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The Big Question Facing Tesla Motors

John Rosevear
June 22, 2012

It's an impressive milestone, and the company deserves big props: Tesla Motors (Nasdaq: TSLA  ) delivered the first examples of its Model S sedan to customers this week, a bit ahead of the schedule announced months ago by CEO Elon Musk.

This is a big achievement. From the massive production investments needed to the arcane morass of regulatory hurdles that need to be met around the world, the business of making cars is one of the hardest for a newcomer -- even a smart, well-financed newcomer -- to enter. That Tesla has come this far (and that it has thousands of orders in hand) is most impressive.

But there's still a big question looming over the company, and it's one that makes me very leery of Tesla as an investment.

What happens next?
Here's the big question: After the 10,000 or so true believers who have put down deposits on a Model S get their cars, who will step up to buy? Or more to the point, how many will?

So far, electric cars haven't exactly taken the world by storm. Despite great marketing, a mass-market price, and a global brand name known for quality, Nissan sold fewer than 10,000 examples of its all-electric Leaf last year. General Motors' (NYSE: GM  ) Chevy Volt was acclaimed by critics and came with range comparable to an ordinary gas-powered car, thanks to its gas-fueled on-board generator, but couldn't even break 8,000 sold.

The Model S is a different proposition from those two cars, but that's both a plus and a minus. On the one hand, the EPA says that a Model S equipped with Tesla's top-of-the-line 85-kWh battery pack has a range of 265 miles, far beyond any other mass-market electric car. (For comparison, the Leaf's EPA-rated range is 73 miles, and Ford's (NYSE: F  ) Focus Electric gets 76.)

On the other hand, there's a pretty simple equation in the electric car business: Range costs money. In the Model S's case, you'll pay big. Pricing for the 85-kWh variant of the Model S starts at $69,900 (after a $7,500 federal tax credit), nearly double what you'd pay for a Leaf. That's comparable to a loaded BMW 5-Series or Mercedes-Benz E-Class, and that's before you start adding options to the Model S, which can drive the price up to within spitting distance of six figures.

An expensive proposition for an unproven car
To be fair, the Model S is -- at least on paper -- plausible competitor for an E-Class or a Lexus LS. It's big and roomy, beautifully styled, and comes with a well-trimmed interior loaded with high-tech touches centered around a huge 17-inch NVIDIA (Nasdaq: NVDA  ) powered touchscreen.

But will it sell, once the early adopter types have their cars? Tesla plans t