What will the Tesla Model 3 mean to the California economy?
There’s a famous quote attributed to the brilliant inventor Nikola Tesla: “The scientists of today think deeply instead of clearly. One must be sane to think clearly, but one can think deeply and be quite insane.” The same might be said of some investors whose fervor and passion toward Tesla Motors Inc. and Elon Musk, its L.A.-based chief executive, appears to border on the fanatical.
The company’s recent unveiling of the new “mass-market” Model 3 was an event that rivaled even the most zealous Apple product launch at the height of Steve Jobs’ evangelical popularity. In just a matter of days after the announcement, pre-orders (customers putting down a refundable $1,000 deposit for the right to purchase a Tesla 3 when the model eventually rolls off the assembly line by the end of next year) were approaching 400,000. All while devotee bloggers hailed: “Tesla unveils the Model 3 and the world will never be the same.”
Tesla’s growth and its loyal, passionate customer base have been nothing short of remarkable, helping the company to expand from 900 employees in 2010 to more than 13,000 today – most working either in the firm’s Palo Alto headquarters or in its flagship assembly factory just north of San Jose in Fremont. Therefore, the long-term viability and success of Tesla doesn’t just appeal to California’s desire to lead the nation on key environmental and socially conscious initiatives, it also has a potentially huge local economic impact.
Can supply meet demand?
Perhaps the most pressing challenge for Tesla is the firm’s growth plan for its Model 3 and the ability to ramp up manufacturing to meet demand. The firm has established a lofty goal of producing 500,000 cars annually by 2020. Yet, just last month, Tesla fell short of its modest Q1 manufacturing goal of delivering 16,000 vehicles. Despite projections that say the auto maker’s factory has the necessary capacity, producing 500,000 cars annually represents a 10-fold production increase in just four years – a very ambitious scaling up.
Tax credits
In addition, by the time the first Model 3 rolls off the assembly line late next year (if the company meets that stated timetable), Tesla will have already used up the lion’s share of its full federal tax credit of $7,500 on the first 200,000 alternative energy cars sold. That means the “affordable” base model cost of $27,500 being marketed to potential customers ($35,000 MSRP with the $7,500 tax credit) might be overly optimistic. As we’ve seen with the Tesla Model S, which has a base price of $70,000 but often retails closer to $100,000, the actual cost of a Model 3 with options will likely be significantly higher. Sticker shock might ultimately cause many of those who plunked down their $1,000 deposit to rethink their purchase.
There’s no question that Musk is a wildly ambitious and charismatic visionary who inspires passion in his employees and customers. Whether or not that will be enough to propel Tesla to the forefront of the auto industry, however, remains to be seen.
Doubling down and staking everything on the viability of a single product is always a risky bet. But it’s a bet that certainly could pay off handsomely for the California economy should Tesla prove successful in the long run.
Eric C. Pritz is a partner with Signature Estate & Investment Advisors in Century City. He provides financial advice and wealth management services to high-net-worth individuals, organizations, and companies in Los Angeles.
