The Model 3 is winning over hundreds of thousands of customers, helping Tesla's (NASDAQ:TSLA) total quarterly vehicle delivery volume more than quadruple in just over two years. But the electric-car maker thinks its next vehicle to come to market will sell in even higher volumes than the Model 3. That vehicle is the Model Y -- a compact sport-utility vehicle priced only slightly higher than Tesla's popular Model 3.
But when will customers finally be able to get their hands on the Model Y? Alongside Tesla's fourth-quarter update on Wednesday, management revealed that the important vehicle is ahead of schedule. Model Y production has already begun and deliveries are scheduled to start by the end of March -- well ahead of the company's initial timeline for deliveries to start in the fall of 2020.
Model Y progress
While Tesla's better-than-expected revenue and earnings per share were notable achievements for the automaker in Q4, arguably the most important news in the update was that the Model Y was ahead of schedule.
"The production ramp of Model Y started in January 2020," Tesla said in its fourth-quarter update. Further, the automaker said it will begin delivering the first Model Y vehicles to customers by the end of March.
Tesla also slipped in another update on Model Y in its earnings release, noting that the company was able to increase the driving range of its dual-motor all-wheel-drive Model Y from 280 miles to 315 miles on a single charge, citing "engineering progress." This increased range "extends Model Y's lead as the most energy efficient electric SUV in the world," management explained.
Tesla's next big catalyst
Investors have good reason to expect strong sales from Tesla's Model Y.
It's no secret that SUV sales are on the rise while sedan sales have been steadily declining. Acknowledging this reality, CEO Elon Musk has said he expects Model Y sales volume to eventually be greater than Model 3 sales. Within a few years, Musk has said he expects annual demand for Model 3 and Model Y to be on the order of 750,000 and 1.25 million units, respectively.
Further, the vehicle represents a compelling value proposition for prospective customers. The long-range dual-motor version of the vehicle sells for $54,000, just $5,000 more than the Model 3 with the same battery and motor configuration. In addition, a $3,000 upgrade can get customers a third row, making room for two more passengers.
In the near term, the Model Y's earlier-than-expected launch is likely one reason why Tesla guided for total 2020 deliveries to "comfortably exceed 500,000 units" -- up from about 368,000 in 2019.
Of course, Model Y's impact on sales in 2020 may be small. The automaker said in its fourth-quarter update that the production ramp for Model Y "will be gradual as we will be adding additional machinery in various production shops." Tesla expects these tooling capacity upgrades to be complete by mid-2020, enabling combined Model 3 and Model Y production capacity of 500,000 units per year at the company's factory in Fremont, California. In the meantime, Tesla says combined Model 3 and Model Y production capacity is an annual rate of 400,000 units.