While Tesla Motors' (NASDAQ:TSLA) electric Model S sedan has been a hit, and sales for the vehicle are likely to continue to rise in the coming years, the company has two other major vehicles in its pipeline that it is betting will be even more successful: the Model X and the Model 3. Fortunately for investors, Tesla is already fine-tuning the technology that will be used in these vehicles by including some of their key technologies in the Model S. In other words, the Model 3 and the Model X are both partially inside the Model S.
This is great news. Testing the technology of future vehicles in its current lineup will reduce the risk of errors and detours in its upcoming vehicles. While this may seem somewhat unimportant, a bit of perspective on just how crucial these vehicles are to Tesla's business expansion plan shows that every step to reduce the risk of road bumps in future vehicles matters. So, first a bit of background on Tesla's plans with the Model X and Model 3.
Why Tesla's next vehicles are incredibly important
Tesla's Model X, a fully electric SUV, is due for launch in the second half of next year. Tesla has big expectations for the vehicle. On several occasions, CEO Elon Musk has said that he thinks the Model X could eventually outsell the Model S. A mind-boggling 20,000-plus deposit-backed preorders for the X (and counting) suggests he may be right.
The importance of the Model X to Tesla's business plans can't be understated. Likely to be priced slightly higher than Tesla's Model S, the Model X should have a six-figure average selling price -- probably somewhere around $110,000. The vehicle, therefore, will likely play an important role in bringing in cash flow for the company to fund its Gigafactory plans.
And this brings us to Tesla's next car in its pipeline: the Model 3. Once the Gigafactory is up and running -- Tesla is planning for the factory to go live in 2016 -- it can finally produce and sell its Model 3, a lower-cost vehicle that's only possible with the economies of scale brought to lithium-ion manufacturing by the construction of the Gigafactory. The Model 3, Tesla predicts, will help the company reach annualized deliveries of 500,000 vehicles per year by 2020-- a massive jump from Tesla's forecast for 33,000 deliveries in 2014.
Both cars, therefore, are absolutely crucial to Tesla's journey to becoming a mass-market automotive company.
Model X and Model 3 inside the Model S
How is Tesla already fine-tuning technologies for these cars in market use with the Model S?
X tech: For the Model X, Tesla is already gaining expertise in building the dual-motor powertrain and the chassis for its upcoming Model X SUV, because they will share the same bottom platform.
"We do have the advantage with the X that we have the dual-motor powertrain and the chassis. So the bottom end of the car kind of sorted out with Model S that takes that part of the risk out of it," Musk explained during the company's third-quarter earnings call.
The dual-motor system, which is what makes Tesla electric cars all-wheel-drive, will begin to roll out in conjunction with the first deliveries of Tesla's new and improved flagship Model S, the performance 85 kWh dual-motor version, in December. This is at least six months before the first deliveries of the X to customers.
3 tech: While it's not the exact motor that will be used in the Model 3, Musk suggested in the company's Q3 call that the front motor on the dual-motor system -- the smaller of the two -- for the performance 85 kWh Model S represents the beginnings of the powertrain technology that will be used in the car.
[T]hat smaller drive unit, in a lot of ways, is a precursor for the Model 3. It represents a significant improvement in cost, in steady state power -- a number of other factors. It's basically -- it's like a second-generation motor, essentially, that's a good pathfinder for 3 on the powertrain side.
The closer Tesla can get to manufacturing and real-life use of key technologies to be used in future vehicles, the lower the risk associated with the production of these new vehicles. Then, of course, the overlapping production of similar technologies across different vehicles should also help to streamline production ramp-up from both a speed and cost standpoint.