Tesla To Start Model 3 Leasing Program, Should Investors Worry?

Tesla’s reported leasing program for its Model 3 Sedan will not bode well for investors, according to an analyst. Although Tesla has denied any immediate leasing plan, it has stated that leasing for the new model will start this year itself.

According to Garrett Nelson, a CFRA analyst, the lease plan to boost demand coincides with the calibrated expiration of federal tax credits for buyers of Tesla vehicles.

Reduction of federal tax credits in 2019 is affecting the Model 3 sedan’s demand.

CEO Elon Musk had also said Tesla would wait until the end of this year to start the Model 3 leasing program.

“We've been reluctant to introduce leasing on Model 3 because of its effect on GAAP financials,” Musk said.

However, a report on Wednesday revealed the new plan, which quoted an internal e-mail that asked Tesla employees to get ready for the leasing of Model 3 in the next few weeks. Tesla offers lease programs on many other models.

There used to be a full $7,500 federal tax credit for electric vehicles. Tesla buyers in the U.S. are not getting that since the start of the year.

But Tesla sought to compensate that by cutting the price of all models in the US. That is how the price of Model 3’s Mid-range battery has been pruned to $44,000 from the original $46,000.

Concerns of competition pressure and top line factors

The CFRA analyst explained that despite Tesla’s success in reducing unit costing in recent quarters, there are obvious concerns on many top-line factors including dipping sales volume, price discounts, and mix. This will bother investors.

The prospect of Tesla facing intense EV competition in medium-term needs to be factored in, the analyst noted. That will be more prominent in the 2021 model year, added the analyst.

Already many EV manufacturers have lined up new releases and models in the upper end of the market, where Tesla is active now. Tesla’s high demand premium vehicles include full-size Model S sedan and the Model X SUV.

Leasing to begin with the US market

Responding to Tesla’s denial of any immediate plan, Electrek replied that the internal email was explicit that the leasing program would start in a few weeks.

It said Tesla not wanting a lease plan to affect its financials in the current quarter is acceptable. But leasing is going to be a huge demand driver for the company. It said, most probably Model 3 leasing will start off with the U.S. market.

How does leasing work?

According to the Tesla website, competitive leasing plans exist for Model S or Model X. According to Tesla CFO, Deepak Ahuja leasing covers 20 percent of Model S and Model X sales.

Leasing involves paying a small amount as down payment and enrolling on a low monthly payments plan.

There are many leasing options to choose from. They can be customized as per the pocket size of the customer, in terms of ownership span and mileage.

Generally, Tesla Leasing terms are for 3- years with options of 10,000, 12,000 or 15,000 annual mileage targets.

A modest $7,000 down payment, acquisition fee of $695 and the first month's lease payment will be enough to pick a Tesla vehicle on lease at the moment.