Tesla’s award-winning Model S. Photo credit: Tesla Motors Inc (NASDAQ:TSLA)
Can Tesla Motors Inc (NASDAQ:TSLA) really make it in the automotive mass market?
It’s the question that haunts (or that should be haunting) current and potential Tesla investors. Tesla has already achieved big things, designing and building a great electric luxury sedan in the Model S, pictured above. It has also proven that it can sell enough of them to turn a profit.
It’s true that so far the profit has been tiny, and the economic conditions in the U.S. quite favorable, but still: That’s an enormous achievement.
But it’s another big leap from there to becoming a mass-market carmaker – but it’s a leap Tesla Motors Inc (NASDAQ:TSLA) will have to make to justify anything like its current stock market valuation.
Can Tesla do it?
A closer look at Tesla’s real mass-market plan
Tesla Motors Inc (NASDAQ:TSLA) has never made a secret of the fact that its ambition has been to enter the mass market all along. CEO Elon Musk reiterated that plan in an interview with Bloomberg last week.
In that interview, Musk said that Tesla was working toward a vehicle that would be “half the price” of the Model S, would have a range of about 200 miles, and would come to market in “3 to 4” years.
The Model S starts at $69,900, not counting a $7,500 federal tax credit, and can be optioned up to a bit over $100,000. So at half of that price we’re still talking something that’s priced more like a BMW 3-Series than a truly mass-market compact car.
Tesla Motors Inc (NASDAQ:TSLA) has already proven that it has a knack for upscale styling and for the details that matter to luxury-sport-sedan buyers. It’s not a big mental leap to imagine a baby Tesla that delivers Model-S-like performance and luxury in a 3-Series-sized package, with a 200-mile range and a starting price around $35,000-$40,000.
It’s also easy to imagine that Tesla Motors Inc (NASDAQ:TSLA), which will see its street cred burnished by more glowing reviews as it rolls the Model S out in Europe and Asia later over the next year or so, will be in a good position to sell a fair number of those compact sedans.
Buyers will continue to worry about the lack of recharging stations, but 200 miles’ worth of range is enough for just about anyone to get to work and back home with plenty of extra electrons in the tank.
Long story short, it could do well for them. Or maybe we should say well enough? But how well?
The two big questions facing Tesla’s hopes for mass-market volume
There are two big questions here, and we don’t have easy answers to them yet. But the answers that suggest themselves should be troubling to Tesla investors.
First, will Tesla Motors Inc (NASDAQ:TSLA) need to build more factories? It’s a big question because car factories are expensive investments, both up-front and on an ongoing basis.
An all-new factory with all the relevant tooling for an assembly line or two could cost a billion dollars. That’s just the beginning, because every factory adds to ongoing fixed costs, costs that Tesla – with just one factory so far, and that acquired on the cheap – has been able to contain so far.
The greater Tesla Motors Inc (NASDAQ:TSLA)’s fixed costs, the more cars it has to sell just to break even, no matter what the economy is doing. So far, the relatively strong U.S. economy has been very favorable for the Model S, but that won’t last forever – and as Tesla expands globally, it becomes vulnerable to economic headwinds elsewhere, just like any other major automaker.