Model 3 Completes Tesla's Secret Plan

Rendering of what the Tesla Model 3 could look like

As the March 31st reveal date approaches, the Tesla Model 3 has been dominating the alt car news recently. Many people will be hearing about this vehicle for the first time as the reports from the big reveal are circulated, but it has been planned for a long time.

When Tesla was started, they had a plan to start at the high end of the market and work their way down. Plenty of EV startups had tried starting at the bottom and gone bankrupt. Tesla planned to start at the high end of the market because new technology is expensive. For example, when DVD players came out in the mid-1990's they were over $500. Today, you can buy one for less than $30. Economies of scale bring down prices.

Tesla's plan was to follow this natural adoption curve and use a start-at-the-top business model. In 2006, Elon Musk wrote:

        
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In short, the master plan is:
Build sports car.
Use that money to build an affordable car.
Use that money to build an even more affordable car.
While doing above, also provide zero emission electric power generation options.
Don't tell anyone.

So, Tesla's plan was to create a high-priced low-volume car, then a medium-priced medium-volume car, then a low-priced high-volume car. The first car was the Tesla Roadster.

Tesla Roadster

Tesla Roadster

The Tesla Roadster was codenamed DarkStar. The plan was to use Lotus Elise frames, AC Propulsion motors, and commodity batteries. Tesla would work on battery packaging and battery management. The rest would be nearly as simple as the home EV conversions that many hobbyist undertake. That plan didn't work out as expected.

The car body had to be significantly redesigned. Quality problems plagued the AC Propulsion motors. Tesla had to raise the price and delay the launch several times. These problems nearly killed the fledgling company. But they got through them and learned many lessons that they could directly apply to their next project. In 2008 the Roadster was launched and the campaign to change the view of EVs as glorified golf carts was off to a racing start.

Tesla Model S

Tesla Model S

The Tesla Model S was the medium-priced, medium-volume, part two of the strategy. It was codenamed Whitestar. As a designed-from-scratch project, they again had many unforeseen problems and the launch was delayed. They worked through these issues and launched the car in June of 2012. When the Model S was introduced there were three battery options: 40 kWh, 60 kWh, & 85 kWh. The respective prices were: $57,400, $69,900, & $79,900. The smallest battery pack met Tesla's goal to have an offering in the $50k price range ($49,900 after the federal tax incentive).

Then something unexpected happened.

When the GM EV1 was being sold, there were two battery options: the standard lead acid pack and a longer range nickel-metal hydride option. The cheaper lead acid model accounted for the vast majority of sales leases. Many of us expected Model S sales to follow a similar course but things were different this time. The Model S is a vastly different vehicle than the EV1 and the design and tech in Model S made it attractive to more than just environmentalist crowd.

After 3 months of preorders, the 40 kWh version was just 4% of the demand. Tesla canceled the 40 and said that existing preorders for the 40 would receive a vehicle with a 60 kWh pack and a software restriction to make it effectively a 40 kWh vehicle.

This was just the first step in Tesla recognizing their buyers' attraction to the high-end market. They continued to court the high-end making improvements and adding options that led to higher margin products. Battery upgrades, performance models, dual motors, ludacris mode, and autopilot moved subsequent offerings up the price scale.

All this upscaling helped Tesla's cash flow.

Is is time for the high volume car?

• The Roadster was done - Phase 1 (low volume, high price)  
• Model S was shipping and winning awards left and right - Phase 2 (medium volume, medium price) was complete-ish.
• So now it's time for the affordable high volume car, right? Almost. 

Phase 3 Needs A Gigafactory 

The battery market had not blossomed the way a high volume vehicle would need. Tesla had defined their mission as, "To accelerate the advent of electric vehicles." This meant that if battery price/production was the limiting factor, that is what they would focus on and address.

Tesla Gigafactory Rendering

In a speech announcing the Gigafactory's site location, Elon Musk said "This factory is very important to the future of Tesla because without it, we could not make the mass market car."

The gigafactory was not just planned as yet another battery factory. The massive scale of it needs to be mentioned. This one factory will double the global battery production. If you add up all the battery factories in China, Japan, Korea and elsewhere that were operating when the Gigafactory broke ground, this one factory would produce more than all of the others combined.

Tesla expects the Gigafactory to reduce the production costs by 30%. The factory is currently under construction and partially operational, but Tesla will need much more of it complete before moving to phase 3.

So what to do while the massive battery factory is being built? If the low price vehicle is not an option, then another another phase 2 vehicle. Let's call it Phase 2.5.

Model X

Tesla Model X

After Darkstar and Whitestar, Tesla aimed for the stars with Model X. It was an ambitious project based on the same foundation as the Model S, but this time in a crossover form. The stats for the Model X are filled with in-class superlatives (fastest, safest...). It has the largest panoramic windshield of any vehicle in production. The gullwing doors are double hinged and Tesla has dubbed them falcon wing doors. The double hinge allows them open and close even in tight spaces.

Just as with Tesla's first two cars, this vehicle was plagued with production delays. Again, given time, Tesla's engineers worked through the issues. In a recent earning report conference call, Elon Musk said that it was hubris that caused Tesla to take on such an ambitious project and that no car company, not even Tesla, will ever again make a vehicle so great.

Many have lamented that the Model X was causing the affordable car to be postponed. This is not the case. What's delaying the Model 3 is lithium batteries produced on a massive scale, but it's coming.

Model ≡

So we are finally going to see the Tesla Model 3 at it's unveiling set for March 31. The Model 3 was codenamed Blastar Bluestar and it is the final step in the original secret plan. The low-cost, high volume 200+ mile range vehicle. Tesla has confirmed that the base price will be $35,000. As with their other vehicles, there will likely be multiple battery options and possibly an all-wheel drive (dual motor) option.

But enough speculation, we'll learn more about Model 3 in less than a month. The real question is, when the Model 3 is shipping and the secret plan from 2006 is complete, what will Tesla do next?

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- Friday, March 04, 2016