Will Tesla's Model 3 Make Electric Vehicles Mainstream?

Tesla Motors  (NASDAQ: TSLA  ) might be the pioneer of electric vehicles, but with its existing models starting over $60,000 the brand has been out of reach for most car buyers. That may change in 2017 when the company releases its Model 3 priced around $35,000.

The challenge for the brand if it hopes to become more mainstream is appealing to people seeking a luxury car, those looking for an environmentally friendly option, and even those not looking specifically for either. The $35,000 price tag puts the car squarely in the lower-end range of luxury vehicles but on the higher side for the hybrid/electric market.

The Model 3 could appeal to a variety of potential customers but its release will put Tesla into an entirely different business than the one it's in now. Currently the company is marketing a very limited number of vehicles, which creates an air of exclusivity. The new car will be an attempt at mass appeal. A few companies have managed to go from serving a small base of loyal customers to a widespread audience -- Apple comes to mind -- but many more have failed.

The question is whether $35,000 is a low enough number to make the average (well, the higher end of average) car buyer consider Tesla. Jason Hellmann, Daniel Kline, and Jake Mann debated the topic on the latest edition of  Business Take, the show that gives you the Foolish perspective on the most important business stories of the week.

What is Tesla trying to do?

Unlike a hybrid, which uses both electric power and a traditional gasoline engine, Tesla's vehicles run purely on electricity. Their current cars are expensive largely because of the cost of making them and the relatively limited amount of vehicles produced.

John Voelcker, senior editor for High Gear Media, explained in an interview with CNET why the current Tesla models cost so much and why that will change:

Lithium ion battery costs need to come down (as one salient reason), both through advances in technology and higher volumes. They made the Roadster, which was a two-seat performance car. They made 2,500 of those. They've made more than 50,000 of their Model S sedans. Once you get into volume manufacturing, like the Model 3 that Musk described, then you're talking not about tens of thousands of cars per year but, ideally, hundreds of thousands of cars per year. 

The more cars Tesla can make, the less each one costs to produce. That's a core principle of manufacturing. But in this case, it's not just about scale, it's about creating the technology to then build it in high volume. Tesla appears to have cracked that code, but is that lower cost low enough for consumers? 

The case for the Model 3 as a luxury car

Tesla CEO Elon Musk has actually compared the Model 3 to BMW's 3 Series -- the luxury automaker's entry-level model, which starts at around $33,000. Add in the fact that the Tesla Model 3 runs requires no gas and it's easy to see how the lower price tag at least puts the company into the discussion.

Whether potential customers view Tesla as having the same cache as BMW is yet to be seen, but the fact that the company's current vehicles are so expensive helps. BMW showed with the 3 Series that as long as standards are maintained it's possible to move a little downmarket while maintaining the reputation of your brand. If the Tesla Model 3 has the panache and flair of the company's earlier models, it's likely it will be seen as a worthy contender by the luxury car crowd. 

Another question that Tesla will have to answer with the Model 3 is can it deliver a premium driving experience? Electric engines don't roar like gas-powered ones, and many luxury buyers are looking for performance along with an exclusive label.

Tesla has the right price for people at the edge of the luxury market and the brand name has always been associated with high-end vehicles. Add in the fact that it requires no gas and is good for the environment and that should give buyers in this category a reason to take it for a test drive.

The case for the Model 3 as an environmentally friendly car

The green crowd might be an even easier sell for Tesla -- that audience is already looking for environmentally friendly vehicles. The $35,000 price tag might be a little high, but it's not out of the ballpark. The most popular environmentally friendly car, the Toyota  (NYSE: TM  )  Prius, has a starting manufacturer's suggested retail price of just over $24,000 (and it sometimes can be purchased for less). That makes Prius the winner purely on price, but Toyota's vehicle is a hybrid while the Model 3 is fully electric. That means Tesla buyers will save money on gas, which could make up the difference depending on usage.

