Earlier this year, Tesla pulled the cover off its hotly anticipated new crossover SUV, the Model X.
Elon Musk’s startup electric-car maker threw a very big, very Tesla party in Fremont, California, where Tesla is headquartered and operates its main factory.
Tesla is now a two-car company, as the Model X joins the Model S sedan in the lineup.
We already knew pretty much everything about the Model X, but seeing was definitely believing. The first versions of the vehicle occupy a haute luxury price stratum, well north of $100,000. But that was no surprise.
The exotic falcon-wing rear doors, a source of much prelaunch speculation (Would they work? Would they delay the car?) were far more exciting than expected: Equipped with sensors, they operate more like avian robots than normal car doors. They wowed the crowd.
The rear seats, which Musk revealed were causing problems with production, look every bit as sculptural as the CEO promised. (Can’t wait to sit in them.)
And then there’s the cabin-filtration system — effectively weapons-grade air-conditioning, which Tesla has dubbed “bioweapons defence mode.” It will protect you from the apocalypse.
All this jazzy stuff, coupled with the Model X’s promised acceleration and overall Tesla-ness, enabled the vehicle to live up to its long promise.
A vast gulf to cross
But before we get too excited, let’s review the numbers. A few months ago, Tesla was building one car in one factory. It’s now building two cars in one factory, and it has brought online another factory in Europe. Almost a decade into its existence, Tesla is still unprofitable and continues to struggle to hit what in the grand scheme of things are relatively modest production goals.
Earlier this year, Tesla trimmed its 2015 delivery target from 55,000 vehicles (mostly Model S’s) to a 50,000 to 55,000 range. This followed a 2014 in which Tesla was able to build all the cars it said it could, mainly by running like hell at the end of the year, but it wasn’t able to deliver all those cars. The official sales slipped into the first month of 2015.
It’s now looking as if Tesla will close out the year more or less in that range, although analysts are thinking that 50,000 appears far more realistic than 52,000 or 53,000.
Carmakers have production issues all the time, but Tesla has chronic production issues (but, pointedly, no demand issues, for the most part — it’s much better at building waiting lists for cars than it is at building the cars themselves, and that’s not a bad problem to have).
Since the debut of the Model S about three years ago, some production issues have been smoothed out, but, for whatever reason, Tesla has demonstrated that while it can build a really great car, it can’t build that car, and now those cars, very efficiently or at any kind of major scale.
And of course, it has to operate with an abundance of caution. Earlier this year, when a seat-belt assembly failed on one Model S in Europe, Tesla recalled the entire Model S fleet worldwide. Even though it wasn’t able to replicate the flaw on any of the thousands of vehicles it tested.
Getting to big
Big, traditional automakers such as General Motors and Ford build, for the US market alone, more cars in a week than Tesla builds in a year.
This wouldn’t be a problem if Tesla’s goal were to be a relatively niche carmaker. But Musk isn’t playing small ball. He wants to remake transportation using the electric car, freeing planet Earth from a dependence of fossil fuels. (The electricity will come from solar power, which is why he’s chairman of SolarCity in addition to being CEO of Tesla.)
Musk has always been clear that the Model X is needed to get Tesla to the point where it can launch the Model 3, a mass-market vehicle that will make Tesla look less like Ferrari or Porsche and more like Honda or Toyota.
In this respect, we can see the boldness of his thinking. Tesla lives in the high-profit-margin realms of the auto industry: It’s good to be making $100,000-plus cars and selling as many as you can make. This money sloshing into the company helps you realise your dreams.
But Musk wants to be building 500,000 cars annually by 2020, transitioning Tesla to the low-margin end of the business: Vehicles that sell for less than $50,000 and appeal to everyday drivers.
Some Tesla watchers, such as Morgan Stanley lead auto analyst Adam Jonas, are sceptical that Musk will succeed in this undertaking. They see Tesla as niche and nothing more (although vitally important for the coming sea-change in the mobility landscape). But for the time being, we need to follow Musk’s lead and operate on the assumption that Tesla’s goal is to be transformative, far more than a manufacturer of playthings for the Silicon Valley elite.
Getting from here to there
The first order of business for Tesla now is to hit production and delivery targets for both the Model S and the Model X over the next few years. The company needs to satisfy its cash requirements, which are considerable given Musk’s ambitions. Secondary businesses, such as energy storage, look promising but aren’t likely to pay off for a decade.
And the EV market in general is now quite weak, as gas prices have plummeted — traditional carmakers haven’t bailed out on their electric efforts, but it’s unclear whether the future market for Tesla vehicles will justify that 500,000 number.
In this sense, the Model X is a make-or-break proposition. If it succeeds, Tesla will become the first new carmaker to define a new market and establish the definition of a future market: first luxury electric cars, then mass-market EVs. But it has to succeed, just as the Model S had to succeed. Tesla isn’t in a position to suffer failure.
This is why the Model X has to offer much more than cool doors, sexy seats, and weapons-grade AC. That’s a feature set. But the Model X has a mission. And everyone will be paying very close attention to Tesla as it strives to accomplish that mission.
The good and the bad
The good news on this front is that Tesla has survived and, by some measurements, prospered. It didn’t go bankrupt or fade away like most other electric-car startups. It now has a market cap above $30 billion (about the same as Hyundai, which can build nearly 4 million cars globally each year), reflecting significant investor confidence in Tesla’s future. While the company may have been on brink in 2009, it’s far from that now.
Additionally, Tesla expects to be able to drastically reduce the cost of the most expensive part of its cars: the battery pack. If it can make this happen, then it will redefine the challenge of the electric car, which has in the past been held back by range limitations that stem from small, affordable batteries. (Tesla uses big, expensive batteries.)
The bad news is that Tesla is showing an alarming pattern of not being as effective at its core business as its traditional competition. Automakers doing business in the US hit an annual sales pace of 18 million new vehicles in September. These companies have a far less captivating story than Tesla, and on balance they aren’t building cars that are as exciting, but they can roll automobiles off their assembly lines in impressive volumes.
We expect Tesla to evolve to be more like these automakers, taking the electric car to what many believe should be its rightful place. The Model X is the bridge to that destiny. Everyone is thrilled that it’s finally arrived. And it should assist Tesla immensely in increasing deliveries from around 50,000 annually to 75,000 and then 100,000.
But the company has to execute. So it 2016 Tesla’s real work will begin.
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