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Tesla Model 3 Critic Flips View, Sees Sedan Being Profitable

(Bloomberg) -- The rollout of Tesla Inc.’s Model 3 electric sedan over the last year was plagued by delays and doubts over whether it could ever be profitable. Now, one of car’s most outspoken early critics has changed his view. 

Munro & Associates, a small Detroit-area firm that disassembles new cars and analyzes them down to the nuts and bolts, came out in April with damning findings that the Model 3 was poorly built and—even worse for Tesla’s long-term outlook—costly to build. On that second point, at least, founder Sandy Munro has reversed course. Upon further analysis, his firm has found that the sedan can be profitable. It may even have the potential to make a 30 percent margin, which would be unmatched by any other other battery-powered vehicle.

“A lot of crow is being eaten around here,” Munro said in an interview posted Monday by “Autoline After Hours,” a show streamed weekly by a Metro Detroit broadcaster. “No electric car is getting 30 percent. Nobody.”

Munro said the systems that impressed him most were the tight integration of circuit board components, which he calls “a symphony of engineering,” and the efficiency of the battery developed by Tesla and Panasonic Corp. Munro also pointed to a comprehensive side-by-side comparison of the parts and materials used by the Model 3, General Motors Co.’s Chevrolet Bolt, and BMW AG’s i3, in which the Model 3 comes out favorably.

The Munro report echoes a teardown published in June by German magazine WirtschaftsWoche. That analysis, conducted by German car engineers, found that the Model 3 costs about $28,000 to build—$18,000 for materials and $10,000 for production. The cheapest Model 3 currently available starts at about $50,000, though a $35,000 version is planned by around the end of this year. 

Chief Executive Officer Elon Musk has based his prediction that Tesla will be profitable in the third and fourth quarters of this year on its ability to produce 5,000 of the sedans a week. The company exceeded that threshold in the last week of June, producing 5,031 units, but has yet to prove it can sustain those numbers. In an interview with Bloomberg Businessweek last week, Musk said Tesla should be able to reach mass production without much strain in August.

Tesla has set a long-term target for the Model 3 to earn a 25 percent gross margin. In May, the company said it expected a “slightly lower” margin in the “medium term” because it dialed back automation in certain areas of manufacturing the car, boosting labor costs. Tariffs, higher commodity prices and a weaker U.S. dollar also may drag on the sedan’s profitability, though consumers were paying more for it on average than Tesla expected, Musk and CFO Deepak Ahuja wrote in their quarterly letter to shareholders.

“The Model 3 is profitable,” Munro said. “I didn’t think it was going to happen this way.”

©2018 Bloomberg L.P.