This week, Tesla’s chief accounting officer quit after only a month; possibly he found it hard to work while standing ankle-deep in red ink. Tesla’s stock is down about 19 percent since Jan. 1.
But even without all the distractions of the past few months, Musk and his company have a potentially significant long-term problem on their hands.
Specifically, Musk has staked Tesla’s future on a sedan: The Model 3, which he is struggling to produce in sufficient numbers to generate positive cash flow. This seemed like a smart and, indeed, necessary decision when he made it several years ago. No electric-car maker could conquer the industry without building a “mass market” vehicle to compete with the top-selling gas-powered brand, the Toyota Camry. And he has sold increasing numbers in recent months (17,800 in August), working through a backlog of about 450,000 preorders. An undetermined, but reportedly large, number of those preorders have subsequently canceled, because customers got tired of waiting or spooked by the elevated price.
Yet now the biggest trend in the automobile market is that American car buyers are abandoning sedans in favor of crossovers and SUVs. Less than five years ago, half of all new U.S. vehicles sold were passenger cars. Today it’s less than a third, and heading lower, according to the Wall Street Journal. There are many reasons for this: low gas prices, design improvements, etc. The bottom line, though, is that consumer preferences seem to be experiencing a fundamental and enduring shift. Traditional automakers are scrambling to adapt, with companies such as Fiat Chrysler and Ford ditching whole product lines in the United States to focus resources on building the products consumers want to buy.
So while Musk has defined success as building what auto mavens call a “Camry killer,” in the meantime the Camry began dying of natural causes. A big carmaker such as Toyota is lucky in the sense that, even as Camry sales have slumped, RAV4 SUV sales have soared. Tesla, however, would be challenged to shift rapidly from the Model 3 to its one crossover, the Model X. And in any case, the Model X starts at $79,500 — far pricier than comparable gas-powered models, even accounting for gas savings and the “wow” factor of driving a Tesla.
Of course, Musk has not yet met the original promise of the Model 3, which was to sell a Camry-sized car at Camry prices. Rather, for the foreseeable future, he’s selling option-rich versions of the car that retail for north of $50,000, because, as he has admitted, he desperately needs the cash. Even if that were not the case, demand for the “mass-market” Model 3 would seem to be less massive, long-term, than anticipated.
But wait! The Model 3 is electric and digital and cool and from Silicon Valley. Doesn’t that make it a fundamentally different product from the sedan? Yes and no. Surely there is a certain non-trivial number of people who will buy a Model 3 (or its older cousin, the Model S) for the cachet of owning such a car, despite conventional considerations such as size, affordability and other practical factors. That, however, is the hallmark of a niche product, not the one-in-every-garage consumer product Musk set out to create, and which alone could generate significant overall carbon emissions savings. Saving the planet was supposed to be the whole point of this exercise, remember?
As automotive historian John Wolkonowicz told the Journal, real consumers favor SUVs, pickups and crossovers because “it’s all about activity today, rather than elegance or performance.” They want a hauler for the kids and the dog, a “tool that does the job.”
Unless and until Elon Musk — or someone — produces an electric vehicle that does what the RAV4 does, at the same total cost of ownership, market dominance will remain elusive.
Yes, many people told pollsters that they would consider buying an electric car. Relatively few actually did, though, because of what economists call “revealed preference.” Basically, this is the difference between what you claim you’d be willing to buy, in theory, and what you really do buy, given your budget constraints. And for all the buzz, pro and con, about Musk and his recent doings at Tesla, it could be that basic fact of economic life that determines his fate.