While some Tesla fans are stoked about the new all-wheel-drive and Performance versions of Model 3, many in the wider world are disappointed that Tesla continues to prioritize deliveries of high-dollar loaded models (the tricked-out Performance model will go for as much as $83,000 with the Autopilot option). When will the masses get to drive the $35,000 EV they were promised?

It may be cold comfort to the thousands waiting for Tesla to get around to producing the base Model 3, but Elon Musk has good reasons for doing things this way--in fact, the survival of the company may depend on it, as he explained in a cryptic tweet: "With production, 1st you need achieve target rate & then smooth out flow to achieve target cost. Shipping min cost Model 3 right away [would] cause Tesla to lose money & die. Need 3 to 6 months after [reaching a production level of 5,000 vehicles per week] to ship $35k Tesla & live."

The chorus of Tesla doomsayers has been crowing at the latest news, trying to paint the pricey-models-first strategy as a last-ditch maneuver by a company desperate for cash. However, long-time observers of the company understand that Tesla is following the same strategy that it has since its founding: start with an expensive luxury product and work downward from there. This logic informs not only Tesla's long-term product strategy (Roadster to Model S to Model 3) but also its production schedule for each model--when the company began production of Models S and X, it followed precisely the same policy of delivering high-margin loaded versions first.

Many young companies have successfully followed this playbook, which tends to parallel the history of most new technologies. Mobile phones, air travel, even automobiles themselves--all started out as playthings for the rich, and moved down the income scale with each new iteration.

There's another simple but important principle at play here (aside from the obvious one that you can't please everybody), which applies to startups and established giants alike: focus on your most profitable products to maximize cash flow. There's a reason that automakers always put their trucks and SUVs at the front of the lot (and that Ford recently became the first to announce that it plans to focus almost exclusively on trucks and SUVs).

It's well known in the auto industry that manufacturers earn higher margins on options and top trim levels than on the cars dealers derisively refer to as "strippies" (lower-priced base models). However, Tesla has a problem (or opportunity) that the major automakers don't have: it has more orders for its products than it can quickly fill. And it needs to become cash flow-positive soon. The only logical course is to produce the highest-margin versions of its vehicles first, and bank the income it needs to keep the party going.

Published on: May 21, 2018