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How many Model S cars can Tesla really sell?

Recent discussions here on Torque News have created debate over the viability of the Tesla Model S and Tesla CEO Elon Musk's projected production numbers for the car. If the company produces 20,000 cars in 2013, will it realistically be able to sell them too?

Last week, our own John Goreham penned an article in which he predicted that the major manufacturers' electric cars (Volt, Leaf) would ultimately succeed in the marketplace while small upstarts (Tesla, Fisker) would not. That article can be read here.

As would be expected, John's premise created a lot of buzz and commentary. Those of us in the automotive journalism trade know that anytime we mention certain vehicles in a less than favorable light, we will be inundated by the hardcore fans of that car who will make it clear that they think we're idiots. I myself have said that the Chevrolet Volt is "not all that" and was avalanched by "Voltophiles" calling me numerous names and nitpicking over every detail of my penmanship to find fault. This doesn't just happen with electric cars, of course. An article I wrote regarding the Chevrolet Corvair was also quite controversial, even among other automotive journalists who left commentary on my Facebook and International Motor Press Association threads regarding the article. Such is the nature of journalism.

It is knowing that the same contingent of Tesla fans will likely descend upon me that I delve into that car and its dubious future here. While I have little doubt that Tesla CEO Elon Musk's plans to build 20,000 cars next year are at least viable, it seems unlikely that the company will be able to sell twenty thousand cars in the same time frame.

Can Tesla Make 20,000 Cars?
Although there is ample room for failure, of course, it does appear at least feasible that the company could build that many cars in 2013. It has the facilities, would not need to expand its current workforce by much, and appears to have the supply lines for its needed parts and materials in place. Recent reports and filings by the company, which is relatively transparent now that it's publicly traded, show that batteries, motor parts, and aluminum - the material that makes up about 60% of the car's total - are lined up and already growing. The company has surpassed the 1,000 frame and rolling chassis mark in its production output. Many of the problems that could be expected to happen in these first stages of the car's production have happened or are happening and being resolved now, according to Tesla's Q3 2012 filing (more here).

The only thing that could slow Tesla down outside of an act of nature or similar event would be quality issues as production grows. Looking at Tesla's closest neighbor in the EV business, Fisker, illustrates how heavily this can impact a growing carmaker's mojo. It's very, very likely that Tesla will have at least one recall event during 2013, but if they are lucky, it will happen early on and be quickly taken care of and remedied on the production line before too many units have been affected.

Tesla already has, or at least is well on the way towards putting together, a full production shift for the S. To make 20,000 cars is only about 1,700 cars a month and is well within the capability of a single shift in a 20-day production month. The former NUMMI factory they are utilizing is capable of these numbers many times over if fully utilized.

Deposits As Sales Prognosticators
The most-often cited numbers relating to possible Model S sales are the number of pre-production deposits that have been made with the company. The trouble here is that these are deposits, not purchases, and can be canceled and refunded right up to the point of actual production. Tesla has more than enough deposits and sales, even given the cancelled deposits that inevitably come, to deliver all of the vehicles planned for production this year (about 2,500) and if production reaches 800+ a month in January, then all of the cars being built through to March or April of 2013 have also been sold.

The trouble with using deposits as sales indicators is that they only indicate those enthusiastic enough to put money down well ahead of the expected delivery of the vehicle. The Nissan Leaf, for example, has been produced in such low numbers that sales versus delivery have happened with a considerable lag between the time the customer orders their Leaf and that it actually appears in their driveway. On the other hand, the Chevrolet Volt used early deposits and interest as an indicator of very high sales volumes and over-produced the car to the point that they had a 90+ day glut of inventory and closed production for over a month to allow sales to clear out these large inventories.

The Model S is a car that, at its most base configuration, sells for about $57,400, but indications are that the average sales price will likely be in the $70,000 to $75,000 range. That's nearly twice the price of the Volt and well over twice the cost of the Leaf. Thus the Model S is selling in a very different market from the Chevrolet and Nissan electrics, but not quite in the extremely high price range of the Fisker Karma. This means the only comparable cars to the Model S are standard internal combustion vehicles rather than electrics and perhaps their (very low-selling) hybrid counterparts, making it hard to judge how large this luxury electric car's market might be.

