Tesla, Inc. to Discontinue Cheapest Model S as Model 3 Deliveries Ramp-Up

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Electric-car maker Tesla (NASDAQ: TSLA) has been making some changes to its Model S and Model X lineups as it ramps up production and deliveries of its cheaper Model 3. Namely, Tesla lowered prices for the base version of its Model X and for Model S and Model X vehicles equipped with Tesla's largest batteries. The changes are likely part of an effort to better position the higher-end vehicles next to Tesla's recently launched Model 3.

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Now Tesla is making another change to its product lineup by discontinuing the rear-wheel-drive version of Model S. The move will make the entire Model S and Model X lineups only available in all-wheel drive, leaving the Model 3 as the sole Tesla vehicle offered in a rear-wheel drive option.

Model S and Model X: all-wheel drive only

Tesla is discontinuing the last rear-wheel-drive Model S on Sunday, Sept. 24, a Tesla spokesperson confirmed to The Motley Fool. 

The rear-wheel-drive version of the 75 kilowatt-hour battery Model S was Tesla's least expensive Model S, starting at $69,500. To add all-wheel drive, customers have to pay an additional $5,000. The all-wheel version of Tesla's 75 kWh Model S gives it slightly more range and quicker acceleration than the rear-wheel-drive version.

By discontinuing the last rear-wheel-drive Model S, Tesla further differentiates its higher-end vehicles from its July 28-launched Model 3. One of the ways Tesla is able to offer a $35,000 version of its new Model 3 is by eliminating many of the features available in the Model S. The entry-level Model 3, for instance, has a smaller 50 kWh battery, doesn't come with all-wheel drive, and is slightly smaller than the Model S. While Model 3 customers can upgrade to a larger battery and all-wheel drive, an upgraded Model 3 will still have less range and slower acceleration than the base version of Model S.

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Preventing cannibalization

Clear differentiation between Tesla's Model 3 and its higher-end vehicles could help prevent cannibalization of Model S and Model X sales. While Tesla doesn't have to worry about cannibalization yet since Model 3 production is still extremely slow (Tesla only expects to produce 1,500 Model 3 units in Q3), the threat is real as Model 3 production ramps up. 

Before the end of the year, Tesla expects to achieve a production run-rate for the Model 3 of 5,000 units per week. Further, at some point next year, Tesla believes it will achieve a production run rate for the Model 3 of 10,000 units per week, or an annualized run-rate of over 500,000 units -- a big jump from Tesla's current annual production run-rate of 100,000 units for the Model S and Model X combined.

The Model S and Model X remain important products for Tesla's business. Tesla expects Model S and Model X sales to be slightly higher in the second half of the year, and investors are hoping two higher-priced products can help contribute operating cash flow to Tesla's capital-intensive expansion plans.

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Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.