On the horizon await the Model X luxury SU-EV and the Model E mass market vehicle, the keys to Tesla's future

Tesla Motors, Inc. (TSLA) and its founder and CEO, Elon Musk, are slowly turning some skeptics into believers.  From Norway to China and back home to the United States, the last couple weeks have been a rollercoaster ride when it comes to news of Tesla's March sales.  But when you add it all up momentum clearly seems to be on Tesla's side.
I. Model S Sales -- Slow in the U.S., but Hot in Norway
Tesla shares currently hover around $210 USD per share, a disappointing drop of almost 20 percent from the highs of ~$250 USD per share we witnessed in early March.  And we'll likely see more shifts in weeks to come.
On May 7, investors will get the electric carmaker's official earnings report.  But already sales numbers for March have trickled out from various sources including vehicle registrations and tax rebate application.
The first early results to look at are U.S. sales of the Model S sedan.  Overall this is the one part of the Tesla news that looks a bit disappointing.
While its an unquestionably lauded and feted vehicle, the Model S sedan continues to face one insurmountable barrier in the U.S. -- price.  Currently, the Model S with the base 60 kWh battery retails for around $69,900 USD in the U.S. before tax credits and sales taxes.
Barclays Capital (Barclays plc (LON:BARC)) and Gartner Inc. (IT) analysts told The LA Times that Tesla moved an estimated 4,600 Model S vehicles in the U.S. in the first three months of 2014 -- 1,600 in March and 3,100 in January/February.

Tesla Model S
The 2014 Tesla Model S sedan

That total is up only 1 percent on a year to year basis.  Brian Johnson, an automotive analysis for Barclays Capital tells The LA Times:

We believe that Model S demand in the U.S. has plateaued.

That's seemingly a setback for Tesla, which hoped to hit sales of 35,000 Model S vehicles this year.  But outside the U.S., the picture looks a lot rosier for Tesla.
II. Norway -- Tesla's Second Home
At the start of last year, Tesla was only officially selling Model S sedans to buyers in two nations -- the U.S. and Canada.  Tesla's Q&A webpage for the Model S still reflects this, stating:

Model S is currently only sold and serviced in the US and Canada. If you export your Model S outside of these countries, Tesla will be unable to service your vehicle until it has been brought back to its home market. We strongly recommend that you reserve a Model S in the market where you plan to drive it. European deliveries will begin in summer 2013, and in other regions starting in 2014.

Last year indeed brought a launch in Europe, albeit a less flashy one than some were expecting.  Tesla already has nine stores in Europe from its Roadster sales campaign; these were repurposed for Model S sales.

Tesla Model S

These include stores in Europe's biggest electric vehicle market, Norway (more on this shortly), and Switzerland.  Tesla also prepared for the Model S's European invasion with the quiet launch of three new dealer sites -- London, UK; Brussels, Belgium; and Amsterdam, Netherlands, plus four new service centers in Brussels; Amsterdam; Frankfurt, Germany; Hamburg, Germany; and Vienna, Austria.
While Tesla has pledged a broad rollout through much of Europe, its Q3 2013 deliveries began in three select nations [PDF] -- Norway, the Netherlands, and Switzerland.  These markets were selected as they all traditionally had large tariffs/surcharges for fossil fuel-burning "dirty" sport scars, but have pledged substantial breaks in the fees charged for foreign electric vehicles.
Here's a quick rundown on the sales success thus far. 

Note the statistics come from, but have been confirmed by other third-party sources such as The Wall Street Journal.
Last year Tesla moved a little over 1,900 Model S sedans in Norway, its top market (and ironically also the European Union's top oil producer).  Note the Norwegian market is so lucrative due to the "Engangsavgift" (one time car fee).  
In a response to an article on the Norwegian tax breaks posted on the The Motley Fool, a user by the name "TeslaDayTrader" breaks down the average fees on a 416 hp gas engine sports car as:
  • MVA / VAT = ~$32K USD
  • Weight = ~$33K USD
  • Horsepower = ~$65K USD
  • Co2 emissions = ~$32K USD
  • Total fees = ~$162K USD
These kind of steep penalties are somewhat unique to Norway.  Perhaps that's why Norway has seen sustained sales when others have fallen.  