The Elusive Model S Market
Sales volumes in the mid-sized luxury sport sedan market in North America are not large. It's one of the smallest in the overall automotive market, in fact, and is similar to pickup trucks in that brand loyalty is very, very strong. The Model S' uniqueness will certainly mean sales, as early deposits on future production attest. But that will not sustain sales through 2013 and Tesla will have to find many more traditional buyers. Competitive, but established ICE vehicles in the segment, such as the Audi A6 and Lexus GS, don't even sell 10,000 units per year, showing that the Model S has a tough row to hoe.

Add to that the fact that hybrids, the largest of the electrified car market, are less than 3% of the total automotive sales volume in the U.S. and most of them are low-priced Toyota Prius cars - a vehicle that costs 1/3 the price of a Model S. Total battery electric vehicle sales in the U.S., not including low-speed models, is less than half of one percent of the total automotive market.

Distribution will be another big hurdle that the company has begun addressing, but is not likely to overcome in only a year. Tesla has well under two dozen stores in North America. Competitor Lexus has about fifteen times that many outlets. At its current distributorship size (number of showrooms), Tesla would have to move about 1,200 units per showroom per year to meet the 20,000 goal. Assuming all sales are in the U.S. and Canada.

Of course, the company is working hard to get European certification to sell there - and will likely have it before the end of this year, if Musk is to be believed. They are also trying to enter some Middle Eastern and Asian markets, but no time frame has been given on those. Asia will likely happen first, but the Middle East could conceivably be where Tesla would potentially move the most cars in foreign sales. Well-heeled markets in Arabia and Israel have shown themselves capable of embracing electric vehicles at a rate better than others, but are limited in size.

Still, 20,000 units is a lot of (expensive) cars. Even with foreign sales, the company would have to sell most of its production here in North America.

Looking at the numbers objectively, doing what we can to gauge the market, and seeing the number of obstacles to be overcome to achieve Musk's 20,000 unit goal, it's very unlikely that Tesla will be able to build and sell 20,000 Model S cars in 2013. Once all markets are open and the car has been vetted, those numbers could be realistic - maybe in 2014 or 2015.

So while the Model S is an award-winning dynamo of publicity and the company's CEO is a public figure of much repute, the market is not likely going to bear 20,000 electric luxury cars in only one year. This does not reflect badly on Tesla Motors, which in all likelihood will achieve profitability in the next quarter, nor on its larger-than-life CEO Elon Musk, who has a history of making huge, bold claims and (eventually) following through on them. But Tesla fans would do well to remember that quarterly reports are as much a public relations exercise on behalf of the company's Wall Street trading as they are a reporting of the company's financial status.

Comments

Mike F (not verified)    November 19, 2012 - 10:10PM

In reply to by DrJohnM (not verified)

Aaron,

I'll keep it real simple. You might be right that Tesla won't sell 20,000 cars next year even if they can build them.

There is one very simple test of your prediction.

If true, the reservation rate will at some point have to begin tapering off. So far it has been accelerating. For the last few months reservations have been coming in at the rate of 30-40 a day. In the last 5 days the rate has increased to approximately 100 a day! If rates hold above 75 a day, then Tesla will sell 20,000 cars in 2013 and end the year with a backlog bigger than the one now.

Aaron Turpen    November 20, 2012 - 1:24PM

In reply to by Mike F (not verified)

The company just announced production and first deliveries have been made. As with the Roadster on its introduction, the initial reservation and purchase rates will be high. Don't be surprised when they begin dropping off in January/February. This happened with the Leaf too. And the Volt. And the Karma.

Rob (not verified)    November 20, 2012 - 7:41PM

In reply to by Aaron Turpen

The leaf and the Karma are crap products, the leaf because its not fit for purpose with a range that starts too low for normal driving needs and degrades more rapidly then most EV's from there because they chose inefficient air cooling for their battery cooling system. The Karma because it is a hybrid which is overpriced and underperforms. It is completely unsurprising that sales of them have been sluggish.
Your statement that the Volt sales have languished is bizarre considering that volt orders and sales are up several hundred per cent this year with 2961 sold in October 2012 compared with 1,100 in October 2011.
So far, apart from a return to trend after large spikes related to particular events like first deliveries, Tesla reservation rates have been on a steady but inexorable rise. The rate of rise has also consistenly accelerated and they have now cracked 500 reservations per week. Now you may believe that for some reason in January and/or February that trend will suddenly change, however I think anyone who predicts a sudden change in a long term trend has the onus to justify that prediction. I certainly don't buy the idea that the beginning of deliveries will result in decreased interest, and regardless deliveries began in June, I can't see any way that deliveries will result in decreased orders after 6-7 months. I would suggest that you be a little less smug about the way you make prediction, who knows what will happen, my expectation is obviously different to yours but at least I present mine as an opinion and the justification for it. Saying "don't be surprised when" comes across as condescending and as though your opinion is actually a foregone conclusion.

