Consumer Reports just handed down a not-very-good review of the Tesla Model X, calling the all-electric SUV that launched last year “more showy than practical.”
On balance, Consumer Reports appreciated the Model X for its speed and handling, but found things to dislike about some of the vehicle’s more complicated aspects.
Tesla responded to the review by saying the company has spent almost a year dealing with early Model X production issues – and noting that Model X owners are overwhelmingly delighted by their vehicles. For the record, Business Insider’s Ben Zhang and I were quite impressed by the Model X when we experienced it (briefly) in March.
The Consumer Reports review set off a flurry of fretting about Tesla – nothing out of the ordinary, as every time negative news about the company’s cars hits, concerns arise about whether Tesla can really grow as big and as rapidly as CEO Elon Musk wants it to, achieving 500,000 in annual deliveries by 2018.
The key question is always the same: Is demand for Teslas really out there?
Demand is actually mind-blowing
This is an easy question to answer. There’s probably more demand for Tesla vehicles than would be satisfied even if Musk’s goal of half a million cars was met.
The bottom line is that Tesla will never have trouble selling its cars, at least not until it cranks up production to the same levels of other major global automakers. For the time being, Tesla’s biggest challenge remains managing the demand it can almost effortlessly create.
Musk has addressed this challenge often. When the Model 3 mass-market vehicle – scheduled to arrive in late 2017, priced at around $30,000 after tax credits – was unveiled earlier this year, Tesla swiftly racked up almost 400,0oo advance reservations at $1,000 a pop.
Musk later reminded analysts that all the company did was post a few tweets and live-stream the unveiling event in Los Angeles.
Let’s be perfectly clear: This is one of the largest and most important happenings in the history of the automobile industry. In over a century, no carmaker has even come close to witnessing so much demand for an unavailable vehicle. A General Motors or Toyota would kill to have such a stunning amount of enthusiasm, backed up by cash money, for a new car or truck. But it can’t kill, so it spends billions on marketing and advertising.
Tesla, for all practical purposes, spends zero on marketing and advertising – although Musk, in a spirit of charity, says that someday it will, because the media requires advertising spending to stay alive. The company sends emails, holds customer events, has a small but intrepid communications team, and lets Musk do his thing on Twitter. That’s it.
Tesla versus the rest
And that’s been it for pretty much Tesla’s entire history. The carmaker has gone from delivering no vehicles to delivering close to 100,000 in 2016 without committing a red cent to stoking demand. During that same period, Ford and General Motors spent something like a combined $6 billion on advertising – in the US alone.
They sold a lot more cars than Tesla during that period, and kept the lights on and the martinis flowing at numerous ad agencies. But their cost per sale in terms of marketing was basically 100% higher.
Musk is already the greatest car salesman who has ever lived, and Tesla sales operations have to be considered the most efficient that the auto industry has ever seen. Other car companies have enviable sales and profits based on limited obvious advertising spending. Ferrari leaps to mind, as demand for its cars, by design, always outpaces supply – and the cars all sell for well over $100,000.
- Getty Images/ Scott Olson
But Ferrari also spends something like half a billion dollars annually on its Formula One racing team – the Italian automaker’s primary form of advertising.
Against the backdrop of this sort of business-as-usual yearly cash burn to generate profitable demand, raising concerns about whether Tesla is about to see an exodus of interest in its vehicles simply because Consumer Reports has some complaints about the Model X is kind of insane.
I’m not even sure it would be sensible to calculate the return Tesla might theoretically get on every $1 in incremental ad spending. Such an effort might cause a rupture in reality because it would be astonishingly higher – considering Tesla’s scale of production – than any carmaker’s, ever, in human history.
None of this means Tesla’s stratospheric market cap of about $30 billion is justified, nor should it reassure any Tesla investors, analysts, or observers that the company will be able to deftly surmount the many, many hurdles it faces in the future as it transitions from being a niche Silicon Valley luxury electric-car maker to a truly major force in the global auto industry.
We should also look skeptically at the overall electric-car market, which represents 1% of vehicle sales worldwide. Assuming that Tesla demand is the same as electric-car demand is a gigantic mistake that many otherwise sensible major automakers are making. (Not that Musk is discouraged – far from worrying about all the so-called Tesla killers aiming to take him out, he’s delighted that more automakers are taking up the “electric” banner.)
- Matthew DeBord
But no one can scoff at Tesla’s 375,000 preorders for the Model 3. And it’s far from clear that those preorders are the limit for an affordable long-range EV. My feeling is that Tesla could sell a million vehicles if it committed to that scale of manufacturing – no easy task, and one that the company might not be able to manage on its own – and have them on the world’s roads over the next decade.
That figure has, of course, been criticized. Will all those people make good on their commitment to buy a Model 3?
It doesn’t matter. If Tesla converts only one of every two preorders into a sale, it would still be an astounding business accomplishment. The Tesla naysayers who reliably fixate on the noisy negative news around the company would be wise to more closely monitor the salient signals.
It boils down to this: There is currently more demand for Tesla vehicles than could be satisfied with more than triple its late-2016 production levels. For one car. That no one has even test-driven yet.
It could be decades before Tesla has anything that even remotely resembles a sales problem. Get used to it.