Way back in 2006, when Tesla Motors (NASDAQ: TSLA) was still a young start-up with no products -- even the Roadster was still in development -- Elon Musk outlined a long-term vision for the company:
- Build sports car
- Use that money to build an affordable car
- Use that money to build an even more affordable car
- While doing above, also provide zero emission electric power generation options
Since then, Tesla has achieved great success in the luxury car market. However, it hasn't really followed through on the plan to use the profits from each luxury product to move further downmarket. While Tesla still plans to build a relatively affordable car in a few years (the Model 3), for now it is doubling down on the super-luxury segment with the Model X, unveiled on Tuesday.
A fabulous SUV
Based on the early reviews for the Model X, it looks like Tesla did a fabulous job. That's not very surprising, considering that Tesla's Model S also got stellar reviews -- and ranked as the best car ever tested by Consumer Reports by a wide margin.
The most noticeable feature of the Model X is its "Falcon Wing" doors that can open in tight spaces and make it very easy to get in and out of the rear seats. (The doors even have sensors to prevent them from hitting a garage ceiling or a car parked nearby.)
Other key features include a panoramic windshield, second-row seats with ample storage space underneath, up to 5,000 lbs. of towing capacity, self-opening front doors, quick acceleration, and best-in-class safety ratings. And, of course, Tesla did this all in an electric car!
You'll pay up for the privilege
Musk's original "secret" plan for Tesla called for the Model S to be offered at a price roughly half that of the Roadster (which originally started at $89,000). However, while the 40 kWh Model S started at $59,900 -- or $52,400, after the standard federal tax credit -- it didn't sell. Few people spending $50,000-plus on a car were willing to settle for the base model's 160-mile range.
Instead, the average selling price of a Model S has hovered around $100,000 -- not much different than the entry-level Roadster price. The 60 kWh model, originally the mid-tier offering, has also been scrapped in favor of a 70 kWh version with more range. The cheapest Model S now costs $70,000 (plus a $1,200 destination and document fee) before tax credits.
The Model X is even pricier. Right now, Tesla is offering fully loaded "Signature" series versions that start at an eye-watering $132,000. Eventually, Tesla plans to launch lower-spec models -- including a smaller battery pack than the 90 kWh version in the Signature series -- with prices estimated at $5,000 more than a comparable Model S.
That said, the "90D" version has an EPA-rated range of 257 miles, less than the 270-mile range of the Model S 85D variant. In other words, it is not quite as fuel efficient as the Model S, which is natural, given its extra height and weight. (The difference appears to be about 11%.) This makes a smaller battery pack option even less appealing than on the Model S.
How big is the market?
Demand for the Model X appears to be strong -- Tesla currently estimates that new Model X orders will not be ready for delivery until the second half of 2016. As of last week, there were more than 31,000 Model X reservations. Furthermore, Tesla has previously indicated that Model X sales are likely to equal or exceed Model S sales.
That said, once Tesla satisfies the appetites of early adopters, it's an open question as to how many $100,000-plus cars and SUVs it can sell on an ongoing basis. An IHS Automotive study earlier this year estimated 2015 sales for the seven leading "ultra-luxury" automakers -- which target the Model S and Model X price points and higher -- at a little less than 300,000 units globally.
This figure underestimates sales of cars in the $100,000 price range because it doesn't count the most expensive models from mainstream luxury brands, particularly Mercedes and BMW. Even including the priciest models from these luxury brands, the total market size appears to be less than 1 million vehicles per year.
In other words, to sell 100,000 vehicles per year -- originally Tesla's run-rate target for the end of 2015 -- it must grab a double-digit share of the ultra-luxury auto market. Given the strong brand loyalty among luxury auto buyers, Tesla probably needs to bring a lot of new buyers into this price range.
That's the tricky part. What was supposed to be Tesla's era of the "affordable car" has instead become the era of $100,000-plus luxury autos that are out of reach even for the upper middle class. There will be no shortage of people who want the Model X. However, if most of them simply can't make the payment, it's not much consolation to Tesla.
Environmentally conscious members of the middle class will just have to wait for the Model 3 -- and hope that it's actually as affordable as Tesla has implied.
Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.