Can Tesla sell enough cars until the Model 3 arrives?
Two years before the release of Tesla’s long-awaited $35,000 Model 3, Tesla finds itself at another crossroads that may threaten the company’s welfare.
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Tesla continues to walk the tightrope
One simple slide in a PowerPoint presentation by a Tesla official at an auto convention in Washington this month did almost as much damage as Elon Musk’s rocket blowing up soon after liftoff.
JB Straubel, chief technological officer and co-founder of Tesla Motors, put up a slide on June 15 indicating that Tesla’s Model 3 would not “begin production until 2018.” This apparent delay set the new vehicle back from the previously announced deadline of 2017 and almost knocked the company for a loop. The website Inside EVs broke the story, as it were, and word of the PPT slide was repeated in countless news stories. The interpretation was clear: Once again, Tesla had been forced to postpone key product rollout.
Within hours, Tesla had assured investors and analysts that it was not changing its schedule. The $35,000 Model 3 will be available in 2017, as previously planned. “Contrary to speculative blogger reports, we still plan to show Model 3 in 2016 and begin production in 2017,” Ricardo Reyes, vice president of communications, tweeted. The statement about production in 2018 was said to refer to “full production,” an attempt at back-filling that many analysts viewed with a grain of salt.
Whether the reference to 2018 was just a typographical error or an inadvertent peek under the kimono, the controversy showed how delicately balanced Tesla’s position is, both in terms of meeting customer expectations and in raising money to continue its projects.
Missing deadlines would certainly be nothing new for Tesla. In February 2012 the company said its crossover Model X would be available by the end of 2013. In February 2013, it said it would be late 2014. In November 2013 the company announced that a small number would be available by the end of 2014, but actual deliveries would not begin until the third quarter of 2015. Everyone is waiting to see if this deadline will be kept. Meanwhile, speculation has increased that any delay in the debut of the Model 3 may be due to the resources that have been spent trying to get the Model X out the door.
The Model 3 is Tesla’s bid for the big time. The car is projected to have a range of 500 miles and would be priced at the aforementioned $35K, less than half of the $79,570 MSRP of the 2015 Tesla Model S. The Model 3 is intended to be a mass-market sedan that’s well within the reach of the average car buyer. Musk, Tesla’s flamboyant co-founder and CEO, hopes to sell 500,000 versions of the Model 3 by 2020, a feat that could put Tesla on a firm financial footing.
But there are pending obstacles. One is the Chevrolet Bolt, a plug-in all-electric that is the successor to the Volt, a plug-in hybrid. GM demonstrated the Bolt in a sample model this month and will also be priced in the $35,000 range. GM promised to have the Bolt on the market by early 2017, which would beat Tesla’s Model 3 out of the gate.
Whether electric-car buyers will be attracted to the Bolt – or whether they will wait for what will almost certainly be a superior product from Tesla – is a hotly debated question. “GM is ramping up to make 20,000 Bolts. Tesla is ramping up to make 500,000,” said one commenter to a Wall Street Journal story. “When a company names its new car the ‘Bolt,’ Tesla has little to worry about,” said another. But other readers cited GM’s superior service network, and the company’s long history of making money, while Tesla has only lost money.
One thing is certain: Tesla is building brand loyalty. A survey of 145 Tesla owners by automotive analyst Dan Dolev of Jeffries found that 85 percent said their next car would also be a Tesla, and 25 percent wouldn’t even consider another brand. Eighty-three percent said they would recommend Tesla to their friends, and a remarkable 89 percent said they would still buy a Tesla without the $7,500 federal government tax break. The owners also turned out to be not nearly as rich as expected. Almost 70 percent had previously owned cars that cost less than $60,000, including ones as modest as a $15,000 Toyota Highlander. They paid an average premium of 80 percent over their previous car when they bought a Tesla. As a result of the survey, Jeffries raised its target price for Tesla stock to $350 from its current $265.
The battery-producing Gigafactory outside Reno is moving ahead on schedule, with the first phase of the structure near completion and machinery is about to be moved in. The current phase represents only 14 percent of the planned layout. Once completed, the Gigafactory will be the largest building in the world, with a footprint of 5.8 million square feet and two stories of manufacturing totaling 10 million square feet. Panasonic, Tesla’s battery partner, is expected to send hundreds of workers to the site this fall to prepare for full-scale production. The factory will also employ hundreds of local workers.
