For the third quarter of 2018, Tesla reported GAAP net income of $312 million; free cash flow of $881 million, supported by operating cash flow of $1.4 billion; and a Model 3 GAAP gross margin of more than 20%.
Q3 2018 was a truly historic quarter for Tesla. Model 3 was the best-selling car in the US in terms of revenue and the 5th best-selling car in terms of volume. With average weekly Model 3 production through the quarter (excluding planned shutdowns) of roughly 4,300 units per week, we achieved GAAP net income of $312 million. We also delivered on our internal cost efficiency targets, leading to GAAP Model 3 gross margin of more than 20%, which exceeded our guidance. Finally, our total cash increased by $731 million and we had free cash flow (operating cash flow less capex) of $881 million despite less than 10% of that amount coming from key working capital items (payables, receivables, and inventory).—Tesla investor letter
In Q3, Tesla delivered 56,065 Model 3s to customers. More than half of trade-in vehicles for those purchases were priced below $35,000 when new, according to Tesla—indicating that customers are trading up their relatively cheaper vehicles to buy a Model 3 even though there is not yet a leasing option and the Q3 starting price of a Model 3 was $49,000.
As a result, Tesla is suggesting that the total market potential for Model 3 is larger than just the premium sedan market. Tesla is also trying to bring down the Model 3 pricing to the originally teased $35,000 mark. A new medium range model is priced at $46,000.
Tesla noted that the mid-sized premium sedan market in Europe is more than twice as big as the same segment in the US. Tesla is bringing the Model 3 to Europe early next year, and expects to start taking orders in Europe and China for Model 3 before the end of this year.
To increase the affordability of Model 3, Tesla is accelerating its manufacturing timeline in China. The company aims to bring portions of Model 3 production to China during 2019 and to progressively increase the level of localization through local sourcing and manufacturing. Production in China will be designated only for local customers.
Model 3 quarterly production and deliveries should continue to increase in Q4 compared to Q3. Our target of delivering 100,000 Model S and X vehicles this year remains unchanged.
We expect gross margin for Model 3 to remain stable in Q4 as manufacturing efficiencies and fixed cost absorption offset a slightly lower trim mix and the negative impact of tariffs from Chinese sourced components. Gross margin for Model S and X will likely decline slightly in Q4, as we expect that the sequential increase in tariffs in Q4 from Chinese sourced components will be only partially offset by increased manufacturing cost efficiencies. For all three vehicles, additional tariffs in Q4 on parts sourced from China will impact our gross profit negatively by roughly $50 million.—Tesla investor letter