By Dana Hull
Tesla has proved it can make an expensive electric car, but it has not yet met its goal of making an affordable one. Its long-term success may hinge on its ability to drive down battery and manufacturing costs and create a car in the $35,000 price range.
There are many ways to measure Tesla Motors’ remarkable progress in the three years since the electric carmaker launched its initial public offering. There’s the first-ever profitable quarter this spring. There’s the nearly perfect 99 out of 100 score in Consumer Reports’ review of the Model S sedan. There’s the stock price, up more than 500 percent since June 2010 and currently trading around $109 a share.
Then there’s this: Tesla, which is on track to build 21,000 cars at its Fremont, Calif., factory this year, is worth more than Fiat and nearly a quarter as much as General Motors — which has 21,000 dealers.
In a considerable understatement, Tesla CEO Elon Musk told shareholders this month: “This has been a great year. Things have really gone pretty well. … I’m having a lot more fun these days.”
But while Tesla has proved it can make an expensive electric car, it has not yet met its goal of making an affordable one, and its long-term success may hinge on its ability to drive down battery and manufacturing costs and create a car in the $35,000 price range.
“The biggest single challenge for electric vehicles is affordability,” Musk acknowledged at the shareholders meeting. “If we could build the Model S for half the price that it currently costs, and solve the long-distance travel problem, then we’d see widespread adoption. That’s what’s needed for there to be a huge tipping point for electric cars. We’re trying to advance that as fast as we can. I’m hopeful that we’ll be there in three to four years.”
Tesla says it plans to roll out what it calls the “Gen 3,” a smaller version of the $72,000 Model S at about half the price, in 2016 or 2017. Sometime next year, it plans to start delivering the Model X, a crossover between an SUV and a minivan.
Prices for the Model X have not been announced, but Tesla hopes to deliver the Gen 3 at a much lower cost than the Model S because it will spend much less on research and development. It also expects battery technology to improve, allowing it to use smaller, less expensive batteries than those that power the Model S. Also, as it produces cars in higher volumes, Tesla should be able to negotiate cheaper part prices from suppliers.
The company’s success to date stands in sharp contrast to onetime competitors Coda and Fisker, both of which have spectacularly flamed out in their efforts to build and sell electric vehicles.
“Tesla is the one shining light in the EV industry,” said Mike Omotoso, an analyst with LMC Automotive in Troy, Mich. “You have to give Elon Musk a lot of credit. He has experience as a CEO, and he assembled a great team. He brought in Detroit guys early on, and he hired a lot of people with the know-how to engineer and manufacture the car successfully.”
The challenge for Tesla in the near term, many analysts say, is for it to keep demand for the Model S high while making steady progress on the other vehicles in its development pipeline. But some analysts say Model S sales, which have been strong thanks to pent-up demand, could flatten in the second half of the year.
“Right now everything looks good because Tesla is selling anything it can build. People have been on a waiting list for months,” said Alan Baum, who runs an auto-industry market-research firm in West Bloomfield, Mich. “The challenge for Tesla is to keep demand up. The Model S is a phenomenon, but how long can that go on?”
Tesla has sought to stoke demand for the Model S by greatly expanding its network of Supercharger stations, which offer free, rapid charging to all Model S drivers. Within a year, the Tesla Supercharger network will stretch across the continental United States and Canada. Last week, Musk unveiled Tesla’s plans to offer battery-swapping at Tesla Stations in 90 seconds.
Tesla’s wildly enthusiastic owners have become evangelists for the company, much in the way Apple’s reputation is defended and championed by its legions of fans. When The New York Times published a negative review of a Washington, D.C.-to-Boston Model S road trip, the venerable newspaper was swamped with complaints from the Tesla faithful. A caravan of Model S owners quickly convened and recreated the road trip. That incident is an example of how Tesla has been able to build a formidable brand without spending money on advertising.
The first Tesla users conference, known as Teslive, takes place in July. A Roadster owner from Hong Kong is among those flying in from around the world; the sold-out event includes highly sought-after tours of Tesla’s Fremont factory and a keynote speech by Musk.
But despite Tesla’s success at promoting itself and the Model S, Omotoso said, the company’s future depends on broadening its product line.
“A car company can’t survive on one car model alone,” he said. “Tesla needs the Model X and then the Gen 3 to be successful.”
There is some speculation Tesla will be sold to a company like Toyota or Daimler, with which Tesla already has partnerships. But others say Tesla has a chance of making it as a stand-alone company, albeit one that produces cars in low volumes relative to the major auto manufacturers.
“A year ago a lot of people didn’t know what a Tesla vehicle was,” said Andrea James, an analyst with Dougherty & Co. “Today you’d have to be living under a rock to not know who Tesla is, or be curious about them. Tesla has emerged to the next level. Investors are looking at the next stage; they have to show progress on the Gen 3 program.”