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Tesla launched Model Y, Model 3 variants priced $5,000

lower

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Tesla removed premium and some basic parts and features to

cut

cost

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Tesla's margins have been under pressure after price cuts,

incentives

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Plummeting regulatory credit sales seen hurting Tesla's

profit

By Abhirup Roy and Akash Sriram

SAN FRANCISCO, Oct 21 (Reuters) - The profitability of

Tesla's so-called affordable new cars will be in focus

when the electric vehicle maker reports quarterly results on

Wednesday, and analysts think that thousands of dollars in cost

cuts per vehicle will not be quite enough to protect profit

margins.

The Standard Model Y and Model 3, introduced earlier this month,

represent a bet by Elon Musk that Tesla can increase overall

sales and earnings by driving volume, even if each vehicle

itself is less profitable. The billionaire CEO has prioritized

robotaxis in Tesla's future but must keep sales up while the new

machines are developed.

The Model Y and Model 3 are priced $5,000 to $5,500 lower

than predecessors in the United States. Cutting battery size,

offering a less powerful motor, removing rear touchscreens and

myriad other current details have saved thousands of dollars.

"Tesla's intent is clear - trade short-term margin for

long-term network scale," said Shay Boloor, chief market

strategist at Futurum Equities, who said some cannibalization of

sales of pricier models was to be expected.

The new vehicles offer cheaper ways into a Tesla in Europe and

Asia, where Chinese EVs are gaining ground, and partially offset

the elimination of a federal tax credit in the United States.

That credit ended in September, leading to a last-minute jump in

U.S. sales that will be reflected in quarterly results. Analysts

polled by Visible Alpha expect an 8.5% fall in deliveries for

the year, an issue that Musk might address.

Analysts and investors have said the Standard variants are

still too expensive. And Tesla is walking a careful line with

many of the premium features as well as basic ones stripped

out.

The smaller battery and the less powerful motor accounted

for about 40% of the price cut, according to estimates from Sam

Fiorani, vice president at research firm AutoForecast Solutions.

Tesla avoided a deeper cut to the battery in order to offer a

range of 321 miles (516.6 km) per full charge on both of the

variants.

Instead, the company chose to remove many other parts,

Fiorani said.

It dropped ventilated, vegan leather seats, ambient lighting

and power-folding mirrors. Gone are even basic features such as

seat-side buttons to change position, seat-back pockets and the

waterproof lining in the front trunk or "frunk."

"The removal of components is enough to make a buyer think

about moving up to the other model," said Fiorani.

Tesla's gross margin from automotive sales has dropped in

the past few years as it slashed prices and offered incentives

to stave off rising competition and waning demand due to high

interest rates, an aging lineup and consumer backlash against

Musk's far-right political views.

"The big question is, how much incremental demand is there

at this point with the staleness of their vehicle portfolio?"

said Garrett Nelson, a senior equity analyst at CFRA Research.

The results will also show the speed at which a key driver

of Tesla's profit is disappearing. The U.S. government has

changed policy on regulatory credits that traditional automakers

bought from electric-vehicle companies to make up for the

tailpipe pollution from their gasoline-powered vehicles. The new

policy means future sales of the credits are unlikely - and they

may have dried up in the third quarter as well.