This year Consumer Reports reported that Tesla is more showy than practical.
On balance, Consumer Reports lauded 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.
The Consumer Reports review set off wave of worrying 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 its goal : 500,000 in annual deliveries by 2018.
The key question is always the same: Is there really demand for the cars of Tesla?
Demand is actually mind-shattering
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 thing is that Tesla will never have trouble selling its cars, at least not until it get its production to the same levels of other major global automanufactorers. 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.
This was 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 experiancing such demand for an unavailable vehicle. Any big automaker would kill to have such a astonishing amount of enthusiasm, backed up by cash money, for a new car or truck. But they cant, so they 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 single cent to stoking demand. During that same period, Ford and General Motors spent around $6 billion combined on advertising — and that is 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.
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.
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 conquer the many, many hurdles it faces in the future as it transitions from being a niche 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.
But no one can reject the 375,000 preorders for the Model 3. And it’s far from clear that those preorders are the limit for an affordable long-range Electric Vehicle.
That figure has, of course, been criticized. Will all those people make good on their commitment to buy a Model 3?
If Tesla converts only one of every two preorders into a sale, it would still be an amazing business accomplishment. The Tesla detractors 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 the company experiences a demand problems.