Tesla Model 3: Why it changes everything

The Tesla Model 3 has already changed the automobile industry.

Almost a month ago on March 31, Tesla unveiled the much hyped Model 3, an all-electric four-door compact sedan that will slot well below the Model S and X in the manufacturer’s lineup. It will be priced from US$35.000 up with an autonomy of 200 miles and is the first realistically affordable car Tesla is launching, in essence the ‘make or break’ car for Tesla which relies on its mass volume of sales to become a sustainable car company. The pre-order figures it generated surprised all worldwide analysts included myself. A Time survey before the unveiling showed that conventional wisdom was on 55.000 pre-orders in the first 72 hours. Instead, the Model 3 reached that figure in a couple of hours, hitting 180.000 pre-orders in 24 hours, 276.000 in 48 hours, 325.000 in 72 hours and over 400.000 by now, representing potential sales of over US$14 billion. (Update: This figure was amended to 373.000 on May 19)

Tesla Model 3 pre-orders as of April 2 vs. cumulative Tesla sales to-date.

These pre-orders are US$1.000 refundable deposits, so they don’t equate to fully purchased cars, merely an “expression of interest”. Still, it makes the Model 3 the most pre-ordered vehicle in the history of automobile and the fastest one to reach 400.000, by far. Precedent record-holders would typically peak at 100.000 in the first month with much smaller deposits, such as the Dacia Logan during its launch in Iran a little less than a decade ago. Needless to say this is also a record for an all-electric car. All-time sales of highway capable plug-in electric cars since 1890 stand at 1 million units: the Model 3 has reached almost half this in less than a month. The electric car sales record holder is the Nissan Leaf (200.000) with the Chevrolet Volt in third (106.000). In second place, Tesla has sold roughly 120.000 Model S since launch, so Model 3 orders equate almost four times that.

Model 3 interior

In order to honour these sales, Tesla will essentially need to become a different car company altogether. Until now a disruptive niche player, it has been valued like a tech company. At roughly US$33 billion, its market capitalisation has nothing to be ashamed of compared to behemoths Ford ($51b) and General Motors ($46b), which each sell in two days what Tesla sell in one year… As for Fiat Chrysler FCA it could actually be absorbed by Tesla, valued at “just” $10 billion. Yet Tesla has never made a profit. Even if Model 3 sales will likely be spread across two to three years, it would put Tesla at a worldwide sales level comparable to Acura (205.000 sales in 2015), Infiniti (215.000) or Porsche (225.000) and looking at American brands, well above Lincoln (120.000) and potentially teasing Cadillac (278.000). In other words, among well established luxury brands.

The Model 3 unveiling was streamed live on the Tesla website. 

Tesla will need to drastically ramp up its production but the company’s track record has shown this may be an issue. With initial production and deliveries announced for the end of 2017, such high pre-order figures mean people who ordered their vehicles in the past month could be waiting until 2020 to get it. That’s when refund figures could potentially start to soar. In April Tesla announced they missed their target for first quarter 2016 results at 14.000 sales vs. 16.000 because of “how much technology” they put in the Model X SUV. If Tesla struggled to deliver 16.000 vehicles because of technological hiccups, it’s hard to imagine how they can possibly spit out 400.000 units of an equally highly innovative car. Tesla will need to completely change the way they operate to achieve this, and do it fast.

Tesla Model 3

But before any Model 3 is delivered to happy customers, the mere fact that it reached record levels of pre-orders is an extremely significant milestone in the history of automobile and its potential shift towards electric vehicles. Until now, the hot spots for alternative fuel vehicles – the high volumes being mainly hybrids and mainly sold by Toyota – have been locations where their success is almost entirely spurred by government measures that make is advantageous to buy an eco-friendly car: Japan, California and Norway. Until now consumers have not purchased electric or hybrid cars because they wanted to but by and large because they were pushed to. The Model 3 changes this.

Tesla customers line up to pre-order a Model 3 in Sydney, Australia 

Before the Model 3 unveiling on March 31, people were camping outside of Tesla dealerships to earn the right to pre-order it for $1.000 once the booking was open. Some had been lining up two or three days in advance. This is a pent-up demand frenzy that is normally reserved to new Apple products which don’t even compare in price. Also extremely significant is the fact that Tesla doesn’t spend any money on marketing. So Elon Musk has managed to create an incredible amount of desirability for an electric car, something that no manufacturer had managed to achieve before.

Chevrolet Bolt

This shows us for the first time in the history of automobile that there is a real demand for a cool electric car. Even if the Model 3 get scrapped for lack of funds (worst case scenario), it will act as a trigger for the largest manufacturers in the world such as Volkswagen, General Motors or even Toyota to start thinking about offering an affordable electric car in their lineup. GM is already on its way with the Bolt, a $30.000 all-electric compact hatch with a 200 mile range that should hit US dealerships before the end of 2016.