III. Europe -- Positive Momentum Grows

A post by a Tesla enthusiast compiling the numbers lists the total 2013 sales by European nation as:
  1. Norway - 1986
  2. Netherlands - 1127
  3. Switzerland - 213
  4. Germany - 204
  5. Belgium - 148
  6. Denmark - 112
  7. Austria - 48
  8. France - 19
  9. Italy - 8
As you can see from the previously listed Netherlands sales numbers for Q1 2014 (207), Tesla has actually seen sales drop in this market where it did so well in 2013.  But fortunately for Tesla, that appears to be exception rather than the rule.  One possible explanation is that the savings in terms of taxes, fees, and parking are much larger for businesses than private buyers.  Clearly not all businesses are interested, so it's very possible that sales in 2013 were heavily driven by businesses (who stand to gain the most) and the current lower levels represent a heavier percentage of individual buyers.
Clearly the biggest sales success is in Norway, where Tesla is literally shattering sales records for vehicles of any kind -- not just EVs.  As shown above, in March Tesla reportedly shipped 1,493 Model S sedans to Norwegians, breaking a nearly three-decade-old sales record set by Ford Motor Comp. (F) in 1986 (with the Sierra sedan).  

Tesla Model S in snow
The Tesla Model S sedan saw incredible sales in Norway, thanks to the government assist.  But sales in other parts of Europe with smaller incentives were also impressive.
[Image Source: Tesla Forums]

Other Q1 2014 sales high points included Denmark (111), France (58), Germany (239), Sweden (34), and Italy (20) are all near -- or in some cases well above -- their full year totals for last year.
Crunching these sales numbers, it appears Tesla sold roughly 2,900 EVs in Europe in Q1 2014 to match its 4,700 in the U.S. and 60 in Canada.  In other words, the EU is accounting for more than a third of Tesla's sales -- not a bad start considering complaints of lacking infrastructure in some parts of Europe.
And there's more good news for Tesla -- it expects to start deliveries of Model S sedans to the UK by June or July.  The expected price is £49,900 (~$83,800 USD).  Given the £5,000 ($8,400 USD) "UK Plug-in Grant" (a tax deduction), UK sales should be relatively brisk, making up for whatever shortfall might happen in Norwegian sales.
IV. The Chinese Connection
In the near term, Tesla is looking to establish a sales presence in China starting this year.  China is home to a fast-growing luxury vehicle market, as the Asian nation marches towards surpassing the U.S. as the top global economy.  Unsurprisingly, China is also one of the hottest luxury electric vehicle markets as well, in terms of growth potential.
Tesla clearly recognizes the importance of China to its short-term gains.  In Nov. 2013 Tesla opened its first Chinese showroom in the capital city of Beijing.

Model S Beijing
Tesla's Beijing storefront opened in Nov. 2013. [Image Source: Tesla Motors Club/artsci]

While the Model S sedan is priced at CN¥734,000 (~$118,000 USD) thanks to the whopping 25 percent tariff China charges foreign automakers, Mr. Musk believes that the Chinese market could become a valuable addition this year alone.  Commemorating the first eight deliveries of Model S vehicles to Chinese buyers, he told Chinese enthusiasts this week that he believed as many as 5,000 Model S sedans might be bought in China this year.  He comments:

[It's] just a guess.  [But] I do think that's probably a good number. Maybe it will be higher.  I don't honestly know. Thus far the response has been very positive.  I'm incredibly appreciative of customers like you for taking a chance on a new product from a new company.  Without customers like you, we would have no chance.

