UBS repeats: Tesla will lose money on $35,000 Model 3

Key Points
  • Tesla Model 3 has a powertrain that appears to be years ahead of competitors.
  • But the $35,000 base model the company originally planned to make is expected to lose money.
Tesla analyst: The company needs to increase price of Model 3 just to break even
Tesla analyst: The company needs to increase price of Model 3 just to break even

Buyers waiting for that long-promised $35,000 Tesla Model 3 sedan probably shouldn't hold their breath.

After UBS recently pulled apart a Model 3 and compared its quality and estimated costs with two competitors, UBS analyst Colin Langan said he thinks Tesla will never be able to make money at the $35,000 the company originally planned to charge for an entry-level model designed for the masses.

"This car needs to sell in the low $40,000's to break even, and I think they're a long way from the 25 percent growth margin target, unless they can sell it well over $50,000," Langan said Tuesday on CNBC's "Power Lunch."

UBS hired a team of engineers to pull apart three different electric cars to compare their technology and production costs: a new Tesla Model 3, a 2014 BMW i3 and a 2017 Chevy Bolt.

The team examined a $49,000 2018 Model 3 and were "crazy" about the powertrain, "highlighting next-gen, military-grade tech that's years ahead of peers," Langan said in a note dated Aug. 15. But the costs were higher than expected, and the cars would lose about $6,000 each at Tesla's original plan to sell an entry model at $35,000, he said.

It is another sign Tesla may have trouble turning into the mass-market automaker it said it wants to become.

Plans to manufacture the lower-cost vehicle have been delayed since its announcement in 2016 as the electric car manufacturer struggled to meet demand. CEO Elon Musk said in May that manufacturing the Model 3 at that price "right away" would cause Tesla to "die."

Instead, Tesla focused on higher-cost versions that yield better margins, and that move may help Tesla post the profit in the third quarter of 2018 Musk said he expected. The cheapest model available now is $49,000, and buyers can add options that hike the price up to $80,000. Langan estimated the profit margin on the $49,000 version UBS tore apart was about 18 percent.

The problem is those prices aren't sustainable for a midsize sedan like the Model 3, Langan said. Even though the Model 3 is a battery electric, Langan said at least some of its buyers will also be shopping midsize sedans with internal combustion engines that are priced in the mid-$40,000 range, such as the BMW 3-Series.

The UBS engineers gave a breakdown of each car's powertrain and battery, electronic controls, frame and body as well as interior and safety features. They evaluated each part's design, ease of manufacturing and cost.

Tesla beat its two competitors in cost, but the Model 3 didn't have as big a lead over the other automakers as UBS had expected. However, some of the Model 3's technology seemed to be far ahead of that found on the Chevrolet and BMW. In particular, Tesla's electric powertrain stood out as exceptionally simple and flexible.

UBS based its estimates on consultations with engineers and industry research.

Tesla was not immediately available for comment.

Chevrolet and BMW did not comment on the original UBS report.

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