Tesla ditches Model S with smallest battery, bumps up guidance

Tesla Model S

Electric car maker Tesla Motors announced on Sunday night that it has decided to cancel production of the base version of its Model S electric car that has the smallest battery pack, at 40 kWh (or 160 mile range). Tesla says only 4 percent of customers had ordered that version.

Tesla will continue to sell the Model S with 60 kWh (230 miles) and 85 kWh (300 miles) battery packs. Customers that already purchased the base Model S will get a 60 kWh version, but with software that will maintain the battery level to its 160 miles range.

Tesla Model S

The decision means that Tesla’s least expensive Model S will start at $62,400, instead of in the $50,000 range. Perhaps the move could also help boost Tesla’s margins on the Model S, which was around 8 percent at the end of 2012, and which Tesla is hoping will be closer to 25 percent later this year.

Clearly Tesla’s early customers, at this stage, care more about having a larger range for the car than shaving off $10,000 from the car. Perhaps that could change for Tesla’s third electric car, which is supposed to be a more low cost mainstream car.

At the same time that it streamlined its product line up, Tesla also announced that it has boosted its earnings guidance for the first quarter of 2013, due to 250 more Model S cars being delivered than expected. While Tesla had already reported that it expected to reach profitability on a non-GAAP basis (excluding non-cash options and warrant-related expenses) for the first quarter of 2013, Tesla now says that it expects to be profitable on a GAAP basis, too.

The fourth quarter of 2012 was a breakthrough time for Tesla. The company moved into volume production, and started producing 400 Model S cars per week. Now Tesla just needs to continue to produce Model S cars at that volume and push up its margin to meet 25 percent so that it can morph into a profitable company on a recurring basis.

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