It’s still too early to tell if Tesla’s Model 3 will be its ultimate answer to profits, experts say

Hollis Johnson/Business Insider

Eight analysts who study Tesla and the automotive industry told Business Insider the Model 3 has been a success for the company so far, but they raised questions about long-term demand and competition.
The analysts highlighted cumulative sales, rather than reviews or customer feedback, as the linchpin of the Model 3’s success.
But the number of Model 3s Tesla has sold so far may not be a reliable indicator of long-term demand for the vehicle.
And Tesla will face heightened competition as it expands its international presence.
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Ask Tesla fans and critics about the success of the electric-car maker’s Model 3 sedan, and you will get very different answers.

The company’s supporters will point to the vehicle’s impressive sales, glowing reviews, and enthusiastic owner feedback. Detractors will highlight the manufacturing problems that delayed its rollout, build-quality and service issues, and the fact that Tesla has failed to meet initial production targets for the vehicle.

That split is embodied in the divide between Consumer Reports’ editorial staff and its readers, who have offered a range of feedback about the Model 3 since its 2017 release. The publication pulled its recommendation of the vehicle in February due to reports of reliability problems, but the Model 3 still topped the publication’s owner-satisfaction list. (The latter only included owner feedback, while the former also included input from Consumer Reports’ editorial staff.)

When evaluating the impact the Model 3 has had on Tesla, it can be difficult to separate signal from noise. Eight analysts who study Tesla and the automotive industry told Business Insider that the Model 3 has been a success for the company so far, but they raised questions about long-term demand and competition.

Model 3 sales have been impressive

The analysts highlighted cumulative sales, rather than reviews or customer feedback, as the linchpin of the Model 3’s success. While enthusiasm from automotive critics and owners can elevate the public’s perception of a vehicle, what ultimately matters to Tesla’s balance sheet is translating positive sentiment into revenue.

"I think that with Tesla it’s always very difficult to give a straight answer about whether something has been a true success," said the Gartner automotive analyst Michael Ramsey. "But I do think [the Model 3] has been a success, because if you step back and look at cars at that price point and the volume that they’re selling at, it’s pretty amazing."

The Model 3 was the best-selling luxury vehicle in 2018, beating the runner-up, the Lexus RX, by around 24%. And as sales accelerated during the second half of the year, Tesla posted the first consecutive quarterly profits in its 16-year history.

But the number of Model 3s Tesla has sold so far may not be indicative of long-term demand for the vehicle. Some 2018 customers reserved the Model 3 in 2016 or 2017 but were not given the option to take delivery of the vehicle until last year. (Tesla has not disclosed the number of remaining reservation-holders since May 2018, when it said it had over 450,000 at the end of March.)

"The Model 3 continues to be very much an evolving story for Tesla," said Ed Kim, the vice president of industry analysis at AutoPacific. "The sales numbers for the first year looked very, very strong, but those strong numbers do not necessarily reflect natural market demand for the car because the first units weren’t being built to satisfy current demand. They were being built to fulfill orders that were placed years ago."

Model 3 deliveries have slowed in 2019, according to the electric-vehicle website InsideEVs, which estimates Tesla’s US deliveries on a monthly basis. (Tesla only reports deliveries on a quarterly basis.) Around 46,425 Model 3s have been delivered to US customers so far in 2019, compared to around 101,700 during the final five months of 2018, the website said.

A Tesla representative said it would be more accurate to compare US Model 3 deliveries from the first five months of 2019 with the first five months of 2018, when Tesla delivered around 18,305 Model 3s in the US, according to InsideEVs.

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The Model 3 will face new competition

Tesla began delivering the Model 3 to international customers this year, opening a new source of pent-up demand. The company cited seasonal effects and logistical issues as the primary causes of its disappointing first-quarter delivery numbers, saying a large number of vehicles were on their way to European and Chinese customers when the quarter ended.

"There’s demand to be absorbed in Europe and Asia that hasn’t been met yet," said the Morningstar automotive analyst David Whiston.

But Tesla will face heightened competition as it expands its international presence. Rival vehicles, like the Chevrolet Bolt EV and Jaguar I-Pace, haven’t made much of a dent so far, but the number of luxury and mass-market electric vehicles is set to increase in the coming years. Volkswagen plans to invest over $33 billion in electric vehicles by 2023 and introduce nearly 70 electric models by 2028. Ford plans to invest $11 billion in electric vehicles and have 40 hybrid and fully-electric models available by 2022.

Traditional automakers will have some advantages over Tesla, like the ability to offer US customers the full, $7,500 federal tax credit for electric-vehicle sales. The credit begins to phase out once an automaker sells its 200,000th electric vehicle in the US, a milestone Tesla hit last year. Starting July 1, Tesla customers will only receive an $1,875 federal tax credit, and at the beginning of next year, the credit will expire entirely.

Established rivals also have more stable sales and service operations than Tesla, said Rebecca Lindland, the founder of the website Rebeccadrives.com and a former analyst for Kelley Blue Book. Tesla customers have complained about long waits for repairs at Tesla’s company-owned service centers, and Tesla CEO Elon Musk said in January that improving service quality was his top priority for the first quarter.

"There’s a lot less drama involved with buying an Audi e-tron or a Mercedes EQ than a Tesla," Lindland said.

But Tesla’s vehicles have longer ranges than their competitors, and the company’s brand has an aura that traditional luxury automakers can’t match, Lindland said.

"No other brand has that mystique," she said.

Robust long-term demand for the Model 3 is critical for Tesla

One year from now, the Model 3 is still likely to be the best-selling electric vehicle, even if the rate of sales declines, said Maryann Keller, the the principal at the automotive consulting firm Maryann Keller & Associates. If sales do decline, the size of the drop-off will be important for Tesla, because the Model 3 was designed to generate sales volumes high enough to compensate for the fact that it nets the company a lower gross margin than its luxury Model S sedan and Model X SUV. Beating other automakers might not be enough to produce consistent profits.

Tesla has said it intends to deliver between 360,000 and 400,000 Model 3s this year (it delivered 145,846 in 2018), and Musk has said worldwide demand for the Model 3 could fall between 500,000 and 800,000 each year, depending on economic conditions. The accuracy of Musk’s prediction could determine whether the Model 3 delivers Tesla to consistent profitability or raises new doubts about the company’s long-term prospects.

Have you worked for Tesla? Do you have a story to share? Contact this reporter atmmatousek@businessinsider.com.

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Source: Business Insider – mmatousek@businessinsider.com (Mark Matousek)