Wall Street Journal columnist Charley Grant threw a wrench into the works recently when he wrote that Tesla is still burning through cash and probably will run out of money if the Model X does not sell as expected. He says the company should sell another issue of stock while the price is still high. He suggested that a price of $200, 25 percent below the current market rate, could raise $750 million and carry the company over to the introduction of the Model 3.
Whether the company will dilute ownership or take a chance that Model X sales will reverse its cash flow is just one of the many decisions Musk will be facing in the near future. One thing is certain: He will be balancing atop that high wire for several years to come.
Tesla going full speed ahead, but it has competition
Shrugging off any concern about falling gas prices, Tesla is planning to have its medium-priced Model III on the road by 2017. If it meets with anything like the reception of the 2014 Model S, Tesla will be in good shape.
Auto reviewers were ecstatic about the Model S, saying it put Tesla in a class by itself. As Ali Aslani wrote on MasterHerald.com:
If you think electric cars are slow and wretched creatures, you obviously haven’t seen the 2014 Tesla Model S. This vehicle is a beast on wheels that will make you forget half your life’s problems, until you look down at the dash and remember that you cannot pull up to a gas station for refueling, once you run out.
That refueling is becoming less and less common, however, as Tesla’s battery technology has pushed the range for its vehicles to 400 km, or 250 miles. It’s enough for a good commute to work. And recharging stations are becoming more common as Tesla and other auto manufacturers push to have them installed.
What really turns on car enthusiasts, however, is the acceleration possible with an electric motor. Alex Kerston posted a video on CarThrottle.com, in which a user who normally drives a Lamborghini Aventador has just ridden in the 691-hp Model S P85D:
The acceleration is ridiculous. I daily drive an Aventador and I thought I got used to fast acceleration. But no. … As a passenger, you do not get a chance to get ready for it at all. My internal organs were glued to the back of my body. … after about a dozen of those 0-60 accelerations, I felt like I had to puke – probably the first time I’ve felt this way in many years.
The question is, is this the kind of performance ordinary drivers are looking for? The Model III will weigh 1,000 pounds more than the Model S and therefore won’t be in the same class as the roadsters. But at $35,000 to $50,000, it will still be in the higher class of buyers. With all the inconveniences of recharging and being a first mover in the electric field, it will be a wonder if the Tesla standard model will be able to reach the 500,000 sales mark at which the company is aiming.
Meanwhile, other auto manufacturers are not standing still. Last week, Volkswagen, the largest auto company in the world, reportedly bought a stake in the Silicon Valley battery manufacturer QuantumScape, which gives VW access to a technology that could potentially deliver far more range that Tesla’s 400 km. QuantumScape’s solid-state batteries also carry a smaller risk of fire than the lithium-ion batteries used in many electric vehicles, including Tesla’s. Hybrid technology leader Toyota has been developing comparable technology since at least 2010, and EV leader Nissan has been promising similar developments. By the time Tesla comes to market with its lithium-ion-driven Model III, it could end up looking downright conservative in its technology.
Volkswagen’s investment in solid-state batteries is especially interesting, since at one point it was actually copying Tesla’s approach to EV battery technology. In 2009 and 2010, Volkswagen was working with Tesla co-founder Marin Eberhard on Tesla’s cylindrical-style lithium batteries but rejected the technology as too complex when it brought the e-Golf to market. Now Volkswagen is looking to leapfrog Tesla into solid-state technology.
Volkswagen Group is planning a short-term offensive against Tesla. It will bring out the $100,000 electric R8 sports car to compete with the Model S. Also in the works is the forthcoming Q8 crossover coupe. Both cars will be produced by VW’s Audi subsidiary.
Other manufacturers are taking aim at Tesla’s share of the $100,000 electric sports-car market. BMW is likely to add more products to its electric “I” brand and has unveiled an electric powertrain that it’s calling the “Tesla killer.” Porsche, also owned by Volkswagen Group, is said to be planning an electric version of a smaller sedan, code-named the Pajun. Former Tesla investor Mercedes-Benz is also working on an electric version of its flagship S-Class vehicles.
The takeaway is that powerful electric vehicles with a suitable range are no longer going to be a luxury item. If Tesla is successful in breaking through with the Model III, it’s going to be followed quickly by competitors in the same class and perhaps with a different technology.
