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Tesla Motors Inc (TSLA): Is the Model 3 Too Good to be True?

Tesla Motors Inc (NASDAQ:TSLA) Model 3

Fiat Chrysler Association says it would copy the upcoming Model 3 from Tesla Motors Inc if it knew how. The Model 3 will be Tesla’s 4th model when it comes out later next year. Revealed at the end of last month, it is the EV company’s first mid-class vehicle and already has several hundred thousand people lining up to get it. The Model 3 may have a few rivals to contend with, but current figures indicate it will dominate the affordable EV space months before it even goes into production.

Tesla Motors Inc (NASDAQ:TSLA) Model 3

Model 3 is in hot demamd

Clearly, the car is already a winner. The Model 3 has acquired close to 400,000 paid pre-orders in just the first two weeks of its announcement. Going at a standard price of $35,000, and even much lower for some, the car presents itself as a chance to get a new Tesla EV at a huge discount. Before the Model 3’s announcement, Tesla Motors was widely recognized as a nearly unobtainable luxury car brand. Indeed, the automaker is perhaps the most exclusive luxury car maker around. Despite this, the Silicon Valley automaker holds a huge lead as the U.S.’s best selling high-end car brand.

Now Tesla is moving down the market to collect a share of the mid-range EV segment. Not at all lacking though, this part of the market is already teeming with EVs and hybrid solutions. Bearing this, it was thought that Tesla would have a hard time raking in appeal with its lee-expensive EV. The company proved many experts wrong, but it too is overwhelmed by the sudden and rising influx of Model 3 deposits being laid down all over the world.

Tesla plays down delivery expectations

Repeated comments made by Tesla execs, including Elon Musk himself, suggest that the company is really trying to play down the delivery expectations of the upcoming EV. Speaking at a convention in Amsterdam this week, VP Diarmuid O’Connell said the real success would be “delivering a great product at the volumes that we believe are possible and necessary,” suggesting that Tesla doesn’t want to feel rushed in producing and delivering the car.

“It has exceeded all of our expectations as far as the rate at which we received reservations. Something approaching 400,000 people have already put down up to $1,000 dollars to reserve this car,” O’Connell said.

To place things into context, the Chevy Volt, which was General Motors’ first successful push into the mid-market EV segment five years ago, has only just passed the 100,000 sales market. The Tesla Model 3, a concept car that is yet to go into production, already has around 400,000 buyers globally. GM will be making a hot Model 3 contender in the form of its upcoming Chevy Bolt come year-end. However, the car will likely still do modestly in comparison to Tesla.

Too good to be true?

Many experts are still convinced that the Model 3 is far too good to be true. Numerous analysts have assured that, Gigafactory or none, the promised affordable EV will still cost significantly more to make than the alluring $35,000 it goes for. It could be that, once again, much like with the Model X, Tesla has fallen victim to its own hubris.

Elon Musk has admitted that most of the delays and setbacks seen in the Model X’s production are because the company was too ambitious with the SUV’s design. The falcon wing doors alone require an enormous amount of time and money to put together. Setting the bar too high is why any new Model X buyer will have to wait a year before they find themselves behind the wheel of their dream car. However, it seems worth it as reviews the world over describe the SUV as the absolute pinnacle of luxury and class.

This does bring the Model 3 into question though. Anyone who’s kept up with Tesla happenings is fully aware of the EV giant’s delivery trends and struggles. If the company can’t make profits selling top-end luxury cars, how would it do so selling cheap EVs that are allegedly being sold at loss? Musk himself assured that the Model 3 would be five-stars in all spheres.

It’s not that there is proof that Tesla can’t sell the Model 3 at a profit, but that it is very unlikely. The CEO of the FCA himself has admitted that if the Model 3 formula could be replicated, then he too would use it and add a little Italian flair as well. He doubts that any of it could be done profitably though.

“I’m not surprised by the high number of reservations but you have to build then deliver them and also be profitable,” says Sergio Marchionne. Fiat Chrysler has a huge interest in strengthening itself in the mid-market EV segment of the U.S. The company is struggling to expand and is even laying off workers decreasing decreasing pay in Michigan. Despite this, it is still making ventures into what it considers to be a drying market.

Fiat Chrysler sells a couple thousand of it 500Es a year and is among the better sellers in the mid-market EV space. Gaining a Tesla-like edge could significantly boost the appeal of its cars, especially in Europe where small to mid-size cars have a huge appeal.

No shortage of Tesla rivals

Tesla Motors Inc has no shortage of car makers lining up to knock it off its pedestal. The likes of Faraday Future are reportedly making headway in building their own luxurious and equally sporty EVs. Ford too is stepping up the Model E. Porsche, BMW and Volvo are already moving in on the EV giant as well. In the affordable segment, Toyota, which has a massive consumer base across the globe, is said to be a massive potential rival for Tesla Motors. It’s Prius leads the hybrid market and a well-designed electric vehicle could easily give the Model 3 a hard time.

For now, Tesla seems to be set to rake in a majority of the mid-range EV market as well. However, there is still a lot of time for that to change.

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