Will Model 3 leasing help or hurt Tesla?
- This article comes to us courtesy of EVANNEX (which also makes aftermarket Tesla accessories). Authored by Shankar Narayanan. The opinions expressed in these articles are not necessarily our own at InsideEVs.
Leasing is the preferred financial option for most luxury car buyers. According to Car and Driver, “more than half of all luxury sedans of any size are leased”. If we go by that statistic, leasing could easily double Tesla Model 3 sales in the United States.
Above: Brands with the highest levels of lease penetration (Source: Edmunds)
But unfortunately, things are not that simple, as Tesla prefers to keep leasing under a tight leash. Tesla CEO Elon Musk says that leasing forces an additional burden on Tesla's financials.
During the Q4-18 earnings call, Elon Musk said, “Well, we’ve been reluctant to introduce the leasing on Model 3 because of how affects our GAAP financials. So it is worth noting that demand to date is with zero leasing. So obviously, leasing is a way to improve demand but it makes our financials look worse. So we don’t want to introduce that right away. I mean we’ll introduce it sometime later this year probably.“
Unlike a direct purchase, which allows Tesla to book revenue at the time of sale, leasing defers payment over several months. The spread of sales revenue over a period of time increases Tesla’s near-term financial burden.
But Tesla’s first trip to the asset-backed securities market in February 2018 allowed the company to raise $546 million by selling bonds backed by Model S and Model X lease payments.
In December 2018, Tesla sold $837 million of bonds backed by auto leases. According to Bloomberg, a major portion of the December bond sale carried AAA ratings from Moody’s.
The high rating is a good indication that there will be enough demand if Tesla wants to hit the asset-back securities market to sell bonds backed by Model 3 leases.
Though the financial burden due to leasing is not as bad as it was before, Tesla still refuses to prioritize leasing over direct sales. A recent statement from Tesla now sheds more light on Tesla’s decision.
“Please note, customers who choose leasing over owning will not have the option to purchase their car at the end of the lease, because with full autonomy coming in the future via an over-the-air software update, we plan to use those vehicles in the Tesla ride-hailing network.” – Tesla
By refusing the purchase option for lease customers, Tesla is trying to build a pool of cars that will allow the company to launch a ride-hailing service, where it owns a decent portion of its fleet. An unusual move, as no ride-hailing company would prefer to directly own a large portion of its fleet.
Ride-hailing companies do the exact opposite of what Tesla is planning to do. Uber’s Xchange Leasing program, allows the company to lease cars to Uber drivers.
But Tesla is not a rideshare service. It’s an auto manufacturing company that wants to use ride-sharing/ride-hailing to help increase production, boost its revenue and increase margins.
The lack of a purchase option at the end of a lease term increases the short-term risk for Tesla as it reduces lease demand. But the payoff could be huge if Tesla manages to successfully build autonomous tech that allows the company to launch a full-fledged ride-hailing service.
Even if autonomous tech takes several years to mature, nothing is likely to stop Tesla from launching a ride-hailing service of its own.
Tesla’s decision to retain ownership of leased cars makes it clear that Tesla is committed to the launch of its ride-hailing service. Get ready for the Tesla Robotaxi!
Author Bio: Shankar Narayanan is the editor of 1redDrop.com. Has an MBA from Kent State University and an engineering degree from Madurai Kamaraj University. He has been an active contributor to top financial sites like SeekingAlpha and GuruFocus, and has a penchant for talking business, finance, and technology.
- Editor’s Note: EVANNEX, which also sells aftermarket gear for Teslas, has kindly allowed us to share some of its content with our readers, free of charge. Our thanks go out to EVANNEX. Check out the site here.