Speaking at the Detroit Auto Expo, Elon Musk, Tesla’s chief executive officer, added to the bad news when he said that the electric car company would not be profitable until 2020. Musk’s statements are not surprising when you consider the company’s sales; however, they are a dampener for the company’s fans, who comprise a cult base not incomparable to Apple fans. But, the electric car company is no stranger to adversity.
Launched in 2003, Tesla had a roller-coaster ride during its initial years. Amongst its problems were the departure of two co-founders, cost overruns during the making of Tesla Roadster, and delays in getting its first car to market.
But, all that is history now.
The Model S Sedan, which is available in three battery pack varieties and mileage ranges, received rave reviews from experts and customers alike, when it was launched in 2012. Sales have been healthy and the company’s stock price was on a tear before it began tanking late last year.
The key to Tesla’s profitability, according to Musk, lies with the Model 3, a cheaper version of the Model S Sedan. The Model 3, which will have fewer features compared to its Sedan counterpart, is expected to begin rolling out by 2017. According to Musk, the vehicle is expected to travel up to 200 miles on a single charge. This figure is comparable to the Model S’s capabilities: The car company’s website states that the Model S has a range of up to 300 miles. Musk has set a target sales figure of a “few million cars” by 2020.
However, Musk’s sales target requires a concert of several events and innovations to occur at the same time.
First, and most importantly, battery cell technologies need to advance significantly. Tesla cars use lithium ion batteries because they offer several performance advantages. At average prices that are estimated upwards of $400 per kilowatt hour, the batteries are an expensive deal. To further complicate matters, Tesla cars are equipped with banks of them. This inflates car production costs and that cost is then fixed into the car’s eventual price tag. The tag is not an issue for Tesla’s current customer base – wealthy suburbanites.
But, it is a major deterrent for the vast majority of car consumers. To be sure, lithium ion battery costs have been declining by 7% annually. But that decline is not sufficient to propel Tesla’s expected volumes within the current timeframe. The company has hedged its bets by announcing a collaboration with Panasonic to build the world’s largest manufacturing plant for lithium ion batteries in Nevada.
Second, the company will need to increase the number of supercharging stations in its network across the world. Supercharging stations play a role similar to gas stations; they enable Tesla owners to recharge their electric vehicles. Tesla has already begun populating America with supercharging stations on a war footing. It ramped up to 103 stations last year (from nine stations in 2013) and has plans to blanket about 98% of the United States. However, the company has lagged outside America. Europe and China, key future markets for the company’s electric vehicles, have fewer charging stations. In fact, Tesla has only only 15 charging stations planned for China this year. This could stymie the company’s growth in those markets.
Third, the company needs to efficiently navigate its way around regulatory bottlenecks and mainstream perceptions about electric cars. With a business model that eliminates car dealers, Tesla has already charted new territory. In the process, however, the company has run up against several obstacles and litigation.
Musk seems to have softened his stand against car dealers in recent times. During the same interview at the Detroit Auto show, he indicated that the company was willing to work with dealers who were not “jerks.” His conciliatory statements make good business sense. Tesla’s model may work for early adopters and sales figures numbering in tens of thousands. But, it inflates costs and complicates operations when sales volume increases. Dealers widen the automakers’ reach and cut costs by ensuring after-sales support and maintenance. They can also help Tesla deal with negative perceptions about electric cars by educating customers about their benefits. For example, the company’s stock price tanked in recent times on the back of plunging oil prices. Similarly, “misperceptions” about the car’s charging capabilities cost customers for the company in China.