Perhaps more importantly, while driving a Prius comes with a bit of a badge of honor among the green set, it can hardly be called stylish. The Model 3 will likely be considered a step up that's justifiable because it's actually better for the planet.

Nissan and Fiat currently sell electric vehicles, but both have ranges below 100 miles so it's unfair to compare them to the Model 3. By 2017 Tesla won't be the only company offering a full-electric car capable of going 200-plus miles on a charge. Nissan, which currently sells its Leaf electric vehicle with a starting MSRP of just over $29,000 (before tax incentives), also plans to offer an electric car with a 200-plus mile range. The current Leaf can go 84 miles before it needs a charge.

The company has not released pricing for its new vehicle, but if the current Leaf sells for just under $30,000, it's reasonable to imagine that one with a longer-range battery will cost at least somewhat more. Nissan has also not finalized a look for its new Leaf, but much like Toyota, nothing from the company's past suggests it will compete with the Model 3 in the design department.

Will people buy it?

It seems likely that the Model 3 will at least get a chance from lower-end luxury buyers -- especially those who also care about the environment -- and it has obvious appeal for people specifically targeting electric or hybrid cars. To truly become a major player, however, Tesla needs to appeal to people not specifically looking at dropping gasoline. For those customers Tesla will have to appeal for economic reasons. Research suggests that it has a strong case.

A report by the Electric Power Research Institute looked at the total cost of ownership for two fully electric cars -- the Leaf and the Chevrolet Volt -- compared to the cost for similar gasoline and gasoline hybrid vehicles. The study found that savings in fuel and maintenance mean electric vehicles can be cheaper to own, even with a higher sticker price. In most cases, the plug-in cars have total costs within 10% of conventional vehicles. You may pay more up front, but you make it back a little each week by not having to pay for gas. 

That could be good news for Tesla, but customers still have to be willing (and able) to front the added cost, even if they make it up over time.

"Tesla wants to make the car affordable," Mann said. "You don't have to pay for gas for the life of the car…. Tesla should use that math to market the car."

The Model 3 seems well-positioned to move Tesla from the fringes of the auto business and into the mainstream. Of course 2017 is a long way away and a lot can change between now and the new vehicle's release, but Tesla's future looks bright.

Do you think have a cheaper model will help Tesla become a much higher-volume brand? Watch the video below and share your comments.

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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 25, 2014, at 5:24 PM, deeageaux wrote:

    Nissan LEAF will likely be a 150 mile range car not 200 plus like the Tesla.

    BMW and MB sell cars in the $32k-$130K plus range without losing prestige. So will Tesla.

    There will be less Teslas on the road than either BMW or MB for the foreseeable future, making them more exclusive.

    Tesla has more cachet and it is not even close.

  • Report this Comment On July 25, 2014, at 6:42 PM, AmcnFndrs wrote:

    Most hybrid's on the market today do not meet a luxury brand design aesthetic so Tesla has a huge opportunity to combine price, environment, design and technology to create something special that is worth waiting for. Going direct to the consumer could also be an interesting play in further cost reduction/low hassle buying experience, etc. We have enough hybrids on the market today that look like mini "mini-vans" or like a min-bus shaped like an arrow - C'mon...we are starved for good design.

  • Report this Comment On July 25, 2014, at 8:44 PM, nonqual wrote:

    "The Model 3 will go on sale in 2017 for about $40,000, said Tesla spokesman Simon Sproule, although the price could change as the vehicle gets closer to market."

    The Roadster went from $89k in '08 to $109k in '09; very few were delivered in '08.

    The S went from "under $50k" to cancellation of the 40 kwh version; the 60 kwh starts at $69k in black or white with cloth seats and NO other options particularly Supercharging.

    Three years ago Musk was saying the Gen III would be $30k. Watch and see

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Daniel B. Kline

Daniel B. Kline is an accomplished writer and editor who has worked for the Microsoft's Finance app and The Boston Globe, where he wrote for the paper and ran the business desk. His latest book "Worst Ideas Ever" (Skyhorse) can be purchased at bookstores everywhere.

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