In their most important US market, the plunge in registrations far outpaced their already stunning global decline. Which opens a whole new question.

The Model S and the Model X are Tesla’s high-dollar high-margin vehicles. Some versions clock in at over $100,000. Sales of them have been declining globally ever since the Model 3 showed up in quantity. But in the second quarter, registrations in California of the Model X plunged by 40% compared to a year ago. And registrations of the Model S plunged by 54%, to just 1,205 vehicles.

California is the most important market for these models in the US. In 2018, the state accounted for 40% of Model S registrations in the US. It’s Tesla’s home turf. In California, the Tesla buzz has been deafening for years, supported by hefty state subsidies from day one.

This registration data was collected by Dominion Cross-Sell, cited by the Wall Street Journal. A delivery occurs when the customer takes possession of the vehicle. A registration occurs later, when the sale of the vehicle is registered with the DMV, and the DMV completes its process.

Global deliveries of the Model S and the Model X have deteriorated sharply – but not like in California. Tesla, which will report second quarter earnings on Wednesday, doesn’t disclose US deliveries. It only discloses global deliveries. According to Tesla’s own disclosures, global deliveries of the Model S and Model X combined fell by 33% in the first half, with a 44% drop in Q1 and a 21% drop in Q2. This type of drop – 33% in the first half – is devastating enough for any automaker, unless it plans to discontinue the model in the following years.

But the fact that California car buyers are souring on the Model S, attested to by a 54% drop in registrations, is rough. By the looks of it, high-dollar Model S and Model X sales are getting brutally cannibalized by lower-dollar Model 3 sales.

Model 3 registrations in California nearly doubled to 16,372 in the quarter, according to Dominion Cross-Sell. It is definitely getting popular. In San Francisco, I now see them driving and parked every time I walk around. And they’re involved in accidents. Just on Sunday, an allegedly speeding driver in a (peer-to-peer rented) Model 3 ran a red light in the Tenderloin, collided with a Mini and then hit pedestrians. The headline in the SFGate: “Husband killed, wife hurt after being hit by Tesla in SF.” If the car had been a Ford Fusion, the vehicle’s make would not have made it into the headline.

Tesla is special. That is one of the things CEO Elon Musk has accomplished. Some terrible tragedy involving a Tesla has “Tesla” in the headline. If some terrible tragedy involves a Ford, well, forget “Ford.” Any publicity is good publicity, they say.

But the high-dollar and high-margin Model S and Model X are like so 2017.

The Model S has some issues, including it’s expensive, it’s no longer unique – there are many EVs out there now – and it has been around since 2012. Though there have been many updates over the years, including mechanical and software updates, battery improvements, and some changes to the exterior, the car is fundamentally unchanged and is getting a little long on the tooth, by auto industry standards. It used to turn heads. Now people are used to it.

But the biggest issue the Model S faces is the Model 3. It looks similar — like a slightly smaller re-skinned Model S — but under the new pricing tiers, the Model 3 costs a lot less. And this gap is growing. Last week, Tesla raised the price of the base Model S to about $80,000. This is over twice the amount of the base Model 3. And the most expensive Model 3 sell for about $15,000 less than the base Model S. So, for buyers, these are massive differences.

But for Tesla, gaining volume of lower-priced lower-margin vehicles by gutting its volume of high-dollar high-margin vehicles is a tricky strategy for its cash flow, which needs every help it can get.

And with deliveries plunging 33% globally, and more in its most important market, which could be a harbinger for global trends, there is now a new question: How long can Tesla maintain the Model S and the Model X? If Tesla cannot stop this plunge in deliveries, after a year or two, the Model S and Model X will fall into oblivion and will have to be discontinued.

Kudos to the private equity firm behind this deal. These things don’t happen overnight for companies. They happen overnight only for investors. Read… Everything’s Fine Until Suddenly it Isn’t: How a “Leveraged Loan” Blows Up

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