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Wednesday, August 30, 2017

Tesla Model 3: We Don't Need No Stinking Badges

The real advantage of changing badging on Model 3 is not what you may think.

Tesla Model S P90D Ludicrous badge
Model 3 is now shipping! At the reveal event, one of the things we learned is that Tesla will not be badging Model 3 in the same way that they badge Model S and Model X.

With Model S/X the battery pack capacity is clearly labeled on the back of the vehicle. For example, a P90D badge indicates that it is a performance vehicle (P), it has a 90kWh pack (90), and the D indicates that it has dual-motor all-wheel drive. If the badge is underlined, as in the image above, this additionally indicates that the vehicle has the ludicrous performance upgrade.

Through their various incarnations over the years, Model S has had pack sizes of 40, 60, 70, 75, 85, 90, and 100 kWh. In some cases, these were software limited versions of larger capacity packs. In the history of Model S, one of the things that you could count on was that the battery capacity in Tesla's vehicles would periodically increase as battery tech advanced.

There are two battery pack options for Model 3: standard and long range. Edmunds reports here, that the long range pack is actually 80.5 kWh. When Elon Musk was asked about this in an investor call, he said it was "closer to 75." In that same call, Musk mentioned that standard range pack was "just over 50."

Badges? We Don't Need No Stinkin' Badges

I assumed that the car we were shown on July 28th would be the starting point for Model 3 and that it would have a similar march forward of battery capacity that we've seen with Model S. With this march forward, you'd need to be able to distinguish the various models with badging. To my surprise, Model 3 will not be badged with the pack capacity. Instead, Tesla will be referring to Model 3 variants by their range, rather than by their battery capacity.

This makes sense from a messaging perspective. Engineers talk about kilowatt-hours, Joe and Jane car buyer talk about range. Moving to a mass market, it's important to simplify things; boil them down to what's important to the car-buying public.

The only point of capacity is to provide range. Range is king.

The simplified messaging is important, but there's another advantage (perhaps even the real reason) that the badging has been changed for Model 3.

No Badge Equals More Margin

When the range is advertised instead of the capacity, improvements to the vehicle can be used to improve the profit margin on each vehicle, rather than increase the range. For example, say they make a small improvement to the inverter, motor, weight reduction, and/or aerodynamics for a 1% efficiency improvement. With this 1% improvement the car could have %1 more range. However, instead of the new models having 2 or 3 more miles of range, Tesla can reduce the pack capacity by a similar 1%. This will result in vehicles that have the same range advertised previously while the pack has a slightly smaller capacity.

In the above example, the new vehicle will have a slightly higher MPGe rating and an equivalent range. If the pack size is what was advertised, then reducing the pack size would seem like a step-down, even if the range was identical. By keeping the capacity unadvertised, it's importance is deemphasized.

"Range badging" allows Tesla turn efficiency into profit.

For a mass market car, the margins are vital to the company's profitability. This system allows Tesla to turn efficiency improvements into margin improvements. Tesla has stated that they will have a 25% margin on Model 3 sometime in 1H 2018 after exiting "production hell" and reducing overtime pay. Musk went on to explain that they have an eventual 30% margin target for Model 3.

Hitting this target would give Tesla the best gross margin in the auto-industry. Most mainstream automakers such as GM and Ford command blended margins of under 15%. Porsche is the industry leader with 26.9% gross margin.

If range badging is the strategy that Tesla is taking, the days of hearing about a larger battery pack every other year or so are over. Model 3 will be sticking to the 220 and 310-mile range into the foreseeable future.

Maybe in 2025, Tesla will add a super long range option.

Tesla Model 3 with no rear badging, photo via quiznosofficial on imgur

Any Badging?

Today, there is only one variant of Model 3 for sale. Soon the standard range option will be out and soon after that the dual motor option and perhaps a performance version. When these other variants arrive, how will they be distinguished? Will the car have a PLRD badge? Or will this info only appear in the touchscreen rather than the rear of the car. When the standard range cars start shipping later this year, we'll find out.