Aaron Turpen    November 20, 2012 - 9:35PM

In reply to by Rob (not verified)

I didn't say deliveries would cause the drop off, but the initial release of trend "big new thing" items tends to be their largest selling period before they begin dropping off. As I said, that happened with the Volt, Leaf, etc. Initial interest was very high up through the first few months of production and then dropped off as the early adopters had their fill.

I've explained why, so I've fulfilled the onus. Many markets and products are the same - new phones from Apple, new games, new model introductions of just about everything that generates a lot of buzz and interest before its release.

Rob (not verified)    November 20, 2012 - 10:53PM

In reply to by Aaron Turpen

The theory you are alluding to is the Gartner hype cycle, there are two major problems with your application of it in this case. First is that you have conveniently truncated it, it is not just an initial surge followed by decline, it is an initial early adopter surge, a dip as early adopters are exhausted and issues become apparent followed by a gradual rise and plateau as the market for the technology matures.
The second issue with its application is that it is designed not to relate to an individual product it is designed to describe the process of introduction and maturity of the market for a technology, in this case not the model S but EVs in general. I would suggest that we are not on the downslope of the cycle, that came with the early EVs like the EV1 in the early 90's, the dip has clearly occurred. Now with maturing technology including the development of large lithium ion batteries I would suggest we are now rising out of the "trough of disillusionment" and the latest offerings including the Model S represent the gartner cycle's "slope of enlightenment" as the technology and the market for it approaches maturity.

Aaron Turpen    November 21, 2012 - 12:00AM

In reply to by Rob (not verified)

No, I'm alluding to a similar cycle that is a part of the product lifecycle. It applies not to overall technologies, but individual products such as the various iPhone generations, the successive titles in a game franchise, etc. The Model S is another product that will see the same overall cycle.

As for your comments about EVs.. I think you're wrong. The EV1 was a blip, not a market changer. We'll see electrics keep climbing and then fall off as something new that's seen as better (whether it is or is not doesn't matter) shows up. So far, EVs are taking about 0.3% of the automotive market annually and will probably get to a point where they're doubling that in the next couple of years.

One more time, with the Model S, we're talking purely about 2013, not the future of the car or the company. Just next year and that's it. Long-term, I think the Model S has a good chance of being a widely accepted vehicle, but my contention is that short-term, it will be relatively slow in adoption and the company is not likely to make it's 20,000 sales and deliveries for 2013 as hoped.

Todd R. Lockwood (not verified)    November 20, 2012 - 1:45PM

"Distribution will be another big hurdle that the company has begun addressing, but is not likely to overcome in only a year. Tesla has well under two dozen stores in North America. Competitor Lexus has about fifteen times that many outlets. At its current distributorship size (number of showrooms), Tesla would have to move about 1,200 units per showroom per year to meet the 20,000 goal. Assuming all sales are in the U.S. and Canada."

Tesla's Garden City, NY mall store has already had over 60,000 visitors since its opening this September. I doubt if a Lexus dealership would have had one-tenth that number of visitors. With Tesla's business model, there is no relationship between showrooms and purchases. Many buyers simply place their reservation online, many without even seeing the car in a store. I would be one of those buyers. Since placing my online reservation, I've visited two Tesla stores and taken a test drive. Now I'm convinced I made the right decision.

DrJohnM (not verified)    November 20, 2012 - 2:52PM

In reply to by Todd R. Lockwood (not verified)

They are showrooms not dealerships and do not necessarily have any technical ability or even physical space to accept cars for onward distribution. They are building separate service centres.

There is the warning in the price section for the model S (US web site) saying that the price does not include Tesla Personal Delivery. I do remember that they were talking about pick up at the factory or have the car delivered at home.

