Tesla unveils new e-car, but is it sustainable?

Many are are asking if the money-losing company - now the most valuable automaker in the US - is on the path to becoming a sustainable business that justifies its high stock market valuation?

Tesla starts Model 3 production with the target of making 1,500 sedans in September and 20,000 in December. It hopes to produce 500,000 vehicles next year, before reaching a target of one million in 2020 - almost as many as the total number of electric vehicles sold worldwide as recently as 2015.

"This is a big ‘if' and Musk/Tesla-style hyperbole," Michelle Krebs, Executive Analyst at Cox Automotive's Autotrader in Detroit, told DW.

Tesla had sold 186,000 electric cars as of December 2016. Would-be customers have put down deposits on more than 400,000 Model 3s.

Price before beauty?

"Tesla has built an extremely strong brand name," Krebs says, noting that Autotrader's Kelley Blue Book Brandwatch data - which measures consumer perceptions of brands on 19 factors - gives Tesla a score at or near the top on a number of measures, suggesting it has a strong brand name.

"It's cool to own a Tesla," she goes on. "Tesla models are viewed as being beautiful in their designs as well as technologically advanced. In addition, Elon Musk is charismatic and greatly admired for his vision and success with his other companies, like PayPal and SpaceX." 

Over-valued?

Tesla's market capitalization is $54 billion (48 billion euros), up nearly 50 percent this year even after the latest shortfall in deliveries of its existing two models - the S and the X - which prompted a 16 percent drop in June.

Some warn Tesla's price is over-inflated, especially when compared with those of GM and Ford - which produce 20 times more revenue.

This is mainly due to increasing competition from other carmakers switching their product lines to electric. Another factor is that charging stations are not yet fully available everywhere. They are available on the coasts in the US but are few and far between in the middle part of the US, Krebs notes.

The company has also faced quality issues, from software glitches affecting the sunroof and the display screen of the S to door and seat faults in the X.

Musk himself recently expressed doubt over Tesla's share price, suggesting the shares were "higher than we have the right to deserve."

Indicatively, Tesla is also one of the most shorted stocks, with billions of dollars in bets against it.

But is the price right?
Analysts say no one can produce a car that size and with that amount of battery at a lower cost than General Motors.

Frank Schwope, an auto analyst at NordLB, told DW he didn't think Tesla would ultimately be able to deliver on what it has promised - selling the car in its naked version for $35,000.

"Whether they can do it easily and also make a profit is really in the stars. Sometimes you wonder if Musk will first make a profit or land with his Space-X rocket on Mars, you cannot be sure," Schwope said.

UBS analyst Patrick Hummel told the Financial Times that the Model 3 will cost more to make than we yet know because it has more expensive features, such as an array of self-driving sensors.

Tesla disagrees, of course. JB Straubel, Tesla's chief technical officer, said recently that thanks to production of its batteries at its so-called gigafactory in Nevada, the Model 3's cells will be 30 percent more efficient than the S.

A new demographic
With the Model 3, Musk is aiming at a "completely different demographic” that has not shown interest in electric cars before, Krebs says.

She warns, however, that to date Tesla has only sold expensive EVs, like the roadster and the Model S, which have a limited audience with the means to be an early adopter to add a Tesla to their household fleets.

"The Model 3 is another story altogether. It is intended to appeal to a much larger, wider audience due to its more mainstream pricing," Krebs says.

Unlike many of the company's existing customers - these are not people who can afford multiple vehicles and who have an eco-conscience. It has, for example, ditched leather seats in favor of 100 percent vegan leather seats.

These potential customers "are intrigued by electric cars, but what they buy is sports utilities," says Krebs. "Gasoline prices are super cheap, and engines get far better fuel efficiency than they used to."

Stabilizers off

Another issue for Tesla is the abolition of state incentives and a fall in interest in electric cars. One example is Hong Kong. The Chinese special administrative area was great for electric cars - especially Tesla - but at the end of April, thanks to a complete lifting of tax exemptions for electric cars, it collapsed. In March, Tesla sold 2,939 units of their model S and Tesla was the market leader with an 87 percent share. But in May Tesla sales dropped to zero.

In other markets as well, the e-car sales slumped dramatically after the government subsidies were reduced. The sales of pure electric cars and plug-in hybrids in Denmark in the first quarter of this year fell by 60.5 percent, for example, after the government agreed to gradually cut perks.

"The new tax policy completely ignored the market," Lærke Flader, head of the Danish E-Auto Association, said.