Tesla’s Model S And Model X Still Have Room To Grow

by Trefis Team
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There has been some speculation in recent months that the sales of Tesla Motors’ (NYSE:TSLA) premium vehicles could be leveling off. The company already holds about 30% market share in the large luxury sedan segment, and its combined deliveries of Model S and Model X vehicles have remained at roughly the same levels over the last four quarters (average run rate of about 100k per year), raising concerns that the market for Tesla’s lucrative high-end models may be saturated. However, there are a few trends that indicate that Tesla could maintain an edge in the luxury vehicle space going forward.

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Buzz Surrounding Model 3 May Be Helping Tesla Move More Premium Vehicles

Tesla launched its new mass-market sedan, the Model 3, in late July, with the first few vehicles going to employees. Initial reviews of the car from the automotive press have been overwhelmingly positive, and there’s a possibility that the buzz surrounding the Model 3 is also helping Tesla move more premium vehicles. The delivery period for current bookings on the mass-market sedan stands at more than a year. In comparison, the Model S is available within as little as a week. Tesla is also heavily promoting the Model S on its website and marketing materials, while up-selling the premium sedan to customers interested in the Model 3. In its most recent earnings call, Tesla indicated that the order rate for the Model S and X vehicles was about 15% higher in July, compared to its Q2 average weekly order rate, with shipments for both vehicles also expected to grow over the second half of the year.

Declining Costs Give Tesla A Competitive Advantage

Tesla may also have a longer-term competitive advantage in the luxury market on account of declining battery costs. The company’s Giga Factory in Nevada could help to double lithium ion battery production in a couple of years, while cutting down costs via a streamlined supply chain. The lower battery prices could give Tesla more headroom to reduce pricing or improve specifications of the Model S and X, giving it an edge over rivals in the luxury space. For instance, last week Tesla dropped the starting price of its Model X SUV from $82,500 to $79,500, on account of improved margins and better manufacturing efficiencies.

Moreover, electric vehicles have many inherent advantages over their internal combustion engine-based counterparts, including better performance and lower depreciation and maintenance (10 to 20 moving parts compared to a few thousand in ICE cars). While the benefits of all-electric drive trains are unlike to remain exclusive to Tesla in the long run, with major luxury automotive manufacturers betting big on electric vehicles, their production ramps are likely to be slower. For instance, Mercedes-Benz and BMW estimate that their electric or hybrid vehicle sales will account for between 15% and 25% of total sales over the next eight years.

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