Questions Linger as Tesla Prepares to Launch Model 3

AP Photo/Ng Han Guan
AP Photo/Ng Han Guan

On March 31st, Tesla will unveil its newest all electric vehicle, the Model 3.  There is a lot of excitement about the release of the Model 3 because it’s expected that it will include many of the features and designs of both the Model S and Model X at a much lower price point.  It is expected that a basic Model 3 will retail for less than $40,000 and will come with a $7,500 “green” government subsidy.

Tesla has built a reputation among many as the American car manufacturer of the future.  A fully loaded Model S can do 0-60MPH in 2.8 seconds, has semi-autopilot functionality, and can travel more than 200 miles without being recharged.  They are owned by one of the most successful modern business tycoons, Elon Musk.  After making his billions with PayPal, Musk has become the public face of Space X, Solar City, HyperLoop, and Tesla.

But beneath the happy-shiny green success story that is dominating the media, there are signs of real trouble at Tesla. Tesla’s stock (TSLA) lost nearly forty percent of it’s value between the middle of December and the middle of February, falling from about $240 per share to $140 per share.  The stock has since rebounded and is currently being traded for about $230.  With so much volatility, the pressure is on for Tesla to deliver it’s car for the masses at today’s unveiling.

Just about everyone admits that the Tesla Model S is pretty amazing, but there are some major questions about Tesla’s ability to live up to the brand it has built as it begins to build its first somewhat affordable car.

Quality Control and Production Problems

The main issue that’s been buried in the cheerful Tesla coverage is that its luxury Model S has been riddled with quality control and production problems.  When Edmunds reviewed the Model S it took three drive units to get the car to function.  Problems with the drive unit are commonplace, but the quality problems don’t end there.  A Consumer Reports review is titled “Tesla Model S P85D breaks before testing begins.  A broken power door handle is one of the most common Tesla problems.”

There are so many problems that owners have created extensive checklists for people accepting delivery of the Model S and Model X.  Every other manufacturer performs these kinds of checks at the end of the production line, but Tesla buyers have to do all the quality control work themselves.

The only reason that these quality problems haven’t sunk Tesla yet is that luxury car buyers are actually less demanding than mass market car buyers. Both the Model S and the Model X come with a price tag of around $100,000 depending on the options an owner chooses.  Luxury consumers have the means to deal with quality control problems, especially when they feel like they are helping to save the world from fossil-fuel burning gas guzzlers.  Less wealthy consumers that the Model 3 is targeting are likely to be far less understanding of regular repairs, especially those relying on their new Tesla as a primary vehicle.

One of the biggest questions for Tesla is that with all the quality control problems they are having producing 50,000 units at a $100,000 price tag, what happens when they try to scale by a factor of 10x while cutting the consumer cost by nearly half?

Mass Production and Tesla’s Share of the Auto Market

In 2015 Tesla produced just 50,000 vehicles and only plans to be able to produce 500,000 vehicles by 2020.  In the 90 million unit global car market, it makes Tesla one of the smallest players.  Tesla has benefited from being the first high-performance all electric vehicle on the market, but competition is coming.

In 2018 Porsche plans to release the Mission E to compete directly with Tesla’s Model S.  Audi also plans to release the E-Tron Quattro in 2018 to compete directly with Tesla’s Model X.  Both the Mission E and E-Tron Quattro will feature Tesla-like performance with longer battery range.  Other automakers like GM and Nissan are preparing to launch mass-market electric cars at roughly the same price and range as the Model 3. Tesla has never faced direct competition before, and it’s about to get it from luxury and mass-market cars.

The entrance of companies with much larger and more consistent production capabilities into the market could spell trouble for Tesla.  Will consumers show the same willingness to accept Tesla’s quality control issues when Audi, Porsche, and other luxury brands are offering competing vehicles? These larger brand companies also have the ability to subsidize losses in the electric vehicle market with profits from other sectors, like trucks and luxury SUVs.  Tesla doesn’t have such a luxury.

The “Affordable” Model 3 is a Mirage

Remember that $7,500 “green” government subsidy? Turns out that it has a limit that Tesla is quickly approaching.  As Steve Hanley explains over at Teslarati, people hoping to score a Tesla for less than $40,000 should think twice before putting their $1,000 deposit down. The issue here is that the government subsidy begins to expire after Tesla sells 200,000 cars, which it is projected to reach just as the Model 3 is coming online. Since current Tesla owners and people buying the most expensive versions of the Model 3 will get their vehicles delivered first, it’s unlikely that there will be any left for first-time Tesla buyers hoping to get a car for less than $35,000.

Auto-Pilot Safety and Liability Issues

Meanwhile, Tesla faces huge legal risks from the auto-pilot system that it has rushed to market. Tesla released auto-pilot technology to the public in October 2015, and it didn’t take long for videos to surface of people using it irresponsibly and the technology nearly causing accidents.  During the test drive of a Model S P90D that inspired this article, the salesman informed us that the car would stop at a red light in auto-pilot mode only if there was a car stopping at the light in front of us.  Otherwise, he warned, the 4,500 pound sedan would blow right through the light.

Tesla has tried to shield itself from liability by making it clear that drivers need to remain attentive with their hands on the wheel while using the auto-pilot.  Still, if Teslas start crashing with the auto-pilot engaged, lawyers will make the case that Tesla is responsible.

Subsidies and Profitability

What has propped Tesla’s myth of success up is the fact that Tesla, like other Elon Musk businesses, is the recipient of huge government subsidies.  A profile of Musk’s companies by the LA Times found his empire to be “fueled by $4.9 billion in government subsidies.”

The State of Nevada and the City of Reno shelled out more than a billion dollars in incentives and tax breaks to convince Tesla to build it’s “gigafactory” in Reno.  Tesla has already fallen far behind the employment and production projections it used to convince Nevada politicians for such a generous package.

In multiple investigative reports by the Edward Neidermeyer and the Daily Kanban, Tesla also was caught failing to deliver on promises made to the State of California that qualified them for “fast refueling credits.” The reports on Tesla’s “battery swap scam” can be found hereherehere, and here.

If Tesla continues to fail to meet projections, will politicians continue to shell out huge subsidies based on Tesla’s projections?

Even with all the subsidies, questions remain as to whether or not Tesla has ever been profitable. Tesla reports a variety of Generally Accepted Accounting Practices (GAAP) and non-GAAP numbers to share holders, and the gap between the GAAP and non-GAAP numbers has been increasing.

Reality Behind the Myth

As the first major car startup in decades, Tesla has brought a lot of excitement to the auto industry, but that excitement has turned its story into a myth. Behind that myth, the reality is ugly: its cars have massive quality problems, it can’t make money, it aggressively goes after government subsidies, it misleads the public, and it faces crushing competition. The Model 3 will be Tesla’s first step from the relatively easy world of small-volume luxury car building into the cut-throat world of the mass market, where quality problems are harder to control and buyers expect total reliability. Other automakers have built affordable electric cars, and every one of them has sold worse than expected. It’s always possible that Tesla will be able to achieve where no one else has, but its track record suggests that its problems are about to get worse, not better. The myth is easy to maintain when you’re selling heavily-subsidized luxury cars to true believers. As Tesla runs out of tax credits and has to sell to more demanding consumers, the truth will inevitably win out.


Please let us know if you're having issues with commenting.