Will the Model 3 Make or Break It for Tesla Motors Inc.?

The bullish thesis for Tesla Motors (NASDAQ: TSLA  )  would have many investors believe that the automaker is at the cusp of changing the future of the automobile. 

However, without a car that is produced in more significant volume and with a cheaper price, the task of changing the automotive world will be difficult. But lo and behold, the Tesla Model 3 could be the game-changer the company needs.  

What is the Model 3?
Unlike the Model S -- Tesla's luxury sedan that starts near $70,000 -- the Model 3 will be cheaper.

Tesla Roadster. Source: Tesla Motors

Much cheaper actually, in the ballpark of $35,000. The details were confirmed in a tweet from Tesla.

Unfortunately, the Model 3 is unlikely to be revealed until 2016, and will not likely be available to consumers until 2017. Still, it's rather exciting that within the next few years, a more affordable and scaled down version of the Model S will be available to consumers. 

The car is expected to be roughly 20% smaller than the Model S and have a driving range of just over 200 miles per charge. By the time the Model 3 is available for purchase, the Supercharger network is expected to blanket 98% of the U.S. population, (this task will actually be completely by the end of 2015, according to Tesla). 

In order to supply the Model 3 with its power, Tesla's battery factory -- the Gigafactory -- will be capable of producing enough batteries for 500,000 vehicles per year. That's a whole lot of cars compared to the approximately 25,000 Tesla sold last year

Tesla Model S. Source: Tesla Motors

Which brings up one problem...
While the Gigafactory is Tesla's saving grace for meeting what is expected to be high demand for the Model 3, it also isn't expected to be completed until 2020 -- three years after the Model 3 is available to consumers. 

It's not that Tesla cannot manufacture all three vehicles without the Gigafactory. It's just that it's expected to play a pivotal role in the company's ability to meet demand and lower input costs, (which could decrease 30%, according to information presented by Tesla).

Even at this point, if one were to go to Tesla's website and order a Model S, it would not be scheduled for delivery until late October. Clearly demand outnumbers supply, and this strain is only likely to get worse following the introduction of the Model X and the cheaper, more affordable Model 3. 

Tesla has laid out the red carpet for the Model 3
By nabbing perfect safety scores, becoming Consumer Reports' highest-rated vehicle, and with its fully electric capability and luxurious look, the Model S has nearly made "Tesla" a household name. 

But its price tag and low supply has kept it out of reach for many consumers. The arrival of the Model X couldn't be more perfect. It's scheduled to debut in 2015, in the midst of surging popularity for crossovers and SUVs. 

Still, supply and price will likely keep the Model X out of the garage for many consumers. And while many cannot get their hands on either the Model S or the Model X, they still want the car. 

And that's where the Model 3 comes in. As the company continues to boost production, build immense interest for its brand with the Model S and Model X, and finish building out an extensive Supercharger network, the Model 3 will become available for purchase.

Tesla Model S. Source: Tesla Motors

In other words...
CEO Elon Musk has played his hand perfectly, in terms of timing the release of the Model 3, pending any future road bumps.

The only thing I'm uncertain about, is how Tesla will meet demand for the Model 3 should demand increase significantly, without the completed Gigafactory?

In the end, the Gigafactory will be essential to both battery supply and costs. At today's prices, investors are clearly expecting future vehicle output to increase and for costs to decrease. The Model 3 can certainly boost sales with a lower pricing point. The only question is, can Tesla keep pace?

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Read/Post Comments (6) | Recommend This Article (3)

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 July 24, 2014, at 1:01 PM, Bigs8818 wrote:

    This simply sounds like"an ebarrassment of riches". I am sure they can build the battery factory a good deal quicker if the money is there.

  • Report this Comment On July 24, 2014, at 1:10 PM, JackB125 wrote:

    Batteries & battery packs production from the Gigafactory is a prerequisite for Model III production. Both are targeted to begin in 2017; however, this will be a limited production . Tesla is planning to scale up both until 2020 when each facility will be at their maximum designed productions. For the Fremont vehicle plant, that will be 500,000 units/year. For the Gigafactory, that will be 50 GWh/year. Of the 50 GWh's worth of batteries/packs, 35 GWh will be for the Fremont factory & 15 GWh will be for Tesla's proposed new business in stationary energy storage solutions.

    At this time, most people don't know much about stationary energy storage solutions business. Fortunately, JB Straubel, Tesla's Chief Technology Officer, gave the keynote speech at the 2014 Energy Storage Symposium on 5/21/14. This address provides a great overview of what they think is coming in this area. And, it is BIG. JB Straubel speculates that it could possibly become Tesla's primary business in the long-run. See .

  • Report this Comment On July 24, 2014, at 1:22 PM, RobertFaheyJr wrote:

    The future of Tesla depends on the coincidence between the Model 3 rollout and the Gigafactory output. That's why Tesla is breaking ground at multiple sites -- to ensure at least one comes to fruition on time. All old news.

  • Report this Comment On July 24, 2014, at 1:23 PM, AjitC wrote:

    I think that Tesla is going to do quite well even without Gen III or the GigaF. Economies of scale, design improvements, supply chain optimization will lower the cost of Model S/X. Tesla will add features like Adaptive Cruise Control, collision avoidance, etc and increase margins. SCs network expansion will increase perceived value of the car.

    Yes, there is issue of p battery supply. However, with increased demand, greater manufacturing margins, Tesla could incentivize Panasonic to produce enough batteries.

    In other words, if demand increase, price/profits increase and supply shows up. Worldwide with SC networks in US/Canada, China and EU, Telsa could sell 100,000 autos of S/X with ASP of $100,000. Gross margins of 30%. That is $3B Gross. Net could reach $1.5B. PE? 30? 40?50?

  • Report this Comment On July 24, 2014, at 2:52 PM, Haeze wrote:

    I am curious where Bret Kenwell gets his intel that the Gigafactory will not be done till 2020. All estimates I have seen from Tesla were that it would take "two to three years" to build, and their projected date of completion has always been set for 2017. The only quotes of the year 2020 with regard to the Gigafactory were for them to ramp up to full capacity of 50gWh/year, which is not necessary for the initial release of the Model 3.

  • Report this Comment On July 24, 2014, at 10:00 PM, My535 wrote:

    Try ordering a $70k BMW or Audi today, October seems about right.

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Bret Kenwell

At The Motley Fool I cover consumer goods and industrial companies, and mainly the automakers. I am a long-term investor looking for companies with sustainable and above average growth. I also like to uncover value, dividend-paying companies. Follow me on Twitter @BretKenwell

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