- There are big gaps between the current scenario and Tesla's dream of 500,000 cars by 2020.
- China should feature heavily in their plans if they are to reach that goal.
- Why is China so critical to their plans? And why should they think of investing in local production?
As the world watches Elon Musk’s moves, mesmerized by the way he intends to change the world, and captivated by his every Tweet, post, investment and opinion, I get the sense that somehow not everyone understands the implications of what he’s doing with Tesla (NASDAQ:TSLA).
So, let's step back and take in the bird’s eye view of what’s really going on at Tesla - its limitations, its strengths, and its realistic breakthrough in China.
Star Performers: Model S and Model X
The Model S - their most affordable one right now - starts at around $70,000 and goes all the way up to $106,000+. The S family of Tesla also has an impressive range of 300 miles with the 90 KWh battery.
The Model X, on the other hand, is even less “affordable” at a starting tag of $80,000, but sports a few extra features. It also boasts the highest possible standards of safety in any car - let alone just the EV category - and has a host of gimmicks that add to the fun factor.
As an EV-SUV, it’s safe to say that there is no car like the Model X. It even ranges 265 miles by EPA standards and 310 on the European NEDC testing cycle.
How Much Are They Selling Of Model S And X?
In the first quarter of 2016, Tesla sold 14,820 cars, of which 2400 were Model X and 12,420 were Model S.
Tesla’s 2016 Outlook:
“We plan to invest in equipment to support cell production at the Gigafactory, begin installation of Model 3 vehicle production machinery, open about 80 retail locations and service centers, and energize about 300 new Supercharger locations.
To achieve these goals we plan to deliver 80,000 to 90,000 new Model S and Model X vehicles in 2016” - EV Obsession
I think it’s an achievable goal, but even if they stretch that to 100,000, they’re still far short of their 500,000 target in annual sales.
Let's look at the market they're competing in to see why that would be the case.
Luxury Segment Sales In The United States
Being luxury segment vehicles, there isn’t much room to keep growing the sales of Models S and X, because the potential market is small. As you can clearly see in the chart above, the total segment sales is just around 100,000 cars in one of the world's largest auto markets - and no company will ever be able to capture the whole segment for itself.
So, obviously, there’s a huge gap between the potential sales of their higher-end models and the actual market size. Considering the competition they’ll face from the German trio of Audi, BMW and Mercedes, it’s unrealistic to expect a dramatic jump in sales.
Can the Model 3 Fill this Gap?
But the Model 3 - that’s an entirely different story altogether.
At a price point of $35,000, the target market for the Model 3 is very different from the ones that the Models S and X appeal to. It is supposedly a mass-market car that will have broader appeal than its predecessors.
Is that a realistic outlook, though? At the current price point, can the Model 3 effectively fill that gap Tesla is facing?
The Price Barrier
Even at the current $35,000, however, the Model 3 is hardly what you could call the common man’s car. In the United States, where hatchbacks have an MSRP starting at under $20,000, it’s not a competitive option.
The BMW 2 and 3 series are comparably priced, as is the Mercedes CLA and the Acura from Honda.
Now let’s see what the current level of sales are for these models.
Now we can clearly see that the entire small and luxury car segment combined is less than 175,000 in the U.S., with Tesla holding a mere 27,000 car market share at this point. Assuming this type of sales volume holds until the Model 3 rolls out (end of 2017 by Musk's optimistic estimates), can it really grab 100% of market share and sell 175,000+ cars combined in 2018?
My optimistic limit would be about 25% to 30% - similar to what they've achieved in the large luxury segment. That means they have a market for around 50,000 cars - unless they create a new market segment, which is not unreasonable. Put that in ludicrous-mode optimism terms and you're still looking at well under 100,000 cars.
You might now say: wait, don't they have orders for 400,000 Model 3s already? No they don't. They have reservations. Not the same thing, as I've explained in the section below.
So, assuming they can pull off a sales coup and get 100,000 confirmed orders for all three models in 2018, they'll be 400,000 units short of their 2020 target.
That Brings us to Tesla’s Chinese Situation
That’s exactly the reason Musk has been pushing on the China front so hard. It also makes a lot of sense for Tesla to start producing in the country that recorded the second highest number of reservations for the Model 3. And let’s not forget the reduction in levies that Tesla will gain from by localizing production.
But let’s also not lose sight of one critical factor - reservations don’t necessarily translate into sales. We don’t know how the sales scenario will play out over the next few years, but if Tesla wants to keep pursuing that 500,000 target and their larger goal of 1 million cars per year, then China is the only country that can help them get there.
Tesla is already making moves in China because their own supercharging network expansion is going to help tremendously.
““I am quite happy to say that charging is no longer a roadblock for most of our [Tesla drivers] in China,” said Robin Ren, Tesla’s vice president for the Asia-Pacific region.
“Today you can drive all the way from Harbin, a city in the north, to Shenzhen which is located in the southernmost part of China with a Tesla car by using our supercharging network,” he said. There are currently about 100 supercharging stations in China, with about 400 superchargers in total.” - SCMP
The Final Take
In conclusion, Models S and X may well support Model 3 sales once the latter starts rolling out, but China and the United States are where their focus should be.
To get into China in a big way, however, they need to get battery costs down quickly and ramp up the Gigafactory production much faster than what they originally estimated. They must also make sure that they're ready to start production in China in the next two years.
That may well happen, and that’s exactly why the Model 3 and China combination is critical to Tesla’s future. As the Gigafactory starts cell production next year, China has to be “primed” to accept huge deliveries of the Model 3.
Tesla’s full potential, therefore, can only be realized once the Gigafactory hits full production. Until then, the company has to delicately balance its production capabilities with the overwhelming demand that it has created for the Model 3.