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Tesla Motors Inc (TSLA) Model X Luxury Supply and Demand Math Needs Work

Tesla Motors Inc Model X

Tesla Motors Inc has been stymied by the rollout of the Model X. The SUV has caused the firm no end of trouble since first being announced in 2012. We’re now more than six weeks out from the official launch of the car and, apart from those shipped to friends and family, there’s still no Model X on the road.

That’s not worrying Wall Street a whole lot right now. Those following Tesla Motors are focused on the Model 3, and the firm’s mass market future. Some stumbling along the road isn’t going to hurt the firm, in the view of those that think Elon Musk can change the world. One analyst reckons he can prove the risks are great with some fairly simple math.

Tesla Motors Inc Model X

Doing the Model X math

, who authored a piece on Model X demand and supply metrics over at Seeking Alpha, reckons that Tesla Motors boss Musk is overestimating his capacity to build and ship the Model X next year. In the view of the analyst, who says they run a family investment office worth over $1B, there won’t even be enough people around to buy the Model X. 

Montan Skeptic takes a look at the market that Tesla Motors  is trying to break into, in his view that is the $80K and up SUV market. The 7 top sellers in the market in 2015, the BMW X5, Lexus LX, Mercedes G Class, Porsche Cayenne, Range Rover, and Toyota Land Cruiser, are forecast to sell a total of 58,027 units.

Skeptic then does a little bit of gymnastics in order to assess worldwide demand for luxury SUVs. The piece takes the ratio of Model X reservations in the US to Model X bookings in total and multiplies the result by the size of the luxury market in the US, as defined by the total above.

The report comes up with a number of 83,650 units for worldwide SUV demand in 2015. That’s a fuzzy method for getting a handle on international SUV demand, but the US figures are likely more important, and clear, for the time being.

There are, according to Model X Tracker, a total of 22,638 Model X units reserved in the US. That number does not include cancellations that may already have been made

A certain number of those reservations are likely pulled forward from the years in which people were waiting for the Model X to arrive. That means the 22,718 number includes SUV demand from at least 2015, if not a smaller amount of demand from 2014 and 2013 as well.

Elon Musk says that his plant in Fremont will be able to build between 1,600 and 1,800 units per week next year. At a low end of 600 per week that means a total of 31,200 Model X units built next year. At the high end, where the Model X accounts for half of all units built, it implies close to 47,000 units built in 2016.

If Tesla Motors isn’t able to grow demand drastically, and the firm is able to hit its production numbers, there could be oversupply inside the US next year. The firm would need to break into the luxury SUV market in a huge way, judging by the above numbers, in order to sell the cars it promises to build.

Looking down on the Tesla Motors Model X

Skeptic also takes quite a dim view of those that have reserved the Model X so far. He reckons that Tesla Motors  will have quite a low yield on reservations. In his view only about a third of those that have booked the car will end up buying it. That leaves him expecting sales of just over 10,000 from bookings made so far.

The post concludes, on the demand side, that, “Our examination of worldwide ultra-luxury SUV demand indicates that, assuming a base price of $95,000, the company will strain to sell more than 14,800 Model Xs. And our review of the admittedly very sketchy yield data, together with some guesses and surmises, puts demand at about 18,000 Model Xs.”

The report also asserts that Elon Musk is being much more positive about the production rates at Tesla Motors than is realistic. There’ are reasons to think that’s true, given the delays so far in the shipment of the Model X.

Expanding the market at Tesla Motors

It seems clear that if Tesla Motors is going to only enter the luxury SUV market it could have huge trouble selling anything like 40,000 units of the Model X next year. Those are the kinds of limits that don’t necessarily need to apply to Tesla Motors, however, though it will take hard work for the firm to convince 40,000 people that its $80,000 Model X is worth picking up.

Tesla Motors will have to expand the market rather than simply enter an existing one, and there are some signs from the Model S that it has already achieved that in the luxury sedan space.

Jessica Caldwell of Edmunds, in a report published last July, found an increasing diversity of people were buying the Model S. According to the firm’s survey 36 percent of Model S buyers earned less than $100,000 per year. In the year previous less than 25 percent fell in that income bracket.

It seems that even those who are stretched to afford a Tesla Motors Model S are willing to buy one. Part of this is likely the gas savings. Tesla Motors estimates that buyers will save about $10,000 on fuel over five years. Jefferies auto analyst Dan Dolev found that some people are willing to pay more in order to get a car with the Tesla Motors badge.

In a report published in June Mr. Dolev found that about 70 percent of Model S buyers moved from a car that cost less than $60,000. “On average, owners were willing to pay 60% more for a Tesla,” he wrote.

For the Model X Tesla Motors won’t be just aiming at buyers of SUVs with a price tag of over $80,000 like the Skeptic suggests. Instead the firm will be trying to lure people who would otherwise have bought a new family car to its brand.

Given the numbers in the luxury SUV market, it would be very difficult indeed for Tesla Motors to sell 40,000 Model X units per year. Given that Tesla has likely done its market research, and it knows a whole lot more about who bought the Model S than anyone else, there’s reason to believe that the firm knows what it’s talking about.

It’s important to be skeptical of Tesla Motors, especially if you’re looking to invest money in the firm. Coming at an analysis of the firm’s market prospects with faulty assumptions may lead down a dimly lit path, however.

If you look at the Tesla Motors Model X under the constraints of the auto market as it is now, then it will be hard worn to reach the numbers that the firm forecasts. If, however, Elon Musk viewed the auto market with those constraints then the Model X wouldn’t exist at all, and neither would Tesla Motors.

The Model X will have to transcend auto market categories in order to become what Tesla Motors fans want. It’s going to have to be a family car that people are willing to spend a lot more to get their hands on. That’s something that Elon Musk appears to have been able to make happen with the Model S, and those betting on the firm’s shares, which now value Tesla Motors than $30B, need to see it happen.

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