It's a staple of the tech press to talk up electric cars that could "kill" Tesla (NASDAQ:TSLA). We've seen Tesla-killing headlines with the Lucid Air, Faraday Future's FF91, Porsche's upcoming electric car, and more. If it's a halfway-decent electric car, somebody wants you to think that it means certain doom for Elon Musk's electric-car venture.
It's almost as if some people think that the market for electric cars will never grow, that any new electric car necessarily means lost sales for the Silicon Valley automaker.
But it isn't so. I've been watching and writing about Tesla, often quite skeptically, for years now, since before Tesla went public. And I have come to the firm conclusion that there's only one electric car on the horizon that stands any chance at all of putting Tesla out of the auto business.
Behold the one car that could kill Tesla
Here it is, the one and only electric car that really could kill Tesla.
For the two or three readers who might not know it on sight, the car in the photo is a prototype of Tesla's upcoming Model 3. It's a compact electric sedan that is set to go into production later this year. More to the point for our discussion, it's intended to be Tesla's first mass-market product.
How could Tesla be "killed" by its own car? Hyperbole is another feature of many Tesla discussions, but the launch of the Model 3 really is a "make-or-break moment" for the company. It's Tesla's first true step into mass production on a scale comparable to the major automakers. It's also Tesla's first step into the mass market, beyond its early-adopter enthusiast customer base.
To date, Teslas have been niche products. They're expensive, small-production cars for a niche audience, tech-savvy enthusiasts who have been willing to overlook the cars' imperfections because of their excitement about Tesla's technology.
That's absolutely not meant as a criticism. Tesla has been able to sell the Model S and Model X at good margins, giving it cash to plow into its future growth. Early Tesla owners have been exceptionally enthusiastic ambassadors for the brand. And Tesla has been able to learn the extremely difficult art and science of auto manufacturing at a measured pace -- or put another way, it has been able to turn its occasional big mistakes into lessons learned at a relatively small cost.
All of that will soon be put to a very big test. If Tesla fails, it really will be in trouble.
Why Tesla's fate depends on the Model 3
Tesla delivered 76,230 cars in 2016. That's an impressive achievement in context. But to become a sustainably profitable automaker and come anywhere close to justifying its sky-high valuation, it needs to build and sell a whole lot more, year in and year out.
How many more? The smallest "major" automaker is Subaru, which sold just over one million cars worldwide in 2016. But unlike Tesla, Subaru's corporate parent Fuji Heavy Industries (NASDAQOTH:FUJHY) is very conservative with its spending. A better comparison might be BMW (NASDAQOTH:BAMXF), which sold 1.9 million BMW-brand vehicles last year (along with 127,194 Minis, 3,785 Rolls-Royces, and 136,963 motorcycles.)
Somewhere between those two numbers is probably the level of annual sales at which Tesla's auto business hits sustainability. Getting there means moving beyond that tolerant early-adopter owner base and into the wider market. It means attracting new buyers who are accustomed to BMW-level quality and amenities -- or Toyota-level quality.
There's much to praise about the Model S and Model X, but they've both had their problems. There are weaknesses in the basic designs of both models that wouldn't pass muster at BMW -- or Toyota, or General Motors (NYSE:GM), or any of the other big automakers, at least not at anywhere near Tesla's price point.
The Model 3 has to be better on all fronts. The good news is that Tesla knows that, has taken strong steps to make it happen, and is in a better position than it has ever been to deliver a high-quality product.
But if it still somehow falls short, it'll have a problem. Tesla might still sell several hundred thousand Model 3s in a mad rush of enthusiasm over the next couple of years -- but if the Model 3 has problems that Tesla can't easily solve, it'll struggle to sustain that sales pace after the wave of not-so-early-but-still-early adopters get their cars.
That's when things could genuinely get tough for Tesla.
The big test is coming soon
Long story short: When it comes to fit and finish, durability, and overall refinement, the Model 3 has to clear a significantly higher bar than its predecessors. If it doesn't, and if Tesla can't fix it quickly after launch, then the company will have a serious problem.
That problem will be magnified if a better-funded rival launches a strong Model 3 competitor while Tesla is struggling, in a bid to steal some of Tesla's pre-orders. (Don't be surprised if at least one big automaker tries this. There's at least one that could.)
In reality, even a big launch debacle and a fierce direct competitor isn't likely to "kill" Tesla, at least not anytime soon. But it will greatly complicate Tesla's effort to get its auto business to sustainable profitability in the near future, and it could well clobber Tesla's stock price.
The good news is that it looks like Tesla has made the right moves to deliver a high-quality Model 3 from the start. We'll find out soon.