They probably will need to enhance their process once they are up to speed with volume and also the challenges of other countries. But they have been distributing the Roadster in both the US and other countries, so that should not be a problem in the short term.

Frankly, I don't see the value add of having someone check again, something that should have been checked and working out of the factory. That is what your paying a dealer for. Take delivery of your car, check that the factory filled the brake fluid, oil etc and then hand you the keys. If you were going to pay someone to do that, what would you expect as a fair price? $100 maybe $50?

Ford started to sell directly to customers in the UK as from 2010. But they basically go through the fifty Ford owned dealers in the UK and delivered through five regional centres.

Aaron Turpen    November 20, 2012 - 4:46PM

In reply to by DrJohnM (not verified)

It doesn't really apply to Tesla (yet), but many dealerships add items to cars or custom configure them for buyers on-site. For example, dealers in my area often add after-market snow plow fittings and so forth as these are popular options in my area. Dealers also act as a direct point of contact if something goes wrong with the car, if an after-purchase change is requested, and as a face-to-face sales point.

Rhyalus (not verified)    December 1, 2012 - 12:03PM

Hello all...

Let's say Telsa delivers on EVERY aspect of what they have promised....

The market for a $70,000 car is too small for this to work. the technology (once vetted), will have become less expensive for any of this to be mainstream.

BTW - Tesla just announced a price INCREASE, stating that they announced the price three years ago. WELL, the car has not been out for three months..... the price has to go DOWN not up!

I am a reservation holder. Unfortunately, I will probably relinquish my reservation and get the new MKZ hybrid for 46k FULLY loaded. That will give me 45 MPG. I WANTED to support the concept and future that Tesla represents, but how can I do this for 70k+?

And by the way the Tesla has great speed and handling, but the fit and finish is quite bland, and there are no features that one would expect in a 70k car.

R

Rhyalus (not verified)    December 1, 2012 - 12:13PM

In reply to by Rhyalus (not verified)

Sorry - meant to say that this technology will have to become less expensive for any of this to be mainstream,

To clarify; early adopters will help Tesla make this work, but for this to reach the masses, the price on this car will have to come WAY down.

R

Rob (not verified)    December 1, 2012 - 7:39PM

In reply to by Rhyalus (not verified)

Tesla Roadster 2 Door sports car: base price $109,000
Tesla Model S 4 door luxury sedan with significantly higher spec interior: Base price $59,900 (post price increase)

I'd say they're well on their way to bringing down costs wouldn't you?

The reality of the price increase is that the original price announcement was made in 2008, the investment and financial environment is completely different to when the announcement was made. considering the enormous changes that have occurred in the meantime it is astonishing Tesla has been able to bring the vehicle to market so close to their estimated price from 4 years ago and made prior to the GFC. If they need an extra $2,500 per vehicle to get them over the investment hump and aid them to roll out the Model S's mass production and the continued R&D for their 3rd generation vehicle then so be it. Considering the reviews and awards most would consider it a reasonable price for the vehicle.

I have some doubts about whether you are actually a reservation holder, if you were you would likely know that the price increase will not only not affect any current reservation holders but it will also not affect anyone who makes a reservation prior to January 1st. Therefore it makes little sense why you would be considering cancelling your reservation as the price increase will not apply to you.

Rhyalus (not verified)    December 1, 2012 - 10:44PM

In reply to by Rob (not verified)

Hi Rob,

Trust me, I am reservation holder. I got my invitation to finalize a couple of weeks ago, the email about the price change a couple of days ago, followed by a 2nd invitation that is referred to in the pricing email.

The price is the same for me, this is true. The car is barely out of the door, though, and they are adding amenities (which I would have expected in a 70k sedan) which are not available to me without the price increase.

Call the base price what you will, but the real ASP is 70k +. Buying a car like this without the few add-ons barely makes sense. This is with the 60kw battery.

On the Tesla forums some folks pointed out to me that the Model S was never intended to be a "mainstream" car, and that this was to fund later generation cars that can be more affordable. Maybe this is true, and my expectations were different...

R

DrJohnM (not verified)    December 2, 2012 - 6:31AM

In reply to by Rhyalus (not verified)

Hi Rhyalus,

I agree hat ou probably will add some options that will bring up the price towards the numbers your talking about, however, this is not exclusive to Tesla. Purchase a Audi or a BMW and the options lists are far longer than that of Tesla. I looked at purchasing an Audi here on continental Europe and the standard finish just about allows you to drive off the dealers lot.

