Coverage: Tesla banks on successful Model 3 launch

It’s pegged as Tesla’s first affordable car, but the launch of the Model 3 means much more to the Silicon Valley automaker than just affordability.

CEO Elon Musk is hoping the Model 3 will open Tesla and its vehicles up to a larger market, something the company will need for long-term success.

Mike Ramsey of The Wall Street Journal had the day’s news:

Tony Wetzel is taking Thursday off to hang out at a Tesla Motors Inc. showroom outside of Boston and place a deposit on the electric-car maker’s latest model.

Referring to Thursday as Model 3 Day—in recognition of the public debut of the Silicon Valley auto maker’s first affordable vehicle—the 50-year-old Marshfield, Mass., resident and Tesla sedan owner has high expectations for the car.

“I’m confident the Model 3 will have many more bells and whistles than my Model S,” he said, referring to the car expected to be priced starting at roughly $35,000, but which won’t be delivered to customers until late 2017.

He isn’t the only one counting on a big showing for the car. Tesla Chief Executive Elon Musk wants the car to reverse years of losses and stanch hefty cash outflows. To him, it must accomplish something the Model S and Model X have failed to do: sell at a profit.

He designed the Model 3 to be built at lower cost and in higher volumes. Unlike the company’s pricey Model S and Model X—which sell on average for more than $100,000—it will made of steel instead of aluminum, and use a battery that goes fewer miles on a charge.

RBC Capital Markets auto analyst Joseph Spak says Tesla will have to make “compromises” to achieve high volumes, but “we doubt technology will be one of them.” Mr. Spak believes the vehicle could have semiautonomous driving technology.

Morgan Stanley auto analyst Adam Jonas said the Model 3 will have acceleration and handling characteristics on par with BMWs, and come in various configurations. “We expect the Model 3 range will include a variety of body styles including a four-door sedan, coupe, cabriolet, small SUV and other passenger configurations,” he said.

Mr. Musk’s ultimate goal is get the vehicle to a wider market, forecasting 500,000 total company sales annually by 2020. Much of that increase would come from a Model 3 that competes against mass-market cars from General Motors Co.’s Chevrolet and Nissan Motor Co.’s Leaf.

Dee-Ann Durbin of the Associated Press explained why the Model 3 is Tesla’s biggest test yet:

The Model 3 is the most serious test yet of 13-year-old Tesla’s ability to go from a niche player to a full-fledged automaker. It could be the car that finally makes electrics mainstream – or customers could be scared off by Tesla’s limited number of stores and service centers. Either way, the Model 3 is already changing the industry, spurring competitors to speed development of electric cars and improve their battery range.

“The Model 3 is going to be a pivotal model for Tesla,” said Patrick Min, a senior analyst with the car buying site TrueCar.com.

Tesla didn’t release details about the car before the event. Potential buyers could start putting down $1,000 deposits Thursday for the Model 3. It’s scheduled to go on sale at the end of next year.

Right now, Tesla sells two vehicles: The Model S sedan, which starts at $71,000, and the Model X SUV, which starts around $80,000. But a lower-priced car has been a longtime goal of Tesla CEO Elon Musk. In a 2006 blog post, Musk said Tesla planned to build “a wide range of models, including affordably priced family cars” in order to speed the world toward a solar-powered future.

The Model 3 puts Tesla within reach of millions more customers. Last year, only 2.1 percent of new cars purchased in the U.S. cost $75,000 or more, but 35 percent – or 5.5 million – cost $35,000 or more, according to TrueCar. The Model 3 is a critical part of the money-losing automaker’s plan to increase sales from around 85,000 this year to 500,000 by 2020.

But Tesla faces several hurdles. U.S. buyers remain skeptical of electric cars, and low gas prices haven’t helped already anemic sales. Sales of new electric vehicles grew 6 percent in the U.S. last year, but they still remain less than 1 percent of the overall vehicle market, according to IHS Automotive. Tesla also faces growing competition from big, deep-pocketed rivals like General Motors Co.

Alex Davies of Wired warned buyers not to be confused by the car’s seemingly low price, which the company is hoping will draw in more people:

There are several reasons that price is almost certainly a fantasy. First, that $35,000 base model probably won’t have the fun options people want. Based upon how Tesla has priced its Model S sedans and Model X SUVs, crowd-pleasing features like all-wheel drive, a larger battery for more range, and that really cool “autopilot” feature will add thousands to the sticker price. The base price of a Model S is 70 grand. Tesla won’t reveal the average sale price, but Morgan Stanley pegged it at $105,000 in 2014.

But even if you’re happy with the base model, there’s a bigger problem. The sub-$30,000 price point is based on a $7,500 federal tax credit (some states offer additional incentives, but nothing nearly so generous). That discount is designed to foster adoption by subsidizing the cost of what remains a fairly expensive technology without dinging automakers. Everyone from General Motors to Nissan relies upon tax credits to help move cars by keeping the cost of cars like the Model 3, the Chevrolet Bolt, and the Nissan Leaf below $30,000, a number consumers find palatable.

That federal tax credit won’t be around forever. It was designed to get automakers started, and applies to the first 200,000 electric vehicles a manufacturer sells in the US. Once an automaker hits that benchmark, the credit phases out incrementally over the following 12 months.

It’s not known just how many cars Tesla has sold in the US since the Roadster debuted in 2008. The automaker didn’t start breaking down sales by region—US, Europe, etc.—until 2014, and declined my request for that data for previous years. Still, some back-of-the-envelope math offers a glimpse.

Tesla has said it sold nearly 42,000 vehicles in the US in 2014 and 2015. Add in smaller volumes for 2012 and 2013, plus most of the 2,400 or Roadsters the company sold worldwide, and 50,000 vehicles in the US is a safe bet. That’s a quarter of the cars eligible for the credit.