On October 1, the China-made Tesla Model 3 began a new round of price cuts: the Model 3 with a standard driving range is adjusted to RMB 249,900 ($36,800) after subsidies, while the one with a longer range follows with a price cut to RMB 309,900 yuan. And it's only been five months since the last price cut.

According to Ping An Securities, considering the gross margin of the product and the positioning of the model, RMB 200,000 could be the bottom line for the China-made Model 3, and another price cut is expected in the first half of next year.

In order to understand the profit margins and price reduction potential of the China-made Model 3, the revenues, costs, and profits of the US-made Model 3 are first estimated.

Model 3 sales in 2019 are 302,000 units, corresponding to 21.2 GWh of battery installed capacity, which is measured to get a Model 3 with a standard driving range sales ratio of 24%, long-range + performance version sales ratio of 76%, and the average price of a Model 3 unit in 2019 is $48,000.

Ping An Securities expects Model 3 average gross margins to be around 20% in 2019, with an average cost per unit of around $38,400.

A cost breakout of the 2019 Model 3 produced in the US, based on financial data from key suppliers, industry data, and other publicly available information, is expected to have an average unit BOM cost of approximately $31,400, or approximately 82% of the total cost.

Ping An Securities forecasts each of the China-made Model 3 cost breakdown items separately by model and by China-made parts adoption rate.

Compared to the US plant, the Shanghai plant has a greater cost advantage over the US plant in terms of raw materials, labor, and depreciation, in addition to higher energy and logistics costs.

With the increase in the proportion of China-made parts, there is still room for China-made Model 3 prices to decline on the basis of ensuring reasonable profits.

Battery: After CATL supply to Tesla, Model 3 with standard driving range China-made Model 3 all switch to lithium iron CTP program, the cost of the single-car battery is expected in China-made lithium-ion three-element battery on the basis of another 20% drop.

Other parts: assuming China-made parts cost is 10%-20% lower than the US-made models, the current Tesla all parts comprehensive China-made parts are expected to reach 70%, is expected to finally achieve 100% China-made in the first half of 2021.

Direct labor: assuming a monthly salary of 7,000 yuan for production employees, and about 5,000 employees in the first phase of the workshop, corresponding to a production capacity of 150,000-200,000 units, the labor cost of a single car is about 2,800 yuan, down 70% compared with the US-made Model 3.

Manufacturing costs: According to Tesla's financial report, the fixed asset investment in the Shanghai plant is 65% lower than that in the US. Corresponding to a capacity scale of 150,000-200,000 units, the depreciation expense of Model 3 is expected to drop by about 65% per vehicle.

For energy, Tesla's Shanghai factory is 50% more expensive than the US factory.

In terms of amortization and other manufacturing costs, costs are expected to drop by 50%.

Based on the above assumptions, Ping An Securities expects the Model 3 with standard driving range bike costs to fall by 29% compared to the US version after achieving 100% China-made, Model 3 with a longer range bike Cost reduction by 23%.

Finally, we analyze the profit level and potential price reduction of China-made Model 3 under different strategies.

(1) Price Rigidity Strategy: If the price of Model 3 with a standard driving range and Model 3 with a longer range remains unchanged at RMB 269,700 and RMB 309,900 respectively, the current two versions of China-made Model 3 will be sold at the same price before subsidies. 3 gross margin is around 28%/20%. With 100% China-made parts, the Model 3 gross margin will reach 33%/26%.

2) Steady gross margin strategy: If the steady gross margin is maintained at 25%, the price of Model 3 with standard driving range will drop to RMB 221,000, and Model 3 with a longer range will drop to RMB 307,000 after 100% of China-made parts are used.

Ping An Securities believes that a price range of slightly above CNY200,000 would be appropriate for the Model 3.

Meanwhile, Tesla is planning to launch a new cheaper model to cover the lower price group below RMB 200,000.

In terms of gross margin and model positioning, Ping An Securities believes that the minimum price of the China-made Model 3 will remain in the range of RMB 200,000 to RMB 220,000.

Considering that Tesla's China-made parts are expected to reach 100% in the first half of 2021 and that the new Model Y is expected to be available for sale in May 2021, it is expected that Tesla will lower the price of its products during the Labor Day and National Day holidays. China-made Model 3 will see a new round of price cuts.

Ping An Securities believes that the China-made Model 3 with a standard driving range is expected to drop to around RMB 220,000, after which it may drop further, but it is unlikely to fall below RMB 200,000. The price of the range is expected to remain at RMB 300,000.

Tesla is entering a new and larger capital expenditure cycle, with greater scope for price adjustments due to economies of scale; on the other hand, the frequent price cuts may be intended to further stimulate sales.

At the beginning of the year, Tesla set an annual sales target of 500,000 vehicles, but despite the impact of the Covid-19, the company has not adjusted its target.

As of Sept. 30, Tesla had delivered 318,400 new vehicles, which means that more than 180,000 vehicles will need to be delivered in the fourth quarter to meet this year's sales target, with China being the key market.

After the latest round of price cuts, the Tesla Model 3 has entered the CNY200,000-RMB250,000 price range, which will help attract price-sensitive consumers. It also puts some competitive pressure on electric models in the same price band, such as the BYD Han and Xpeng P7.

As for pure EVs, the downward shift of Tesla's price range will divert foreign and China-made high-end models, and in the short term, RMB 150,000 to 250,000 will be the main market for joint venture EVs, while RMB 150,000 or below will be the niche market for Chinese EVs.

Ping An Securities pointed out that Han's current production capacity is insufficient and some consumers may shift their purchase targets due to long waiting time, resulting in loss of orders from Han; Xpeng P7 is similar to Tesla in terms of intelligent product positioning and is also expected to bear the pressure of Tesla's price reduction.

The Nio competes with the above-mentioned models in terms of price, service, and model categories, and has already experienced Tesla's last round of price cuts, but its sales are rising month after month, so Ping An Securities believes that the impact of Tesla's price cuts on its sales will be small.

In the long run, electric vehicles are an incremental market with huge room for growth.

Tesla's series of actions, including frequent price cuts, have had a good educational effect on the market, making more people gradually understand EVs, which means that the potential customer base for EVs is gradually expanding, which will have a positive impact on most of the EV products and companies in the market.