TESLA Inc. spent years and billions of dollars figuring out how to make enough Model 3 compact sedans to satisfy early customer demand. Now, the electric-vehicle maker is facing questions about how much consumer interest is still there.
Total deliveries fell 31% in the first quarter compared with the last three months of 2018, to about 63,000. The slowdown threatens Tesla’s sales-growth goals and raises concerns about how large the pool of buyers is for the company’s high-price sedans.
Tesla Chief Executive Elon Musk has described demand for the Model 3 as “insanely high.” “The inhibitor is affordability,’’ Mr. Musk told analysts this year. “It’s got nothing to do with desire.”
The company would have to see substantial sales growth in the remaining three quarters of the year to achieve its guidance of delivering as many as 400,000 vehicles globally. Among the challenges are pricing and competitive pressures, used Model S large sedans becoming more widely available, and worries that projections in China won’t be met. Failure to achieve its sales goal would raise more questions about Tesla’s ability to pay down debts and fund future expansion.
The average selling price of the Model 3 was $57,000 last year, according to analysts’ estimates. Mr. Musk has been slashing costs so the company can afford to keep the starting price at about $35,000. Still, price remains an issue for some potential buyers, especially as the benefit of tax credits fades.
Daniel Jones briefly looked at a Model 3 from Tesla when he began thinking about buying a new car, but ultimately went with a slightly used black BMW 3 Series, a direct competitor. The deciding factor was price. The 51-year-old Dallas resident liked the Model 3’s looks and the idea of an all-electric car, but the Silicon Valley compact sedan was out of his budget. The used BMW cost about $22,000.
Shares of Tesla have plunged 46% this year as investors and analysts question whether demand for the car has peaked. In addition to the drop in deliveries, the company posted one of its largest losses ever in the first quarter. Tesla attributed the weakness to challenges exporting the Model 3 overseas for the first time. Mr. Musk also blamed the quarter’s disappointing results on customers uninterested in buying during the winter months and buyers moving up purchases late last year to get ahead of the U.S. federal tax credit dropping to $3,750 from $7,500.
A Tesla spokeswoman declined to comment for this article. Mr. Musk, in a sign that the company is cognizant about pricing, said in a recent industry podcast that he expects Tesla’s future pickup to be priced below $50,000.
Questions about demand represent a dizzying turn for Tesla, reversing the concern that consumed investors for the past three years: Whether the auto maker had the manufacturing muscle to meet consumer desire. During that time, customers were willing to plop down $1,000 reservations for a vehicle they hadn’t test-driven that was years from production. Weeks after first revealing the car in 2016, the company had reservations for more than 400,000.
“The original bull thesis was largely based on [Tesla] creating the ‘iPhone of cars,’ selling high-margin, mass-market electric vehicles across multiple, complementary product lines,” said Brian Johnson, an analyst for Barclays PLC. “However, as we’ve seen, Model 3 demand has largely stagnated in the U.S.”
Tesla faces increasing competition from other auto makers, including Audi and Mercedes-Benz. In another twist, the company, which started selling a large sedan called the Model S in 2012, is also competing with itself.
Tesla began offering a leasing program for the Model S in 2014 and those vehicles, which typically sell new at $100,000, began hitting the used market in a noticeable way last year, said Seneca Giese, a former Tesla manager. Mr. Giese, who co-founded an online used-car retailer called Current Automotive that specializes in electric vehicles, said he has found the sweet spot for selling a used Model S is around $45,000 to $50,000.
When Tesla’s sales picked up in the second half of 2018 after the company ramped up production, it came as the overall sedan market had been in decline in the U.S., with customers flocking to SUVs. The Model 3 was the best-selling premium compact car in the U.S. last year and in the first quarter, according to Edmunds, a website that tracks new vehicle sales.
Not only did Model 3 beat the Mercedes-Benz C-Class and BMW 3 Series in the U.S., but it also contributed to a near 50% increase in the overall size of the market of people plunking down $57,000 or more for a car last year, according to Edmunds. Without the Model 3, that segment would have declined. The average price paid for a new vehicle last year in the U.S. was about $32,500, according to J.D. Power.
“There was lightning in a bottle that they captured for a second, but it doesn’t look like they can sustain anything close to that,” said Jeremy Acevedo, an analyst for Edmunds.
Much of Tesla’s projected growth is based on China, where it is racing to open its first overseas assembly plant. Mr. Musk has said the company could make as many as 500,000 vehicles this year globally if Tesla can get the factory operating at volume in the fourth quarter. The aggressive timeline to open the factory, which broke ground in January, has been met with skepticism given Tesla’s history for missing deadlines.
Last week, Tesla began taking orders in China for a locally made version of the Model 3 that will have a starting price about $11,000 cheaper than the current version exported from the company’s California factory. While other luxury-car makers, including BMW and Mercedes-Benz, have benefited from the Chinese market, sales have slowed and increased trade tensions are causing havoc.
Adam Jonas, a one-time bullish analyst from Morgan Stanley who has turned bearish about the auto maker’s outlook, has questioned whether the vehicle faces sales challenges among buyers who favor SUVs and aren’t sold on electric.
“Tesla was seen as a growth story,” he said. “What’s changed is demand.” - WSJ
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