Tesla Just Started Selling The Wrong Car But It Might Not Matter

When the first Tesla Model 3s were delivered to customers last night, it was a major milestone. Ten years of work, planning, capital raising, interest building had made it possible for the company to produce a desirable, somewhat affordable electric vehicle. With 500,000 reservations placed to own a Model 3, Tesla says the car is sold out through most of next year. And given CEO Elon Musk says Tesla is facing "six months of production hell" just to get manufacturing ramped up, the company will surely be busy for the foreseeable future. Still, there's a nagging feeling that Tesla is building the wrong vehicle. Whether that matters is to be determined.

Tesla

On ramp: Tesla will need to grow Model 3 production quickly to satisfy the 500,000 reservation holders.

Our Love Affair With Cars Is Over

The Tesla Model 3, despite its unique interior and powertrain, is a rather conventional 4-door sedan. The initial deliveries clock in at $49,000 -- far higher than the nominal $35,000 base price. But even the lower figure makes Model 3 anything but a mainstream vehicle in the U.S. Consider that none of the top five vehicles sold are traditional cars, but instead are pickups and small crossovers. In the top 20, there are just seven sedans, three of which are near entry level products from Honda, Toyota, and Nissan. The remaining big sellers are standard four doors but all of them (the Camry, Accord, Altima, and Fusion) start below $24,000.

The first time you see a vehicle that could arguably be considered a "comparable" to Model 3 is at #61, where the Mercedes C-Class shows up. That car sells at about 80,000 per year in the U.S. The BMW 3-Series now comes in lower overall, but if you add the 4-Series as well (BMW only separated them a short while back), it's a 100,000+ seller annually. Tesla has historically sold about half its cars in the U.S. And while that ratio could change in time, the company now basically has the unenviable task of outselling the 3-Series, C-Class, and Audi's A4 combined.

While that is daunting enough, it's more troubling when you consider the reason: Americans increasingly don't want cars at all. That's reflected in the above purchase data, but also in surveys asking buyers what they want next. Two thirds of SUV and crossover buyers already owned one; fewer than half of car owners plan on buying another, per IHS Markit data from the linked CNBC story.

Y Not?

Tesla isn't unaware of these trends, of course, but is launching Model 3 against the headwinds of declining auto sales overall and what might eventually be a "carpocalypse" in the U.S. It has an answer in the forthcoming Model Y, a crossover that is to Model X what the 3 is the company's Model S sedan: smaller and cheaper. The problem for Tesla is Model Y is at least two years away, having not yet hit the public prototype stage.

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