This is not a mainstream car and really has to be compared with a high spec audit A6/A8 or a BMW 5/7

For example (taken from the Dutch Audi web site) an Audi A6 business edition with 19" alloys and leather interior €65,000 ($84,000)
Audi A8 3ltr diesel 19" alloys, leather €119,400 ($155,000)

The A6 does 0 to 100kph (60 mph) in 10.3 seconds
The A8 in 7.9 seconds

The prices n the Netherlands are very high due to the tax rates, but even n the UK, the A8 above is still $113,000 equivalent for a slower car that costs more to run.

DrJohnM (not verified)    December 2, 2012 - 6:32AM

In reply to by Rhyalus (not verified)

Hi Rhyalus,

I agree hat ou probably will add some options that will bring up the price towards the numbers your talking about, however, this is not exclusive to Tesla. Purchase a Audi or a BMW and the options lists are far longer than that of Tesla. I looked at purchasing an Audi here on continental Europe and the standard finish just about allows you to drive off the dealers lot.

This is not a mainstream car and really has to be compared with a high spec audit A6/A8 or a BMW 5/7

For example (taken from the Dutch Audi web site) an Audi A6 business edition with 19" alloys and leather interior €65,000 ($84,000)
Audi A8 3ltr diesel 19" alloys, leather €119,400 ($155,000)

The A6 does 0 to 100kph (60 mph) in 10.3 seconds
The A8 in 7.9 seconds

The prices n the Netherlands are very high due to the tax rates, but even n the UK, the A8 above is still $113,000 equivalent for a slower car that costs more to run.

Norwegian (not verified)    February 24, 2013 - 2:01PM

It seems a bit typical American to think that (North) America is the whole world ;-) Now, obviously most of the market of Tesla Model S will be in America, but I can ensure that the there will be sold at least 2000 of them in (little) Norway (of 5 million inhabitants) in 2013 and 2-3 times more in 2014. The government put on HIGH taxes on usual cars, but has no tax on electric cars, in addition to many other benefits as no toll on highways, no VAT etc.

Aaron Turpen    February 25, 2013 - 10:32PM

In reply to by Norwegian (not verified)

Once more, I will point out that now, at the end of February, Tesla has NO sales outlets outside of the U.S., NO approvals to sell their vehicles (safety, etc) outside of North America, and at least a three month lag to get cars from here to anywhere else to sell them. So even if 2,000 Norwegians can afford and buy a Model S, Tesla can't legally send them there UNTIL they have these other things in place.

John Goreham    March 8, 2013 - 2:35PM

David Herron at TN reported February 20th that the Tesla filing claims 2,650 Model S cars delivered to customers in 2012. Pretty much all the rest of the debate is just speculation. Tesla delivered half the cars it said it would last year. That was the last time Tesla told anyone how many cars it had sold. When the maker starts reporting its monthly SALES like all other US manufacturers do, we can resume the debate with facts, rather than rely on pessimism, or optimism. Both sides of the Tesla and EV coverage are skewing their reporting. Tesla production claims are untrustworthy. I’m hoping Tesla makes it and proves me wrong, but I have not seen any facts to support the argument.

Jon (not verified)    April 6, 2014 - 7:21PM

Well Aaron hit that one out of the park again. It seems Tesla made there own predictions but exceeded it by 20%. Yet Aaron argued with everybody for months. I guess you all are "teslaphiles". Aaron seem to have distaste for electric cars. He really hates the Volt, which is fine until he writes stories with complete falsehoods about the car. Spreading complete untruths. I wonder if Aaron ever wrote a positive story on an electric car? Even Bill OReilly has changed his tune. OReilly's recent quote "Electric cars are the future of America and will save us Billions" Arron refers to me as a Voltophile. He got that piece wrong to.

Rob (not verified)    April 7, 2014 - 4:40PM

Well my suggestions to be less smug about your predictions Aaron turned out to be rather sage, in the end almost every one of them turned out to be woefully incorrect. Tesla sold 22,450 Model S in 2013, and with deliveries to almost all of Europe well underway they manufactured several thousand more that don't count as sales until fully delivered.