The Model 3: Can Tesla Deliver?

The wait is over. On March 31st, in front of a selected crowd of 800 people and an enormous online audience, Elon Musk unveiled Tesla’s new Model 3. The sleek new addition to Tesla’s line of electric vehicles is an affordable version of the futuristic luxury, built for the masses. According to the Los Angeles Times, by 10 p.m. that day, individuals had already placed 133,000 preorders.

On top of its sleek design, Tesla’s Model 3 will boast a range of at least 215 miles per charge, the power to accelerate from 0 to 60 miles per hour in six seconds, and the capacity to seat five adults. The car also boasts special features such as a tablet instead of ordinary knobs and controls, a rear windshield and roof made out of a single sheet of glass and an autopilot features. The car will have an average price of $42,000. As of April 7, there were 325,000 pre orders for the model, totaling up to $14 billion dollars in potential revenue.

While the unveiling has undoubtedly bolstered Tesla’ stock value (rising 15 percent as of April 6, just a week after its unveiling) and raised expectations for its future performance, the overwhelming response to the Model 3 has undoubtedly created many challenges that Tesla must overcome to capitalize on its new vehicle. Some of these obstacles, critics argue, could significantly damper Tesla’s expectations and performance.

Without a doubt, the greatest challenge Tesla faces is increasing the scale of its operations. According to Transport Evolved, the company currently produces an average of a little more than 52,000 cars per year. Based on the large influx of pre-orders, analysts predict that Tesla will need to raise production to 300,000 cars a year, 200,000 more cars than it has produced since its inception. Moreover, the company is already failing to reach its current production target. According to the Las Vegas Review, the first week after the unveiling of the Model 3, Tesla announced that it had fallen short of its weekly goal of producing 16,000 cars by 1,000. Increasing its production would require hiring more skilled laborers, buying more raw materials and having more production sites – all of which would require large amounts of new capital. Tesla is already an incredibly capital intensive company, burning through $400 million in cash each quarter. According to a Barclay’s report, analysts estimates that the company will need to raise $11 billion of additional capital in the next five years, which is very demanding considering that the company has yet to have a profitable quarter.

To make matters even worse, Tesla’s lull in production and lack of profitability shows no signs of changing in the near future. Given the Model 3’s low profit margins and the company’s ever-growing capital requirements, it is possible that Tesla won’t be able to turn an immediate profit once the Model 3 has been released. In addition to the low margins, the rise in commodity lithium prices will raise production costs and possibly the sale price of the car itself. Noted by many investors as “the single most valuable commodity of the tech-driven future,” surging demand and short supply has caused the price of lithium to skyrocket. According to USA Today, the price of lithium carbonate more than doubled in November and December of last year alone. According to Breitbart, analysts predict that global prices of lithium will increase by another 20 percent before 2018. A key part of the production of the Model 3, lithium is used to construct the batteries Tesla uses in its cars. The company has already invested about $5 billion in its “Gigafactory,” a production site for these lithium ion batteries. According to the Financial Posts, Tesla is already trying to avoid the raising cost of lithium by moving to different lithium carriers. There is one catch: the companies that Tesla is in discussion with have never actually mined lithium. Tesla’s hope is that by creating these new partnerships, it will be able to circumvent the monopoly that its current suppliers have on the commodities price. Tesla has already agreed to buy the minimum tonnages of Lithium from Pure Energy Materials Limited and Bacanora Minerals, conditional on whether they are able to meet grade, tonnage, and most importantly, Tesla’s target price range.

Tesla will also be using up its federal tax credits as production increases. While many Tesla buyers are attracted by the notion that buying the car would result in $7,500 worth of tax credits, the reality is that these credits decrease as Tesla produces more cars. After the production of 200,000 more cars, Tesla will be left with substantially less tax credits. According to Extreme Tech, within a year of the Model 3 release, there may be no credits at all.

Tesla will also face formidable new competitors in the electric car market, an industry once deemed its “home ground.” Ford Motors recently announced that it would invest an additional $4.5 billion in electric vehicles by 2020, adding 13 new vehicles to its product portfolio. General Motors’ battery powered Chevrolet Bolt is also expected to launch in 2016. Faraday Future, a company that some analysts foresee as Tesla’s main future competitor, also announced that it aims to launch a next-generation luxury electric car by 2017. The entrance of these competitors will put pressure on Tesla’s business model, as any possible failure to deliver its expectations could push consumers to seek alternatives from one of these companies.

Without a doubt, Tesla’s unveiling of the Model 3 paved way for the history of electric vehicles. What may have initially caused Tesla to celebrate, however, will ultimately test the limits of this innovative company in its ability to strategize, expand and deliver. Only time will tell if Tesla will become the mammoth in electric vehicles that some predicted it would be. One thing is sure: getting there will be a challenge.