More problems for Tesla: Analyst cuts sales forecast
Morgan Stanley auto analyst Adam Jonas has been bullish on Tesla Motors. But he added to the company’s woes Wednesday when he slashed its sales outlook in the face of falling oil prices.
Jonas predicts that the luxury electric-car maker will only be able to sell 300,000 vehicles by 2020.
Cheap gas prices could be partly responsible, since the narrative at the start of this month was that plunging prices had contributed to consumers returning to their SUV- and pickup-loving habits. (Electric vehicles didn’t sell badly in November either, particularly the Nissan Leaf.)
But this segment in CNN Money’s story presents an other interesting angle:
The biggest drag on Tesla sales will be the lower-priced, mass market Model 3 expected in showrooms in about three years.
Jonas’ doubts that Tesla will be able to price the Model 3 in the $35,000 range as many have been expecting. He’s now thinking the price could be closer to $60,000.
Tesla’s philosophy is that it won’t put out a vehicle that doesn’t meet its own, and founder Elon Musk’s, high expectations. See this post from November, about how the company wasn’t bothered about delaying production of the crossover-utility vehicle Model X, which is now expected in showrooms until the third quarter of 2015.
Tesla’s stock has fallen precipitously since Sept. 4, when it was $286.04. It closed at $197.81 on Tuesday.
Tesla won’t produce the Model X until it’s sufficiently awesome
Elon Musk would rather wait to put out an eagerly awaited product than push one out that’s not awesome.
That was apparent from the language used in Tesla’s Q3 newsletter, published Tuesday (emphasis ours):
We recently decided to build in significantly more validation testing time to achieve the best Model X possible. This will also allow for a more rapid production ramp
compared to Model S in 2012.In anticipation of this effort, we now expect Model X [the company’s forthcoming SUV] deliveries to start in Q3 of 2015, a few months later than previously expected. This also is a legitimate criticism of Tesla – we prefer to forgo revenue, rather than bring a product to market that does not delight customers. Doing so negatively affects the short term, but positively affects the long term. There are many other companies that do not follow this philosophy that may be a more attractive home for investor capital. Tesla is not going to change.
Tesla’s earnings beat analyst’s expectations, but some weren’t impressed by the pace of deliveries by the luxury electric-car maker. Tesla said it would deliver about 33,000 vehicles in 2015, lowering its estimate by 2,000. John Thompson, CEO of Vilas Capital Management, said on CNBC’s “Closing Bell” program that Tesla is “grossly overvalued … A company making 33,000 cars is worth half of Ford Motor Company today.”
Still, Tesla’s stock closed at $240.20 Friday, down 98 cents for the day, but up from $230.97 since Tuesday’s earnings report. Ford closed at $14.17, down 2 cents.
(Photo: Darren Brode, Shutterstock)
Tesla Motors, Inc.’s Demand Is Growing Faster Than Production
Tesla’s (NASDAQ: TSLA ) Model S has been an enormous success. Not only has the all-electric luxury sedan been outselling all comparably priced cars in North America in 2013, but Tesla is expecting sales to increase by more than 50% this year. Most surprising of all, however, is that Tesla is achieving this without spending any money on advertising. How long can this trend continue?
Tesla Announces Plans to Deliver 100,000 Electric Cars in 2015 Read more
Elon Musk announced that Tesla will deliver 100,000 electric vehicles in 2015. This is a big jump up from the 22,000 vehicles Tesla produced in 2013 and the 34,000 projected for this year.
Is Elon Musk the next Henry Ford?
Elon Musk doesn’t mind making comparisons between himself and Henry Ford. Others are doing it as well.
In announcing his plans for a “Gigafactory” to manufacture batteries for a fleet of 500,000 Teslas, Musk said it would be like Ford opening his famous River Rouge plant, the move that signaled the birth of mass production.
The founder of PayPal and current titular leader of Silicon Valley (now that Steve Jobs is gone), Musk is not one for small measures. The factory he is now dangling before four western states would produce more lithium-ion batteries than are now being produced in the entire world. And that’s not all. He’s designing his new operation to mesh with another cutting-edge, non-fossil-fuel energy technology – solar storage. His partner will be SolarCity (where Musk sits on the board), run by his cousin Lyndon Rive. Together they are looking beyond mere automobile propulsion and are envisioning a world where all this solar and wind energy stuff comes true.
