Tesla’s Model 3 – 300,000 Preorders
Whether part of a carefully planned strategy or the simple evolution of a product, it is hard to escape the fact that Tesla Motors, the foremost manufacturer of electric cars and producer of the second-best-selling fully electric car behind the Nissan Leaf, continues to make the news. With the pre-release of its first ‘affordable’ saloon car, the Model 3 Series starting at $35,000, it is hard to argue against the company’s continued presence in what remains a predominantly hydrocarbon-fueled motor industry. With a staggering 325,000 advance orders placed in the first 7 days of the vehicle’s unveiling, all paying a $1,000 deposit for a car that will not be available until the latter part of next year, it is difficult not to believe that Tesla will succeed in the next stage of its journey.
Tesla’s Bumpy Path
The path to becoming a pioneer in the electric car industry has been far from a smooth journey for the company which was founded back in July 2003 by Martin Eberhard and Marc Tarpenning. They chose to name the company after Nikola Tesla, a Serbian-American physicist born in 1856 and who is credited with being the father of the induction coil and the AC induction motor on which the company based its original design concept.
However, without the subsequent driving force of Elon Musk, co-founder of the PayPal website which was sold to eBay for $1.5 billion way back in 2002, the company would likely have folded. Musk, now the majority stakeholder, was responsible for leading several rounds of funding for the company, and through a further personal investment of $35 million in 2008 during a fifth round of funding for the company in the sum of $40 million, this saw it stave off bankruptcy by a whisker. Behind on its delivery of its first production model, the Roadster, and with the US careering headlong like a runaway train into the grip of a financial crisis, it was still difficult to see Tesla surviving. The saving grace came in the form of $465 million in interest-bearing loans from the United States Department of Energy, swiftly followed by another round of investment, seeing an additional $82.5 million added to the coffers, Daimler once again being a notable re-investor in the company, thus adding further credibility to its presence within the motor industry.
2010 then saw the company go public, and the IPO raised $226 million, of which $150 million was from Musk himself, taking his stake in the company above 65%, with much of the capital raised being used to pay back the loan from the Department of Energy (the loan today having been paid off in full). Having gone through such a financial rollercoaster of a ride as Tesla has, and come out the other side bigger and stronger, this only helps to strengthen belief in the longevity of this company which today has a net value of approximately 50% that of Ford. When you consider that the order for 325,000 cars in just one week has a value to the company of $14 billion, its financial future looks to be more secure than it has ever been before.
Tesla’s Strategy: Taking Exclusivity to the Mainstream
To a degree, these advance orders would seem to answer the question whether Tesla cars go mainstream. In relation to the 90 million cars sold worldwide annually, this may not seem like a huge number, but in the electric car market, it is huge. With queues outside Tesla dealerships surpassing any of those seen in the days running up to the release of a new model iPhone, it would seem that at least in America, the public are hungry for this competitively priced car. Tesla appears to be following a tried-and-tested route to market, which is to offer pricey exclusivity for a product before making it available to the general public. There has always been a strong market for exclusivity, so high prices of new-to-market products enables a substantial amount of R&D costs to be recouped, allowing for further development of a mass produced model.
One only has to look at CD players, which have been with us now for approaching 35 years. In 1982 when Sony launched the first commercially available CD player, the cost was $674, which equates to $1,650 today. In a similar vein to Tesla having to create a network of charging stations throughout the US and Europe, Sony had to invest heavily in producing commercially available CDs, the first of which was a selection of 50 predominantly classical albums and each costing around $15.00, or $35.00 in today’s money. In the same way, a sceptical jury is still ‘out’ on the chances of Tesla succeeding with the Model 3 Series, back then many could see CD players and CDs only being available to the wealthy and audiophiles. Within 5 years of their release, CDs had become the purchase of choice where music was concerned, so what did the sceptics know anyway?
Bring a product with the cachet of a high-tech must-have gadget and a history of exclusivity within reach of the mass market, and they are going to bite, especially if the marketing is done correctly, which Tesla clearly has.
However, there is still a way to go, and many a slip exists ‘twixt cup and lip’ as the expression goes. Tesla suffered a two-year delay on the production of the Model X which angered fans of the marque, but not sufficiently for them to lose faith in the company. However, the mainstream market is likely to be less forgiving in the event of a similar situation with Model 3.
Tesla also has to be aware of the phasing out of the US Government’s $7,500 federal tax credit for electric cars, a credit which also only applies to the first 200,000 cars the company sells. Concern must, in addition, surround whether demand for electric cars will remain high if oil prices continue to fall. The long and the short of it is that Tesla has come a long way and has not fallen at hurdles other less supported companies would have, which tells you a great deal, and finally you are left with just one question, and that is whether 350,000 people could all be wrong about the future Tesla cars? We believe not.