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Can the Tesla Motors (TSLA) Model 3 Help Solve Automakers Troubles?

Tesla Motors Inc (NASDAQ:TSLA) Model S

Tesla Motors Inc  has a problem right now, actually several problems, but one that is particularly annoying.  The cost of gas is low – too low.  Buyers find it difficult to justify the $100,000+ price tag of a Tesla Model S or Model X when gas is so cheap.  More expensive gas equals a more attractive switch to an electric vehicle.  Oil prices are working against Elon Musk and his car company.

Tesla has largely succeeded where others have failed, and the company has proven that electric cars have a shot at making it to the mainstream. Tesla originally tested the waters with the Roadster, and then it upped its game with the luxury Model S sedan. The Model X SUV is proving that the success of the Model S wasn’t a fluke – for the record, Tesla can’t make the Model X as fast as it sells it. The firm will soon unveil an affordable EV in the Model 3, and a working Gigafactory will provide Tesla with the economies of scale for profitability.

Tesla Motors Inc (TSLA) Factory Freemont, California

Yet, despite the impressive success that Tesla has had in the past and the bright future that the firm has ahead, a dark cloud still looms over its prospects. The firm has been facing headwinds since the markets opened this year. Previously bullish analysts are now leaning with a bearish bias on Tesla. Investors are losing confidence in its stock, it share price stuck a new 52-week low on Tuesday, and the stock has lost 23.8% since the markets opened this year.

Tesla Motors challenged by crude oil price crash

Tesla Motors’ problems go beyond a change in analysts’ opinion, dwindling investor confidence, and a crashing share price. The biggest (probably an existential) threat facing Tesla right now is one it can’t control – a sustained crash in global energy prices. The price of crude oil has been falling since last year as a combination of factors suppresses the price of petroleum products. There’s a supply glut, China has a weak economic outlook, and geopolitical tensions in the Middle East makes it hard for OPEC to reach a consensus on reducing the supply.

One of the chief selling points of Tesla’s Model S and Model X is the cost savings that the buyers get over the course of many years during which they won’t buy gas. One may argue that Tesla’s cars are luxury class, arguably safer, and possibly better built than gas-guzzling rivals are, but the fact is that they somewhat pricey in relation to gas-guzzling equals. However, Tesla’s cars do not run on gas, they run on electricity and Tesla has practically made the electricity free to drivers through its Supercharger network.

One might also argue that people who can afford to drop between $100,000 and $150,000 for a Model S or Model X won’t really be worried about the cost of gas, and that they didn’t  buy Tesla’s cars solely for cost savings in gas – you’ll also be right.

However, for the millions of people waiting for Tesla to release a mass-market Model 3 EV at the $35,000 price point, cost savings on gas might be an important issue. Now, many potential Model 3 buyers might want to buy a $35,000 car for the cost-savings in gas, but now that gas prices have crashed, the premise for buying an EV might not be as strong as it used to be.

On Monday, Adam Jonas of Morgan Stanley, a longtime Tesla bull reduced his optimism about the prospects of the firm and he reduced its price target on the stock from $450 to $333. One of the reasons for the slash is the sustained weakness in global oil prices. In the words of Jonas, “Low demand for electric vehicles categorically and globally in a $30 oil environment leads us to reduce volume assumptions for the Model 3.”

Tesla Model 3 to the rescue

Tesla Motors Inc. might still be able to keep the demand for its Model 3 high even if oil prices continue to drop. However, the drop in oil prices has made it imperative that the firm must create strong selling points for the Model 3 that go beyond savings on the price of gas. If the Model 3 turns out to be better built, arguably safer, and more comfy than other gas-guzzling cars that cost $35,000, the falling cost of crude oil wouldn’t be able to reduce the demand for the Model 3 EV.

The Model 3 is still in development and the firm will unveil the car next month but deliveries won’t start until 2017. Tesla Motors still has ample time to ensure that  it builds the Model 3 with enough selling points that transcends the cost savings from gas. The best part is that Tesla can look at the weaknesses of rival $35,000 cars with internal combustion engines and use the Model 3 to solve those problems.

The Model X is coming to China and fast

In other news, Tesla Motors Inc.  has decided that it wants to take the Model X to China even before buyers in Europe gets a chance to buy the car. On Tuesday, Tesla Motors announced on its Chinese website that it will offer a limited edition Signature Red version of the Model X P90D for about 1.48 million Yuan ($225,000) just in time for the Chinese New Year festivities starting on February 8. The standard 90D will cost Chinese buyers about $146,000 to $178,000, with a $15,000 reservation fee required.

In China, red is the color of celebration and many wealthy Chinese folks would be looking to celebrate the Chinese New Year in grand style. Tesla struggled with the sales of the Model S in China despite the fact that China is the world’s biggest market for EVs as the country battles with congested cities and pollution challenges. One of the reasons Model S suffered in China was that the car was “small” by Chinese standards and many of them traditionally expected a “bigger” car to justify the huge price tag.

Now, the Model X is “big” by Chinese standards, the car is a looker, and the signature Falcon Wing doors are bound to turn heads in China’s crowded parking lots. Hence, Tesla is making a smart move by pushing the Model X to China ahead of Europe. Michael Dunne, a strategic adviser on the Asian auto market told Bloomberg Business that, “this is Tesla’s opportunity to establish the brand… Tesla’s success in China will hinge on its ability to establish that it is a distinctive, alluring and exceptional brand to own. With the Model S they struggled.”

More so, the high-efficiency particulate air filter, which seeks to block contamination from polluted air as well as bacteria and viruses in the Model X should also drive the demand for the SUV in china. Dunne notes that, improved, “for affluent, educated urban dwellers, air quality — for themselves and their children — is a big priority,”

In the final analysis, 2016 might be a particularly volatile year for Tesla investors as the stock begins a rollercoaster ride with exciting highs and stomach-churning lows. Now is the perfect time to reexamine the core reasons why you bought the shares of Tesla Motors in the first place, now is the time to decide if you still believe in Elon Musk and this plan to change the world, one EV at a time.

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.

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