Sunday, April 24, 2016

Tesla changed cars forever. Now it must deliver

It was the night of the unveiling. Nineteen minutes into his big talk, Elon Musk finally revealed what everyone had come to see. Three of Tesla Motor Inc.’s Model 3 prototypes rolled onto stage. But it was the next revelation that brought the house down: Tesla had already taken in more than 115,000 reservations that day, each with a $1,000 deposit—sight unseen. The crowd swooned. The media roared.
In the weeks that followed, reservations jumped to about 400,000—almost four times the total number of cars Tesla has produced over the last eight years. As the dust settles on this achievement—an affordable, practical, desirable electric car—we’ve been pulling together data to put it in historical context.
The Model 3’s unveiling was unique in the 100-year history of the mass-market automobile. The closest analog is that of the 1955 Citroen DS, which took in 80,000 deposits over 10-days at the Paris Auto Show. Much like the Model 3, the DS was lauded as an engineering marvel that was years ahead of its time. A more recent parallel among technological sensations is Apple Inc.’s iPhone.
The Model 3 represents the first time an affordable electric car doesn’t have to apologize for running on batteries. Conventional wisdom once held that electric cars would always run slow and would never be objects of automotive lust. Tesla flipped that on its head by clocking some of the fastest times from 0 to 60 miles per hour in the world with its Model S. The cheaper Model 3 is no slouch, either.
Affordable? Check. Desirable? Check. But how far can you go before having to charge it again? That’s always been a foundational question. Could this upstart really make a long-range car with the grace of the Model S—and deliver it at a reasonable price? Apparently, yes. The Model 3 offers the cheapest range available for any electric car, even though it retains some of the richest features. In the long run, this may be one of the most important contributions of the car, if it is to bring the electric automobile fully into the mass market. 
Battery cost makes up a third of the price of an electric vehicle—a fact that hasn’t been lost on Tesla. The company has been throwing a lot of its sweat and money at cutting this expense—including building the biggest battery factory on the planet and launching a standalone battery-storage business.
The strategy seems to be working: Tesla is now making finished battery packs at or below $220 per kilowatt hour, considerably less than the industry average, according to analysts at Bloomberg New Energy Finance (BNEF).
If Tesla can shave an additional 30% off its battery cost, it should be able to sell the Model 3 with a healthy 20% gross profit margin.
Tesla is also expanding range by eking more miles out of the same electricity.
Musk said on Twitter that he thinks the final Model 3 will have a drag coefficient of 0.21. That would make it one of the sleekest cars ever sold.
But even a long-range battery dies, and what happens then?
As it turns out, charging isn’t as big a hurdle as many drivers imagine. Sure, there are still roughly 13 gas stations for every public charging location. But that’s ignoring the most common type of charging station of all: your garage. About two-thirds of US homes have them. With an at-home charger and 215 miles of range, most customers rarely need to stop at a charging station. Looking at it that way, charging locations already outnumber gas stations by about 400 to 1.
Public charging stations are primarily needed for drivers who spend long stretches on the road at a time. For most of these drivers, it’s the speed of the chargers—not the absolute number—that matters most, so Tesla is focusing on building a charging network with the fastest chargers in the world.
Tesla Superchargers can provide 170 miles of driving range in 30 minutes; owners of the Model X and S can use them all without charge. The number of Superchargers will double this year alone, says Tesla.
So Tesla has the right chargers and it has the right car. The sky is the limit, right? Well, here is the biggest hurdle the company faces between now and the electric-car filled horizon: follow-through. First Tesla has to make all those Model 3s on order, and this is a company that’s known for delays. The chart below shows each of Tesla’s unveilings and the forecast for delivery Musk provided when he began taking reservations. Every car missed its deadline, most recently with the Model X overshooting by more than 18 months. Did we mention that those $1,000 deposits on the Model 3 are fully refundable?
Tesla can no longer afford such delays, for several reasons.
Earlier, Tesla relied on wealthy early adopters who weren’t in a rush. Many Model 3 buyers don’t have that luxury. The backlog of 400,000 reservations will probably grow before the launch slated for late next year.
Even if it doesn’t, this is a considerable number of cars to move. Delays for some in the queue are inevitable, but how long will buyers wait? The competition is arriving soon.
General Motors Co.’s Chevy Bolt is already going to beat Tesla to market with an electric car that can drive 200 miles on a charge for less than $40,000. While the Bolt doesn’t share the panache of a Model 3, it’s a practical option, and the luxury brands aren’t far behind.
Perhaps most pressing for Tesla is that the $7,500 US subsidy for electric cars, which brings the base Model 3 price to $27,500, is going to expire.
Everything must go right for the Model 3 to succeed: the battery factory must flourish, costs must come down, car-manufacturing capacity must scale at an astonishing rate, and all of it needs to arrive on time.
Musk says he can sell 500,000 cars a year by 2020 worldwide. Here’s what the US Tesla market would need to look like in order for that to happen: The high price of the Model S and Model X will put a cap on their total potential market, according to BNEF. For Tesla to meet its 2020 forecast, it will need to make up the difference with the rapid deployment of the Model 3. In fact, Tesla may need to sell more units than the class-leading BMW 3 Series.
Almost every major automaker—as well as tech firms such as Google Inc.—has an electric-car programme that’s moving ahead with new urgency. In addition to GM’s effort, Ford Motor Co. is investing billions of dollars in its programme and even paid $200,000 for an early Tesla Model X, presumably so it could tear it apart.
Competition from Detroit and abroad could spell trouble for Tesla, but it’s also necessary if electric cars are to replace the internal combustion engine. Being any later to this party will only hurt Tesla.
Earlier this year, BNEF analysts and I made some predictions about how quickly electric automobiles could begin to supplant gasoline-powered cars and upend oil markets. It was seen by some at the time as being overly optimistic for the electric-car industry.
But after looking at the anticipated specs and timeline of the Model 3, some the assumptions are beginning to look, if anything, a little bit conservative. Tesla can take credit for blowing the whole thing open, but it will have to keep up its remarkable pace to stay in the game.

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