If accurate that would cut the number of Model S sedans Tesla would need to sell in Europe and North America to meet its target to 30,000 -- which seems well with reach given the Q1 2014 sales of ~7,700 vehicles in these regions.  That hints at how important the Chinese market is to Tesla, even if its potential is handicapped for now.

Elon Musk was forced to offer an apology of sorts to Chinese customers after Tesla let its previous goal of delivering to China in January 2014 slide.  Mr. Musk told Chinese buyers at this week's event that the delay was made in their best interests, as Tesla feared a repeat of its troubled European rollout, in which buyers in certain regions such as the Netherlands and Norway complained of lacking charging infrastructure.  

During the last several months, Tesla has begun to build in Beijing and cooperate with authorities to build in other major Chinese cities, standardized EV chargers to give Model S buyers ample places to juice up.

Elon Musk
Elon Musk greets Chinese customers and businesspeople at a visit earlier this week.
[Image Source: AP]

The Model S itself comes with a household charging station, but in the U.S. buyers typically lean heavily on public chargers.  Mr. Musk stated:

We intentionally held back on the debut to the Chinese market until we were confident of that.  I met with [Chinese buyers] earlier today and personally apologized.

To eliminate the tariffs on the Model S and other future vehicles -- a key detriment to Tesla's long-term competitive prospects in China, Tesla must traverse some challenging obstacles.
Chinese law requires U.S. automakers to team up with a Chinese firm in order to sell without tariffs.  Elon Musk told reporters this month that it will take over a year to decide who to team up with, although he implied such collaboration will likely be in the works.  Whoever it picks to team with, Mr. Musk indicated that Tesla would look to build a factory to sell directly to Chine sometime in the next 3 to 4 years.
V. The Model X (2015) -- Can Troubled SU-EV Make it to the Market?
But as much as Tesla's current image is predicated on its current successes and shortcomings, much of the current hype surrounding it, relates to its bold plans for the future.
Tesla is currently America's fourth largest automaker, but it wants to ascend even higher.  One key to that goal is the Model X luxury SUV, which is scheduled to begin shipping next year.
The Model X was first unveiled in 2012, but has become a minor boondoggle of sorts for Mr. Musk.  Tesla is growing somewhat desperate to get the delayed vehicle out the door.  Elon Musk had originally suggested a 2013 release at a price point of $49,900, but it was delayed to 2014 and the price was expected to rise.  And this February Tesla announced yet another costly delay -- to 2015.
The Tesla Model X SUV, back in 2012 [Image Source: Automobile Magazine]

Tesla's Model S is currently built at the historic NUMMI factory in Fremont, Calif., a facility formerly owned by Toyota Motor Corp. (TYO:7203).  The facility can accommodate up to 500,000 vehicles per year (~41.7k per month).  It appears Tesla is currently using only a little under a fifth of the plant's total capacity.  That gives Tesla plenty of capacity to handle whatever Model X sales it can generate.
Like the Model S, the Model X is also expected to command a premium price point, but is expected to avoid cannibalization by expanding Tesla's reach to new markets.  One such market is the often-underserved affluent female buyer segment, which accounts for a large chunk of luxury SUV sales.
VI. Model E -- Hello, Mass Market
But the most crucial key to Tesla's growth plans is the Model E, also known as Tesla's Generation 3 electric vehicle.  The Model E will be Tesla's first mass market vehicle.  Mr. Musk commented on the Model E to Bloomberg back in May 2013:

That's really the car I wanted to create from the beginning: A compelling, affordable car that has a range of at least 200 miles.

The price point for that vehicle will be similar to General Motors Comp.'s (GM) modestly successful Chevy Volt, selling at under $40,000 USD -- or roughly half the price of the Model S sedan.  It reportedly will be driven by a 48 kWh battery stack and be 20 percent shorter than the Model S.
One big question mark surrounding the Model E is the launch date.  If Tesla releases the vehicle late next year (in time for the 2016 model year), it will likely have to tool the NUMMI plant for Model E production.  That's very possible given the reportedly design similarities to the Model S and the NUMMI plant's idle capacity.
Given the delays to the Model X rollout it would not be surprising to see the launch slide to 2016 or even early 2017.  Indeed, as of last year Mr. Musk was predicting a rollout in 3 to 4 years (2016 or 2017) and that release window appears in line with the company's slide deck [PDF] for the gigafactory.
But aside from determining a feasible rollout timeline, there are much bigger questions of whether Tesla can truly engineer a profitable mass-market electric vehicle, particularly one at such a low price and such a big spec.

