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3 Reasons Tesla Motors, Inc.'s Model 3 Will Be a Game-Changer

By Daniel Sparks - Jul 20, 2014 at 10:00AM

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We know a few details about the car, and now the name. But will the Model 3 really be a game-changer? Absolutely.

Earlier this week, Tesla Motors (TSLA 0.78%) finally announced the official name of its planned affordable car: Model 3. When Auto Express writer Steve Fowler detailed his interview with Tesla CEO Elon Musk earlier this week about the car, Fowler called Tesla's next-generation smaller car a BMW 3 Series rival. While that statement may seem a bit outlandish to those who aren't familiar with Tesla, there's a good chance Fowler will turn out to be right.

Model S 21" turbine wheels with red break calipers. Image source: Tesla Motors.

"Wait a second," some readers may argue, "BMW sold about 350,000 3 Series Sedans last year. How can Tesla go from a planned 35,000 deliveries this year to soon rivaling the BMW 3 Series Sedan?"

As it turns out, there is quite a bullish case for Tesla's affordable car when you take a closer look. And, considering Tesla's $27 billion market capitalization, the market at large seems to agree that Tesla has a chance at building a car just as marketable as BMW's 3 Series. Indeed, with the help of the Model 3 that Tesla plans to launch in 2017, the electric car-maker wants to sell 500,000 cars annually by 2020. This would put Tesla on par with BMW's entire 3 Series lineup, which includes a hybrid, a touring model, and the Gran Turismo; in 2013, this entire BMW lineup had sales of 500,000 globally.

If Tesla's Model 3 could really rival BMW's 3 Series Sedan, the Model 3 would undoubtedly be an industry game-changer.

But how in the world would Tesla pull this off? Here are three catalysts that could catapult Tesla to the mainstream.

1. Big investments
Tesla is making the investments needed to turn itself into a large automobile manufacturer. The Model 3 will be built on a new and separate platform that will fill out more of the capacity of its Fremont, California, factory. Tesla CEO Elon Musk said the factory has capacity to eventually tool for production of 500,000 cars per year. Tesla has also said it eventually will build factories overseas, showing interest in both China and Europe. 

Tesla Fremont Factory. Image source: Tesla Motors.

Musk wants to solve the lithium-ion battery bottleneck that is currently holding up the company from ramping up production fast enough to keep up with demand once and for all when the company builds its planned Gigafactory. The $5 billion project is set to begin this year and finish on time for the 2017 Model 3 launch.

As talks with suppliers and plans regarding the Gigafactory progress, Musk says the company now believes the original goal of a 30% reduction of cost in lithium-ion batteries as a result of building the factory is a conservative projection. This means Tesla shouldn't have trouble hitting its target $35,000 price point for the Model 3.

2. A unique value proposition
Tesla doesn't have any trouble selling its vehicles. Despite no advertising spending and no promotions, Tesla remains limited by supply -- not demand. Even so, in 2013 Tesla's Model S was the best-selling vehicle in North America among comparably priced cars. 

While Tesla can certainly thank tax credits as a driver for sales, the value proposition for a Tesla vehicle is undoubtedly compelling in other aspects. Beyond the wild power and acceleration, the fact that a Model S is fully electric helps it achieve unmatched safety ratings. And naming just a few other unique and compelling selling points the electric-car maker can boast, consider its over-the-air updates, free supercharging for life, and meaningful all-electric range.

Model S. Image source: Tesla Motors.

Many of these same selling points are driving robust Model S sales will likely carry over to the lower-cost Model 3.

3. A boost from solar
While a fully electric car already offers big savings over a gas-guzzling internal combustion vehicle, these savings will only grow as solar PV panels continue to become more affordable and more capable.

SolarCity panels. Image source: SolarCity.

Just five years ago, it didn't make sense for many homeowners to go solar. But this is changing rapidly. Consider, for instance, that solar panel prices declined 80% between 2008 and 2012 alone.

By the time the Model 3 is launched, the prices of solar panels are likely to be much lower than they are today. Buying an electric car toward the end of this decade will make more sense than ever.

Combining the right investments, a futuristic car with a solid value proposition, and a likely boon for the electric-vehicle sector from progress in solar technology, the Model 3 is likely to be a game-changer, easily challenging BMW's 3 Series Sedan. More importantly, this sort of success would set Tesla up to officially become a mass-market player.

Priced at around $35,000, the Model 3 will be about 20% smaller and have a range of over 200 miles. Tesla is planning to launch the vehicle in 2017.

Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends BMW, Ford, and Tesla Motors and owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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