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

Tesla's Model 3 might the game-changer for the masses, but supply issues could hold it back from its true potential.

Jul 24, 2014 at 12:25PM

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.

Roadster

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

Model S

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.

Model S

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?

Leaked: Apple's next smart device (warning, it may shock you)
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Bret Kenwell has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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