Panasonic Lithium Cells
Panasonic lithium cells like these Model S cells will likely drive the Model E.

Aside from the release date, perhaps the biggest riddle surrounding the Model E is how low Tesla will be able to drive the cost of the battery pack.  While there are some obvious sacrifices Tesla can make in terms of performance and features that will trim ten thousand dollars or more off the base price of the Model S, a major component of its price is still the inescapable cost of the battery pack.
In short, to turn a profit on the Model E Tesla must manufacture a complex battery system at rates drastically lower than any rival automaker has been able to do to date, perhaps at as little as a sixth of the cost per kilowatt-hour.
But that cost might not be as high as some imagine.  The Model S's battery pack, for example, would be estimated to cost either $42,500 and $55,250 USD for the 60 and 85 kWh variants, according to The MIT Technology Review's information on rival EVs like the Chevy Volt.  But according to a recent interview with Tesla CTO JB Straubel, Tesla is incredibly already only paying a fraction of that.  He states:

They’re way less than half, actually.  Less than a quarter in most cases.

The key is small cell batteries.  Tesla's competitors virtually all opted for large cell battery designs and they paid the price -- literally.  At this point there's little arguing the fact that Tesla's approach is more cost effective, even if companies like GM continue to stubborn argue that someday large cell packs will be cheaper.

Model S battery Pack
The Tesla Model S battery pack

Clearly Tesla knows its batteries, but it faces some key challenges.  First, it must prove that it can truly bring down costs by dramatically increasing production, an approach that will require a lot of risk and in some cases dramatic new methodologies such as the cutting out the middlemen from the raw materials supply chain.
For Telsa's primary battery partner -- Japan's Panasonic Corp. (TYO:6752) -- this is a plan that could bankrupt not only Tesla, but its ally, should it fail.  Commented Panasonic President Kazuhiro Tsuga earlier this month to Bloomberg:

Elon plans to produce more affordable models besides Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger.

While some worry Panasonic could panic and bail on Tesla's bold vision, at the Chinese press events Tesla CEO Elon Musk reiterated that the current plan is to work with Panasonic to build the Model E's battery pack.
Tesla's plan to reduce costs via the gigafactory is essentially a fresh spin on a rather old argument.  It is echoing what EV proponents have been saying since the movement began to pick up steam a decade ago -- scale will bring down costs.  It's a well-argued viewpoint, but there's never been the chance to fully test it -- until now.
Tesla says it will be using more lithium batteries than the entire global electronics market when the Model E gets up to capacity.  It predicts that kind of scale will allow it to decrease the cost of the battery pack by as much as 30 percent per kWh.  If it can do that, it could be building the 48 kWh pack for as little as $6,000-7,000 USD a truly unbelievable achievement given the EV industry's history of relative disappointments.
There is little denying that Tesla has a remarkably bold plan, and one that's predicated to Tesla being able to successfully leverage its expertise in the luxury EV market to create a more compelling mass market sedan with some inherited perks from its luxury brethren.
That'll be a tough task, both engineering-wise and financially speaking, but Tesla's success forces both skeptics and believers alike to seriously consider the plan.  After all, Tesla already successfully navigated the road from the limited-release high end of the luxury market (Tesla Roadster), to more mid-priced, high volume luxury market (with the Model S and Model X). The road to the mass market is fraught with peril, but not necessarily more so than the path Tesla had to navigate to travel from the Roadster to the Model S.

Sources: AP, Bloomberg, WSJ, LA Times

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