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Tesla's big bet

Nils ZimmermannMay 12, 2016

The stakes are high for Tesla and its new mid-priced Model 3. Growing competition in the electric car market and a dwindling amount of cash have left the company fighting for its survival.

Tesla Motors Elektroauto Model 3
Image: Reuters/Tesla Motors

Tesla CEO Elon Musk doesn't do things half-heartedly. And on Thursday, he even turned the unveiling of a mid-priced sedan into headline news. The presentation of the all-electric Model 3 was met with the kind of enthusiasm Steve Jobs achieved in his heyday.

Here are the basics. The Model 3 is gorgeous. Deliveries are supposed to start in late 2017. And more than 135,000 people lined up to put down $1,000 (880 euros) to reserve their spot in an order-of-delivery list, making it the biggest consumer pre-order event in history of any kind, by a wide margin.

The base model will be priced at $35,000 and will have an estimated range of 350 km, while a more expensive model could go as far as 500 km between recharges. Government subsidies for electric vehicles (EVs) will bring down the price by a few thousand dollars for buyers in some jurisdictions.

Tesla - and this is especially the case with its Model 3 - does not aim to compete in a niche EV market. It seeks to change the automotive game altogether. It wants to make EVs that are both better and, eventually, cheaper than their petrol-powered counterparts.

"Tesla is aiming to compete head to head with models like the BMW 3-series," Bloomberg New Energy Finance analyst Colin McKerracher told DW. "Those entry-level luxury cars are Tesla's real competition if it's aiming for large scale adoption."

The grand scheme

The Model 3 was a long time coming. From the beginning, Musk had a three-stage plan for Tesla. First, he watned to introduce a beautiful, high-end and high-performance EV sports car, dubbed the Roadster, to prove that EVs needn't be reminiscent of golf carts.

The second step was to integrate a couple of luxury models - the Model S sedan and Model X SUV - to show that EVs can be serious, useful family cars, and to develop a reputation for superb engineering and aesthetics. The company would meanwhile use the income stream from luxury sales to fund on-going development work.

And finally, Tesla would revolutionize the economics of EVs by scaling down the Model S into a family sedan with a price tag rivalling standard internal-combustion vehicles.

Perhaps the name Model 3 was chosen as a playful reference to Henry Ford's Model T, which revolutionized transportation as the first car mass-produced using modern industrial methods. It was therefore also the first car to be affordable for the mass-market consumer - just as the Model 3 is meant to be.

The path to success

The question is whether Tesla will be able to stay in business as the EV revolution it has helped unleash properly gathers pace. New editions of the electric-powered Nissan Leaf and Toyota Prius are on the market, and Chevrolet just announced its own entry, the Bolt.

The Bolt, like the Model 3, is meant to have a range of about 350 km and will cost about $37,000. But it is set to beat Tesla's Model 3 to market by more than a year.

Volkswagen is also expected to be a serious competitor in the global EV market.

Analyst McKerracher pointed out that, unlike Tesla, huge companies like GM (which owns Chevrolet) and VW can afford to cross-subsidize their EVs with revenues from sales of gas-powered cars. Their deeper pockets give them more leeway for temporary setbacks in sales volume.

Bildergalerie Detroit-Automesse
The Chevrolet BoltImage: picture-alliance/dpa/U. Deck

Tesla will also have to tackle the high price of battery packs, which makes competing with the affordability of gas-powered cars difficult.

Yet "there is a path to success for Tesla," McKerracher said. "But several things have to go right in parallel as production is ramped up."

Tesla's gigantic hope

"The key is making sure Tesla's Gigafactory achieves a sufficient sales volume to drive down the price of the battery packs that power Tesla's cars," McKerracher added.

The Gigafactory is a giant battery-pack factory Tesla is building in the Nevada desert at a cost of $4 to 5 billion, in partnership with lithium-ion battery cell provider Panasonic.

It is possible for Tesla to produce enough batteries to allow it to turn a profit on its Model 3, according to analyses run at Bloomberg New Energy Finance.

But this will be partly dependent on the sale of batteries destined for the roof and not the road. The Gigafactory will also be producing stationary storage batteries for homeowners with solar panels.

After more than a decade of operation without a single year-end profit, Tesla is at a make-or-break moment with its Model 3, an all-in bet on the future of electric vehicles. If it doesn't work out, the company seems unlikely to survive. But in any case, Musk's ultimate goal - bringing forward the EV revolution - looks sure to live on.