Downsides Of The Tesla Model 3

 

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Downsides Of The Tesla Model 3

As far as the downsides of the Tesla Model 3, let’s try to look at things from a different perspective: the biggest downside of Model 3, in my opinion, is that it doesn’t exist yet. Lots of things can change until the launch date and I would assume that, when it was presented earlier this year, Model 3 was probably nowhere near a decent stage of development.
In order to understand this perspective, you have to take a different look at the way the company operates: in my opinion, it’s fundamentally a very focused marketing machine that until now has been focused on selling shares, with car sales instrumental to that. Before some fans attack me because of this comment, let me tell you that… it was the right thing to do!

In other words, Elon perfectly knew since the beginning that he would need a massive amount of money to become a car OEM and that, in order to raise that money, he had to create and sustain excitement in investors even more than in clients. Another way to look at it is that at this prices, the purchase of Tesla stock is more irrational than the purchase of a Model S: the latter is a very good car, competitive in its market, while the stock is more of a bet (or a gamble) on future dividends that nobody knows if they will ever appear. Car sales and car fans are just instrumental in raising the money Tesla needs to reach the point where it will be self-sustainable: the gamble is that financial markets keep drinking the company’s kool-aid at least until the company becomes self-sustainable. If they stop drinking it too soon, it will be game over and a historical failure, if believers sustain the company long enough, it will be a masterpiece of entrepreneurship and a tremendous success.

The presentation of Model 3 should be read in this light, in my opinion: it was a massive fundraising event, not from car buyers, but from investors. Let me repeat it: I am not criticizing the company for doing that at all, since it was the best way to do it. Nothing wrong with that as long as you know what’s going on. It reminds me of when Model S was presented to Daimler in 2009 and Tesla obtained an investment of $50m. I was not in the company at the time, but if Tesla is really the fast company it claims to be, at the time of the presentation of Model S to Daimler the car was probably little more than a nice designed body installed on… whatever. Again, nothing wrong with that, the styling was great and we are glad (or, at least, I am) that Daimler was convinced to put some money in Tesla and rescue the project. I guess it was an excellent example of “fake it until you make it” in true Silicon Valley style (to give credit where it’s due, before then Elon and JB managed to prepare an electric Smart in almost no time and that probably contributed a lot to the credibility of the team).

I wonder if Model 3 was very different from that when it was presented, but if the company will deliver on its promises, I’m sure it will be a great car.

However, right now there are some important risks: among them the possibility that the car will not be launched in time (and Tesla never managed to respect a planned launch date) or that the development will not deliver on the promises. You may argue that there’s no risk in having to wait 6 or 12 months more, but I disagree: the competition can be ready very quickly (see below). Other risks I can think of include costs and therefore price (Model S was supposed to start at $57,400 but that model was poor in terms market feedback and was canceled very soon), performance (i.e. range), quality (Model S had lots of quality problems for months after the launch and some customers in Europe are still lamenting an interior quality inferior to competitors), but also taking production to that scale can go horribly wrong. Oh, and did I mention how much the latter can impact the cost and therefore the price?

Furthermore, while I’m confident about the future performance of Model 3, wondering if it will be successful for the entirety of its life-cycle is anybody’s guess, since that will depend on the preferences of each target segment and at this point it’s hard to guess that: as an example, some features introduced for the first time by Tesla are loved by customers, while others became almost irrelevant among buying criteria and product narrative, like the 7 seats. I am positive Model 3 will reach good success if the price will be right (and I am thinking of the real market price of a decent version, not the $35k which is good for PR) thanks to continuous product updates, but it’s clear it will enter in new segments and the reaction of those customers to various features it’s hard to guess at this time.

Which takes me to the final point: Is Model S killing Mercedes and BMW sales in its class like someone else claims? Will Model 3 do the same?

Well, let’s not be ridiculous. First of all let’s discuss what models are the competitors of Model S (and, no, S-Klasse from Mercedes is not a competitor, except for fringes of its market). Furthermore, in global markets this is not happening: they are not killing anyone, also because, while the American public may be more forgiving in terms of interior quality, in Europe and China there has been some criticism about quality and design of interiors and for many customers that’s far more important than reaching 0–60 in 2.5″ or in 4″ or 5″. Even more important, fans tend to forget that the battery technology (including BMS) of Tesla is not out of reach for Mercedes, BMW and Audi: the fact they didn’t launch a Model S equivalent until now is due to the fact that it doesn’t make economic sense to them, not to the idea that they can’t do it. I repeat: forget the idea that “they can’t make a car like Model S”, or at least forget the idea that the technical challenges are too hard for them. The reality is that a pure EV in the same segment didn’t make economic and commercial sense to them.

Scaling up production, however, it’s a different kind of issue: in other words, it would be much harder for Tesla to learn how to manufacture Model 3 at scale efficiently and with good quality than for Daimler, BMW, and others to introduce electric technology in their cars. Why am I confident about that? Not because they are profitable, but because, regardless of what Tesla fans like to think, car manufacturers like these are not dinosaurs but have a huge track record of successfully incorporating a wide variety of technologies in their products. While it’s true they are not nimble (German OEMs almost never are, and that’s the reason why most of their product last very long), they are tremendously solid, they don’t cut corners, they deliver great quality and technologies and they don’t test technologies on customers, especially when they are safety-related: yes, Autopilot, I’m talking about you.

In other words, Tesla is not building a defensible monopolistic position in the industry, similarly to what Amazon has done, but will be exposed to competition. While it’s true that only very few companies retain the leadership in their industry for a long time, right now, even if I have a huge respect for Elon, I wouldn’t bet against the ability of the likes of Daimler, BMW and Audi to maintain the top spot.

Which doesn’t mean Tesla can’t be successful, but simply that it is not “killing” anyone, or at least not anytime soon.

Source: What Are The Downsides Of The Tesla Model 3?

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