How Tesla Motors Will Get to 500,000 Vehicles

In January 2011 Tesla (NASDAQ: TSLA  ) presented an aluminum body of its planned Model S. Producing just hundreds of its fully electric sporty Roadsters per year at the time, CEO Elon Musk's prediction that Tesla could sell 20,000 of these luxury family-sized vehicles in the first full year of operation sounded a bit crazy. Fast-forward to the end of 2013, the company's first full calendar year of Model S sales, and Tesla had sold 22,477 vehicles. 

Tesla Model S. Photo by Levi Sim, used with permission.

Now Musk is sounding crazy again. The company says that, thanks to its planned Gigafactory and a lower-cost car scheduled for a 2017 launch, Tesla could sell 500,000 vehicles annually by 2020. And once again, Musk's prediction is difficult for the general public to believe. And Tesla skeptics are concerned: If there is a risk posed to demand, is Tesla's plan to build a factory that will more than double worldwide production of lithium-ion batteries a risky bet?

Rendering of planned Gigafactory. Image source: Tesla Motors.

Sure, the Gigafactory would be risky if a path to annualized demand in the hundreds of thousands was risky. But the path is clear. In fact, I think demand for 500,000 Tesla vehicles annually by 2020 sounds very reasonable. Here's why.

A proven value proposition
People love the Model S. In fact, that's probably an understatement -- the Model S is hands down the best car ever built. Just take a look at this exhaustive list of accolades for the car if you have any doubts.

And despite severely limited supply and zero spending on advertising, the Model S was the top-selling vehicle in North America among comparably priced cars in 2013.

As it turns out, electric cars are not just greener than traditional internal combustion vehicles -- they are better, too. Take a test drive in a Model S and suddenly the luxury ICE vehicles you once envied will seem terribly antiquated. Moving gears, rampant fluids, and noise will seem both excessive and unnecessary.

The Model S has proven in an incredibly short period of time that the fully-electric Tesla value proposition is compelling. Imagine a similar value proposition to the one the Model S presents but at $35,000, the planned price point for Tesla's third-generation vehicle scheduled to launch in 2017. 

A massive market with very low penetration
Or here's another way to think about it: Is 500,000 cars really that bold of a bet? Today, Tesla's deliveries are just a small fraction of the broader auto market.

Enter a very helpful chart found in Tesla's corporate presentations:

Source: Tesla Motors.

Of course, Tesla's more affordable third-gen vehicle will dramatically expand Tesla's addressable market beyond the global premium auto market outlined above.

Massive addressable market or not, Tesla only expects to sell 35,000 vehicles in 2014. Some doubters may protest, "How, then, could Tesla predict to sell 500,000 vehicles annually in just six years?"

Actually, by year's end, Tesla estimates that the rate of sales in Europe and Asia combined will be almost twice the sales in North America. Assuming Tesla's North American delivery rate in 2013 holds, this would imply that demand for the Model S alone could reach a rate of 70,000 vehicles per year by the end of 2014 -- already about 15% of Tesla's goal for annualized deliveries in 2020.

So, do I think 500,000 vehicles is an unreasonable aspiration? Not at all. A proven value proposition, a basically untouched addressable market, and soaring sales at a much higher price point than the planned price for Tesla's third-gen vehicle give me plenty of confidence that future demand will be adequate enough to make use of the Gigafactory's production capacity. Five-hundred-thousand vehicles per year by 2020 is a realistic projection.

To top it all off, Tesla's Alexis Georgeson just confirmedwith The Motley Fool that the company has "no plans to initiate any paid advertising." Demand, apparently, still isn't an issue for Tesla -- even in the foreseeable future.

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Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2014, at 12:13 AM, DrDauger wrote:

    After driving my Model S 15k+ miles for just over a year, it clearly surpasses all other cars. Occasionally I drive my previous car, a BMW M3, and rental cars and ICE cars now feel lurchy and downright clunky in comparison.

    Rome wasn't built in a day, nor was the gas car industry (a century?), and nor will the electric car industry. Tesla's design is the future, and it is good.

  • Report this Comment On March 10, 2014, at 1:50 PM, gjsuhr wrote:

    There is a blog that tracks Electric vehicle sales. http://ev-sales.blogspot.com/

    Tesla Model S sales in February were:

    Netherlands 10

    Norway 431

    Italy 3

    France 13

    USA 1400

    Sweden 0

    Germany 30 (Jan)

    My understanding is that Norway has a host of incentives so it sells pretty well there...just like California.

  • Report this Comment On March 11, 2014, at 10:27 AM, damilkman wrote:

    Here is the problem. There is a big difference between Dr Dauger and the rest of us. Most of us can't or would consider it financially foolish to have so much capital tied up into a BMW M3 and an S3. With markups that could easily approach 200K invested in getting from A to B. I have no problems with rich people spending their hard earned money. Most of them deserve the enjoyment of their labor.

    However, the market segments that are focused towards the masses are completely different from the luxury car market. It really does come down to price. No one really knows what the AFFORDABLE car will be priced at. The Tesla will be going head to head verse a 15K starter car.

    What is left unmentioned is Musk's strategy. In my opinion he is attempting the same Apple model. In the 80ties, people bought Apples and then later MAC's because over IBM clone PC's despite very serious markups. Many did it despite Apples costing 1-2K more. But people did it to be cool.

    This is Musk's strategy. There is no way in my opinion he is going to get the cost down. But if he can build a cool brand and people want it because he is cool Tony Stark, then there may be people willing to shell extra tens of thousands. The question is does the model work for cars. Big difference between spending 2K more sheling 5K for the best Mac on the market then 15-20K more and 35K to have a Tesla.

  • Report this Comment On March 12, 2014, at 7:48 AM, DarylMc wrote:

    damilkman

    What you say is garbage and completely wrong. There is no other electric vehicle for sale right now which can match Tesla Model S range regardless of price.

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