring back the long range Model 3 and make the price $47,000 or less. If it does this, the standard range Model 3 needs to be $40,000 or less or nobody will buy it. LFP batteries will be a big key in the Model 3 RWD to keep it selling as they can charge to 100% regularly.

I believe the visit from the VP of Giga Shanghai will help the Fremont factory implement these cost improvements on the Model 3. I own the Model 3 RWD, and it has been a wonderful car to own.

What else can Tesla do to address the growing inventory of the Model 3 - should it cut prices even more?

In Related News: Elon Musk Tells Employees Not To Worry About Stock

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Jeremy Johnson is a Tesla investor and supporter. He first invested in Tesla in 2017 after years of following Elon Musk and admiring his work ethic and intelligence. Since then, he's become a Tesla bull, covering anything about Tesla he can find, while also dabbling in other electric vehicle companies. Jeremy covers Tesla developments at Torque News. You can follow him on Twitter or LinkedIn to stay in touch and follow his Tesla news coverage on Torque News.

Image Credit, Tesla, Screenshot