For Tesla, Model 3 marks a big push and a big test

PALO ALTO — It’s new, sleek, fast and carries the hottest nameplate in the automotive world — Tesla.

Tesla collected nearly 400,000 reservations for its lower-priced Model 3 in the days following its unveiling last year. The Palo Alto electric vehicle maker proclaimed that time “the week that electric vehicles went mainstream.”

But uncertainty still surrounds the fate of the all-electric Model 3, Tesla’s $35,000 sedan reaching its first customers Friday.

It marks a turning point — either rocket fuel for the widespread adoption of electric vehicles, or the flame-out of a fast-moving, ambitious but still unprofitable company. Or maybe something in between.

“The next 12 months are just hugely critical for the company,” said Karl Brauer, executive publisher and analyst for Autotrader and Kelley Blue Book. The Model 3 and several other new electric vehicles could capture the imagination and buzz of U.S. drivers and push EVs into the mainstream, he said. “That’s really what EVs need.”

The cost of new electric vehicles is dropping so quickly that Bloomberg New Energy Finance research this month now expects prices of EVs to rival gas-powered cars by 2025. Almost every major automaker expects to add or upgrade all-electric vehicles to their lineups within two years.

Tesla could use the boost, despite record stock prices. Deliveries of the Model S and Model X flagged in the last three months. Tesla has yet to turn an annual profit despite competing in the high-margin marketplace of luxury automobiles.

Analysts say Tesla — known for blown deadlines — has to hit certain targets for production and quality to remain at the front of the EV pack.

CEO Elon Musk told investors last year the company would ramp up manufacturing to 500,000 vehicles in 2018 by making more components in-house.

“The Model 3 is the first car Tesla is creating that is designed to be easy to make,” Musk said. “This is really a fundamental difference.”

If Tesla hits its ambitious production goals, the company could nearly double the number of battery-powered cars on U.S. roads — about 300,000 — by the end of next year.

The high-end Model S and Model X pushed former owners of luxury cars to spend about 40 percent more on their new Teslas, said Gil Tal, director of research at the Plug-In Hybrid and Electric Vehicle Research Center at UC Davis.

Tal said Tesla’s earlier vehicles changed the market.

“I suspect the Model 3 will do the same,” he said. “The car probably has more power to draw people over than any other car in the market.”

Vehicle sales come down to practical issues, with several studies showing consumers care most about the cost of EVs compared to traditional, gas-powered cars.

For example, a Bay Area owner of a $37,500 electric Chevy Bolt would receive a $7,500 federal tax credit and a $2,500 California rebate, but the car would still cost about $5,000 more than its gas-powered cousin.

Assemblyman Phil Ting, D-San Francisco, is proposing more generous subsidies, essentially making electric car costs the same as comparable gas-powered vehicles. The bill is being considered in the state Senate.

“We don’t think the adoption rates are going quickly enough,” said Steve Chadima, senior vice president at Advanced Energy Economy, an association of clean energy businesses.

Analysts have also warned that the Model 3 can’t suffer the flaws of earlier Tesla vehicles — uneven manufacturing quality, software glitches and unexpected quirks.

If it fails to meet the expectations of a broader consumer base, Tesla’s plans for electric pickup trucks, vans and semis could be endangered.

Brauer said the company needs to prove it can build a reliable car and expand the support network behind it. Tesla service stations and its charging network could become overwhelmed by a sudden growth in its fleet.

Tesla has been aggressively expanding its fast-charging network. It also announced it was adding 100 new service centers and more than 350 mobile service units to troubleshoot and repair vehicles.

Brauer said the company had a unique head start for about five years, because Tesla offered the only long-range electric vehicles.

“They were the only game in town,” Brauer said. “That world is about to be blown to pieces.”

The electric vehicle market continues to grow, although the rate of expansion has slowed in the past two years. The International Energy Agency estimated the worldwide electric car fleet swelled from 1 million in 2015 to 2 million last year.

Much rides on the strength of the Tesla brand. Without spending any money on traditional advertising, Musk has been able to drum up excitement and sales.

“They essentially got a $4 billion advance to build their car,” from the $1,000-apiece Model 3 reservations, Chadima said. “They’ve figured out how to tap into people’s excitement.”

The four-door Model 3 has room for five adults, and a range of 215 miles on a single charge. It also comes with a suite of cutting edge technology — an optional driver-assist package and multiple sensors to navigate, steer, and avoid collisions and hazards.

Even when tricked up with features, the Model 3 slides into the bottom of the Tesla line-up. The entry-level Model S, equipped with a 75-kilowatt hour battery pack, checks in with many more luxury appointments and options at $70,000.

The company estimated that more than 90 percent of the early Model 3 reservations came from first-time Tesla customers. It’s a much broader, but still passionate, base.

Matthew Pirkowski, a 31-year-old tech consultant from San Francisco, has admired the company for years, but wasn’t in the market to trade his BMW for a $100,000 Model S. So he waited.

Pirkowski quickly reserved a Model 3 and expects to get his first Tesla next year. He’s fine with the wait.

“I have a perfectly functional car,” he said, but “I knew what I wanted.”

Promises, promises

Tesla CEO Elon Musk is notorious for setting aggressive deadlines — and watching them slip past. So far, the Model 3 appears to be on track.

Musk, May 2016 – The Model 3 would begin production in July 2017.

Today – The first 30 new cars will be delivered to employees and early supporters on Friday.

Musk, March 2016 – Company will double the number of fast-charging Superchargers by the end of 2017. “You will be able to go virtually anywhere,” he said.

Today – Tesla had about 3,600 Superchargers early last year. It now has about 6,050 fast chargers, with construction on pace to top 7,000 by the new year.

Musk, May 2016 – “As a rough guess,” he said, the Fremont factory would produce between 100,000 and 200,000 Model 3s in the second half of 2017.

Today – Musk revised production estimates down. The company aims to ramp the pace of production to 20,000 vehicles a month by the end of the year. It’s very unlikely to reach 100,000 Model 3s this year.

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