So, is Musk a modern-day Prometheus, bringing the fire to propel an entirely new transportation system? Or, as many critics charge, is he just conning investors onto a leaky vessel that is eventually going to crash upon the shores of reality? As the saying goes, we report, you decide.
One investor that is already showing some qualms is Panasonic, which already supplies Tesla with all its batteries and would presumably help the company fill the gap between the $2 billion it just raised from a convertible-bond offering and the $5 billion needed to build the plant. “Our approach is to make investments step by step,” Panasonic President Kazuhiro Tsuga told reporters at a briefing in Tokyo last week. “Elon plans to produce more affordable models besides [the] Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger.” Of course, this is Japan, where “the nail that sticks out gets hammered down.” Corporate executives are not known for sticking their necks out.
Another possible investor is Apple, which has mountains of cash and, at least under Steve Jobs, was always willing to jump into some new field – music, cell phones – to try to set it straight. This is a little more ambitious than the Lisa or the iPod and Jobs is no longer around to steer the ship, but Apple and Musk officials held a meeting last spring that stirred a lot of talk about a possible merger. A much more likely scenario, according to several commentators, is that Apple would become a major player in the Gigafactory.
And a Gigafactory it will be. Consider this. The three largest battery factories in the country right now are:
1) The LG Chem factory in Holland, Mich. is 600,000 square feet, employs 125 people and produces 1 gigawatt hour (GWH) of battery output per year.
2) The Nissan factory in Smyrna, Tenn. is a 475,000 square-foot facility with 300 employees puts out 4.8 GWH per year.
3) A123 Systems’ battery factory in Livonia, Mich. is 291,000 square feet, employs 400 people and produces 0.6 GWH per year.
Both LG and Nissan received stimulus grants from the Department of Energy, built to overcapacity and are now operating part-time.
Now here’s what Musk is proposing. His Gigafactory would cover 10 million square feet, employ 6,500 people and produce 35 GWH per year of battery power. Basically, Musk’s operation is going to be ten times better anything ever built before, at a time that most of what exists isn’t even running fulltime. Does that sound like something of Henry-Ford proportions? Similar to Ford’s $5 a day wages, perhaps?
There are, of course, people who think all of this is crazy. In the Wall Street Journal blog, “Will Tesla’s $5 Billion Gigafactory Make a Battery Nobody Else Wants?,” columnist Mike Ramsey expresses skepticism over whether Tesla’s strategy of using larger numbers of smaller lithium-ion is the right approach. “Every other carmaker is using far fewer, much larger batteries,” he wrote. “Tesla’s methodology – incorrectly derided in its early days as simply using laptop batteries — has allowed it to get consumer electronics prices for batteries while companies like General Motors Co. and Nissan Motor Co. work to drive down costs without the full benefits of scale. Despite this ability to lower costs, no other company is following Tesla’s lead. Indeed, in speaking with numerous battery experts at the International Battery Seminar and Exhibit in Ft. Lauderdale a few weeks ago, they said that the larger cells would eventually prove to be as cost effective, and have better safety and durability. This offers a reason why other automakers haven’t gone down the same path.
But Musk has managed to produce a car that has a range of 200 miles, while the Leaf has a range of 85 miles and the Chevy Spark barely makes 82. Musk must be doing something right. And with Texas, Arizona, Nevada and New Mexico all vying to be the site of the Gigafactory, it’s more than likely that the winning state will be kicking in something as well. So, the factory seems likely to get built, even on the scheduled 2017 rollout that Tesla has projected.
At that point, Musk will have the capacity to produce batteries to go in 500,000 editions of the Tesla Model E, which he says will sell for $35,000. Sales of the $100,000 Model S were 22,000 last year. Does this guy think big or what?
To date, Silicon Valley doesn’t have a terribly good record on energy projects. Since Kleiner Perkins Caufield & Byers fell under Al Gore’s spell in 2006, its earnings have been virtually flat and the firm is now edging away from solar and wind investments. Venture capitalist Vinod Khosla’s spotty record in renewables was also the subject of a recent 60 Minutes segment. But, as venture capitalists say, it only takes one big success to make up for all the failures.
Will Tesla’s Model E be the revolutionary technology that, at last, starts making a dent in oil’s grip on the transportation sector? At least one investor has faith. “I’d rather leave all my money to Elon Musk that give it to charity,” was the recent evaluation of multi-billionaire Google founder Larry Page.
