Blue Dots Partners

On Thursday, March 31^st, in Los Angeles at SpaceX, Elon Musk, the CEO of Tesla introduced the Model 3 to the world. It has been a smash hit, becoming one of the most anticipated products in a long time and certainly the most eagerly awaited entry in the auto industry.

By the end of that day, Tesla raked an impressive number of pre-orders: 115,000 people shelled out $1,000 to reserve the coveted car. The following day, the number jumped to 180,000. The number of Model 3 reservations continued to swell to reach about 400,000 in 21 days after the announcement, which is about 4 times the total number of cars Tesla has ever produced over the past 8 years.

This is, by far, the most exciting buzz in the 100-year history of mass-market cars. Compare it to the French Citröen DS that got 80,000 reservations in 1955 over 10 days at the Paris Auto Show. By contrast, Apple received 232,000 pre-orders for the original iPhone when it was launched on June 29, 2007.

This time, no apologies needed for running on batteries.

This is how Tesla put $400M into the company in 21 days without selling one single share. This is, by far, the most impressive money raised I have ever seen. Between March 31^st and April 21^st, the company increased its cash position by $400M without selling one single share and without any obligation to pay interest (of course, the cash is carried on the company’s balance sheet as debt). Basically “free” money. During the same period, the company’s market cap increased by $3.1B (about a 10% jump).

Now what?

In less than 3 weeks, Tesla effortlessly generated a tremendous amount of anticipated delight by making 400,000 people dream with unprecedented expectations for a $35,000 product that does not even exist (representing a pent-up demand of $14B in sales). Very few have actually touched, let alone driven, the Model 3, which is being still designed and tested at the Gigafactory in Reno, Nevada, which itself, is still under construction.

Is it a pipe dream? Of course not!

However, many challenges are now facing Tesla: 

• Gross margin? Yes indeed. Tesla currently burns about $400M per quarter, yes, that is about $4.5M a day!
• Public charging stations? Not a problem: I have one at home, it’s called a garage. Range is really only a problem for road trips. That’s where superstations will be handy, but Tesla has to deliver on that promise too. It has announced that the super station network will quadruple to 15,000 stations in the next 2 years.
• Time is the big enemy The biggest challenge for Tesla is to now execute its delivery. Indeed, the company does not have a good track record. The initial Roadster was delayed 9 months, the Model S 6 months, the Model X 18 months, your guess is as good as mine for the Model 3. These 400,000 people won’t have the patience to wait too long after the stated launch at the end of next year. Competition is not going to stand still. GM announced the Chevy Bolt EV, which will have a 200-mile range, has a $30,000 base price, and is planned to be available late this year, well before the Model 3 ships.
• Real cost? The $7,500 federal subsidy for an electric car might not be available by the time the Model 3 ships. It is scheduled to phase out after 200,000 domestic electric vehicles are sold.

I am wondering why the company announced the Model 3 so far from the initial manufacturing date of late 2017 given the serious risk of production delays. So, it will be about 2 years in reality before people (including myself) who reserved one write a $34,000 (assuming that the federal subsidy is gone) check to enjoy the car. Now that a tremendous amount of expectation has been built, the company has to address the difficult challenge it has imposed on itself: manufacture the delight.

We’ll see what happens…